1
Problems for the class on Feb 21 (end-of-chapter problems in the textbook)
Ch.3: problem 7 (p.77)
The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts?
a. Public saving b. Private saving c. National saving d. Investment
Ch.4: problem 4 (p.114-115)
Suppose a country has a demand function (M/P)d = kY, where k is a constant prameter. The money supply (M) grows by 12% per year, and real income (Y) grows by 4% per year. a. What is the average inflation rate?
b. How would inflation be different if real income growth were higher? Explain.
c. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.
Ch.6: problem 3 (p.188)
The residents of a certain dormitory have collected the following data: People who live in the dorm can be classified as either involved in a relationship or uninvolved. Among involved people, 10% experience a breakup of their relationship every month. Among uninvolved people, 5% will enter into a relationship every month. What is the steady-state fraction of residents who are uninvolved?
Ch.9: problem 2 (p.285)
Suppose that the central bank reduces the money supply by 5%. a. What happens to the aggregate demand curve?
b. What happens to the level of output and the price level in the short run and in the long run?
c. According to Okun’s law, what happens to unemployment in the short run and in the long run?
d. What happens to the real interest rate in the short run and in the long run? (Hint: Use the model of the real interest rate in Ch. 3 to see what happens when output changes.)
2 Ch.11: problem 2 (p.336)
Use the IS-LM model to predict the effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the central bank should do to keep income at its initial level.
a. After in invention of a new high-speed computer chip, many firms decide to upgrade their computer system.
b. A wave of credit-card fraud increases the frequency with which people make transactions in cash.
c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.
Ch.13: problem 1 (p.402)
In the sticky-price model, describe the AS curve in the following special cases. How do these cases compare to the short run AS curve we discussed in Ch. 9?
a. No firms have flexible prices (s=1).
b. The desired price does not depend on aggregate output (a=0).
