978-0134733821 Chapter 23 Solution Manual Part 2

Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 252

ANSWERS TO DATA ANALYSIS PROBLEMS

1. Go to the St. Louis Federal Reserve FRED database and find data on real government

spending (GCEC1), real GDP (GDPC1), taxes (W006RC-1Q027SBEA), and the personal

consumption expenditure price index (PCECTPI), a measure of the price level. Download all

of the data into a spreadsheet, and convert the tax data series into real taxes. To do this, for

each quarter, divide taxes by the price index and then multiply by 100.

a. Calculate the level change in real GDP over the four most recent quarters of data

available, and the four quarters prior to that.

b. Calculate the level change in real government spending and real taxes over the four most

recent quarters of data available, and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b)

help explain, if at all, your answer to part (a)? Explain using the IS and AD curves.

No, this is not consistent with what would be expected for tax and spending changes.

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Chapter 23

ANSWERS TO QUESTIONS

1. What does it mean when we say that the inflation gap is negative?

2. “If autonomous spending falls, the central bank should lower its inflation target in order to

stabilize inflation.” Is this statement true, false, or uncertain? Explain your answer.

3. For each of the following shocks, describe how monetary policymakers would respond (if at

all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium.

a. Consumers reduce autonomous consumption.

b. Financial frictions decrease.

c. Government spending increases.

d. Taxes increase.

e. The domestic currency appreciates.

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ANSWERS TO APPLIED PROBLEMS

25. Suppose the current administration decides to decrease government expenditures as a means

of cutting the existing government budget deficit.

a. Using a graph of aggregate demand and supply, show the effects of such a decision on

the economy in the short run. Describe the effects on inflation and output.

b. What will be the effect on the real interest rate, the inflation rate, and the output level if

the Federal Reserve decides to stabilize the inflation rate?

If the Federal Reserve decides to use its monetary policy tools to stabilize inflation, it will

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b. Using an MP curve and an AS/AD graph, show how a sufficient amount of asset

purchases can reverse the effects of the financial panic depicted in part (a).

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ANSWERS TO DATA ANALYSIS PROBLEMS

1. On January 19, 2017, the Federal Reserve released its amended statement on longer-run

goals and monetary policy strategy. It stated: “The Committee reaffirms its judgment that

inflation at the rate of 2%, as measured by the annual change in the price index for personal

consumption expenditures, is most consistent over the longer run with the Federal Reserve’s

statutory mandate.” and that “the median of FOMC participants’ estimates of the longer-run

normal rate of unemployment was 4.8%.” Assume this statement implies that the natural rate

of unemployment is believed to be 4.8%. Go to the St. Louis Federal Reserve FRED

database, and find data on the personal consumption expenditure price index (PCECTPI),

the unemployment rate (UNRATE), real GDP (GDPC1), and real potential gross domestic

product (GDPPOT), an estimate of potential GDP. For the price index, adjust the units

setting to “Percent Change From Year Ago.” For the unemployment rate, adjust the

frequency setting to ‘Quarterly’. Download the data into a spreadsheet.

a. For the most recent four quarters of data available, calculate the average inflation gap

using the 2% target referenced by the Fed. Calculate this value as the average of the

inflation gaps over the four quarters.

b. For the most recent four quarters of data available, calculate the average output gap

using the GDP measure and the potential GDP estimate. Calculate the gap as the

percentage deviation of output from the potential level of output. Calculate the average

value over the most recent four quarters of data available.

c. For the most recent four quarters of data available, calculate the average unemployment

gap, using 4.8% as the presumed natural rate of unemployment. Based on your answers

to parts (a) through (c), does the divine coincidence apply to the current economic

situation? Why or why not? What does your answer imply about the sources of shocks

that have impacted the current economy? Briefly explain.

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2. Go to the St. Louis Federal Reserve FRED database and find data on the personal

consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an

estimate of the natural rate of unemployment (NROU). For the price index, adjust the units

setting to “Percent Change From Year Ago.” For the unemployment rate, adjust the

frequency setting to ‘Quarterly’. Select the data from 2000 through the most current data

available, download the data, and plot all three variables on the same graph. Using your

graph, identify periods of demand-pull or cost-push movements in the inflation rate. Briefly

explain your reasoning.

See graph below. The period from around early 2001 to around the end of 2003 appears to be