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Solution
S-231
1. Since the crash of its stock market in 1989, the Japanese economy has seen little eco-
nomic growth and some deflation. The accompanying table from the Organization for
Economic Cooperation and Development (OECD) shows some key macroeconomic
data for Japan for 1991 (a “normal” year) and 1995–2003.
a. From the data, determine the type of policies Japan’s policy makers undertook at
that time to promote growth.
b. We can safely consider a short-term interest rate that is less than 0.1% to effec-
1. a. From the annual real GDP growth rate, we can see the slow growth of the Japanese
economy: the economy actually contracted in 1998 and 2002, with minimal
growth in 1999 and 2001. We can also see that policy makers used expansionary
monetary policy to spur the economy: short-term interest rates fell from 7.38% in
Government
Real GDP Government budget
annual Short-term debt deficit
growth interest (percent (percent
Year rate rate of GDP) of GDP)
1991 3.4% 7.38% 64.8% −1.81%
1995 1.9 1.23 87.1 4.71
1996 3.4 0.59 93.9 5.07
18
CHAPTER
Macroeconomics: Events and Ideas
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Solution
2. The National Bureau of Economic Research (NBER) maintains the official chronology
of past U.S. business cycles. Go to its website at www.nber.org/cycles/cyclesmain.html
to answer the following questions.
a. How many business cycles have occurred since the end of World War II in 1945?
Committee, and what was it?
2. a. Answers will vary. But as of December 2014, there had been 11 business cycles
since the end of 1945. This includes the recession that began in December 2007
and, at the time of writing, still continued.
b. As of December 2014, the average duration of a business cycle for the period
3. The fall of its military rival, the Soviet Union, in 1989 allowed the United States to
significantly reduce its defense spending in subsequent years. Using the data in the
following table from the Economic Report of the President, replicate Figure 18-3
for the 1990–2000 period. Given the strong economic growth in the United States
during the late 1990s, why would a Keynesian see the reduction in defense
spending during the 1990s as a good thing?
Budget deficit Unemployment
Year (percent of GDP) rate
1990 3.9% 5.6%
1991 4.5 6.8
1992 4.7 7.5
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Solution
Solution
3. The accompanying diagram replicates Figure 18-3 for the 1990–2000 period. It was
fortunate that defense spending fell and the budget deficit declined during this period
because additional spending at a time of strong growth (and low unemployment
rates) would likely have created inflationary pressure.
Unemployment rate,
budget deficit
4. In the modern world, central banks are free to increase or reduce the money supply
as they see fit. However, some people harken back to the “good old days” of the gold
4. a. For prices to remain stable when the economy was expanding and the velocity of
5. The chapter explains that Kenneth Rogoff proclaimed Richard Nixon “the all - time
hero of political business cycles.” Using the table of data below from the Economic
Report of the President, explain why Nixon may have earned that title. (Note: Nixon
entered office in January 1969 and was reelected in November 1972. He resigned in
August 1974.)
CHAPTER 18 MACROECONOMICS: EVENTS AND IDEAS S-233
Government
Government receipts Government spending budget balance 3-month Treasury
Year (billions of dollars) (billions of dollars) (billions of dollars) M1 growth M2 growth bill rate
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Solution
Solution
Solution
5. The data indicate that President Nixon may have used fiscal and monetary policy to
aid his reelection efforts. From his first year in office, 1969, to his reelection year,
6. The economy of Albernia is facing a recessionary gap, and the leader of that nation
calls together five of its best economists representing the classical, Keynesian, mon-
etarist, real business cycle, and Great Moderation consensus views of the macroecon-
omy. Explain what policies each economist would recommend and why.
6. In response to a recessionary gap in Albernia, the economists representing the differ-
ent views of the macroeconomy would make the following suggestions.
Classical: Do nothing. The recessionary gap will exist only in the short run, and the
only focus for policy makers is the long run.
7. Which of the following policy recommendations are consistent with the classical,
Keynesian, monetarist, and/or Great Moderation consensus views of the macroeconomy?
a. Since the long - run growth of GDP is 2%, the money supply should grow at 2%.
7. a. Monetarists would support such a policy; they believe in a monetary policy rule
that allows the money supply to grow at the same rate as GDP. Since classical
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Solution
b. Classical economists would see the inflationary pressure as a short-run problem
and would not advocate any policy; their view would be that the inflationary pres-
c. Classical economists would see a recessionary gap as a short-run problem and
would not advocate any policy; their view would be that the recessionary gap will
not exist in the long run. Monetarists would also be reluctant to endorse a short-
run discretionary monetary policy because they believe it will make the economy
worse. Expansionary monetary policy, such as an increase in the money supply,
would be recommended by Keynesians and by followers of the Great Moderation
consensus if the economy is not suffering from a liquidity trap.
8. Using a graph like Figure 18-4, show how a monetarist can argue that a contrac-
tionary fiscal policy need not lead to a fall in real GDP given a fixed money supply.
Explain.
8. As you can see in the accompanying figure, contractionary fiscal policy shifts the
aggregate demand curve leftward, from AD1 to AD2, in panel (a). Correspondingly,
there is a decrease in money demand, and the money demand curve shifts leftward,
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Solution
9. Monetarists believed for a period of time that the velocity of money was stable within
a country. However, with financial innovation, the velocity began shifting around
a. Calculate the velocity of money for each of the countries. The accompanying table
shows GDP per capita for each of these countries in 2013 in U.S. dollars.
Nominal GDP per capita
Country (U.S. dollars)
Egypt $3,225
South Korea 24,328
b. Rank the countries in descending order of per capita income and velocity of
money. Do wealthy countries or poor countries tend to “turn over” their money
9. a. The velocity of money is defined as nominal GDP divided by the quantity of
money. For example, the velocity of money in Egypt is 1,753/431 = 4.1. The velocity
of money for each of the countries is shown in the accompanying table.
Country Velocity of money
Egypt 4.1
South Korea 2.8
b. Rank in descending order of velocity: South Korea, United States, Thailand, Kenya,
Egypt, India. Rank in descending order of per capita income: United States, South
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