Blanchard Macroeconomia 3 edio

ANSWERS TO END-OF-CHAPTER PROBLEMS

CHAPTER 1
Quick Check
1. a. b. c. d. e. ,. .. a. U0 3U 4a'an b. True. True. True/Uncertain. Average growth i lower ince 1!"3. #owever$ ince the mid%1!!& $ out'ut 'er wor(er ha growth at about the 're%1!"3 rate. )t* too oon to tell whether thi mar( a return to 're%1!"3 growth rate or im'l+ a ,ew luc(+ +ear . True. -al e. -al e. 1!/&%.&&& 3.12 3.12 1.12 .&&1%.&&. &.!2 1./2 %&.!2

5robabl+ clo er to long%run average$ becau e average over hort time 'eriod re,lect bu ine c+cle . #owever$ 4a'an wa growing e6ce'tionall+ ,a t in the earl+ 'o twar 'eriod a it caught u' to the United 0tate . 3ven i, 4a'an recover ,rom it current lum' over the ne6t decade$ it ma+ not re ume growth a high a it 'reviou average. 7ow unem'lo+ment might lead to an increa e in in,lation. Although mea urement error ma+ contribute to the mea ured lowdown in growth$ there are other relevant i ue $ including the 'roductivit+ o, new re earch and the accumulation o, new ca'ital. Although labor mar(et rigiditie ma+ be im'ortant$ it i al o im'ortant to con ider that the e rigiditie ma+ not be e6ce ive$ and that high unem'lo+ment ma+ ari e ,rom ,lawed macroeconomic 'olicie . Although 'oor regulation o, the ,inancial + tem ma+ be contributing to the length o, 4a'an* lum'$ mo t economi t believe that the colla' e in 4a'ane e a et 'rice triggered the economic downturn. Moreover$ tightening regulation would li(el+ involve more 'ain in the hort run ince ome ban( and ,irm would be ,orced to clo e. Although the 3uro will remove ob tacle to ,ree trade between 3uro'ean countrie $ each countr+ will be ,orced to give u' it own monetar+ 'olic+.

3.

a. b.

c.

d.

e.

Dig Deeper
8. 1. 9i cu ion :ue tion. a. b. 1& +ear ; <1.&1=1&>1.1& or 1& 2 higher? .& +ear ; ..2 higher? 1& +ear ; /82 higher .!2? /"2? ./12 higher 1

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

c.

Ta(e out'ut 'er wor(er a a mea ure o, the tandard o, living. 1& +ear ; 1..!/1.1>1.1"$ o the tandard o, living would be about 1"2 higher? .& +ear ; 3"2 higher? 1& +ear ; 1.&2 higher @o. 7abor 'roductivit+ growth ,luctuate a lot ,rom +ear to +ear. The la t ,ew +ear ma+ re're ent good luc(. )t i too oon to tell whether there ha been a change in the trend ob erved ince 1!"3.

d.

/.

!.!<1.&3=t>1.1<1.&A=t !><1.&8!=t t > ln<!=/ln<1.&8!= B 8/ +r

Expl re Fur!her
". a%c. A o, 4une .&&.$ there have been A rece ion . The number are ea onall+% adCu ted annual 'ercentage growth rate o, D95 in chained 1!!/ dollar . 1!8!;1 1!8!;. 1!13;3 1!13;8 1!18;1 1!1";8 1!1A;1 1!/!;8 1!"&;1 %1.1 %1.1 %..1 %/.3 %..& %8.1 %1&.3 %".! %&./ 1!"8;3 1!"8;8 1!"1;1 1!A&;. 1!A&;3 1!A1;8 1!A.;1 1!!&;3 1!!&;8 1!!1;1 %8.8 %... %1.& %".! %&./ %8./ %/.1 %&." %3.. %..&

d.

@o. Drowth rate ,or .&&1; .&&1;1 .&&1;. .&&1;3 .&&1;8 1.32 &.32 %1.32 1."2 3.1 &./ 1.1 1.3

A.

a%b.

2 'oint increa e in unem'lo+ment rate ,or the A rece ion 1!8! 1.! 1!"8%"1 1!13%18 3.1 1!A& 1!1"%1A ... 1!A1%A. 1!/!%"& &." 1!!&%!1

The unem'lo+ment rate increa ed b+ 1.8 'ercentage 'oint between 4anuar+ .&&1 and 4anuar+ .&&..

CHAPTER "
Quick Check
1. a. -al e.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

b. c. d. e. ,. .. a. b. c. d. e. 3. a. b. c.

Uncertain; real or nominal D95. True. True. -al e. The level o, the E5) mean nothing. )t rate o, change tell u about in,lation. Uncertain. Fhich inde6 i better de'end on what we are tr+ing to mea ureGin,lation ,aced b+ con umer or b+ the econom+ a a whole. HI1&&? 5er onal Eon um'tion 36'enditure no change; intermediate good HI.&& million? Dro 5rivate 9ome tic -i6ed )nve tment

HI.&& million? @et 36'ort no change; the Cet wa alread+ counted when it wa 'roduced$ i.e.$ 're umabl+ when 9elta <or ome other airline= bought it new a an inve tment. I1$&&&$&&& the value o, the ilver nec(lace . 1 t 0tage; I3&&$&&&. .nd 0tage; I1$&&&$&&%I3&&$&&&>I"&&$&&&. D95; I3&&$&&&HI"&&$&&&>I1$&&&$&&&. Fage ; I.&&$&&& H I.1&$&&&>I81&$&&&. 5ro,it ; <I3&&$&&&%I.&&$&&&=H<I1$&&&$&&&%I.1&$&&&%3&&$&&&= >I1&&$&&&HI81&$&&&>I11&$&&&. D95; I81&$&&&HI11&$&&&>I1$&&&$&&&. .&&1 D95; 1&JI.$&&&H8JI1$&&&H1&&&JI1>I.1$&&& .&&. D95; 1.JI3$&&&H/JI1&&H1&&&JI1>I8&$&&& @ominal D95 ha increa ed b+ /&2. .&&1 real <.&&1= D95; I.1$&&& .&&. real <.&&1= D95; 1.JI.$&&&H/JI1$&&&H1&&&JI1>I31$&&& Keal <.&&1= D95 ha increa ed b+ .82. .&&1 real <.&&.= D95; 1&JI3$&&&H8JI1&&H1$&&&JI1>I33$&&& .&&. real <.&&.= D95; I8&$&&&. Keal <.&&.1= D95 ha increa ed b+ .1..2. The an wer mea ure real D95 growth in di,,erent unit . @either an wer i incorrect$ Cu t a mea urement in inche i not more or le correct than mea urement in centimeter . .&&1 ba e +ear; 9e,lator<.&&1=>1? 9e,lator<.&&.=>I8&$&&&/I31$&&&>1..! )n,lation>.!2 .&&1 ba e +ear; 9e,lator<.&&1=>I.1$&&&/I33$&&&>&."/? 9e,lator<.&&.=>1

8.

a.

b.

c.

d.

1.

a.

b.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

)n,lation><1%&."/=/&."/>.3.>3.2 c. /. a. b. c. Analogou to 8d. .&&1 real D95 > 1&JI.$1&& H 8JI"1& H 1&&&JI1 > I.!$&&& .&&. real D95 > 1.JI.$1&& H /JI"1& H 1&&&JI1 > I31$1&& <31$1&&%.!$&&&=/.!$&&& > ...8 > ...82 9e,lator in .&&1>I.1$&&&/I.!$&&&>.A/ 9e,lator in .&&.>I8&$&&&/I31$1&&>1.13 )n,lation > <1.13 %.A/=/.A/ > .318 > 31.82. Le $ ee a''endi6 ,or ,urther di cu ion.

d.

Dig Deeper
". a. The :ualit+ o, a routine chec(u' im'rove over time. Ehec(u' now ma+ include 3MD $ ,or e6am'le. Medical ervice are 'articularl+ a,,ected b+ thi 'roblem due to con tant im'rovement in medical technolog+. Lou need to (now how the mar(et value 'regnanc+ chec(u' with and without ultra% ound in that +ear. Thi in,ormation i not available ince all doctor ado'ted the new technolog+ imultaneou l+. 0till$ +ou can tell that the :ualit+%adCu ted increa e will be lower than .&2. Mea ured D95 increa e b+ I1&HI1.>I... <0trictl+$ thi involve mi6ing the ,inal good and income a''roache to D95. A ume here that the I1. 'er hour o, wor( create a ,inal good worth I1..= True D95 hould increa e b+ much le than I.. becau e b+ wor(ing ,or an e6tra hour$ +ou are no longer 'roducing the wor( o, coo(ing within the hou e. 0ince coo(ing within the hou e i a ,inal ervice$ it hould count a 'art o, D95. Un,ortunatel+$ it i hard to mea ure the value o, wor( within the home$ which i wh+ mea ured D95 doe not include it.

b. c.

A.

a.

b.

!.

An wer will var+ de'ending on the web ite i acce ed.

CHAPTER #
Quick Check
1. a. b. c. d. e. ,. g. True. -al e. Dovernment 'ending without tran ,er wa 1A2 o, D95 without tran ,er . -al e. The 'ro'en it+ to con ume mu t be le than one ,or our model to be well de,ined. True. -al e. -al e. The increa e in out'ut i one time the multi'lier. True.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

..

a. b. c.

L>1/&H&./J<L%1&&=H11&H11& L>1&&& L9>L%T>1&&&%1&&>!&& E>1/&H&./J<!&&=>"&& 3:uilibrium out'ut i 1&&&. Total demand>EH)HD>"&&H11&H11&>1&&&. Total demand e:ual 'roduction. That i the e:uilibrium condition u ed to olve ,or out'ut. Nut'ut ,all b+; 8&Jmulti'lier > 8&/.8>1&&. 0o e:uilibrium out'ut i now !&&. Total demand>EH)HD>1/&H&./J<A&&=H11&H11&>!&&. Again$ total demand e:ual 'roduction. 5rivate aving>L%E%T>!&&%1/&%&./J<A&&=%1&&>1/&. 5ublic aving >T%D>%1&. @ational aving <or in hort$ aving= e:ual 'rivate 'lu 'ublic aving$ or 11&. @ational aving e:ual inve tment. Thi tatement i mathematicall+ e:uivalent to the e:uilibrium condition that total demand e:ual 'roduction. Thu $ national aving e:ual inve tment i an alternative tatement o, the e:uilibrium condition.

3.

a. b. c.

Dig Deeper
8. a. b. c. d. e. L increa e b+ 1/<1%c1= L decrea e b+ c1/<1% c1= The an wer di,,er becau e 'ending a,,ect demand directl+$ but ta6e a,,ect demand through con um'tion$ and the 'ro'en it+ to con ume i le than one. The change in L e:ual 1/<1%c1= % c1/<1% c1= > 1. Balanced budget change in D and T are not macroeconomicall+ neutral. The 'ro'en it+ to con ume ha no e,,ect becau e the balanced budget ta6 increa e abort the multi'lier 'roce . L and T both increa e b+ on unit$ o di 'o able income$ and hence con um'tion$ do not change. L>c&Hc1L9H)HD im'lie L>O1/<1%c1Hc1t1=PJOc&%c1t&H)HDP The multi'lier > 1/<1%c1Hc1t1= Q1/<1% c1=$ o the econom+ re 'ond le to change in autonomou 'ending when t1 i 'o itive. A,ter a 'o itive change in autonomou 'ending$ the increa e in total ta6e <becau e o, the increa e in income= tend to le en the increa e in out'ut. A,ter a negative change in autonomou 'ending$ the ,all in total ta6e tend to le en the decrea e in out'ut. Becau e o, the automatic e,,ect o, ta6e on the econom+$ the econom+ re 'ond le to change in autonomou 'ending than in the ca e where ta6e are inde'endent o, income. 0o out'ut tend to var+ le $ and ,i cal 'olic+ i called an automatic tabiliRer. L>O1/<1%c1Hc1t1=PJOc&%c1t&H)HDP T > c1t& H t1JO1/<1%c1Hc1t1=PJOc&%c1t&H)HDP

1.

a. b.

c.

/.

a. b.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

c. d.

Both L and T decrea e. ), D i cut$ L decrea e even more.

CHAPTER $
Quick Check
1. a. b. c. d. e. ,. g. a. b. c. d. e. 3. a. b. c. 8. a. b. 1. a. b. c. -al e. -al e. True. True. -al e. -al e. True. i>&.&1; Mone+ demand > I1A$&&&? Bond demand > I3.$&&& i>&.1&; Mone+ demand > I11$&&&? Bond demand > I31$&&& Mone+ demand decrea e when the intere t rate increa e becau e bond $ which 'a+ intere t$ become more attractive. -or the ame rea on$ bond demand increa e . The demand ,or mone+ ,all b+ 1&2. The demand ,or mone+ ,all b+ 1&2. A 12 increa e <decrea e= in income lead to a 12 increa e <decrea e= in mone+ demand. Thi e,,ect i inde'endent o, the intere t rate. i>1&&/I5B 1? i>332? 1A2? 12 when I5B >I"1? IA1? I!1. @egative. I5B >1&&/<1.&A= B I!3 I.&>M9>I1&&J<..1%i= i>12 M>I1&&J<..1%.11= M>I1& B9 > 1&$&&& % /&$&&& <.31%i= An increa e in the intere t rate o, 1&2 increa e bond demand I/$&&&. An increa e in wealth increa e bond demand$ but ha no e,,ect on mone+ demand$ which de'end on income <a 'ro6+ ,or tran action demand=. An increa e in income increa e mone+ demand$ but decrea e bond demand$ ince we im'licitl+ hold wealth con tant.

..

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

d.

Fhen 'eo'le earn more income$ thi doe not change their wealth right awa+. Thu $ the+ increa e their demand ,or mone+ and decrea e their demand ,or bond .

Dig Deeper
/. a. b. c. d. e. ". A. 9emand ,or central ban( mone+>&.1JILJ<.A%8i= I1&& b > &.1JI1$&&&bJ<.A%8i= i>112 M><1/.1=JI1&& b>I1$&&& b M> Md at the intere t derived in 'art <b=. ), # increa e to I3&& b$ the intere t rate ,all to 12. The intere t rate ,all to 12$ ince when # e:ual I3&& b$ M><1/.1=JI3&& b>I3$&&& b.

The ratio o, currenc+ to total mone+ <the 'arameter c in the te6t= would ri e$ leading to a ,all in the mone+ multi'lier. a. b. c. d. e. ,. g. I1/ i withdrawn on each tri' to the ban(. Mone+ holding Gda+ one; I1/? da+ two; I1.? da+ three; IA? da+ ,our; I8. Average mone+ holding are <I1/HI1.HIAHI8=/8>I1&. IA dollar withdrawal . Mone+ holding o, IA? I8? IA? I8. Average mone+ holding are I/. I1/ dollar withdrawal ? mone+ holding o, I&? I&? I&? I1/. Average mone+ holding are I8. Ba ed on the e an wer $ ATM and credit card have reduced mone+ demand. velocit+>1/<M/IL=>1/7<i= Selocit+ more than doubled between 1!/& and .&&&. ATM0 and credit card reduced 7<i= o velocit+ increa ed.

!.

a. b. c.

CHAPTER %
Quick Check
1. a. b. c. d. e. True. True. -al e. -al e. The balanced budget multi'lier i 'o itive <it e:ual one=$ o the )0 curve hi,t right. -al e.

5ear on 3ducation do Bra il

"

Blanchard Macroeconomia 3 edio

,. g. .. a. b.

Uncertain. An increa e in D lead to an increa e in L <which tend to increa e inve tment=$ but an increa e in the intere t rate <which tend to reduce inve tment=. True. L>O1/<1%c1=PJOc&%c1TH)HDP The multi'lier i 1/<1%c1=. L>O1/<1%c1%b1=PJOc&%c1TH b&%b.i HDP The multi'lier i 1/<1%c1%b1=. 0ince the multi'lier i larger than the multi'lier in 'art <a=$ the e,,ect o, a change in autonomou 'ending i bigger than in 'art <a=. An increa e in autonomou 'ending now lead to an increa e in inve tment a well a con um'tion. 0ub tituting ,or the intere t rate in the an wer to 'art <b=; L>O1/<1%c1%b1H b.d1/d.=PJOc&%c1TH b&H<b.JM/5=/d. HDP The multi'lier i 1/<1%c1%b1H b.d1/d.=. The multi'lier i greater <le = than the multi'lier in 'art <a= i, <b 1% b.d1/d.= i greater <le = than Rero. The multi'lier i big i, b 1 i big$ b. i mall$ d1 i mall$ and/or d. i big$ i.e.$ i, inve tment i ver+ en itive to L$ inve tment i not ver+ en itive to i$ mone+ demand i not ver+ en itive to L$ mone+ demand i ver+ en itive to i.

c.

d.

3.

The )0 curve hi,t le,t. Nut'ut and the intere t rate ,all. The e,,ect on inve tment i ambiguou becau e the out'ut and intere t rate e,,ect wor( in o''o ite direction ; the ,all in out'ut tend to reduce inve tment$ but the ,all in the intere t rate tend to increa e it. a. b. c. d. -rom 3c; L>O1/<1%c1%b1H b.d1/d.=PJOc&%c1TH b&H<b.JM/5=/d. HDP -rom the 7M relation; i> LJd1/d. <M/5=/d. To obtain the e:uilibrium intere t rate$ ub titute ,or e:uilibrium L ,rom 'art <b=. )> b&H b1L% b.i> b&H <b1% b.d1/d.=JLH b.<M/5=/d. To obtain e:uilibrium inve tment$ ub titute ,or L ,rom 'art <b=. -rom 'art b and d$ holding M/5 con tant$ ) increa e b+ <b 1% b.d1/d.=/ <1%c1%b1H b.d1/d.=$ in re 'on e to a one%unit increa e in D. 0o$ i, D decrea e b+ one unit$ inve tment will increa e when b1Qb. d1/d.. A ,all in D lead to a ,all in out'ut <which tend to reduce inve tment= and to a ,all in the intere t rate <which tend to increa e inve tment=. Thu $ ,or inve tment to increa e$ the out'ut e,,ect <b1= mu t be maller than the intere t rate e,,ect <b . d1/d.=. @ote that the intere t rate e,,ect contain two term ; <i= d 1/d.$ the lo'e o, the 7M curve$ which give the e,,ect o, a one unit change in e:uilibrium out'ut on the intere t rate$ and <ii= b .$ which give the e,,ect o, a one unit change in the e:uilibrium intere t rate on inve tment. L>EH)HD>.&&H..1J<L%.&&=H11&H..1L%1&&&iH.1& L>11&&%.&&&i M/5>1/&&>.L%A&&&i i>L/8&&&%1/1

e.

8.

a. b.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

c. d. e. ,.

0ub tituting b into a; L>1&&& 0ub tituting c into b; i>1/.&>12 E>8&&? )>31&? D>.1&? EH)HD>1&&& L>1&8&? i>32? E>81&? )>3A&. A monetar+ e6'an ion reduce the intere t rate and increa e out'ut. The increa e in out'ut increa e con um'tion. The increa e in out'ut and the ,all in the intere t rate increa e inve tment. L>1.&&? i>1&2? E>81&? )>31&. A ,i cal e6'an ion increa e out'ut and the intere t rate. The increa e in out'ut increa e con um'tion.

g.

Dig Deeper
1. -irm deciding how to u e their own ,und will com'are the return on bond to the return on inve tment. Fhen the intere t rate on bond increa e $ the+ become more attractive$ and ,irm are more li(el+ to u e their ,und to 'urcha e bond $ rather than to ,inance inve tment 'roCect . a. b. c. d. e. ". a. b. c. 5eo'le would hold onl+ mone+$ and not bond $ when the intere t rate wa negative. Mone+ would be a better tore o, value than bond . 0ee hint. 0ee hint. 7ittle e,,ect. ), the intere t rate i actuall+ Rero$ than the increa e in M ha literall+ no e,,ect. @o. ), there i no e,,ect on the intere t rate$ which a,,ect inve tment$ monetar+ 'olic+ cannot a,,ect out'ut. -all in T hi,t 7M right. )ncrea e in M hi,t 7M u'. Nut'ut increa e . Elinton%Dreen 'an <loo el+=; contractionar+ ,i cal 'olic+ <)0 le,t= and e6'an ionar+ monetar+ 'olic+ <7M u'=. Kece ion$ ,all in the growth rate. 0ome other hoc( ; ,all in inve tment 'ending and con umer con,idence ,ollowing ,all in toc( mar(et? the event o, 0e'tember 11$ which had direct e,,ect and a,,ected con umer con,idence. )ncrea e D <or reduce T= and increa e M. Keduce D <or increa e T= and increa e M. The intere t rate ,all . )nve tment increa e $ ince the intere t rate ,all while out'ut remain con tant.

/.

A.

a. b.

CHAPTER &
Quick Check
1. a. b. -al e. -al e.

5ear on 3ducation do Bra il

Blanchard Macroeconomia 3 edio

c. d. e. ,. g. h. .. a. b. c. d. e. 3. a. b. c.

-al e. True. -al e. Uncertain. True. -al e. <Monthl+ hire H monthl+ e'aration =/monthl+ em'lo+ment >//!3.A>/.82 1.///.1>.12 ..8//.1>3"2. 9uration i 1/.3" or .." month . 8.!/1".3>!2. new wor(er ; .31/8.!>"2. F/5>1/<1HT=>1/1.&1>.!1 Fage etting; u>1%F/5>12 F/5>1/1.1>.!1? u>1%.!1>!2. The increa e in the mar(u' lower the real wage. -rom the wage% etting e:uation$ the unem'lo+ment rate mu t ri e ,or the real wage to ,all. 0o the natural rate increa e .

Dig Deeper
8. a. b%c. d. An wer will var+. Mo t li(el+$ the Cob +ou will have ten +ear later will 'a+ a lot more than +our re ervation wage at the time <relative to +our t+'ical ,ir t Cob=. The later Cob i more li(el+ to re:uire training and will 'robabl+ be a much harder Cob to monitor. 0o$ a e,,icienc+ wage theor+ ugge t $ +our em'lo+er will be willing to 'a+ a lot more than +our re ervation wage ,or the later Cob$ to en ure low turnover and low hir(ing. The com'uter networ( admini trator ha more bargaining 'ower. 0he i much harder to re'lace. The rate o, unem'lo+ment i a (e+ tati tic. -or e6am'le$ when there are man+ unem'lo+ed wor(er it become ea ier ,or ,irm to ,ind re'lacement . Thi reduce the bargaining 'ower o, wor(er . ./3>/"2? <./3=.> 882? <./3=/ > !2 <./3=/ > !2 <,or .&&1=; "!"//.8.> 1.2 7ong%term unem'lo+ed e6it unem'lo+ment le ,re:uentl+ than the average.

1.

a. b.

Expl re Fur!her
/. a. b. c.

5ear on 3ducation do Bra il

1&

Blanchard Macroeconomia 3 edio

".

a%b. c.

An wer will de'end on when the 'age i acce ed. The decline in unem'lo+ment doe not e:ual the increa e in em'lo+ment$ becau e the labor ,orce i not con tant. )t ha increa ed over the 'eriod.

CHAPTER '
Quick Check
1. a. b. c. d. e. ,. g. a. b. 3. a. 0hort run; Medium run; 0hort run; Medium run; True. True. -al e. -al e. True. -al e. -al e. )0 right$ A9 right$ A0 u'$ 7M u'$ L ame$ i u'$ 5 u' )0 le,t$ A9 le,t$ A0 down$ 7M down$ L ame$ i down$ 5 down F0 u' u' 50 ame ame A0 u' u' ,urther i u' u' ,urther A0 down down ,urther i down down ,urther A9 ame ame 7M u' u' ,urther )0 ame ame

..

L down down ,urther F0 ame ame 50 u' u'

5 u' u' ,urther A9 ame ame 7M down down ,urther )0 ame ame

0hort run; Medium run; 0hort run; Medium run; 8. a.

L u' u' ,urther

5 down down ,urther

Mone+ i neutral in the en e that the nominal mone+ u''l+ ha no e,,ect on out'ut or the intere t rate in the medium run. Nut'ut return to it natural level. The intere t rate i determined b+ the 'o ition o, the )0 curve and the natural level o, out'ut. 9e 'ite the neutralit+ o, mone+ in the medium run$ an increa e in mone+ can increa e out'ut and reduce the intere t rate in the hort run. )n 'articular$ e6'an ionar+ monetar+ 'olic+ can be u ed to 'eed u' the econom+* return to the natural level o, out'ut when out'ut i low. )n the medium run$ inve tment and the intere t rate both change with ,i cal 'olic+. -al e. 7abor mar(et 'olicie $ uch a unem'lo+ment in urance$ can a,,ect the natural level o, out'ut.

b. c.

5ear on 3ducation do Bra il

11

Blanchard Macroeconomia 3 edio

Dig Deeper
1. a. b. c. d. e. N'en an wer. -irm ma+ be o 'e imi tic about ale that the+ do not want to borrow at an+ intere t rate. The )0 curve i vertical? the intere t rate doe not a,,ect e:uilibrium out'ut. @o change. The A9 curve i vertical? the 'rice level doe not a,,ect e:uilibrium out'ut. The increa e in R reduce the natural level o, out'ut and hi,t the A0 curve u'. 0ince the A9 curve i vertical$ out'ut doe not change$ but the 'rice level increa e . @ote that out'ut i above it natural level. The A0 curve hi,t u' ,orever$ and the 'rice level increa e ,orever. Nut'ut doe not change? it remain above it natural level ,orever. The 7M curve i ,lat. @o e,,ect. The A9 curve i vertical. A change in 5$ which a,,ect M/5$ ha no e,,ect on the intere t rate or out'ut. @o e,,ect on out'ut in the hort run or the medium run. 0ince the mone+ toc( doe not a,,ect the intere t rate$ it doe not a,,ect out'ut. The natural level o, out'ut i Ln. A uming that out'ut tart at i natural level$ 5&> M&% <1/c=JLn A uming that 5e>5&; L > .cM&%c5>.cM&%c5&%cdLHcdLn. Kecalling that Ln>c<M&%5&=; L> Ln H <c/<1Hc d==JM&. )nve tment goe u' becau e out'ut i higher and the intere t rate i lower. )n the medium run$ L > Ln )n the medium run$ inve tment return to it 'reviou level$ becau e out'ut and the intere t rate return to their 'reviou level .

,. /. a. b. c. d. ". a. b. c. d. e.

CHAPTER (
Quick Check
1. a. b. c. d. e. ,. True. -al e. -al e. True. -al e. True.

5ear on 3ducation do Bra il

1.

Blanchard Macroeconomia 3 edio

..

a.

@o. )n the 1!"& $ we e6'erienced high in,lation and high unem'lo+ment. The e6'ectation %augmented 5hilli' curve i a relation hi' between in,lation and unem'lo+ment conditional on the natural rate and in,lation e6'ectation . Diven in,lation e6'ectation $ increa e in the natural rate <which re ult ,rom adver e hoc( to labor mar(et in titution Gincrea e in RGor ,rom increa e in the mar(u'Gwhich encom'a oil hoc( = lead to an increa e in both the unem'lo+ment rate and the in,lation rate. )n addition$ increa e in in,lation e6'ectation im'l+ higher in,lation ,or an+ level o, unem'lo+ment. <)ncrea e in in,lation e6'ectation al o tend to increa e the unem'lo+ment rate in the hort run ,rom the u''l+ ideGthin( o, an increa e in the e6'ected 'rice level$ given la t 'eriodU 'rice$ in the A9%A0 ,ramewor(. #owever$ increa e in in,lation e6'ectation ma+ tend to increa e hort run out'ut ,rom the demand ide$ becau e o, the real intere t rate e,,ect. The real intere t rate i introduced in Eha'ter 18.= )n the 1!"& $ both the natural rate and e6'ected in,lation increa ed$ o both unem'lo+ment and in,lation were relativel+ high. @o. The e6'ectation %augmented 5hilli' curve im'lie that maintaining a rate o, unem'lo+ment below the natural rate re:uire increa ing <not im'l+ high= in,lation. Thi i becau e in,lation e6'ectation continue to adCu t to actual in,lation. un>&.1/. >12 Vt >&.1%.J.&3 > 82 ever+ +ear beginning with +ear t. Vet> & and Vt>82 ,orever. )n,lation e6'ectation will be ,orever wrong. Thi i unli(el+. W might increa e becau e 'eo'leU in,lation e6'ectation ada't to 'er i tentl+ 'o itive in,lation. The increa e in W ha no e,,ect on un. V1> V 8H.1%.&/>82H82>A2 -or t X 1$ re'eated ub titution im'lie $ V t> V 1 H <t % 1=J82. 0o$ V 1&>.A2? V 11>8A2. )n,lation e6'ectation will again be ,orever wrong. Thi i unli(el+. A higher co t o, 'roduction mean a higher mar(u' o, 'rice over wage . The mar(u' re,lect all nonwage com'onent o, the 'rice o, a good. un><&.&AH&.1T=/.? Thu $ the natural rate o, unem'lo+ment increa e ,rom 12 to /2 a T increa e ,rom .&2 to 8&2.

b.

3.

a. b. c. d. e. ,.

8.

a. b.

Dig Deeper
1. a. b. c. V t > V t%1 H &.1 % .ut > V t%1 H .2>.2 V t > .2? V tH1 > 82? V tH. > /2? V tH3 > A2. V t > &.1 V t H &.1 V t%1 H &.1 % .ut or$ V t > V t%1 H 82 V t > 82? V tH1 > A2? V tH. > 1.2? V tH3 > 1/2

5ear on 3ducation do Bra il

13

Blanchard Macroeconomia 3 edio

d. /. a. b. ". A. a%c.

A inde6ation increa e $ low unem'lo+ment lead to a larger increa e in in,lation over time. Le . The average rate o, unem'lo+ment wa lower in the 1!!& . )ndeed$ even though the unem'lo+ment rate wa at a hi torical low$ in,lation ro e ver+ little. The natural rate o, unem'lo+ment 'robabl+ decrea ed. The e:uation that eem to ,it well i Vt Vt%1 > / Tt$ which im'lie a natural rate o, a''ro6imatel+ /2.

Expl re Fur!her

The relation hi' im'l+ a lower natural rate in the more recent 'eriod.

CHAPTER )
Quick Check
1. a. b. c. d. e. ,. g. h. i. a. -al e. True. True. -al e. -al e. True. True. True. True. The unem'lo+ment rate will increa e b+ 12 'er +ear when g>&.12. Ab ent out'ut growth$ 'roductivit+ growth tend to increa e the unem'lo+ment rate$ ince ,ewer wor(er are re:uired to 'roduce a given :uantit+ o, good . Ab ent out'ut growth$ labor ,orce growth al o tend to increa e the unem'lo+ment rate$ ince more wor(er are com'eting ,or the ame number o, Cob . There,ore$ unem'lo+ment will increa e unle the growth rate e6ceed the um o, 'roductivit+ growth and labor ,orce growth. Fe need growth o, 8..12 'er +ear ,or each o, the ne6t ,our +ear . N(unU law i li(el+ to become; ut%ut%1>%&.8J<g+t%12= un> 12 A ume the econom+ ha been at the natural rate o, unem'lo+ment ,or two +ear <thi +ear and la t +ear=. Then$ g+t > 32? gmt > g+t H Vt > 112 t%1; t; tH1; tH.; tH3; V A2 82 82 82 82 u 12 !2 12 12 12 g+t 32 %"2 132 32 32 gmt 112 %32 1"2 "2 "2

..

b. c. 3. a. b. c.

5ear on 3ducation do Bra il

18

Blanchard Macroeconomia 3 edio

8.

a.

0ee te6t ,or ,ull an wer. Draduali m reduce need ,or large 'olic+ wing $ with e,,ect that are di,,icult to 'redict$ but immediate reduction ma+ be more credible and encourage ra'id$ ,avorable change in in,lation e6'ectation . Nn the other hand$ the taggering o, wage deci ion ugge t that$ i, the 'olic+ i credible$ a gradual di in,lation i the o'tion con i tent with no change in the unem'lo+ment rate. @ot clear. Ba ed in Ball* evidence$ 'robabl+ ,a t di in,lation$ de'ending on the ,eature li ted in 'art <c=. 0ome im'ortant ,eature ; the degree o, inde6ation$ the nature o, the wage% etting 'roce $ and the initial rate o, in,lation. )n,lation will tart increa ing. )t hould let unem'lo+ment increa e to it new$ higher$ natural rate.

b. c. 1. a. b.

Dig Deeper
/. a. b. c. d. acri,ice ratio>1 Vt > 1&2? VtH1 > A2? VtH. > /2? VtH3 > 82? VtH8 > .2 1 +ear ? acri,ice ratio><1& 'oint +ear o, e6ce reduction in in,lation=>1 unem'lo+ment=/<1& 'ercentage 'oint

Vt > A.12? VtH1 > 1.A"12? VtH. > 3.!&/2? VtH3 > ..83&2? VtH8 > 1.3..2 7e than 1 +ear are re:uired. acri,ice ratio; 1&/<1.%1.3..=>.!38 The acri,ice ratio i lower becau e 'eo'le are omewhat ,orward loo(ing and incor'orate the target in,lation rate into their e6'ectation . tH1. The e6 'o t acri,ice ratio ,rom thi cenario > <1 'oint +ear o, e6ce unem'lo+ment=/<1& 'oint reduction in,lation= > &.1 Ta(e mea ure to enhance credibilit+. Vt%Vt%1> %<ut%.&1= ut% ut%1> %.8J<gmt%Vt%.&3= A uming gm$t%1>132$ t; tH1; tH.; tH3; tH8; tH1; tH/; tH"; tHA; V ".12 3.12 %&."2 %3..2 %8.12 %3.12 %..12 %&.12 &.A2 Vt%1> 1&2$ ut%1>12$ and gm>32 beginning in +ear t; u ".!2 !.12 A.A2 ".12 1.!2 8.82 3./2 3.82 3."2

e. ,. ". a. b.

5ear on 3ducation do Bra il

11

Blanchard Macroeconomia 3 edio

tH!; tH1&; c.

1.12 1./2

8.32 8.!2

)n,lation doe not decline moothl+. )n the earl+ +ear $ the large unem'lo+ment rate <relative to the natural rate= reduce in,lation to negative value . 0ince mone+ growth > 3 2 > normal out'ut growth in thi e6am'le$ negative in,lation drive real mone+ growth <and hence out'ut growth= above the normal out'ut growth rate$ and unem'lo+ment ,all . 3ventuall+$ unem'lo+ment ,all below the natural rate$ in,lation begin to increa e again. The e c+cle continue$ with decrea ing am'litude. u>12 and V>&2 in the medium run.

d.

CHAPTER 1*
Quick Check
1. a. b. c. d. e. ,. g. h. a. b. c. 3. a. b. c. d. e. 8. a. b. c. d. True. True. -al e. -al e. -al e. -al e. True. Uncertain. 36am'le; -rance; <1.&81=1&J1$8A!>I8&.! (. Derman+; I8A.8 (? 4a'an; IA..! (? UM; I.1.. (? U.0.; I31.3 ( ..3 -or 4a'an and UM$ +e ? ,or -rance and Derman+$ no. I1$&&& /&&& 'e o I/&& IA&& Me6ican tandard o, living relative to the U.0.Ge6change rate method; /&&/1&&& >.1.? 555 method; A&&/1&&&>.1/ L>/3 L double . Le . L/@><M/@=1/.

..

5ear on 3ducation do Bra il

1/

Blanchard Macroeconomia 3 edio

e. ,. g. h.

M/@>8 im'lie L/@>.. M/@>A im'lie L/@>..A3. Nut'ut le @o.

than double .

@o. )n 'art <,=$ we are loo(ing at what ha''en to out'ut when we increa e ca'ital onl+$ not ca'ital and labor in e:ual 'ro'ortion. There are decrea ing return to ca'ital. Le .

Dig Deeper
1. a. b. c. d. d ln +/dt > .1 d ln (/dt growth rate o, out'ut > 1/. growth rate o, ca'ital 82 M/L increa e . @o. 0ince ca'ital i growing ,a ter than out'ut$ the aving rate will have to increa e to maintain the ame 'ace. 3ventuall+$ the re:uired aving will e6ceed out'ut. Ea'ital mu t grow ,a ter than out'ut becau e there are decrea ing return to ca'ital in the 'roduction ,unction.

/.

3ven though the United 0tate wa ma(ing the mo t im'ortant technical advance $ the other countrie were growing ,a ter becau e the+ were im'orting technologie 'reviou l+ develo'ed in the United 0tate . )n other word $ the+ were reducing their technological ga' with the United 0tate .

Expl re Fur!her
". a%d. Eonvergence ,or the -rance$ Belgium$ and )tal+? no convergence ,or the econd et o, countrie .

CHAPTER 11
Quick Check
1. a. b. c. d. e. ,. g. h. i. Uncertain. True i, aving include 'ublic and 'rivate aving. -al e i, aving onl+ include 'rivate aving. -al e. Uncertain. Uncertain. True. <Nut'ut 'er ca'ita e:ual out'ut 'er wor(er time the 'artici'ation rate$ which i at about /"2 ,or the United 0tate toda+. 0o$ roughl+ /&2 i true.= -al e. -al e. Uncertain/,al e. 3ven i, the endogenou growth model i true$ the growth rate won*t be related to the level o, human ca'ital. The tatement could be true i, higher education level lead to a ,a ter rate o, technological 'rogre . -al e. 3ven i, +ou acce't the 'remi e <that educational inve tment increa e out'ut$ a would be im'lied b+ the Man(iw$ Komer$ Feil 'a'er=$ it doe not nece aril+ ,ollow that countrie hould increa e educational aving$ ince ,uture increa e in out'ut will come at

5ear on 3ducation do Bra il

1"

Blanchard Macroeconomia 3 edio

the e6'en e o, current con um'tion. N, cour e$ there are other argument ,or ub idiRing education$ 'articularl+ ,or low%income hou ehold . .. @o. <1= The 4a'ane e rate o, growth i not o high an+more. <.= ), the 4a'ane e aving rate ha alwa+ been high$ then thi cannot e6'lain the di,,erence between the rate o, growth in 4a'an and the United 0tate in the la t 8& or 1& +ear . <3= ), the 4a'ane e aving rate ha been higher than it u ed to be$ then thi can e6'lain ome o, the high 4a'ane e growth. The contribution o, high aving to growth in 4a'an hould$ however$ come to an end. A,ter a decade; higher growth rate. A,ter ,ive decade ; growth rate bac( to normal$ higher level o, out'ut 'er wor(er. a. b. 1. a. b. c%e. /. a. b. c. d. e. ,. g. h. " a. b. c. d. #igher aving. #igher out'ut 'er wor(er 0ame out'ut 'er wor(er. #igher out'ut 'er ca'ita. M/@>< /<.Y==.? L/@> /<8Y= E/@><1% =L/@> <1% =/<8Y= L/@ increa e with ? E/@ increa e until >.1$ then decrea e . Le . Le . Le . L/@ > <M/@=1/3 )n tead+ tate$ ,<M/@= > YM/@$ which$ given the 'roduction ,unction in 'art <d=$ im'lie ; M/@>< /Y=3/. L/@ >< /Y=1/. L/@ > . L/@ > .1/. 0ub tituting ,rom /e; M/@>1 0ub tituting ,rom /,; L/@>1 M/@>.31? L/@>."1 U ing e:uation <11.3=$ the evolution o, M/@ i ; &.!$ &.A.$ &."1. The evolution o, L/@ i ; &.!"$ &.!3$ &.!1

3.

Dig Deeper
8.

5ear on 3ducation do Bra il

1A

Blanchard Macroeconomia 3 edio

CHAPTER 1"
Quick Check
1. a. b. c. d. e. ,. g. h. i. a. b. c. d. e. 3. 8. 1. True. True. -al e. True. -al e. True. Uncertain. -al e. -al e. Mo t technological 'rogre eem to come ,rom KZ9 activitie . 0ee di cu ion on ,ertilit+ and a''ro'riabilit+ in Eha'ter 1.... 7ower growth in 'oorer countrie . #igher growth in rich countrie . )ncrea e in KZ9 and in out'ut growth. A decrea e in the ,ertilit+ o, a''lied re earch? a < mall= decrea e in growth. A decrea e in the a''ro'riabilit+ o, drug re earch. A dro' in the develo'ment o, new drug . 7ower technological 'rogre and lower growth.

..

A hi,t to a ,ull+ ,unded + tem hould increa e out'ut 'er wor(er in the long run. )t hould have no e,,ect on the long run growth rate o, out'ut 'er wor(er. 0ee di cu ion in Eha'ter 1.... a. b. Both lead to an initial decrea e in growth. Nnl+ the ,ir t lead to a 'ermanent decrea e in growth. Lear 1; 3&&&? Lear .; 3!/& Keal D95> 33&&? growth rate o, real D95>1&2 .&2 Keal D95/For(er>3& in both +ear ? labor 'roductivit+ growth i Rero. U ing I13 a the 'rice o, ban(ing ervice in Lear .; real D95 >3!!&? out'ut growth> 332. %&.A2 5ro'er mea urement im'lie real gd'/wor(er>3/.3 in +ear .. 7abor 'roductivit+ growth i .12.

Dig Deeper

/.

a. b. c. c. e. ,. g.

5ear on 3ducation do Bra il

1!

Blanchard Macroeconomia 3 edio

h. ". a. b. c.

True$ a uming there i 'rogre

in the ban(ing ervice

ector.

<M/<A@==J > < /<YHgAHg@==. > 1? <L/<A@==J > <1=1/.? gL/<A@= > &? gL/@ > 82? gL > /2 <M/<A@== > <8/1=.? <L/<A@==J > <8/1=? gL/<A@= > &? gL/@ > A2? gL > 1&2 <M/<A@== > <8/1=.? <L/<A@==J > <8/1=? gL/<A@= > &? gL/@ > 82? gL > 1&2 5eo'le are better o,, in ca e a. Diven an+ et o, initial value $ the level o, technolog+ i the ame in ca e a and c$ but the level o, ca'ital 'er e,,ective wor(er i higher at ever+ 'oint in time in ca e a. Thu $ ince L/@>AJ<L/<A@==>AJ<M/<A@== 1/.$ out'ut 'er wor(er i alwa+ higher in ca e a. 5robabl+ a,,ect A. Thin( o, climate. A,,ect #. A,,ect A. 0trong 'rotection tend to encourage more KZ9 but al o to limit di,,u ion o, technolog+. Ma+ a,,ect A through di,,u ion. Ma+ a,,ect M$ #$ and A. 7ower ta6 rate increa e the a,ter%ta6 return on inve tment$ and thu tend to lead to more accumulation o, M and # and more KZ9 'ending. ), we inter'ret M a 'rivate ca'ital$ than in,ra tructure a,,ect A <e.g.$ better tran 'ortation networ( ma+ ma(e the econom+ more 'roductive b+ reducing conge tion time=. A uming no technological 'rogre $ lower 'o'ulation growth im'lie a higher tead+ tate level o, out'ut 'er wor(er. 7ower 'o'ulation growth lead to higher ca'ital 'er wor(er. ), there i technological 'rogre $ there i no tead+% tate level o, out'ut 'er wor(er. )n thi ca e$ however$ lower 'o'ulation growth im'lie that out'ut 'er wor(er will be higher at ever+ 'oint in time$ ,or an+ given 'ath o, technolog+. 0ee the an wer to 'roblem "c. There i a lowdown in growth and the rate o, technological 'rogre in the modern 'eriod. 4a'anU growth rate o, technological 'rogre i higher becau e it i catching u' to the U.0. level o, technolog+. @ot all o, the di,,erence in growth rate o, out'ut 'er wor(er i attributable to the di,,erence in rate o, technological 'rogre . A big 'art i attributable to the di,,erence in rate o, growth o, ca'ital 'er wor(er.

A.

a. b. c. d. e. ,.

g.

Expl re Fur!her
!. a%,.

CHAPTER 1#
Quick Check
1. a. b. c. d. e. -al e. -al e. True. True. True.

5ear on 3ducation do Bra il

.&

Blanchard Macroeconomia 3 edio

,. g. h. .. a. b. c.

True. -al e. True. u > 1%<1/<1HT==<A/Ae= u > 1%<1/<1HT== > 8.A2 @o. 0ince wage adCu t to e6'ected 'roductivit+$ an increa e in 'roductivit+ eventuall+ lead to e:ui'ro'ortional increa e in the real wage im'lied b+ wage etting and the real wage im'lied b+ 'rice etting$ at the original natural rate o, unem'lo+ment. Thu $ e:uilibrium can be maintained without an+ change in the natural rate o, unem'lo+ment.

3. 8.

9i cu ion :ue tion. a. b. c. d. Keduce the ga'$ i, thi lead to an increa e in the relative u''l+ o, (illed wor(er . Keduce the ga'$ ince it lead to a decrea e in the relative u''l+ o, un (illed wor(er . Keduce the ga'$ i, it lead to an increa e in the relative u''l+ o, (illed wor(er . )ncrea e the ga'$ i, U.0. ,irm hire un (illed wor(er in Eentral America$ ince it reduce the relative demand ,or U.0. un (illed wor(er . Te6tile 'roduction i moving to low wage countrie . 5o ibl+ demogra'hic change $ increa ed availabilit+ o, childcare out ide the home$ decline in labor u''l+ ,or the e 'o ition . Technological 'rogre .

1.

a. b. c.

/.

Eon ider an increa e in the level o, A in the A9%A0 diagram. Eombine the wage% etting and 'rice% etting e:uation into an A0 e:uation; 5 > 5e<1HT=<Ae/A=-<1%L/<A7=$ R=. An increa e in A ha two e,,ect ; i. To the e6tent that Ae lag behind A$ Ae/A ,all . Thi i the e,,ect that tend to reduce the actual and natural rate o, unem'lo+ment ,or a time. ii. -or a given level o, L$ an increa e in A reduce L/A$ increa e u$ reduce F <through the ,unction=$ and reduce 5. Thi i the e,,ect that tend to increa e the actual rate o, unem'lo+ment in the hort run. The e,,ect in <i= and <ii= both hi,t the A0 curve down$ o out'ut increa e in the hort run. The e,,ect on hort%run unem'lo+ment de'end on the relative trength o, the e,,ect in <i= and <ii=.

Dig Deeper
". 9i cu ion :ue tion.

5ear on 3ducation do Bra il

.1

Blanchard Macroeconomia 3 edio

a. b.

5 > 5e<1HT=<Ae/A=<L/7=<1/A= A0 hi,t down. Diven Ae/A>1$ an increa e in A im'lie a ,all in 5$ given L. Thi occur becau e ,or a given level o, L$ unem'lo+ment i higher$ o wage are lower and o$ in turn$ i the 'rice level. There i now an additional e,,ect$ a ,all in A e/A. )n e,,ect$ wor(er do not receive a much o, an increa e in wage a warranted b+ the increa e in 'roductivit+. Eom'ared to 'art <b=$ nominal wage are lower$ leading to a lower value o, 5 given L.

c.

CHAPTER 1$
Quick Check
1. a. b. c. d. e. ,. g. h. i. a. b. c. 3. a. b. c. 8. a. b. True. True. True. -al e. True. -al e. True. True. The nominal intere t rate i alwa+ 'o itive. -al e. The real intere t rate can be negative. Keal. @ominal 'ro,it are li(el+ to move with in,lation? real 'ro,it are ea ier to ,oreca t. @ominal. The 'a+ment are nominal. @ominal. ), lea e 'a+ment are in nominal term $ a i t+'ical. 36act; r > <1H.&8=/<1H.&.=%1 > 1.!/2? A''ro6imation; r >.&8%.&. > .2 3./&2? 82 1.8A2? A2 @o. Ntherwi e$ nobod+ would hold bond . Mone+ would be more a''ealing; it 'a+ at lea t a Rero nominal intere t rate and can be u ed ,or tran action . Le . The real intere t rate will be negative i, e6'ected in,lation e6ceed the nominal intere t rate. 3ven o$ the real intere t rate on bond <which 'a+ nominal intere t= will e6ceed the real intere t rate on mone+ <which doe not 'a+ nominal intere t= b+ the nominal intere t rate. A negative real intere t rate ma(e borrowing ver+ attractive and lead to a large demand ,or inve tment. An wer will var+. The di count rate i the intere t rate. 0o 359S are <i= I.$&&&J<1%..1= under either intere t rate and <ii= <1%..=JI.$&&& under either intere t rate.

..

c. d. 1. a.

5ear on 3ducation do Bra il

..

Blanchard Macroeconomia 3 edio

b.

The intere t rate doe not enter the calculation. #ence$ +ou 're,er <ii= to <i= ince .&2Q.12. @ote that the an wer to 'art <a= doe not im'l+ that aving will not accumulate. B+ retirement$ the initial inve tment will have grown b+ a ,actor o, <1Hi= 8& in nominal term and <1Hr=8& in real term . A long a r i 'o itive$ the 'urcha ing 'ower o, the initial inve tment will grow. )n addition$ thi im'le e6am'le omit an im'ortant real%world ,eature o, retirement aving ; the ta6%,ree accrual o, intere t. A a re ult o, thi ,eature$ the e,,ective intere t rate on retirement aving i much higher than the e,,ective <a,ter%ta6= intere t rate on ordinar+ aving.

/.

a. b.

I1&&& 0ince the ,ir t 'a+ment occur at the end o, the +ear$ IS > IRO<1Hi=n%<1Hi=P/OiJ<1Hi=nP. 1& +ear ; I1"1.!&? .& +ear ; IA3/.8!? 3& +ear ; I!3/.!/? /& +ear ; I!!/.3! i > .2; con ol I1&&&? 1& +ear ; IA1/...? .& +ear ; I11/".A1? 3& +ear ; I.1A8.88? /& +ear ; I3881./1 i > 12; con ol I.&&&? 1& +ear ; I"1&."A? .& +ear ; I1.&A.13? 3& +ear ; I1118.11? /& +ear ; I1AA".1A

c.

".

a.

)n the medium run$ change in in,lation are re,lected one ,or one in change in the nominal intere t rate. )n other word $ in the medium run$ change in in,lation have no e,,ect on the real intere t rate. 0u''ort. The line hould not go through the origin. The real intere t rate i 'o itive. @o. 3ven i, monetar+ 'olic+ doe not a,,ect out'ut or the real intere t rate in the medium run$ it can be u ed in the hort run.

b. c. d.

Dig Deeper
A. a. b. c. The )0 hi,t right. At the ame nominal intere t rate$ the real intere t rate i lower$ o out'ut i higher. The 7M curve doe not hi,t. Mone+ demand de'end on the nominal intere t rate$ not the real intere t rate. Nut'ut increa e . The nominal intere t rate i higher than in -igure 18%1. Fhether the nominal intere t rate i lower or higher than be,ore the increa e in mone+ growth i ambiguou . Thin(ing in term o, the mone+ mar(et e:uilibrium$ the increa e in the nominal mone+ u''l+ tend to reduce the nominal intere t rate$ but the increa e in nominal mone+ demand <becau e o, the increa e in out'ut= tend to increa e the nominal intere t rate.

5ear on 3ducation do Bra il

.3

Blanchard Macroeconomia 3 edio

d.

Nut'ut i higher than in -igure 18%1. Kea oning ,rom the )0 relation$ the real intere t rate mu t be lower$ ince no e6ogenou variable in the )0 relation have changed. <)n other word $ while the nominal intere t rate ma+ increa e relative to -igure 18%1$ it increa e b+ le than the increa e in e6'ected in,lation. 0o the real intere t rate decrea e .=

CHAPTER 1%
Quick Check
1. a. b. c. d. e. ,. g. h. a. b. c. 3. -al e. True. True. -al e. True. True. -al e. Uncertain/-al e. 1Hi ><I-/I5=1/n i ><1&&&/A&&=1/3%1 > "."2 1."2 8.12

..

The +ield i a''ro6imatel+ the average o, the hort term intere t rate over the li,e o, the bond. a. b. c. 12. 1..12 1.12 Une6'ected hi,t down o, the 7M curve. Une6'ected ,all in the intere t rate and increa e in L. 0toc( 'rice increa e. @o change in toc( 'rice . Ambiguou e,,ect on toc( 'rice . Une6'ected e6'an ionar+ ,i cal 'olic+ mean the intere t rate i higher than e6'ected <a,ter the e6'ected e6'an ionar+ monetar+ 'olic+= but o i out'ut. The intere t rate e,,ect tend to reduce toc( 'rice ? the out'ut e,,ect to increa e them. 0ee Eha'ter 11. )nitiall+ a,ter the increa e$ the +ield curve will lo'e down out to one%+ear maturitie $ then lo'e u'. A,ter one +ear$ the +ield curve will lo'e u'. A,ter three +ear $ the +ield curve will be ,lat.

8.

a. b. c.

Dig Deeper
1. a. b.

5ear on 3ducation do Bra il

.8

Blanchard Macroeconomia 3 edio

/.

a.

An inverted +ield curve im'lie that the e6'ected ,uture intere t rate i lower than the current intere t rate. The e e6'ectation could ari e ,rom a belie, that the )0 curve will hi,t to the le,t in the ,uture <and out'ut will ,all=$ a+ becau e ,uture inve tment i e6'ected to ,all. Diven the -i her e,,ect$ a tee' +ield curve 'robabl+ im'lie that ,inancial mar(et 'artici'ant believe that ,uture in,lation will be ub tantiall+ higher than current in,lation.

b. ".

7et r be the real intere t rate$ g the growth rate o, dividend $ and 6 be the ri ( 'remium. The 'rice i given b+; 1&&&/<1 H r H 6= H 1&&&<1 H g=/<1 H r H 6=. H 1&&&<1 H g=./<1 H r H 6=3 . . . > O1&&&/<1 H r H 6=PO1 H <1 H g=/<1 H r H 6= H <1 H g=./<1 H r H 6=. H . . .P > 1$&&&/<r % g H 6= a. b. c. d. I1&$&&&? I.&$&&& I1&$&&&? I"/!..31 I1/$///./"? I11$111.11 )ncrea e. A ,all in the ri ( 'remium i li(e a ,all in the real intere t rate.

Expl re Fur!her
A. a. b. d. The -ed can reduce the growth rate o, mone+. The nominal intere t rate increa e in the hort run$ but ,all in the medium run. )n,lation wa highe t in earl+ 1!A&. The 1.%month in,lation rate 'ea(ed at 18./2 in March and A'ril o, 1!A&. A declining 'read im'lie that ,uture hort%term intere t rate are e6'ected to decline in the ,uture. The one%+ear T%bill rate wa increa ing the late 1!"& $ but the 'read wa declining$ o mar(et were not e6'ecting the trend to continue. There wa a large decline clo e to a one 'ercentage 'oint decline in the 'read$ which i con i tent with e6'ectation o, lower in,lation in the ,uture. The one%+ear intere t rate ,ell. At the tart o, the di in,lation$ mar(et e6'ected that ,uture intere t rate would be lower$ thu credible. 9uring the rate cut in the rece ion$ 'read went u'$ which im'lie that mar(et were e6'ecting the anti%in,lationar+ 'olic+ to continue with high hort term intere t rate a,ter the rece ion$ a it did.

e. ,. g.

!.

An wer will de'end on when the Feb ite i acce ed.

CHAPTER 1&
Quick Check
1. a. b. c. -al e. True. -al e.

5ear on 3ducation do Bra il

.1

Blanchard Macroeconomia 3 edio

d. e. ,. g. .. a. b. c. d. e. 3.

-al e. -al e. True. True. ."1J<1H1.&1H1.&1.=JI8&$&&&>I!8$1"1 I1!8$1"1 I1!$81".1& b+ I.$&&& Bene,it im'l+ e6tra annual con um'tion o,; &./J<1.&1.=JI8&$&&&J"/1&>I1A$1..

359S i [/<rHY= > I1A$&&&/<rH&.&A= a. b. c. Bu+. 359S>I13A$8/.XI1&&$&&& Brea(%even. 359S>I1&&$&&& 9o not bu+. 359S>I"A$./&QI1&&$&&& I88$&&&J<1%.8=J3/%I8&$&&&J<1%.8=J3A>I3A$8&& I88$&&&J<1%.3=J3/%I8&$&&&J<1%.3=J3A>I88$A&&

8.

a. b.

Dig Deeper
1. a. b. c. d. e. ,. g. h. 359S o, ,uture labor income > I3&? con um'tion>I1& in all three 'eriod . +oung; %1? middle age; 11? old; %1& Total aving >nJ<%1H11%1&=>& & % 1@ H 1&@ > 1@ +oung; 1? middle age; 1..1? old; 1..1? cannot borrow again t ,uture income when +oung. & H 1..1@ % 1..1@ > & & H & H 1..1@ > 1..1@ B+ allowing 'eo'le to borrow to con ume when +oung$ ,inancial liberaliRation ma+ lead to le overall accumulation o, ca'ital.

Expl re Fur!her
/. a%d. Nn average$ con um'tion account ,or about /12 o, D95 and inve tment ,or about 182$ o con um'tion i more than ,our time bigger than inve tment. Kelative to average change $ movement in con um'tion and inve tment are o, imilar magnitude$ which im'lie inve tment i much more volatile than con um'tion.

5ear on 3ducation do Bra il

./

Blanchard Macroeconomia 3 edio

CHAPTER 1'
Quick Check
1. a. b. c. d. e. ,. g. a. True. -al e. -al e. True/Uncertain <The+ can rel+ on ,oreca t b+ other $ but omebod+ ha to do it.= -al e. True. -al e. #igher real toc( 'rice increa e real wealth directl+$ and there,ore tend to increa e con um'tion. Moreover$ the h+'e about the @ew 3conom+$ combined with increa ing toc( 'rice $ ma+ have led to ,avorable e6'ectation about ,uture labor income$ which would al o tend to increa e con um'tion. 0ub e:uent decline in the toc( mar(et decrea ed wealth and ma+ have led con umer to revi e <downward= e6'ectation about ,uture labor income$ e,,ect that would tend to reduce con um'tion. )0 hi,t right. The e6'ected ,uture real intere t rate increa e relative to the current real intere t rate. B+ it el,$ thi tatement im'lie nothing about the level o, intere t rate . The +ield curve could get tee'er even i, all real intere t rate ,ell at all maturitie . A uming$ however$ that at a minimum the e6'ected ,uture real intere t rate increa e $ the )0 'robabl+ hi,t le,t. ), the current real intere t rate doe not ,all$ then )0 de,initel+ hi,t le,t. ), the current real intere t rate doe ,all$ then )0 'robabl+ hi,t le,t$ becau e the e,,ect o, the e6'ected ,uture real intere t rate <a umed to ri e= i tronger than the e,,ect o, the current real intere t rate. 7M hi,t right. The e6'ected ,uture real intere t rate decrea e and e6'ected ,uture out'ut <at lea t ,or a while= increa e . )0 hi,t right. Fithin the conte6t o, )0%7M$ with a ,i6ed ca'ital toc($ an increa e in e6'ected ,uture ta6e cau e )0 to hi,t le,t. #owever$ the increa e in ,uture ta6e <a de,icit reduction 'rogram= will lead to lower real intere t rate and increa ed inve tment in the medium run and higher out'ut in the long run. The e6'ected change in the real intere t rate and out'ut tend to cau e the )0 curve to hi,t right. The net e,,ect on the )0 curve i ambiguou . @ote that the model o, the te6t ha lum' um ta6e . More generall+$ the ta6 increa e ma+ increa e di tortion in the econom+. The e e,,ect tend to reduce out'ut <or the growth rate=. )0 hi,t le,t.

..

b.

3.

a. b.

c. d. e.

,. 8.

Kational e6'ectation ma+ be unreali tic$ but it doe not im'l+ that ever+ con umer ha 'er,ect (nowledge o, the econom+. )t im'lie that con umer u e the be t available in,ormationG model $ data$ and techni:ue Gto a e the ,uture and ma(e deci ion . Moreover$ the+ do not

5ear on 3ducation do Bra il

."

Blanchard Macroeconomia 3 edio

have to wor( out the im'lication o, economic model ,or the ,uture b+ them elve ? the+ can rel+ on the 'rediction o, e6'ert on televi ion or in the new 'a'er . 3 entiall+$ rational e6'ectation rule out + tematic mi ta(e on the 'art o, con umer . Thu $ although rational e6'ectation ma+ not literall+ be true$ it eem a rea onable benchmar( ,or 'olic+ anal+ i . 1. The e an wer ignore an+ e,,ect on ca'ital accumulation and out'ut in the long run. a. )n the ,uture$ ta6 cut will lead to a boom. Thi lead to higher e6'ected out'ut$ lower e6'ected ta6e $ but a higher e6'ected intere t rate in the ,uture. The e,,ect on current out'ut i ambiguou . Thi mean that the -ed will increa e the intere t rate in the ,uture < hi,t 7M le,t=. The e6'ected intere t rate will increa e more$ but there i till the e,,ect o, lower e6'ected ta6e on current con um'tion. The e,,ect toda+ on out'ut i till ambiguou $ but more li(el+ to be negative than in 'art <a=. -uture out'ut will be higher$ the ,uture intere t rate will not increa e$ and ,uture ta6e will be lower. The current )0 curve de,initel+ hi,t right$ and current out'ut increa e .

b.

c.

Dig Deeper
/. a%b. c. 0ee the di cu ion in the te6t. The ge ture eemed to indicate that the -ed u''orted de,icit reduction$ and would be willing to conduct e6'an ionar+ monetar+ 'olic+ in the ,uture to o,, et the direct negative e,,ect on out'ut ,rom 'ending cut and ta6 increa e . A belie, that the -ed would be willing to act in thi wa+ would tend to increa e e6'ected ,uture out'ut <relative to the ca e where the -ed did nothing= and reduce e6'ected ,uture intere t rate . Both o, the e e,,ect tend to increa e out'ut in the hort%run.

Expl re Fur!her
". a. The +ield curve got ,latter between @ovember 1!!. and Augu t 1!!3$ with ver+ little change in hort%term intere t rate . Thi ugge t that the e6'ected ,uture hort%term intere t rate ,ell$ i.e.$ that the -ed wa e6'ected to ado't a more e6'an ionar+ tance. @o rece ion a,ter 1!!3. Thi i con i tent with e6'ectation that the -ed would u''ort the de,icit reduction with relativel+ e6'an ionar+ 'olic+. Le . #igher growth rate in the 1!!& increa ed ta6 revenue .

b. c. d.

CHAPTER 1(
Quick Check
1. a. b. c. d. e. ,. True. -al e. -al e. -al e. True. -al e.

5ear on 3ducation do Bra il

.A

Blanchard Macroeconomia 3 edio

..

Domestic Country Balance of Payments <I= Eurrent Account 36'ort )m'ort Trade Balance )nve tment )ncome Keceived )nve tment )ncome 5aid @et )nve tment )ncome @et Tran ,er Keceived Eurrent Account Balance Ea'ital Account )ncrea e in -oreign #olding o, 9ome tic A et )ncrea e in 9ome tic #olding o, -oreign A et @et )ncrea e in -oreign #olding 0tati tical 9i cre'anc+ Foreign Country Balance of Payments ($) Eurrent Account 36'ort )m'ort Trade Balance )nve tment )ncome Keceived )nve tment )ncome 5aid @et )nve tment )ncome @et Tran ,er Keceived Eurrent Account Balance Ea'ital Account )ncrea e in -oreign #olding )ncrea e in 9ome tic #olding @et )ncrea e in -oreign #olding 0tati tical 9i cre'anc+

.1 181 <>1&&H81= %1.& <>.1%181= & 11 %11 <>&%11= %.1 %1/& <>%1.&%11%.1= A& <>/1H11= %1& 13& <>A&%<%1&== 3& <>1/&%13& or >31%1=

181 .1 1.& 11 & 11 .1 1/& %1& A& %13& %3&

3.

a. b. c. d. e.

The nominal return on the U.0. bond i 1&$&&&/<!/11.3A= 1 >82. The nominal return on the Derman bond i 12. Uncovered intere t 'arit+ im'lie that the dollar i e6'ected to a''reciate b+ 12. Thu $ the e6'ected e6change rate i .!!J<.!1=>&.!8&1 I/3uro. ), +ou e6'ect the dollar to de'reciate in tead$ 'urcha e the Derman bond a +ou e6'ect the return <in I= to be more than 12. The 3uro de'reciate b+ 1../2$ o the total return on the Derman bond <in I= i 1%1../> %&../2. )nve ting in the U.0. bond would have 'roduced a ure 82 return. The uncovered intere t 'arit+ condition i about e:ualit+ o, e6'ected return $ not e:ualit+ o, actual return .

5ear on 3ducation do Bra il

.!

Blanchard Macroeconomia 3 edio

Dig Deeper
8. Eurrent account de,icit loo( bad. @et ca'ital in,low loo( good. Fe (now ,rom balance o, 'a+ment accounting$ however$ that we cannot have one without the other. The evidence doe not u''ort either argument. Eontrar+ to what the 9emocrat aid$ the trade de,icit wa due to a large out'ut e6'an ion in the United 0tate $ which led to a large increa e in im'ort < ee the -ocu Bo6 in Eha'ter .&=$ not 'rimaril+ to a lo o, com'etitivene . Eontrar+ to what the 5re ident aid$ the large net ca'ital in,low were needed to ,inance the trade de,icit? the+ were not a ign that ,oreign inve tor were eager to inve t in the United 0tate . a. 0im'l+ ub titute - ,or 3e in the derivation o, uncovered intere t 'arit+ in the te6t. Fe no longer need to u e the e6'ected e6change rate$ ince we (now the e6change rate at which 3uro and dollar will be e6changed in the ,uture. The+ will be e6changed at the ,orward 'rice$ -. The ,orward rate con i tent with covered intere t 'arit+ i the ame a the e6'ected e6change rate con i tent with uncovered intere t 'arit+. Do long or hort in U.0. bond $ de'ending on the ,orward e6change rate. 0ur'ri e in the e6change rate no longer a,,ect actual return on +our inve tment. All e6change rate e6'o ure ha been eliminated b+ the ,orward contract.

1.

b. c. d.

Expl re Fur!her
/. a. The +en a''reciated ,orm mid%1!A1 to mid%1!!1$ de'reciated until mid%1!!A$ a''reciated through the end o, 1!!!$ and de'reciated through the end o, .&&1. -rom a broader 'er 'ective$ between the end o, 1!A8 and the end o, .&&1$ the +en a''reciated b+ about 1&&2. The +en reached it tronge t value again t the dollar in mid%1!!1. 9e'reciation o, the +en. The +en de'reciated between 1!!! and .&&1. Thi i 'robabl+ good ,or 4a'ane e e6'ort and out'ut.

b. c. ".

\U.0. A et Abroad\ re,er to ,oreign a et ac:uired b+ the United 0tate . The ign convention i that a negative number im'lie a ca'ital out,low <not an out,low o, a et =$ meaning U.0. ac:ui ition o, ,oreign a et . 7oo el+$ a ca'ital out,low i the e6change o, home currenc+ ,or ,oreign a et . )n the 1!!& $ the United 0tate ac:uired a ub tantial amount o, ,oreign a et . #owever$ thi i onl+ one ide o, the ca'ital account. Ea'ital in,low are recorded in the categor+$ \-oreign A et in the U.0.\ )n 'rinci'le$ the um o, \U.0. A et Abroad\ and \-oreign A et in the U.0.\ <with the 'ro'er ign convention = e:ual the U.0. current account. )n 'ractice$ there are mea urement error $ ummariRed in the categor+$ \0tati tical 9i cre'anc+.\ Diven that the United 0tate had a ub tantial current account de,icit in the 1!!& <e6ce't during the ,ir t hal, o, 1!!1=$ it received$ on net$ ca'ital in,low $ which mean the in,low ,rom \-oreign A et in the U.0.\ hould have e6ceeded the out,low ,rom \U.0. A et Abroad\ b+ the amount o, the U.0. current account de,icit. )n all :uarter e6ce't 1!!1;1 and 1!!1;8$ mea ured U.0. ca'ital in,low e6ceeded mea ured U.0. ca'ital out,low $ although never b+ e6actl+ the amount o, the U.0. current account de,icit. )n ome :uarter the tati tical di cre'anc+ wa 'o itive? in other $ negative.

5ear on 3ducation do Bra il

3&

Blanchard Macroeconomia 3 edio

CHAPTER 1)
Quick Check
1. a. b. c. d. e. ,. g. a. b. -al e. Uncertain. -al e. -al e. True. True. True/Uncertain. A''reciation o, the dollar al o 'la+ed a role. ] >35J/5. A''l+ 'ro'o ition A to <35J=/5 and then 'ro'o ition " to <35J=. ), ^5/5 X ^5J/5J and ^3/3 > &$ then ^]/] Q&$ o the real e6change rate i decrea ing <a''reciating ,rom the 'oint o, view o, the dome tic countr+= over time. Diven the Mar hall%7erner condition$ thi im'lie net e6'ort are ,alling. The 'rice o, dome tic good i ri ing ,a ter than the 'rice o, ,oreign good $ while the e6change rate i con tant. A dome tic good are becoming more e6'en ive than ,oreign good $ con umer in both countrie hi,t their 'urcha e awa+ ,rom good in the high%in,lation countr+ to the low% in,lation one. The hare o, 4a'ane e 'ending on U.0. good relative to U.0. D95 i <&.1=<&.1=>12. U.0. D95 ,all b+ .<.&1=<.&1=>&.12. U.0. D95 ,all b+ .<.&1=<.1=>12. Thi i an over tatement. The number above indicated that even i, U.0. e6'ort ,all b+ 12$ the e,,ect i to reduce growth b+ 12. Thi i mall relative to D95$ but large relative to normal growth <o, around 32=. )nitiall+$ net e6'ort and out'ut ,all. A,ter i6 month $ net e6'ort and out'ut increa e.

..

3.

a. b. c. d.

8.

a. b.

Dig Deeper
1. a. L > E H ) H D H _ ` > .& H &.AJ<L % 1&= H D H &.3LJ% &.3L L > O1/<1 % .A H .3=P<1. H D H &.3LJ= > .J<1. H D H &.3LJ= > 88 H &./LJ The multi'lier i . <>1/<1%.AH.3== when ,oreign out'ut i ,i6ed. The clo ed econom+ multi'lier i 1 <>1/.1=. )t di,,er ,rom the o'en econom+ multi'lier becau e$ in the o'en econom+$ onl+ ome o, an increa e in autonomou demand ,all on dome tic good . b. 0ince the countrie are identical$ L>LJ>11&. Ta(ing into account the endogeneit+ o, ,oreign income$ the multi'lier e:ual O1/<1%&.A %&.3J&./ H&.3=P>3.1.1. The multi'lier i higher than the o'en econom+ multi'lier in 'art <a= becau e it ta(e into account the ,act that an increa e in dome tic income lead to an increa e in ,oreign income <a a re ult o, an increa e in dome tic im'ort o, ,oreign good =. The increa e in ,oreign income lead to an increa e in dome tic e6'ort .

5ear on 3ducation do Bra il

31

Blanchard Macroeconomia 3 edio

c.

), L>1.1$ then ,oreign out'ut LJ> 88H&./J1.1>11!. U ing the e two ,act and the e:uation L > .<1.HDH&.3LJ= +ield ; 1.1 > .8H.DH&./J<11!=. 0olving ,or D give D>18.A. )n the dome tic countr+$ @_ > &.3J<11!=%&.3J<1.1= > %1.A? T%D > 1&%18.A>%8.A. )n the ,oreign countr+$ @_J>1.A? TJ%DJ>&. ), L>LJ>1.1$ then we have; 1.1>.8H.DH&./J<1.1=$ which im'lie D>DJ>13. )n both countrie $ net e6'ort are Rero$ but the budget de,icit ha increa ed b+ 3. )n 'art$ ,i cal coordination i di,,icult to achieve becau e o, the bene,it o, doing nothing$ a indicated ,rom 'art <c=. A ta6 on ,oreign good o, rate a a,,ect the 'rice 'aid ,or im'ort . )n tead o, ]$ it i now e:ual to <1Ha=]. )m'ort are given b+ `<<1Ha=]$L=. The 'rice o, e6'ort i una,,ected$ o e6'ort are till given b+ _<]$LJ=. -or a given level o, dome tic income$ the higher 'rice o, ,oreign good to dome tic con umer reduce im'ort $ but doe not a,,ect e6'ort $ o @_ increa e . Thi hi,t the )0 curve to the right$ increa ing dome tic e:uilibrium income. #igher dome tic income o,, et ome o, the initial increa e in @_$ but the overall e,,ect i till ,avorable. The ta6 ha o''o ite e,,ect in the ,oreign countr+$ a,,ecting their e6'ort negativel+$ hi,ting the )0 curve to the le,t$ which reduce e:uilibrium income. 3ach hi,t in the )0 curve will be rever ed$ but the overall volume o, trade$ de cribed b+ `H`J will ,all. ), agent im'l+ ub titute dome tic good ,or ,oreign good $ out'ut will remain the ame.

d. e. /. a.

b.

c. d.

".

An wer will var+.

CHAPTER "*
Quick Check
1. a. b. Uncertain. -al e/uncertain. -al e$ a long a the intere t rate e,,ect on @_ <via the e6change rate= i trong enough. ), thi e,,ect i ver+ mall$ then monetar+ 'olic+ will have a tronger e,,ect in the clo ed econom+$ becau e none o, the e6tra out'ut induced b+ a ,all in the intere t rate will lea( out on im'ort . @ote that in the original Mundell%-leming model$ with i=i*$ monetar+ 'olic+ i de,initel+ more e,,ective in the o'en econom+$ becau e the e6'ected e6change rate will increa e <de'reciate=$ hi,ting the )0 curve right. True. True. -al e. -al e. A,ter the devaluation$ the the ,oreign intere t rate. devalution$ then the intere the devaluation increa e out'ut. ,i6ed e6change rate i credible$ o the intere t rate will e:ual A uming the ,i6ed e6change rate wa credible be,ore the t rate doe not change a a re ult o, the devaluation. #owever$ net e6'ort b+ the Mar hall%7erner condition and increa e

c. d. e. ,. .. a.

5ear on 3ducation do Bra il

3.

Blanchard Macroeconomia 3 edio

b.

The dome tic intere t rate mu t ri e above the ,oreign rate becau e there i an e6'ected devaluation. A a re ult$ the increa e in out'ut i le than the increa e in 'art <a=. )ndeed$ out'ut could ,all i, the e6'ected devaluation i large enough <i.e.$ the home intere t rate increa e b+ a u,,icient amount=. Monetar+ 'olic+ i ine,,ective in the -ollower countrie . The ,i6ed e6change rate im'lie that the dome tic intere t rate i ,i6ed$ given the 7eader intere t rate. )t i true that the 7eader countr+U e6change rate i e entiall+ ,i6ed$ but it till o'erate a i, it were in a ,le6ible e6change rate regime. The leader countr+ i ,ree to change intere t rate a it wi he $ ince the ,i6ed e6change rate i not it target. )n other word $ monetar+ 'olic+ i e,,ective ,or the 7eader countr+. -ollower countrie mu t increa e intere t rate a well. Thi lead to a contraction in out'ut. ), -ollower countrie did nothing$ their currencie would de'reciate. )0 hi,t le,t$ becau e dome tic e6'ort ,all given an+ e6change rate <and hence an+ value o, the intere t rate=. Nut'ut ,all . 3 increa e $ given an+ value o, the home intere t rate$ o )0 hi,t right. The intere t 'arit+ line al o hi,t right. A a re ult$ 3 increa e $ @_ increa e $ and L increa e . The home intere t rate al o increa e $ but b+ le than the ,oreign intere t rate. The e,,ect o, a monetar+ contraction abroad on home out'ut are ambiguou . A monetar+ contraction abroad reduce ,oreign out'ut and increa e the ,oreign intere t rate. The out'ut e,,ect tend to reduce home out'ut <becau e home e6'ort tend to ,all=. The intere t rate e,,ect tend to increa e home out'ut <becau e the home currenc+ de'reciate $ which ha a 'o itive e,,ect on home @_=.

3.

a. b.

c. 8. a. b.

c.

1.

Under ,le6ible e6change rate $ the 'ro'er 'olic+ combine e6'an ionar+ monetar+ 'olic+ <which lead to de'reciation$ but to an increa e in out'ut= with contractionar+ ,i cal 'olic+ <which o,, et the increa e in out'ut ,rom monetar+ 'olic+=. Under ,i6ed rate $ devaluation combined with ,i cal contraction can achieve the ame re ult$ a uming the devaluation i credible. Eon um'tion and inve tment both increa e. The e,,ect on net e6'ort i ambiguou ; higher out'ut lead to lower net e6'ort $ but de'reciation lead to higher net e6'ort .

/.

Dig Deeper
". a. b. c. Nut'ut hould ,all$ the nominal intere t rate hould increa e$ and the e6change rate hould a''reciate. Nut'ut hould increa e$ the nominal intere t rate hould increa e$ and the e6change rate hould a''reciate. 3 entiall+$ +e .

CHAPTER "1
Quick Check
1. a. Uncertain <the 'roblem wa not the return but the 'arit+ cho en=

5ear on 3ducation do Bra il

33

Blanchard Macroeconomia 3 edio

b. c. d. e. .. a. b. c.

True. Uncertain. True/uncertain. -al e. An increa e in the ,oreign 'rice level cau e a real de'reciation$ which lead to an increa e in demand and out'ut. An increa e in e6'ected in,lation cau e a decrea e in the real intere t rate$ which lead to an increa e in demand and out'ut. -ir t$ une:ual in,lation rate lead to e,,ect on the real e6change rate. ), in,lation i high <and o, imilar magnitude= at home and abroad$ then there i little e,,ect on the real e6change rate$ and the e,,ect in 'art <a= goe awa+. 0econd$ in the medium run$ in,lation ha no e,,ect on the real intere t rate$ o the e,,ect in 'art <b= goe awa+. )n the hort run$ out'ut increa e $ the real e6change rate doe not change$ and the nominal intere t rate doe not change <it remain e:ual to the world intere t rate under ,i6ed e6change rate . )n the medium run$ out'ut return to it natural level$ the real e6change rate a''reciate $ and the nominal intere t rate remain unchanged. )n the hort run$ con um'tion and inve tment increa e$ but net e6'ort ,all. )n the medium run$ con um'tion and inve tment return to their original level $ ince out'ut return to it natural level and the intere t rate i unchanged. @et e6'ort ,all b+ an amount e:ual to the increa e in government 'ending. Budget de,icit do lead to trade de,icit $ but not mechanicall+. Ehange in the budget de,icit lead to change in out'ut and the real e6change rate$ both o, which a,,ect the trade de,icit directl+. 1&2>/2He6'ected nominal de'reciation$ +ear. o e6'ected nominal de'reciation > 82 'er

3.

a.

b.

c.

8.

a. b. c.

1&2%/2></2%32=He6'ected real de'reciation$ o e6'ected real de'reciation >12 'er +ear. Lou would 'urcha e the dome tic bond becau e the ,oreign bond will onl+ +ield /2 and there i a lo on +our 'o ition in the ,oreign currenc+.

Dig Deeper
1. a. b. c. /. Keuni,ication im'lie an e6ce ive a''reciation o, the 3a t Derman currenc+. )t lead to a rece ion. Nut'ut remain low until 'rice have decrea ed enough relative to Fe t Derman 'rice a to ree tabli h the right real e6change rate. 5rice mu t ,all. ), there i no 'roductivit+ growth$ nominal wage mu t ,all. o

An increa e in the 'erceived 'robabilit+ o, devaluation ma(e BraRilian toc( much le attractive than non%BraRilian toc( . -inancial inve tor ell o,, their holding and toc( 'rice

5ear on 3ducation do Bra il

38

Blanchard Macroeconomia 3 edio

,all. The+ ,all until the e6'ected return in Keal i large enough to com'en ate ,or the e6'ected devaluation o, the Keal. A,ter the devaluation$ however$ i, inve tor do not e6'ect ,urther devaluation <an+ more than the+ did be,ore the cri i =$ it i rea onable ,or toc( 'rice to recover o har'l+.

CHAPTER ""
Quick Check
1. a. b. c. d. e. a. b. c. -al e. True. Uncertain. True. -al e. 0hort%term unem'lo+ment ha more e,,ect. The long%term unem'lo+ed ma+ not be earching and ma+ not be ver+ em'lo+able. u>&.1/O<1.1=<1%&.1b=P ), b>&$ &.8$ &.A$ the natural rate >!.12$ 11.82$ 11..2. The long%term unem'lo+ed 'ut le downward 're ure on wage than the hort%term unem'lo+ed. Thu $ ,rom the wage% etting e:uation$ ,or a given aggregate unem'lo+ment rate$ an increa e in the 'ro'ortion o, long%term unem'lo+ed would tend to increa e the real wage. 0ince the real wage i ,i6ed ,rom the 'rice% etting e:uation$ however$ the aggregate unem'lo+ment rate mu t increa e to o,, et the u'ward 're ure on the real wage ,rom the increa e in the hare o, long%term unem'lo+ed. )ntuitivel+$ i, the weight on the long%term unem'lo+ed were Rero in tead o, &.1$ then the wage% etting and 'rice% etting e:uation would determine the natural hort%term rate o, unem'lo+ment. Additional long%term unem'lo+ed would im'l+ increa e the aggregate unem'lo+ment rate. The ame (ind o, rea oning a''lie here$ but the e,,ect i le trong becau e the weight on long%term unem'lo+ed in the wage% etting e:uation i not Rero. #igher unem'lo+ment im'lie lower wage given e6'ected 'rice . Thi im'lie lower 'rice given e6'ected 'rice . 3:uivalentl+$ it im'lie lower in,lation given e6'ected in,lation$ which here e:ual 'a t in,lation. V % Vt%1 > <THR= % cu0 or e:uivalentl+; V % Vt%1 > <THR= % c<u%u7= The curve will hi,t to the right. More overall unem'lo+ment i needed to achieve the ame decrea e in in,lation. Le . ), di in,lation lead to an increa e in u 7$ di in,lation will be le the tandard relation. than 'redicted b+

..

3.

a.

b. c. d. 8.

0ee di cu ion in te6t and the an wer to 5roblem 1.

Dig Deeper
1. a. 9raw the )0 and 7M curve o the+ cro cannot cro the horiRontal a6i . clo e to i>1. @ote$ however$ that the 7M curve

5ear on 3ducation do Bra il

31

Blanchard Macroeconomia 3 edio

b. c.

@o. 0ince the nominal intere t rate cannot ,all below Rero$ an increa e in the current mone+ u''l+ cannot increa e out'ut. ), the e6'ected nominal intere t rate were 'o itive in the ,ir t 'lace$ then the central ban( can announce that it will decrea e it. Thi will tend to reduce the e6'ected real intere t rate$ increa e current inve tment$ and hi,t the current )0 curve to the right. N'en. Le . )n the ab ence o, other economic new $ the +ield curve hould become le tee' a,ter the announcement o, the 'olic+$ i, 'eo'le believe that the central ban( will im'lement the 'olic+.

d. e.

CHAPTER "#
Quick Check
1. a. b. c. d. e. ,. a. b. True. -al e. -al e. -al e. -al e. -al e. ), mone+ growth > .12$ 1&2$ "12$ eignorage>1/..1$ 3.1$ 8A".1 )n the medium run$ i, mone+ growth > .12$ 1&2$ "12$ eignorage>1/..1$ .&&$ 11..1. The ,all in real mone+ balance a ociated with higher ongoing in,lation reduce the 'otential ,or eignorage. 5art <a= did not allow ,or thi e,,ect. Fould decrea e the e,,ect o, in,lation on real ta6 revenue . Fould decrea e the e,,ect o, in,lation on real ta6 revenue . Fould decrea e the e,,ect o, in,lation on real ta6 revenue $ but would al o have other e,,ect . The income ta6 can ta6 the rich at a higher rate than the 'oor$ but the ale ta6 rate i the ame ,or rich and 'oor.

..

3.

a. b. c.

8.

The end to the cri i de'end on hi,ting the com'o ition o, ta6e . For(er are alread+ 'a+ing an in,lation ta6. The central ban( mu t ma(e a credible commitment that it will no longer automaticall+ monetiRe the government debt. Although a currenc+ board would do thi $ it i a dra tic and 'erha' unnece ar+ te'. 5rice control ma+ hel'$ but 'rice control without other 'olic+ change onl+ cau e di tortion and are a reci'e ,or ,ailure. A rece ion i not needed$ but it ma+ ha''en. Although nominal rigiditie are le im'ortant during h+'erin,lation Gwhich im'lie that the acri,ice ratio i mallGthe i ue o, credibilit+

5ear on 3ducation do Bra il

3/

Blanchard Macroeconomia 3 edio

remain . Unle be the re ult.

,irm and wor(er believe in the tabiliRation 'rogram$ a evere rece ion ma+

The 'roblem ha two 'art ; <i= there i an ongoing ,i cal de,icit that the government i unable or unwilling to ,inance ,rom nonmonetar+ ource and <ii= the central ban( i willing to monetiRe the debt. The order in which the e i ue are re olved ultimatel+ de'end on the 'olitical realitie . The ,i cal authorit+ could eliminate the de,icit . ), it doe not do o$ the central ban( could commit not to monetiRe government debt. #owever$ thi could drive the government into de,ault on it bond .

Dig Deeper
1. ma6 <&.!%^M/M=<^M/M=>812.

CHAPTER "$
Quick Check
1. a. b. c. d. e. ,. -al e. True/Uncertain. -al e. -al e. True. Uncertain. )t ma+ be wi e ,or a government to commit not to negotiate with ho tage ta(er a a mean to deter hiCac(ing $ even recogniRing that a,ter a hiCac(ing ha ta(en 'lace$ there i a trong incentive to negotiate. #owever$ the 'hra e dunder no circum tance e i categorical. There ma+ ome circum tance under which a government might wi h to violate it commitment. Thi tatement$ o, cour e$ illu trate the di,,icult+ o, 'recommitment. Ean a government reall+ commit not to negotiate$ no matter what the circum tance $ even i, the e circum tance ma+ not have been imagined at the time the commitment wa madef -al e.

g. .. 3.

An wer will var+. a. ), +ou thin( that voter care a lot about current condition $ +ou ma+ want to come into the election with low in,lation and low unem'lo+ment. 0o$ +ou ma+ want to have higher unem'lo+ment earl+ on$ to decrea e in,lation$ and unem'lo+ment lower than the natural rate the +ear be,ore the election. ), voter have rational e6'ectation $ the+ will under tand what +ou are tr+ing to do. Lou will not be able to a,,ect the unem'lo+ment rate. Lou are better o,, (ee'ing in,lation con tant$ and unem'lo+ment at the natural rate.

b.

8. 1.

An wer will var+. @ew gealand want to eliminate ,ear that the central ban( might tr+ to reduce unem'lo+ment below the natural rate with e6'an ionar+ monetar+ 'olic+ and higher in,lation. 0ee Eha'ter .1$ ''. 13!%18& ,or a di cu ion o, in,lation targeting.

5ear on 3ducation do Bra il

3"

Blanchard Macroeconomia 3 edio

Dig Deeper
/. a. b. c. d. e. ". a. 1/. time the e6'ected rate o, in,lation i, the 9emocrat win 'lu 1/. time the e6'ected rate o, in,lation i, the Ke'ublican win. 7ow unem'lo+ment$ high in,lation <V X Ve= #igh unem'lo+ment$ low in,lation <V Q Ve= Le $ i, one loo( at the ,ir t two +ear o, each admini tration$ not Cu t the ,ir t. Unem'lo+ment e:ual to the natural rate$ high in,lation. in,lation i ver+ high$ o V > Ve. Thi i becau e e6'ected

), the Ke'ublican cut militar+ 'ending$ the 9emocrat get 1 i, the+ cut wel,are$ but 3 i, the+ do not. 0o their be t re 'on e i to vote again t wel,are cut . The Ke'ublican will get . in thi ca e. ), the Ke'ublican do not cut militar+ 'ending$ the 9emocrat get . i, the+ cut wel,are$ but onl+ 1 i, the+ do not. 0o their be t re 'on e i not to cut wel,are. The Ke'ublican will get 1 in thi ca e. Diven the an wer above$ the Ke'ublican do better when the+ do not cut militar+ 'ending$ o the+ will not cut. The 9emocrat will not cut either. The two 'artie are loc(ed in a bad e:uilibrium. The+ could ma(e a deal; both vote ,or cut . ), the+ do$ the+ will both be better o,,.

b.

c.

CHAPTER "%
Quick Check
1. a. b. c. d. e. ,. g. a. b. c. d. 3. a. -al e. -al e. -al e. -al e/Uncertain. -al e. True/Uncertain. True to the e6tent the ta6 code i not inde6ed to in,lation. True. 9emand ,or M1 ,all while demand ,or M. i unchanged. 5eo'le hi,t ,und ,rom aving account to time de'o it . 9emand ,or M1 increa e a 'eo'le tran ,er ,und ,rom mone+ mar(et ,und to chec(ing account . 9emand ,or M. remain unchanged. 0hi,t in the com'o ition o, M1 <and con e:uentl+ M.= a 'eo'le hold more currenc+ and ma(e ,ewer tri' to the ban( while holding maller chec(ing account balance . The demand ,or M. increa e a the bene,it o, holding government ecuritie ,all . 82%&2>82? 182%1&2>82

..

5ear on 3ducation do Bra il

3A

Blanchard Macroeconomia 3 edio

b. c. 8. 1.

82 J <1%&..1=%&2>32? 182 J <1%&..1=%1&2>1&.12%1&2>&.12 Le $ given the deductibilit+ o, nominal mortgage intere t 'a+ment in the United 0tate .

5robabl+ not. The e two ,act ugge t that there ha been a hi,t in mone+ demand toward M1$ but not an increa e in overall mone+ growth$ a re're ented b+ M.. The -ed ha three in trument that can be u ed to reduce the e:uilibrium intere t rate. i= Ke erve re:uirement . ), the -ed re:uire ban( to hold a larger hare o, de'o it in re erve than the ban( would choo e to do on their own$ then lowering the re erve re:uirement will reduce ban( demand ,or central ban( mone+. Thi ,all in <central ban(= mone+ demand will tend to reduce the intere t rate. )n term o, the e:uation li ted in the 'roblem$ a ,all in re erve re:uirement i a ,all in W. ii= 9i count 'olic+. )n 'rinci'le$ ado'ting more ,avorable term ,or ban( borrowing ,rom the -ed <e.g.$ lowering the di count rate=$ would tend to increa e ban( borrowing$ and thereb+ increa e central ban( mone+$ #$ which the -ed create to lend to ban( . An increa e in # tend to lower the intere t rate. )n 'ractice$ the -ed di courage ban( borrowing e6ce't ,or 'ecial circum tance . Ehange in the di count rate$ however$ act a a ignal about the -edU intention . Fhen the -ed lower the di count rate$ ,inancial mar(et 'artici'ant tend to believe that the -ed will ,ollow more e6'an ionar+ 'olic+ in the ,uture. A a re ult$ e6'ected ,uture hort%term intere t rate decline$ a do medium% and long%term intere t rate . iii= N'en mar(et o'eration . The -ed can create central ban( mone+$ #$ to bu+ government bond . An increa e in # tend to reduce the e:uilibrium intere t rate.

Dig Deeper
/. )n 'rinci'le$ +e . )nve tment ta6 credit $ which give ta6 brea( to ,irm that inve t$ can hel' increa e inve tment. #owever$ ,i cal 'olic+ i 'robabl+ le ,le6ible than monetar+ 'olic+ in thi conte6t. a. b. ), in,lation remain con tant at VJ$ then unem'lo+ment will remain at the natural rate. 5o ibl+$ but in,lation targeting will not eliminate ,luctuation in unem'lo+ment or obviate the need ,or di,,icult 'olic+ deci ion in the hort run. 0ee the di cu ion on '. 18& in the te6t.

".

Expl re Fur!her
A. An wer will de'end on current -ed 'olic+.

CHAPTER "&
Quick Check
1. a. b. c. d. e. ,. True. -al e. Uncertain. -al e. -al e. -al e

5ear on 3ducation do Bra il

3!

Blanchard Macroeconomia 3 edio

g. .. a. b. c.

-al e )ntere t 'a+ment are 1&2 o, D95$ o the 'rimar+ ur'lu i 1&2%82>/2. Keal intere t 'a+ment are <1&2%"2=J1&&2>32 o, D95. 0o the in,lation%adCu ted ur'lu i /2%32>32. A ume that la t 'eriod unem'lo+ment wa at the natural rate$ o there ha been a two 'ercentage 'oint increa e in the unem'lo+ment rate over the la t 'eriod. B+ N(unU law <with a normal growth rate o, 32=$ out'ut growth i lower b+ two 'ercentage 'oint . 0o$ out'ut i roughl+ two 'ercent lower than it would have been. U ing the rule o, thumb in the te6t$ the ur'lu i lower b+ &.1J.2>12. 0o the c+clicall+%adCu ted$ in,lation% adCu ted ur'lu i .2. The change in the debt to D95 ratio > <32%.2=J1&&2 % 32 > %.2. The debt to D95 ratio ,all b+ .2 a +ear. )n 1& +ear $ the debt to D95 ratio will be A&2. The new intere t rate i 1&2H&.1J.&2>.&2. 0o a uming that e6'ected de'reciation wa 'reviou l+ Rero$ the dome tic intere t rate increa e ,rom 1&2 to .&2. The real intere t rate increa e ,rom 32 to 132. The high real intere t rate i li(el+ to decrea e growth. The o,,icial de,icit increa e ,rom 82 to 182 o, D95. The in,lation%adCu ted de,icit increa e ,rom 32 <a ur'lu = to "2 <a de,icit=. The change in the debt ratio > <132%<%.2==J1&&2%32>1.2. )t goe u' ver+ :uic(l+. )n thi e6am'le$ the worrie were el,%,ul,illing.

d. e. 3. a. b. c. d. e. 8.

-ir t$ even a tem'orar+ de,icit lead to an increa e in the national debt$ and there,ore to higher intere t 'a+ment . Thi $ in turn$ im'lie continued de,icit $ higher ta6e $ or lower government 'ending in the ,uture. 0econd$ the evidence doe not u''ort the Kicardian e:uivalence 'ro'o ition. Third$ i, Kicardian e:uivalence did hold$ then government 'ending would have the ame e,,ect on out'ut regardle o, whether it wa ,inanced b+ bond <i.e.$ with a de,icit= ta6e . Thu $ a de,icit$ 'er e$ would not be needed to timulate out'ut. -ourth$ war%time economie are alread+ low%unem'lo+ment economie . There i no need ,or ,urther timulation b+ u ing de,icit rather than ta6 ,inance. The onl+ correct 'art o, the tatement i the ,ir t entence. A de,icit can be 're,erable to higher ta6e during a war$ but not ,or the rea on tated here.

Dig Deeper
1. /. 9i cu ion :ue tion. Al o ee the bo6 on 0ocial 0ecurit+ in Eha'ter 11 <'. .11=. ), ,inancial mar(et 'artici'ant di count ,uture dividend at the rate o, intere t on government bond $ then thi econom+ will e6hibit Kicardian e:uivalence. ), there i a ri (%'remium a''lied to toc( $ then thi econom+ will not e6hibit Kicardian e:uivalence. To ee wh+$ let at be the dividend ta6 rate at time t and con ider the 're%dividend toc( 'rice under a ,i6ed e:uence o, e6'ected dividend .

5ear on 3ducation do Bra il

8&

Blanchard Macroeconomia 3 edio

I`t > I9t<1 % at= H I9etH1<1 %atH1=/<1 H i1t=H . . . > OI9t H I9etH1/<1 H i1t=H . . .P % OI9tat H I9etH1atH1/<1 H i1t= H . . .P The econd term in brac(et i the 're ent di counted value o, ta6 recei't ,or the government. To ,inance a given e6'enditure 'olic+$ the government mu t (ee' the 59S o, ta6 recei't con tant. Thu $ ,or a given e:uence o, e6'ected dividend $ the timing o, dividend ta6e will not a,,ect the toc( 'rice$ con um'tion or inve tment. A a re ult$ thi econom+ will e6hibit Kicardian e:uivalence. @ote that$ e6 'o t$ dividend will var+ ,rom their e6'ected value $ o ta6e ma+ be adCu ted in the ,uture. Thi new in,ormation could a,,ect toc( 'rice . )n addition$ note that the level o, dividend ta6e the 59S o, ta6 recei't could a,,ect toc( 'rice . ), toc( are a e ed a ri ( 'remium <W=$ however$ o that the+ are di counted at rate i H W$ then the timing o, dividend ta6e will matter$ becau e the government budget con traint will incor'orate a di,,erent di count rate than the toc( mar(et 'rice. A an e6am'le$ u''o e that i>& ,orever but W i 'o itive. )n thi ca e$ the government can a e ta6e at an+ time with no con e:uence$ but hi,ting ta6e to the ,uture will be ,avorable to holder o, toc( . 0ince ,uture dividend are uncertain$ o are ,uture ta6 'a+ment the+ might not have to be made i, dividend turn out to be low. )n thi cenario$ hi,ting ta6e to the ,uture would tend to increa e the current toc( 'rice$ and thu increa e con um'tion and inve tment <i, ,irm are li:uidit+ con trained=. 0o$ Kicardian e:uivalence i violated.

5ear on 3ducation do Bra il

81