ÿWPCI ~Ãg€c!gÇʸî’T*Ò£ÜÕl„ ‰M= Øh‚³¿Òˆ©z0CŒöœaçIãè²ò©2üüSÅg™ŸÚþ/ö‡W#Û($ľIL$lß¾N ‘ùÿÆB<À4a” ÐKOYd pv“¤OÊFÐMomåÛŠNÙJNú©ˆ`Æeái¯L]St}ô¡ñ/‚p‘Fi7‡¡z„\ƒ¶ü¶|šßÚ)¦éT„=8 =Ô¾zjÁ‚BãΠžÉº Ê%°àx¹óè )Âê«ÊìÔçëçÈÃÔàÕ+ñMC¬}ÆÊ2{—ŒüSQÝgØ(È2’ì·E¥<œK­„ÅÃÇ,ì!ðd>æÖ‰ =<÷æ-3/rÙ Ï´²K´â¾þ=ÀÝ|°°µ¢^ÎÃx H,šËÂW"³”gY{<\Òó–üeÿõo MÁÒ­‚6í(ÂÞ½écêfAOŸŒ0×nÉ[-J®À‰cÑm,Òê D’Õ8m£¼ïqÏãÆ–sB,Ýœß1Š mñ™Àþé q_G?ò>æÐ«”p£]ÿ›4ÿJep~ÈŒ"'ø[7€"w(:Ðbð[°^,'ÂÙìÝhu½jÛÅî´[Hjk ¥by“œ‹[’g_˜# òU 0ý %- 0(3 L[ 0D§ UJë UJ5  w(… 4­ Á Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð DCÖ Ö Ö Ö B-                            AQF 0C— — — — — — — — ÆÚ Ú 0D  D/ä B®00™ÞÞÞÞÞÞÞÞ 0Dwwww®»»™iiiiiiiiiiii®™°HP LaserJet 4M Plus (PCL)HPLAS4MP.PRSð\\ððÊ /`)Ͼ¦ p`CG TimesX($¡¡C:\OFFICE\WPWIN\TEMPLATE\STANDARD.WPT(3¯s$§§Ý ƒ!ÝÝ  Ý(ÈhH  Z 2CG Times (W1) RegularH°À`  Z 2CG Times (WN) RegularÈN£gÊvÊCS2"ÿld°3|xHN7Hairlinedxd)Hairline d@j8BCCþÿ<< Cÿÿ(2q$££Ý ƒ!ÝÝ  ݃Level 1Level 2Level 3Level 4Level 5($$””ò òÚ  Ú1Ú  Úó óDD'÷ÿ dxdüÿP Pd ¤Ý ƒj¯s"ÝÝ  Ýò òÔ‡ˆ©’ˆXXÔCHAPTER€13€€à€æ æ ®àANSWERS€TO€END„OF„CHAPTER€QUESTIONSó óÔ#†X ¡Xˆˆ©’#Ô Ý ƒ¯s'ÝÝ  ÝÔ‡X ¡XXXÔÔ‡ò“¨òXX ¡Ôà@Q Q ìàCHAPTER€13€€€€€€ANSWERS€TO€QUESTIONS(3¯s$¢¢Ý ƒ!ÝÝ  Ý ¤Ý ƒj¯s"ÝÝ  Ýò òÔ‡ˆ©’ˆXXÔCHAPTER€14€€à€æ æ ®àANSWERS€TO€END„OF„CHAPTER€QUESTIONSó óÔ#†X ¡Xˆˆ©’#Ô Ý ƒ¯s'ÝÝ  ÝÔ‡X ¡XXXÔÔ‡ò“¨òXX ¡Ôà@Q Q ìàCHAPTER€14€€€€€€ANSWERS€TO€QUESTIONS ¤Ý ƒj¯s"ÝÝ  Ýò òÔ‡ˆ©’ˆXXÔCHAPTER€15€€à€æ æ ®àANSWERS€TO€END„OF„CHAPTER€QUESTIONSó óÔ#†X ¡Xˆˆ©’#Ô Ý ƒ¯s'ÝÝ  ÝÔ‡X ¡XXXÔÔ‡ò“¨òXX ¡Ôà@Q Q ìàCHAPTER€15€€€€€€ANSWERS€TO€QUESTIONSÝ ƒ!ÝÝ  ÝññØ9ØññññÓ  ÓññññÔ‡X ¡XXXÔññññññÑ7€ ¡XdéXXdé7ÑññññññÔ% € ÔññññÑ7€“¨òòdÇXXdé7Ñññññßi€7`3#h 0  `€€E°@xÃee®ùè? Œißâ °±°±°(#°(#ââ ââ ââ â°â ââ °±°±°±°±â°â ââ °±°±°±°±â°â ââ °(#°(#°±°±â2.òò€The€basic€mechanics€of€our€AD/ASòòeóó€framework€have€incorporated€connections€between€savingÐ ú» Ðand€investment€in€the€overall€economy.€€In€reality,€such€a€connection€is€much€richer€and€moreÏcomplex€than€can€be€captured€in€an€aggregate€model€and€involves€the€working€of€a€system€ofÏdomestic€and€international€capital€markets.€€In€this€context,€discuss€the€elements€through€whichÏsaving€and€investment€are€related€in€a€more€realistic€setting€than€can€be€encompassed€in€theÏAD/ASòòe€óómodel.óó€€This€question€is€to€get€students€to€connect€the€discussions€about€savers,€financialÐ ‰ J Ðintermediaries,€and€users€of€funds€(section€13.1)€and€about€portfolio€options€(section€13.2)€withÏthe€less„detailed€linkage€between€saving€and€investment€embodied€in€our€model.€€The€goal€is€toÏget€them€to€see€this€chapter€as€an€enrichment€of€what€they€have€been€doing€rather€than€as€aÏseparate€topic.ÌÌÖ€bÿÿÖ3.€òòWhy€is€there€a€need€for€a€highly€specialized€industry€to€link€savers€with€investors?€€AddressÐ   Ðthe€charge€that€such€middlemen€only€increase€the€costs€to€borrowers€and,€thereby,€end€upÏdiminishing€the€amount€of€investment€and€capital€formation€in€the€overall€economy.€€Explain.óó€Ð Õ– ÐThe€important€roles€of€providing€information€and€absorbing€risk€are€discussed€somewhat€casuallyÏin€the€chapter,€so€this€question€should€force€students€to€put€those€ideas€into€their€own€words.€ÏBy€this€point,€the€notion€of€"mutual€gain"€should€come€more€automatically,€keeping€them€fromÏfalling€so€readily€into€the€common€traps€that€vilify€the€middleman.€ÌÌ4.òò€In€recent€years,€there€has€been€a€substantial€flow€of€saving€from€the€U.S.€to€developingÐ M Ðnations€in€anticipation€of€large€expected€returns€from€new€investments.€€This€may€reflect€aÏnumber€of€factors,€such€as€reduced€political€and€economic€instability€and,€hence,€capital€marketÏuncertainty€in€many€parts€of€the€world.€€Whatever€the€reason€behind€it,€the€consequences€canÏbe€fairly€complicated.€€For€example,€one€impact€of€this€influx€of€dollars€into€these€countries€isÏincreased€demand€for€their€currencies€and€upward€pressure€on€their€exchange€rates.€€This€risingÏexchange€rate€makes€their€exports€more€expensive€in€other€nations€and€damages€their€exportÏsector.€€To€try€to€prevent€this,€governments€may€chose€to€buy€these€additional€dollars€before€theyÏhave€a€chance€to€push€up€the€price€of€the€domestic€currency.ÌÌa.€Suppose€they€do€this€by€increasing€the€domestic€money€supply€to€buy€up€the€dollars.€€WhatÏshort„€and€long„run€impacts€would€this€inflow€of€U.S.€savings€have€on€these€economies?€€ExplainÏin€terms€of€the€AD/ASòòeóó€model.€€óóThis€forces€students€to€try€to€incorporate€this€chapter's€discussionÐ ;%ü" Ðof€global€capital€markets€with€the€underlying€analysis€of€international€trade€from€Chapter€7.€€IfÏthis€nation€responds€to€the€inflow€of€dollars€(i.e.,€increased€demand€for€its€currency)€by€simplyÏprinting€more€money,€then€it€can€succeed€in€keeping€its€nominal€exchange€rate€from€rising€(theÏresulting€rise€in€its€price€level€causing€a€drop€in€the€demand€for€its€currency).€€The€impact€onÏthe€economy€will€be€the€usual€short„€and€long„run€response€from€a€rightward€shift€in€LM€andÏAD.€€But€except€in€the€very€short€run,€this€will€not€keep€its€real€exchange€rate€from€rising,€andÏso€the€result€will€simply€be€a€rise€in€its€price€level€and€related€nominal€variables.òòÐ œ+]%) ÐÌb.€Suppose€they€buy€up€these€dollars€by€issuing€bonds€rather€than€printing€money.€€€Would€yourÐ n-/'+ Ðanswer€in€part€4a€still€apply?€€Explain.óó€€If€this€influx€of€dollars€is€paid€for€by€issuing€bondsÐ ? Ðrather€than€printing€money,€then€the€impact€will€be€that€of€an€increased€structural€deficit,Ïshifting€IS€and€AD€to€the€right,€and€so€on.€€The€lasting€effect€will€be€an€increase€in€the€real€rateÏof€interest€and,€hence,€an€increase€in€the€foreign€demand€for€their€currency,€causing€their€realÏexchange€rate€to€rise.€€(Tax„discounting€would,€as€always,€reduce€the€magnitude€of€the€shift€inÏIS.)ÌÌ5.òò€Suppose€foreign€governments€are€buying€up€the€influx€of€dollars€and€issuing€new€bonds€to€payÐ   a Ðfor€it€(as€in€4b).€€Further€suppose€that€they€now€take€these€new€dollar€holdings€and€buy€U.S.Ïgovernment€bonds.€€If€the€value€of€the€dollar€continues€to€fall€relative€to€their€currency€(asÏhappened€for€many€countries€in€the€mid„90s),€what€will€be€the€consequence€of€this€policy€forÏthese€countries?€€Explain.óó€€This€question€pushes€too€far,€gets€too€messy,€and€moves€further€fromÐ F  Ðthe€main€points€of€this€chapter.€€So,€with€apologies,€I€declare€it€null€and€void.ÌÌ6.òò€Money€is€just€an€asset,€one€among€very€many.€€In€what€ways€does€it€differ€from€other€assets?€Ð Ä  ÐIn€what€respects€is€it€similar?óó€€This€chapter€provides€students€some€discussion€of€alternativeÐ î¯  Ðassets€in€terms€of€risk/expected€return€characteristics.€€Combining€it€with€what€they€learned€backÏin€Chapter€6€(about€money€as€a€store€of€value,€medium€of€exchange,€and€unit€of€account),€theyÏshould€contrast€its€higher€liquidity,€lower€risk,€lower€return€with€alternative€assets.€€TheÏimportant€thing€is€for€them€to€have€to€put€some€structure€to€this€rather€open„ended€question€andÏto€put€it€in€their€own€words.€ÌÌ7.€òòThose€who€can€consistently€predict€an€inflationary€surge€before€others€see€it€coming€have€aÐ O Ðpotentially€valuable€skill.€€If€you€had€this€ability,€how€could€you€put€it€to€profitable€use€in€theÏbond€and€foreign€exchange€markets?€€Explain.óó€€This€is€designed€to€integrate€capital€marketÐ #ä Ðdecisions€with€predictions€of€the€basic€model.€€Someone€who€foresees€an€inflationary€surgeÏbefore€others€do€knows,€other€things€unchanged,€that€there€will€be€rising€nominal€interest€ratesÏ(hence,€falling€bond€prices)€and€a€falling€nominal€exchange€rate.€€A€number€of€strategies€areÏpossible.€€Students€should€at€least€see€the€efficacy€of€(1)€selling€bonds€now€and€buying€themÏback€after€the€market€reacts€and€(2)€buying€foreign€exchange€now€and€converting€it€back€toÏdollars€after€the€market€reacts.€€€€ÌÌ8.€òòWhy€are€economists€skeptical€of€those€who€claim€to€be€able€to€see€what€lies€ahead€in€capitalÐ m#.  Ðmarkets?óó€€Even€from€the€relatively€brief€coverage€of€this€chapter,€students€should€be€able€to€seeÐ X$! Ðthe€improbability€of€someone€having€such€tremendously€valuable€information€and€be€willing€andÏeager€to€share€it€with€others€for€such€a€relatively€moderate€fee.€€This€topic€is€raised€again€inÏChapter€15€in€the€context€of€economic€forecasting.ÌÌ9.òò€The€Federal€Reserve€is€probably€the€most€consistently€criticized€among€policy„making€groups.€Ð ç(¨"& ÐIts€every€action€makes€the€headlines,€especially€when€that€action€is€a€surprise.€€When€anÏanticipated€change€in€Fed€policy€fails€to€materialize,€it€is€criticized€for€its€inaction.€€CriticismÏcomes€from€Wall€Street€and€Main€Street,€as€well€as€from€both€the€legislative€and€executiveÏbranches€of€the€government.€€What€are€the€underlying€sources€of€all€this€criticism?€€Is€the€FedÏincompetent€or€is€it€just€misunderstood?€€Explain.óó€€The€idea€here€is,€again,€for€students€toÐ v-7'+ Ðcombine€what€they€have€learned€in€previous€chapters€about€the€difficulties€facing€the€monetaryÏauthority€(lags,€different€definitions€of€money,€conflicting€goals€and€pressures)€with€the€pointsÏmade€in€this€chapter€about€substitutability€across€assets€and,€particularly,€the€reaction€of€bondÏmarkets€to€Fed€actions€and,€sometimes,€vice€versa.ÌÌÌÌÔ#†X ¡XXX ¡Q#ÔÔ‡X ¡XXX ¡Ôßi€7n3 #h 0  `€€E°Ÿ xÃee®ùèž  Œißâ °±°±°(#°(#ââ ââ ââ â°â ââ °±°±°±°±â°â ââ °±°±°±°±â°â ââ °(#°(#°±°±â2.€òòVirtually€all€presidents€in€recent€decades€have€put€at€least€occasional€pressure€on€the€FederalÐ Y  ÐReserve€to€ease€up€on€the€money€supply.€€The€argument€has€been€that€we€needed€lower€interestÏrates€in€order€to€achieve€a€strong€recovery€or€restore€a€healthy€rate€of€growth.€€Based€on€theÏAD/ASòòe€óóframework,€what€are€the€likely€consequences€of€such€a€strategy?óó€€This€is€to€remindÐ ×  Ðstudents€not€to€throw€away€insights€acquired€in€previous€chapters€that€are€applicable€to€the€issueÏof€economic€growth.€€This€question€requires€them€to€show€that€the€Federal€Reserve€has€no€long„Ïrun€impact€on€the€real€rate€of€interest€and,€therefore,€on€real€investment€and,€hence,€the€rate€ofÏeconomic€growth.€€ÌÌÖ€pbÇÖ3.€òò"Those€who€profess€to€find€the€sluggish€growth€of€recent€decades€such€a€puzzle€are€simplyÐ ŽO Ðrefusing€to€recognize€the€obvious.€€All€we€need€is€more€public€saving€and€less€publicÏconsumption,€and€the€problem€would€be€solved."€€Evaluate.óó€€There€certainly€are€steps€that€canÐ b# Ðbe€taken€to€increase€the€overall€rate€of€economic€growth.€€Section€14.6€catalogues€the€variousÏways€in€which€we€might€raise€national€saving,€increase€investment€spending,€and€increase€theÏproductivity€of€the€various€inputs.€€More€public€saving€(actually€less€public€dissaving€byÏlowering€the€deficit)€is€one€route,€if€it€is€accomplished€by€reducing€public€consumption€ratherÏthan€public€investment€spending.€By€shifting€IS€to€the€left,€reducing€the€real€rate€of€interest,€andÏstimulating€real€investment€spending,€resources€are€moved€from€public€consumption€to€privateÏinvestment€with€a€net€increase€in€the€capital€stock.€€The€lessons€of€the€neoclassical€growth€modelÏtell€us€that€this€will€be€only€a€temporary€rise€in€the€growth€rate,€the€steady€state€being€unaffectedÏunless€changes€in€population€or€technology€growth€occur.€€But,€contrary€to€the€statement€in€theÏquestion,€the€puzzle€as€to€what€brought€about€the€slowdown€in€productivity€growth€remains.€€ÌÌ4.€òò"An€increase€in€private€saving€is€necessary€to€speed€up€economic€growth,€reduce€inflation,Ð P$! Ðstrengthen€the€value€of€the€dollar,€and€end€our€balance€of€trade€deficit."€€Evaluate.óó€€IncreasedÐ ;%ü" Ðautonomous€saving€shows€up€as€a€drop€in€autonomous€consumption,€hence,€a€leftward€shift€inÏIS€and€AD.€€By€lowering€the€real€rate€of€interest€it€will€increase€investment€and€the€capitalÏstock,€but€the€neoclassical€growth€model€tells€us€that€this€will€leave€the€steady„state€rate€ofÏgrowth€unchanged.€€This€one„shot€leftward€shift€in€AD€will€have€only€a€one„shot€effect€on€theÏrate€of€inflation€which,€other€things€the€same,€will€soon€return€to€its€initial€rate.€€A€lower€realÏrate€of€interest€will€reduce€international€demand€for€the€dollar,€thereby€lowering€both€theÏnominal€and€real€exchange€rate.€€This€weaker€dollar€will€discourage€imports,€encourage€exportsÏand€lead€to€a€reduction€in€the€trade€deficit.€€So,€whoever€made€this€statement€is€batting€1€for€4.ÌÐ n-/'+ Ð5.òò€Continued€government€deficits€continue€to€cause€irritation,€much€of€it€for€the€wrong€reasons.€Ð ? ÐWe€have€seen€that€popular€views€of€the€budget€deficit€are€quite€primitive€in€a€number€of€ways,Ïparticularly€in€the€implicit€assumption€that€a€cash„flow€deficit€is€identical€to€a€capital„accountÏdeficit.€€A€careful€look€at€the€issue€of€government€deficits€reveals€no€evidence€(logical€orÏstatistical)€to€confirm€widespread€fears€that€continuation€of€the€U.S.€deficit€at€levels€of€the€pastÏdecade€is€likely€to€lead€to€national€bankruptcy.€€We€have€also€seen€that€with€the€moderation€ofÏactivist€views€of€stabilization€policy,€there€is€little€reason€to€believe€that€constant€manipulationÏof€government€budget€deficits€is€a€vital€tool€in€the€attempt€to€keep€the€economy€operating€at€orÏnear€its€potential.€€But€what€about€the€impact€of€continued€deficits€on€economic€growth?€€DiscussÏthe€contention€that€government€deficits€are€a€drain€on€our€national€saving€and€even€if€they€areÐ r3  Ðóósustainableòò€in€a€narrow€sense,€they€eat€away€at€our€economic€growth.€€They€may€not€lower€ourÐ [  Ðstandard€of€living€but€by€keeping€it€from€rising€as€fast€as€it€otherwise€would,€they€end€up€makingÏus€worse€off.€€Explain.óó€€This€is€again€to€help€students€retain€earlier€insights€about€importantÐ /ð  Ðgrowth„related€issues.€€The€deficit€is€frequently€vilified€by€politicians€and€the€media€for€itsÏadverse€growth€effects.€€But€there€is€no€evidence€to€support€the€implication€that€an€end€to€theÏdeficit€wouldÌcause€a€significant€increase€in€the€rate€of€economic€growth.€€Drawing€on€the€earlier€analysis€ofÏthe€deficit€(Chapter€5,€Fiscal€Policy),€students€should€note€that€if€the€cash€flow€deficit€is€reducedÏby€cutting€public€investment€spending,€there€is€likely€to€be€little€or€no€increase€in€the€growth€rateÏas€capital€is€moved€from€the€public€to€the€private€sector.ÌÌ6.òò€Can€we€alter€the€rate€of€economic€growth€in€the€steady€state?€€Explain€what€the€neoclassicalÐ b# Ðgrowth€model€has€to€say€about€this.€€Where€do€policy€irrelevance€and€tax„discounting€fit€into€theÏpicture€about€the€ability€of€policy€to€influence€economic€growth?óó€€The€only€way€to€increase€theÐ 6÷ Ðgrowth€of€output€per€head€in€the€steady€state€is€through€increases€in€the€productivity€of€theÏinputs€through€technological€change.€€Changes€in€the€saving€rate,€public€or€private,€alter€theÏlevel€of€the€growth€path€but€cause€only€a€temporary€blip€in€steady„state€growth.€€Though€theyÏmay€fall€into€the€same€family€of€circumstances€under€which€policy€manipulation€has€littleÏimpact,€there€is€no€close€connection€between€situations€of€policy€irrelevance€and€tax„discountingÏand€the€limited€impact€of€policy€changes€on€steady„state€growth.€€They€exist€in€different€worlds,Ïunder€different€assumptions.€€However,€a€condition€of€perfect€tax„discounting€(assumingÏconsumers€are€not€liquidity„constrained)€does€lead€to€the€conclusion€that€increases€and€decreasesÏin€the€cash„flow€deficit€have€no€impact€on€IS€or€AD€and,€therefore,€leave€the€real€interest€rateÏand€real€investment€spending€unchanged.ÌÌ7.òò€A€bipartisan€Commission€on€Economic€Growth€is€formed€to€unravel€the€mystery€of€the€20„yearÐ $&å# Ðslowdown€in€the€rate€of€growth€of€real€output€in€the€U.S.€€You€are€in€charge€of€the€subcommitteeÏon€interest€rates€and€are€asked€to€recommend€a€policy€package€that€would€provide€permanentlyÏlower€interest€rates€in€a€way€that€would€increase€total€U.S.€investment€and,€hence,€stimulateÏeconomic€growth.€€Your€recommendation€and€explanation€is€.€.€.óó€The€familiar€litany€ofÐ Ê)‹#' Ðpossibilities€is€recounted€in€section€14.6.€€Various€actions€can€be€used€to€reduce€private€or€publicÏconsumption€spending,€thereby€trading€"consumption€now"€for€"consumption€later."€€These€canÏcome€through€selective€taxes,€subsidies,€laws,€constitutional€amendments,€and€so€on.€€TheÏimportant€bottom€line€here€is€that€this€brings€more€tomorrow€only€if€we€are€willing€to€consumeÐ p-1'+ Ðless€today.€€Another€family€of€policies€can€be€directed€at€improving€the€quality€of€inputs€(betterÏeducation,€more€R&D,€more€efficient€institutional€structure).€€But,€again,€the€process€is€one€ofÏchanneling€current€resources€into€private€or€public€investment€activities€(hence,€out€ofÏconsumption)€in€order€to€enhance€future€consumption.ÌÌ8.òò€Back€in€the€very€first€chapter,€it€was€said€that€economic€growth€is€an€economic€good,€subjectÐ Ì  Ðto€all€the€laws€of€scarcity,€because€it€provides€benefits,€but€only€at€a€cost.€€Discuss€this€issue€inÏthe€context€of€the€debate€over€whether€the€government€should€take€steps€to€increase€the€rate€ofÏgrowth€in€the€U.S.óó€€This€is€another€way€to€come€at€the€points€made€in€the€answer€to€the€questionÐ ‰ J Ðabove.€€An€additional€factor€to€consider€is€the€circumstances€under€which€it€would€make€senseÏfor€the€government€to€override€private€decisions€on€the€consumption„saving€choice.€€To€theÏextent€that€existing€government€policies€or€practices€act€to€encourage€current€over€futureÏconsumption,€it€may€make€sense€to€offset€the€side€effects€with€policies€that€subsidize€saving€orÏinvestment.€ÌÌ9.€òòThe€neoclassical€growth€model€focuses€on€the€linkage€between€investment€spending€and€theÐ ê«  Ðgrowth€in€aggregate€supply€over€time.óóÐ Õ– ÐÌòòa.€What€determines€the€steady„state€rate€of€growth€in€this€model?€€Explain.€óóThe€variousÐ §h Ðassumptions€underlying€the€neoclassical€growth€model€leadòò€óóto€the€result€that€the€steady„stateÐ ’S Ðgrowth€of€real€output€will€be€equal€to€ðð+ðð,€the€rate€of€population€growth€plus€the€rate€ofÏproductivity€growth.€€The€steady„state€rate€of€growth€of€output€per€head€is€equal€to€the€rate€ofÏproductivity€growth,€ðð.òòÐ O ÐóóÌòòb.€This€model€predicts€that€changes€in€the€saving€rate€will€have€no€impact€on€the€rate€of€growth.€Ð !â ÐExplain€the€logic€behind€this.óó€€The€initial€impact€of€a€change€in€the€saving€rate€on€the€growthÐ  Ë Ðrate€disappears€as€the€change€in€the€rate€of€investment€alters€the€marginal€product€of€capital€untilÏit€has€offset€the€change€in€the€saving€rate.€€Algebraically,€if€we€begin€with€steady„state€growthÏof€€%ððyòò*óó=ðð=ðð(yòò*óó/k),€then€an€increased€saving€rate€(+ðððð)€means€a€faster€rate€of€investmentРLj Ðwhich€lowers€the€marginal€product€of€capital.€€This€causes€the€output€to€capital€ratio€(yòò*óó/k)€toÐ ° q Ðdecline,€offsetting€the€rise€in€ðð.€€ÌÌòòc.€Explain€why€the€conclusion€in€9b€does€not€contradict€another€implication€of€this€model€„„€thatÐ k#,  Ðchanges€in€the€saving€rate€alter€the€steady„state€growth€path€and,€with€it,€our€standard€of€living.€ÏóóThough€a€higher€saving€rate€does€not€alter€the€steady„state€rate€of€growth€of€output€(which€canÐ =%þ" Ðchange€only€by€a€change€in€population€growth€or€technology€growth),€it€still€means€that€lessÏconsumption€now€yields€more€consumption€later.€€Hence€the€higher€saving€rate€raises€theÏeconomy€to€a€higher€growth€path€(higher€level€of€output)€even€though€this€path€has€the€sameÏslope€as€the€previous€one.òòÐ á(¢"& ÐóóÌ10.òò€Explain€and€contrast€the€empirical€approach€to€understanding€economic€growth€throughÐ ³*t$( Ðstylized€facts€and€through€the€growth„accounting€model.€€What€are€their€specific€strengths€andÏweaknesses?€€Explain.€€óóSearching€through€the€past€for€patterns€or€stylized€facts€that€distinguishÐ ‡,H&* Ðhigh„growth€from€low„growth€nations€or€eras.€€As€promising€as€this€may€seem€to€be,€a€closerÐ r-3'+ Ðlook€reveals€a€number€of€weaknesses€and€limitations.€€The€problems€arise€because€we€have€aÏcollection€of€facts€but€no€model€or€theory€(or€story)€to€bind€them€together.€€Does€higherÏspending€on€education€really€bring€faster€economic€growth€(as€we€are€disposed€to€think),€or€doesÏit€work€the€other€way€around?€€Put€another€way,€facts€cannot€speak€for€themselves.€€EvenÏresults€that€may€seem€to€have€an€obvious€interpretation€in€terms€of€causality€may€not€turn€outÏthat€way.€€We€can't€find€that€out€unless€we€impose€a€model€of€cause€and€effect€on€the€processÏin€question.€€This€is€what€the€growth„accounting€model€seeks€to€do,€though€in€a€much€moreÏpedestrian€manner€than€the€very€precise€but€highly€abstract€neoclassical€growth€model.€€WithoutÏimposing€long„term€steady„state€conditions€on€the€outcome,€growth„accounting€works€from€aÏproduction€function€with€specific€assumed€characteristics€regarding€diminishing€marginalÏproducts,€returns€to€scale,€and€the€embodiment€of€technological€change.€€Like€the€neoclassicalÏmodel,€it€makes€some€strong€and€obviously€unrealistic€assumptions€in€order€to€reach€aÏcompromise€between€manageability€and€structure.€€This€structure€gives€it€a€framework€withinÏwhich€to€interpret€the€empirical€facts€that€are€unable€to€speak€for€themselves.Ð  Õ  ÐÔ#†X ¡XXX ¡. #Ôò òßi€7|3 #h 0  `€€E°@xÃee®ùè? Œißâ °±°±°(#°(#ââ ââ ââ â°â ââ °±°±°±°±â°â ââ °±°±°±°±â°â ââ °(#°(#°±°±âó óÔ‡X ¡XXX ¡Ô2.€òòWhat€are€the€main€factors€that€need€to€be€considered€in€a€careful€attempt€to€choose€amongÐ ú» Ðcompeting€models€of€the€macroeconomy?€€Explain.óó€This€chapter€is€all€about€this€question€evenÐ å ¦ Ðthough€it€is€never€explicitly€answered.€€So€this€offers€the€ambitious€and€thoughtful€student€aÏchance€to€put€together€the€criteria€and€basic€components€for€selecting€the€best€model€for€theÏpurpose€at€hand.€€Logical€consistency€and€empirical€verification€are€the€big€points,€but€empiricalÏverification€then€requires€attention€to€measurement€problems€as€well€as€the€various€issuesÏconcerning€estimation€and€forecasting,€including€specification€errors€and€the€Lucas€critique.€€ÌÌÖ€~pÇÖ3.òò€There€are€a€number€of€reasons€why€the€standard€Gross€Domestic€Product€(GDP)€measure€isÐ F  Ðan€incomplete€measure€of€a€nation's€overall€standard€of€living.€€Describe€and€discuss€the€majorÏsources€of€discrepancy€between€concept€and€measure.óó€€The€five€proposed€adjustments€in€sectionÐ Û  Ð15.3€address€these€shortcomings:€(1)€put€GDP€on€a€per€capita€basis,€(2)€express€its€changes€inÏreal€rather€than€nominal€terms,€(3)€eliminate€double„counting€by€using€depreciation€to€go€fromÏgross€to€net,€(4)€include€wrongly€excluded€goods€and€services€(imputations),€and€(5)€includeÏwrongly„excluded€costs€and€losses€such€as€capital€losses€from€environmental€degradation.ÌÌ4.òò€It€is€often€said€that€anemic€levels€of€national€saving€are€at€the€heart€of€the€macroeconomicÐ ’S Ðproblems€of€the€U.S.€economy.€€óóÐ }> ÐÌòòa.€What€is€the€cause„and„effect€connection,€if€any,€between€low€national€saving€and€poorÐ O Ðeconomic€performance?€€Explain€in€terms€of€an€appropriate€analytical€structure.óó€€We€haveÐ 8ù Ðencountered€this€question€in€various€ways€at€several€points€in€earlier€chapters.€€It€is€commonlyÏassumed€that€the€higher€the€national€saving,€the€better€for€the€economy.€€But€the€issue€is€actuallyÏmuch€more€complex€than€recognized€by€this€simple€dictum.€€Although€more€saving€now€canÏbring€more€consumption€later,€it€necessarily€means€less€consumption€now.€€For€individuals€(andÏnations)€with€high€rates€of€time€preference,€more€saving€could€mean€a€less€desirable€outcome,Ïi.e.,€too€much€consumption€later€and€not€enough€now.€€In€addition,€according€to€the€neoclassicalÏgrowth€model,€a€higher€rate€of€saving€raises€the€level€of€the€consumption€path€but€cannot€alterÏthe€steady„state€rate€of€growth€of€real€output€or€consumption.€€At€the€same€time,€we€must€beÏaware€that€economies€with€unstable€currencies€or€poorly€developed€capital€markets€are€unableÏto€offer€adequate€saving€(and€investment)€opportunities€for€individuals€to€reach€an€efficientÏbalance€between€consumption€now€and€later.€€ÌÌòòb.€What€are€some€of€the€reasons€that€make€it€difficult€to€measure€the€actual€level€of€nationalÐ 'Ð $ Ðsaving€with€any€high€degree€of€accuracy?€€Explain.óó€€Since€private€saving€is€measured€as€theÐ ø'¹!% Ðresidual€between€after„tax€income€and€private€consumption,€any€biases€in€the€measurement€ofÏthese€categories€will€also€show€up€in€the€saving€figures.€€Moreover,€saving€can€take€a€numberÏof€forms,€some€of€which€elude€detection€by€standard€national€accounting€procedures.€€ForÏexample,€appreciation€of€financial€assets€is€not€counted€in€saving,€so€long€as€they€remain€in€theÏunrealized€capital€gains€category.€€In€addition,€since€national€saving€combines€private€savingÏwith€the€government€deficit,€all€the€many€errors€in€measuring€the€government€deficit€(e.g.,Ð p-1'+ Ðfailure€to€separate€current€and€capital€accounts;€exclusion€of€entitlements€and€other€unfundedÏliabilities€from€the€government€budget)€also€affect€measured€national€saving.€€ÌÌ5.òò€The€Japanese€economy€has€been€the€envy€of€other€nations€on€many€counts.€€Its€high€rate€ofÐ ú» Ðsaving€and€low€rates€of€inflation€and€unemployment€have€provided€a€stable,€yet€fertileÏenvironment€for€rapid€economic€growth.€€Moreover,€when€we€convert€its€per€capita€GDP€intoÏdollars€at€exchange€rates€of€the€mid„90s,€we€find€that€its€standard€of€living€now€exceeds€that€ofÏthe€U.S.€€However,€a€look€at€some€conceptual€issues€underlying€these€measurements€suggest€aÏnumber€of€reasons€why€these€numbers€could€be€misleading€and€should€not€be€taken€at€face€value.€ÏDiscuss€and€explain.óó€€Japanese€statistics€use€slightly€different€definitions€of€unemployment€andÐ r3  Ðsaving.€€When€adjusted€to€the€definitions€used€by€the€U.S.€and€most€other€nations,€theirÏextremely€high€saving€rate€is€somewhat€reduced€while€their€low€unemployment€rates€are€slightlyÏincreased.€€Using€current€exchange€rates€to€compare€living€standards€across€countries€fails€toÏaccount€for€the€purchasing€power€of€that€currency€within€its€own€country.€€When€adjustment€isÏmade€to€purchasing€power€parity€exchange€rates€(a€crude€but€important€correction),€the€measuredÏstandard€of€living€in€Japan€falls€perhaps€10%€short€of€that€in€the€U.S.ÌÌ6.òò€ð ðThe€whole€point€of€a€systematic,€scientific€approach€to€macroeconomics€is€to€obtain€aÐ ¼} Ðpractical€knowledge€of€the€cause„and„effect€linkages€in€the€economy.€€Therefore,€the€onlyÏmeaningful€test€of€a€particular€model€is€how€well€it€can€forecast€the€future.€€Models€that€provideÏpoor€forecasts€won't€survive€the€'predict€or€perish'€standards€of€the€scientific€method."€ÏEvaluate.€€óóThe€first€sentence€is€generally€correct,€but€the€rest€of€the€statement€is€not.€€ItsÐ b# Ðprimary€weakness€is€a€complete€neglect€of€the€distinction€between€unconditional€and€conditionalÏforecasts.€€A€model€may€be€an€excellent€approximation€to€the€actual€economy€but€provideÏterrible€estimates€of€nominal€interest€rates€because€of€erratic€changes€in€exogenous€variables€likeÏthe€money€supply.Ì€Ì7.€òòEconomic€forecasts€made€with€a€structural€econometric€model€can€be€incorrect€for€a€numberÐ Ú› Ðof€specific€reasons.€€What€are€they,€and€what,€if€anything,€can€be€done€to€reduce€each€of€them?€ÏDiscuss€and€explain.óó€€Although€the€coverage€of€this€issue€has€been€only€superficial,€students€canÐ ® o Ðstill€pick€up€a€common„sense€understanding€of€the€difficulties€that€mismeasurement,€specificationÏerror,€and€the€Lucas€critique€pose€for€estimating€the€parameters€of€the€model€and,€hence,Ïmaking€predictions.€€It€is€perhaps€enough€for€this€course€if€students€see€that€close€attention€andÏhard€work€are€the€generic€means€to€minimizing€these€problems.€€Ô#†X ¡XXX ¡ÓQ#ÔññññÔ% € Ôññ