Intermediate Macroeconomics Problem Set
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ka ming lamIntermediate Macroeconomics Problem Set
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ka ming lamCommon questions
Powered by AIThe unemployment rate tends to be countercyclical, as observed in Hong Kong. It increases during economic downturns (e.g., 1998, 2009, 2020) when real output falls, reflecting higher unemployment when output contracts, and decreases during periods of economic expansion when real output grows .
The real interest rate can be calculated using the formula: i = r + π^e, where i is the nominal interest rate, r is the real interest rate, and π^e is the expected inflation rate. In Lanlan, with a nominal interest rate of 11%, a money supply growth of 14%, and a real GDP growth of 5%, the expected inflation rate becomes 14% - 5% = 9%. Thus, the real interest rate is 11% - 9% = 2% .
To achieve a 2% inflation target with a 2% income growth rate and unchanged nominal interest rates, the nominal money supply should grow at 4%. This is because money supply growth equals inflation rate plus income growth (2% inflation + 2% income growth = 4% money supply growth) when the velocity of money is constant .
The naive statistician's conclusion that a reduction in money supply causes GDP to decrease overlooks the principle that output can be affected by factors other than money supply, such as technological advancements or other external shocks. In Lanlan, GDP fell due to recessionary factors, not due to a direct linkage to money supply reduction. Hence, correlation between reduced money supply and GDP doesn’t imply causation .
Banks can't charge a negative nominal interest rate because it would mean depositors would have to pay the bank to store their money, leading to a disincentive for deposits. People would prefer to hold cash rather than incur a fee for depositing money, undermining the banking system's deposit base .
Yes, the real interest rate can become negative if the expected inflation rate exceeds the nominal interest rate. This would occur during periods of high inflation when the purchasing power of returns from fixed-income investments decreases .
Investment is procyclical if it tends to increase when the overall economy is growing and decrease during recessions. In Hong Kong from 1991 to 2021, investment growth rates generally rose during periods of output growth and declined during recessions (e.g., 1998, 2009, 2020), reflecting its procyclical nature .
If the real GDP decreases by 10% and the velocity of money remains constant, the Central Bank must decrease the money supply growth to counteract the deflationary pressure. Since the GDP isn't affected by the money supply, the money supply must decrease at the same rate as the GDP fall to maintain the price level unchanged .
The money demand elasticity of the price level (P) can be derived from the function Md/P = Y^(1/2) (1+i)^(1/3). The elasticity with respect to P is -1 because it is inversely proportional to the price level, indicating that as price level changes, money demand changes in the opposite direction proportionally .
During the gold standard period, the price of gold was fixed against currency. In a long deflation, the purchasing power of gold relative to goods increased, giving strong incentives for people to discover gold to take advantage of its higher purchasing power. This implies that with deflation, less currency was needed to buy the same amount of goods, effectively increasing the value of gold relative to goods like oranges .