Queens College, CUNY - ECON 201

Macroeconomic Theory, Econ 102

Assignment 4 - Short-Run I

Exercise 4.1 The slope of the Phillips curve - Jones’ Chap 9, Ex 3

Draw a graph with a steep Phillips curve and a graph with a gently sloped Phillips curve.

1)Explain how the two economies respond differently to a boom and to a slump.

2. What are some factors that might influence the slope of the Phillips curve?

3. Do you think the slope of the Phillips curve has changed over time in the U.S. economy? Consider the United States in the 1970s versus today.

Exercise 4.2 A productivity Boom - Chap 9, Ex 5

Suppose the economy exhibits a large, unexpected increase in productivity growth that lasts for a decade. Policymakers are (quite reasonably) slow to learn what has happened to potential output and incorrectly interpret the increase in output as a boom that leads actual output to exceed potential. Suppose they adjust macroeconomic policy so that the mismeasured level of short-run output is zero.

2. What happens to inflation over time?

3. This problem outlines a concern economists have had in recent years after the large increase in productivity growth that started around 1995. Now consider the opposite problem: suppose productivity growth declines for a decade. What would be predicted to happen? Has this ever happened to the U.S. economy?

Exercise 4.3 Systemic risk - Chap 10, Ex 4

Consider the following balance sheets for two hypothetical financial institutions, bank B and bank C:

Bank B’s Balance Sheet

 Assets                                                  Liabilities

1. Fill in the missing entries in the balance sheets (denoted ???).

2. What is the leverage ratio in each bank?

3. Suppose housing prices fall sharply and the mortgage-backed securities held by bank C fall in value to only $500. What happens to bank C’s net worth?