Foundations of Modern. Macroeconomics. Second Edition. Exercise and
Solutions Manual. BEN J. HEIJDRA. LAURIE S. M. REIJNDERS and. WARD E.
ROMP.
Foundations of Modern Macroeconomics Second Edition
Exercise and Solutions Manual
BEN J. HEIJDRA LAURIE S. M. REIJNDERS and WARD E. ROMP
OXPORD UNIVERSITY PRESS
Contents Preface 1 Who is who in macroeconomics? 1 Short questions 2 The Cobb-Douglas production function 3 The AS-AD model 4 Consumption tax 5 Tax incidence 6 The Keynesian cross model 7 The import leakage 8 The liquidity trap 9 The IS-LM-AS model with inflation
ix 1 1 1 2 3 3 4 5 5 6
2 Dynamics in aggregate demand and supply 1 Short questions 2 The Keynesian cross model (continued) 3 The IS-LM model with capital accumulation 4 Stability of the IS-LM model 5 The Blinder-Solow model 6 Ricardian equivalence in the Blinder-Solow model 7 The Blinder-Solow model with capital accumulation 8 Adaptive expectations in a monetarist model 9 More on adaptive expectations 10 Optimization and computation 11 The multiplier-accelerator model
25 25 25 26 26 27 27 28 29 29 30 31
3 Rational expectations and economic policy 1 Short questions 2 Stabilization of demand shocks 3 Overlapping wage contracts and the REH 4 A variation on the Muth model 5 Expectational difference equations 6 The Cagan model 7 Fiscal policy under rational expectations 8 The labour market 9 Liquidity trap 10 PIP meets the Pigou effect 11 PIP and the output gap
65 65 65 66 67 68 68 69 69 70 71 72
VI
12 13 14
Contemporaneous information Sticky prices Automatic stabilizer
72 73 73
4 Anticipation effects and economic policy 1 Short questions 2 The IS-LM model with sticky prices 3 Leaning against the wind 4 The term structure of interest rates 5 Fiscal policy with fixed nominal wages and perfect foresight
109 109 110 Ill Ill
5 The government budget deficit 1 Short questions 2 Tax smoothing 3 The two-period model with tax smoothing 4 Ricardian equivalence 5 Ricardian equivalence in the two-period model
143 143 143 144 145 145
6 A closer look at the labour market 1 Short questions 2 Two-sector model with a skill-biased productivity shock 3 Progressive taxation 4 Indivisible labour 5 Efficiency wages
157 157 157 158 159 159
7 Trade unions and the labour market 1 Short questions 2 Smalltalk 3 The Blanchard-Summers model 4 Variable unemployment benefits 5 The two-sector labour market model
173 173 173 174 174 174
8 Search in the labour market 1 Short questions 2 Search unemployment 3 A CES matching function 4 Downward real wage rigidity 5 Dynamics of unemployment and vacancies
181 181 181 182 183 183
9 Macroeconomic policy, credibility, and politics 1 Short questions 2 Capital taxation and income inequality 3 Choice of policy instrument 4 Rules versus discretion 5 Political business cycles
199 199 199 200 201 202
112
Vll
10 The open economy 1 Short questions 2 The Mundell-Fleming model 3 The Dornbusch model 4 The Buiter-Miller model 5 Dynamics of foreign reserves 6 Price flexibility in the Mundell-Fleming model
217 217 217 218 219 220 221
11 Money 1 Short questions 2 Optimal money growth 3 Monetary superneutrality 4 Cash-in-advance constraint in continuous time 5 Cash-in-advance with labour supply
253 253 253 255 256 257
12 New Keynesian economics 1 Short questions 2 Cost function for a Dixit-Stiglitz technology 3 The multiplier when taxes are distortionary 4 Consumers in the New Keynesian model 5 Producers in the New Keynesian model 6 Monetary policy in the New Keynesian model
279 279 279 280 280 281 283
13 Exogenous economic growth 1 Short questions 2 The Harrod-Domar model 3 The production function 4 The wage-rental ratio 5 The Solow-Swan model 6 The Pasinetti model 7 The Solow-Swan model with population growth 8 Some mathematics 9 Optimal investment 10 Welfare of future generations 11 The savings function 12 The savings ratio in the Ramsey model 13 Technological change 14 Constant marginal utility 15 Intertemporal substitution
14 Endogenous economic growth 1 Short questions 2 Endogenous growth 3 Minimum consumption and endogenous growth 4 Asymptotic endogenous growth 5 External effect and endogenous growth 6 Asymptotic capital fundamentalist model
349 349 349 350 351 351 352
vm 15 Real business cycles 1 Short questions 2 Small open economy model 3 The non-market sector 4 A general RBC model . . . . ^ 5 Government spending shocks in the unit-elastic model 6 No wealth effect in labour supply
369 369 369 370 372 373 373
16 Overlapping generations in continuous time 1 Short questions 2 The Buiter model 3 Endogenous growth 4 The Blanchard - Yaari model without insurance 5 Technological change 6 Mandatory retirement 7 Public infrastructure
395 395 395 396 397 397 399 400
17 Overlapping generations in discrete time 1 Short questions 2 Capital fundamentalism in an OLG model 3 Welfare effects of debt 4 Lifetime uncertainty in a two-period model 5 Pensions in the Diamond-Samuelson model 6 Consumption taxation and redistribution
