18.8 PROBLEMS

Question 18.7

Since the crash of its stock market in 1989, the Japanese economy has seen little economic growth and some deflation. The accompanying table from the Organisation for Economic Cooperation and Development (OECD) shows some key macroeconomic data for Japan for 1991 (a “normal” year) and 1995–2003.

  1. From the data, determine the type of policies Japan’s policy-makers undertook at that time to promote growth.

  2. We can safely consider a short-term interest rate that is less than 0.1% to effectively be a 0% interest rate. What is this situation called? What does it imply about the effectiveness of monetary policy? Of fiscal policy?

Question 18.8

In 2012, Canada’s C.D. Howe Institute (cdhowe.org/business-cycle-council) formed a Business Cycle Council to act as an arbiter of when Canadian business cycles begin and end. Similarly, in the United States, the National Bureau of Economic Research (NBER) Business Cycle Dating Committee (nber.org/cycles/cyclesmain.html) acts as arbiter of when recessions start and end. The NBER maintains the official chronology of past U.S. business cycles. Go to the websites of these organizations to help answer the following questions.

  1. How many business cycles have occurred in Canada since the end of World War II in 1945? How many have occurred in the United States during the same time? Did the two countries have about the same number of recessions, and if so did they happen at roughly the same times?

  2. From 1945 until the end of the most recent recession, what was the average duration of a business cycle when measured from the end of one expansion (its peak) to the end of the next? That is, what was the average duration of a business cycle as measured from the beginning of one recession until the start of the next one? Over time, has the length of a business cycle been getting shorter, longer, or staying the same?

  3. Recall from Chapter 6 that a recession is sometimes defined as two or more consecutive quarters of falling output. In contrast, the C.D. Howe Institute and the NBER both use more complex indicators of aggregate economic activity, in particular output and employment, to determine when a recession begins or ends. Briefly describe the pros and cons of each approach in determining the duration of a recession.

Question 18.9

The fall of America’s military rival, the Soviet Union, in 1989 allowed the United States to significantly reduce its defence spending in subsequent years. Using the data in the following table from the Economic Report of the President, replicate Figure 18-3 for the 1990–2000 period. Given the strong economic growth in the United States during the late 1990s, why would a Keynesian see the reduction in defence spending during the 1990s as a good thing?

Question 18.10

In the modern world, central banks are free to increase or reduce the money supply as they see fit. However, some people hearken back to the “good old days” of the gold standard. Under the gold standard, the money supply could expand only when the amount of available gold increased.

  1. Under the gold standard, if the velocity of money were stable when the economy was expanding, what would have had to happen to keep prices stable?

  2. Why would modern macroeconomists consider the gold standard a bad idea?

Question 18.11

For a period of time, monetarists believed that the velocity of money was stable within a country. However, with financial innovation, the velocity began shifting around erratically after 1980. As might be expected, the velocity of money can differ from one country to another—it tends to be faster in countries with more highly developed financial systems. The accompanying table provides money supply and GDP information in 2005 (a typical pre-crisis year) for seven countries.

Sources: World Economic Outlook (IMF); Datastream; Statistics Canada.
  1. Calculate the velocity of money for each of these countries.

    The accompanying table shows GDP per capita for each of these countries in 2005 in Canadian dollars.

    Source: World Economic Outlook (IMF).
  2. Rank the countries in descending order of per capita income and velocity of money. Do wealthy countries or poor countries tend to “turn over” their money more times per year? Would you expect wealthy countries to have more sophisticated financial systems?

Question 18.12

The chapter explains that Kenneth Rogoff proclaimed Richard Nixon “the all-time hero of political business cycles.” Using the following table of data from the Economic Report of the President, explain why Nixon may have earned that title. (Note: Nixon entered office in January 1969 and was re-elected in November 1972. He resigned in August 1974.)

Question 18.13

The economy of Albernia is facing a recessionary gap, and the leader of that nation calls together five of its best economists representing the classical, Keynesian, monetarist, real business cycle, and Great Moderation consensus views of the macroeconomy. Explain what policies each economist would recommend and why.

Question 18.14

Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, and/or Great Moderation consensus views of the macroeconomy?

  1. Since the long-run growth of GDP is 2%, the money supply should grow at 2%.

  2. Decrease government spending in order to decrease inflationary pressure.

  3. Increase the money supply in order to alleviate a recessionary gap.

  4. Always maintain a balanced budget.

  5. Decrease the budget deficit as a percent of GDP when facing a recessionary gap.

Question 18.15

Using a graph like Figure 18-4, show how a monetarist can argue that a contractionary fiscal policy need not lead to a fall in real GDP given a fixed money supply. Explain.