1. 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 Organization for Economic Cooperation and Development (OECD) shows some key macroeconomic data for Japan for 1991 (a “normal” year) and 1995–2003.

   Year	Real GDP annual growth rate	Short-term interest rate	Government debt (percent of GDP)	Government budget deficit (percent of GDP)
   1991	3.4%	7.38%	64.8%	−1.81%
   1995	1.9	1.23	87.1	4.71
   1996	3.4	0.59	93.9	5.07
   1997	1.9	0.60	100.3	3.79
   1998	−1.1	0.72	112.2	5.51
   1999	0.1	0.25	125.7	7.23
   2000	2.8	0.25	134.1	7.48
   2001	0.4	0.12	142.3	6.13
   2002	−0.3	0.06	149.3	7.88
   2003	2.5	0.04	157.5	7.67

   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?

2. Question 18.8

   The National Bureau of Economic Research (NBER) maintains the official chronology of past U.S. business cycles. Go to its website at www.nber.org/cycles/cyclesmain.html to answer the following questions.

   1. How many business cycles have occurred since the end of World War II in 1945?

   2. 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 in the period from 1945 to 2001?

   3. When was the last announcement by the NBER’s Business Cycle Dating Committee, and what was it?

3. Question 18.9

   The fall of its military rival, the Soviet Union, in 1989 allowed the United States to significantly reduce its defense spending in subsequent years. Using the data in the following table from the Economic Report of the President, replicate Figure 33-3 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 defense spending during the 1990s as a good thing?

   Year	Budget deficit (percent of GDP)	Unemployment rate
   1990	3.9%	5.6%
   1991	4.5	6.8
   1992	4.7	7.5
   1993	3.9	6.9
   1994	2.9	6.1
   1995	2.2	5.6
   1996	1.4	5.4
   1997	0.3	4.9
   1998	−0.8	4.5
   1999	−1.4	4.2
   2000	−2.4	4.0

4. 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 harken 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?

5. Question 18.11

   The chapter explains that Kenneth Rogoff proclaimed Richard Nixon “the all-time hero of political business cycles.” Using the upcoming 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 reelected in November 1972. He resigned in August 1974.)

   Year	Government receipts (billions of dollars)	Government spending (billions of dollars)	Government budget balance (billions of dollars)	M1 growth	M2 growth	3-month Treasury bill rate
   1969	$186.9	$183.6	$3.2	3.3%	3.7%	6.68%
   1970	192.8	195.6	−2.8	5.1	6.6	6.46
   1971	187.1	210.2	−23.0	6.5	13.4	4.35
   1972	207.3	230.7	−23.4	9.2	13.0	4.07
   1973	230.8	245.7	−14.9	5.5	6.6	7.04

6. Question 18.12

   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.

7. Question 18.13

   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.

8. Question 18.14

   Using a graph like Figure 33-4, 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.

WORK IT OUT