## PROBLEMS AND APPLICATIONS

To access online learning resources, visit for Macroeconomics, 9e at www.macmillanhighered.com/launchpad/mankiw9e

### Question 10.6

1. An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive.

1. How does this change affect the demand for money?

2. What happens to the velocity of money?

3. If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run?

4. If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change? If not, what should it do? Why?

5. If the goal of the Fed is to stabilize output, how would your answer to part (d) change?

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### Question 10.7

2. Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant.

1. What happens to the aggregate demand curve?

2. What happens to the level of output and the price level in the short run and in the long run? Give a precise numerical answer.

3. In light of your answer to part (b), what happens to unemployment in the short run and in the long run according to Okun’s law? Again, give a precise numerical answer.

4. What happens to the real interest rate in the short run and in the long run? (Hint: Use the model of the real interest rate in Chapter 3 to see what happens when output changes.) Here, your answer should just give the direction of the changes.

### Question 10.8

3. Let’s examine how the goals of the Fed influence its response to shocks. Suppose that in scenario A the Fed cares only about keeping the price level stable and in scenario B the Fed cares only about keeping output and employment at their natural levels. Explain how in each scenario the Fed would respond to the following.

1. An exogenous decrease in the velocity of money.

2. An exogenous increase in the price of oil.

### Question 10.9

4. The official arbiter of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER’s Web site (http://www.nber.org) and find the latest turning point in the business cycle. When did it occur? Was this a switch from expansion to contraction or the other way around? List all the recessions (contractions) that have occurred during your lifetime and the dates when they began and ended.

1 Note that Figure 10-1 plots growth in real GDP from four quarters earlier, rather than from the immediately preceding quarter. During the 2001 recession, this measure declined but never turned negative.

2 Arthur M. Okun, “Potential GNP: Its Measurement and Significance,” in Proceedings of the Business and Economics Statistics Section, American Statistical Association (Washington, DC: American Statistical Association, 1962): 98–103; reprinted in Arthur M. Okun, Economics for Policymaking (Cambridge, MA.: MIT Press, 1983), 145–158.