Type:
Solution Manual
Resource:
Macroeconomics Policy and Practice
Edition:
2nd Edition
Author(s):
Frederic S. Mishkin
Online Instructor’s Manual By
Frederic S. Mishkin Columbia University
Martin Pereyra University of Missouri For
Macroeconomics: Policy and Practice Second Edition
Frederic S. Mishkin Columbia University
Contents Chapter 1
The Policy and Practice of Macroeconomics ..............................................................
1
Chapter 2
Measuring Macroeconomic Data ................................................................................
13
Chapter 3
Aggregate Production and Productivity ......................................................................
23
Chapter 4
Saving and Investment in Close and Open Economies ...............................................
32
Chapter 5
Money and Inflation ....................................................................................................
44
Chapter 6
The Sources of Growth and the Solow Model ............................................................
57
Chapter 7
Drivers of Growth: Technology, Policy, and Institutions ...........................................
71
Chapter 8
Business Cycles: An Introduction ...............................................................................
81
Chapter 9
The IS Curve ...............................................................................................................
89
Chapter 10
Monetary Policy and Aggregate Demand ...................................................................
97
Chapter 11
Aggregate Supply and the Phillips Curve ...................................................................
109
Chapter 12
The Aggregate Demand and Supply Model ................................................................
120
Chapter 13
Macroeconomic Policy and Aggregate Demand and Supply Analysis .......................
136
Chapter 14
The Financial System and Economic Growth .............................................................
152
Chapter 15
Financial Crises and the Economy ..............................................................................
162
Chapter 16
Fiscal Policy and the Government Budget ..................................................................
174
Chapter 17
Exchange Rates and International Economic Policy ...................................................
190
Chapter 18
Consumption and Saving ............................................................................................
205
Chapter 19
Investment ...................................................................................................................
220
Chapter 20
The Labor Market, Employment, and Unemployment ...............................................
230
Chapter 21
The Role of Expectations in Macroeconomic Policy ..................................................
240
Chapter 22
Modern Business Cycle Theory ..................................................................................
251
Epilogue
Policy and Practice: Where Do Macroeconomists Agree and Disagree? ....................
259
Web Chapter
Financial Crises in Emerging Market Economies .......................................................
261
.
Web Chapter Financial Crises in Emerging Market Economies ◼ Chapter Outline, Overview, and Teaching Tips Chapter Outline Dynamics of Financial Crises in Emerging Market Economies Stage One: Initiation of Financial Crisis Stage Two: Currency Crisis Stage Three: Full-Fledged Financial Crisis Application: Crisis in South Korea, 1997–1998 Financial Liberalization/Globalization Mismanaged Perversion of the Financial Liberalization/Globalization Process: Chaebols and the South Korean Crisis Stock Market Decline and Failure of Firms Increase Uncertainty Adverse Selection and Moral Hazard Problems Worsen and Aggregate Demand Falls Currency Crisis Ensues Final Stage: Currency Crisis Triggers Full-Fledged Financial Crisis Recovery Commences Application: The Argentine Financial Crisis, 2001–2002 Severe Fiscal Imbalances Adverse Selection and Moral Hazard Problems Worsen Bank Panic Begins Currency Crisis Ensues Currency Crisis Triggers Full-Fledged Financial Crisis Recovery Begins Policy and Practice: Preventing Emerging Market Financial Crises Beef Up Prudential Regulation and Supervision of Banks Encourage Disclosure and Market-Based Discipline Limit Currency Mismatch Sequence Financial Liberalization
Overview and Teaching Tips This Web chapter is for instructors who want to have a more international orientation of their courses. It extends the analysis in Chapter 15 on financial crises to economies that are just entering the world marketplace. The analysis is parallel to that in Chapter 15, with Figure W.1, which is similar to Figure 15.1, outlining the dynamics of financial crises in emerging market economies. Then the chapter takes
.
262
Mishkin • Macroeconomics: Policy and Practice, Second Edition
students through two detailed applications, South Korea in 1997–1998 and Argentina in 2001–2002, to illustrate how useful the analysis in the chapter is. I have found that my students particularly enjoy the discussion of the crazy government policies that promote financial crises in emerging market countries, and I spend a lot of time on this in the case on South Korea because the perverse policies to help out the chaebols, who had enormous influence on South Korean politics. Similarly, I spend a lot of time in the case on Argentina discussing how severe fiscal imbalances led to policies that encouraged banks to take on government debt, which eventually was to be their downfall. Once the case discussions are finished, students can use the material at the end of the chapter to debate differing policies to prevent future emerging market financial crises. They also enjoy the global box on the Icelandic financial crisis because it illustrates how advanced economies can find themselves in similar circumstances to emerging market economies and be subjected to the enormous costs of financial crises.
◼
Answers to End-of-Chapter Questions
1. Mismanagement of financial liberalization or financial globalization that leads to excessive risk taking by financial institutions that eventually blows up and leads to a financial crisis. The second cause is severe fiscal imbalances that lead to a sovereign debt crisis that ends up destroying the balance sheets of financial institutions, which then leads to a financial crisis. 2. If financial liberalization and globalization are not done properly, financial institutions have tremendous incentives to take on risk and a lending boom ensues. When the lending boom crashes, it destroys the balance sheets of financial institutions, which hinders their ability to do financial intermediation, which increases moral hazard and adverse selection problems, so financial markets seize up. In addition, the destruction of financial institutions’ balance sheets makes it difficult for a country’s central bank to raise interest rates, and this can lead to a currency crisis, which then precipitates a financial crisis. 3. Severe fiscal imbalances can result in governments encouraging financial institutions to buy the government debt. Then when the government is unable to repay the debt, financial institutions suffer substantial losses. The resulting destruction of their balance sheets hinders the ability of financial institutions to do financial intermediation, which increases moral hazard and adverse selection problems, so financial markets seize up. In addition, the destruction of financial institutions’ balance sheets makes it difficult for a country’s central bank to raise interest rates, and this can lead to a currency crisis, which then precipitates a financial crisis. 4. A rise in interest rates as a result of rising interest rates abroad increases moral hazard and adverse selection problems, while a collapse in the stock market decreases the net worth of firms, which also increases moral hazard and adverse selection problems. Failures of prominent financial firms also increase uncertainty and makes asymmetric information worse, again increasing adverse selection and moral hazard problems. All of these contribute to financial markets seizing up and thus help promote financial crises. 5. Deterioration in bank balance sheets makes it difficult for central banks to raise interest rates to defend the currency because if they do so it will make banks worse off. Once speculators recognize this, they have a one-way bet and will start selling off the currency, which can result in a collapse of the currency and a currency crisis. Severe fiscal balances, besides leading to a deterioration of bank balance sheets if a sovereign debt crisis occurs, can also contribute directly to a currency crisis,
.