Isaac's Errata for 2nd edition of Farmer's Macroeconomics
=========================================================

p.37, first paragraph
This paragraph is written in a very unclear manner.
To make it clearer, try this:

        Delete:
        The term (S-I) represents private saving

        Insert:
        The term (S-I) represents net flows from the private
        sector into the financial markets

        Delete:
        Equation 2.9 demonstrates that there are two ways 
        the government can generate a surplus.
        
        Insert:
        Equation 2.9 suggests two ways the government can 
        finance a deficit.

p.39, last paragraph

        Farmer states: "Since then [1992], the budget deficit and the trade
        deficit have both fallen."  To make sense of this you need to compare
        the *averages* for the 1980s and 1990s.

p.50, problem 3

        "Gross investment" is gross *private* domestic investment.

p.51, problem 7

        The question asks for the capital stock in 2002 but only provides data
        up to 1999.  Compute the capital stock for 2000 based on this data.

p.65, Table 3.1

        The entries in this table are out of alignment.
        See the corrected table in my online notes.

p.69, Table 3.2

        Definition of the unemployed should say "full-time or part-time", not
        just "full-time".
        See http://www.bls.gov/cps/cps_htgm.htm
        and http://www.bls.gov/opub/mlr/1995/10/art3exc.htm

p.97, Box 4.5, employment rate graph:

        There is a typo in the axis labeling.
        If you look at the right axis, you will see that
        the labels have all been shifted up by 20%.
        If you fix this, the graph matches the one on p.67.

        You might ask, "match?", since you will do not see
        the trend.  But ask why, given our discussion of 
        representing data in class.  The answer of course it that
        by starting at 0% and going to 100% on the right axis (after 
        fixing the labels), all the variation is squeezed into 
        a very small visual range.  It would be be better to show 
        only 50%-70%; then you see the trend easily.

        E.g., you can look at:
        http://research.stlouisfed.org/fred2/series/EMRATIO?cid=12


p.322, Table 14.2

        The table refers to data for 1950-1979, but the text describes the same
        data as applying to 1946-1979, as does figure 14.6.


p. 324, Figure 14.7

        The debt dynamics equation in this figure wrongly signs the intercept.


Figure 14.7

        The steady-state value in this figure should be should be -3.34 (not -0.33).


Footnote 7, p.338

        Typo: Elasticity definition is missing a 'Y' after the first Delta.


Footnote 12, p.350

        Typo: in the penultimate line, Farmer writes 'gE gQ' when he means 'gN gQ'.


Equation 15.10, p.348

        Minor typo: The solution for k-bar uses the glyph 'a' in stead of the glyph 'alpha'.
Figure 15.4

        The numbers in the pie chart are correct, but the proprtions shaded are wrong.

Appendix to ch.15, p.353

        Typo: The second equation show an incorrect '+' instead of the correct
        '=' right before kt.

Problem 10, p.354

        'n' is undefined.  (It is the population growth rate.)

Box 16.1, p.364

        The error here is missing discussion.  The data source is not
        specified.  Panel A shows I/Y = 15% in contrast to the nearly 20% shown
        in figure 15.5b.

Figure 16.7, p.375

        The dynamic adjustment for Economy A is drawn incorrectly.  (It
        "bounces" off the Economy B line instead of the 45 degree line.)


A Few Problem Answers and Hints
===============================

10.13.a.

Recall that the multiplier is M/H = (1+cu)/(rd+cu).
We assume all reserves are required reserves.
So the multiplier is m = (1+0.2)/(0.1 + 0.2) = 3.
So M = 3 * H = 3 * 100M = 300M.

10.13.b.

The multiplier is m = (1+0.15)/(0.05 + 0.15) = 1.15/0.2 = 5.75.
Given: D = 10,000
So CU = cu * D = 0.15 * 10,000 = 1,500.
So R = rd * D = 0.05 * 10,000 = 500.
So MB = CU + R = 1500 + 500 = 2,000.
So M = CU + D = 1,500 + 10,000 = 11,500.
Or, M = m * MB = 5.75 * 2,000 = 11,500.

10.13.c.

Now the multiplier is (1+0.25)/(0.05 + 0.25) = 1.25/0.3 = 25/6.
It has shrunk because people hold more cash.
We still have MB = 2,000.
But now, M = mult * MB =  25/6 * 2,000 = 50,000/6.
If you still want M=11,500, you need
H = 11,500/(25/6)=2760,
a rise of 760.

11.7

Start with the loanable funds diagram.
Note that the **nominal** interest rate is on the vertical axis.
But S and I depend on the **real** interest rate.
Therefore both S and I down up by the change in expected inflation.
There is no real changes implied by this diagram.
To match the outcome in the loanable fund market
(lower i with unchanged Y) the IS curve must shift down
by the same amount.




12.1

Start with the discussion of 11.7.
This time expected inflation rises.
This case is illustrated in your textbook.
Start with the loanable funds diagram.
Note that the **nominal** interest rate is on the vertical axis.
Therefore both S and I shift up by the change in expected inflation.
There is no real changes implied by this diagram.

However, when we move to the IS curve,
this means that it also shifts up by the change in expected inflation.
Again, the **nominal** interest rate is on the vertical axis.
This time, however, there is an interaction with the LM curve.
Unless the LM curve is vertical, the upward shift in the IS
curve produces real changes.  (E.g., an increase in Y.)



12.5

On the exam, I will not be asking about how such changes 
affect the IS and LM slopes.  That said, if investment is 
interest sensitive, a large change in Y (and thus saving)
can be offset by a small change in i, and the IS curve is 
therefore shallow (in Y,i-space).

12.10

The monetarists (Mark I) think that money can have powerful 
effects on the economy in the short run, and that a volatile 
money supply can correspondingly contribute to business 
cycles.  Is that enough of a clue?


12.15.a

Assume no foreign sector; zero expected inflation.

IS: Y = C + I + G
=>  Y = [100 + 0.8(Y-50)] + (50-25i) + 50
=>  0.2 Y = 160 - 25i
=>  i = 160/25 - Y/125

LM: M/P = L(i,Y)
=>  400/2 = Y - 100 i
=>  i = Y/100 - 2


15.9

You can start with the most general version of the dynamic
adjustment equation, as given in the appendix to chapter 15.

k' = k(1-d)/(1+gE)  + k^a sA/(1+gE)

Solving for the steady state (when k'=k) we have:

k(gE + d) =  k^a sA    =>   k = [sA/(gE+d)]^[1/(1-a)]

For this problem you have special values:
s=0.16, d=0.10, gE=0, A=1, a=0.5
So in the steady state,

k = [s/d]^[1/(1-0.5)] = 1.6^2 = 2.56

15.10

Use the same formula as for 15.9.  That is,
in the steady state

   k = [sA/(gE+d)]^[1/(1-a)]

For this problem you have special values:
s=0.45, d=0.10, gE=0.05, a=0.5.
We will set A=1, but you can keep it in your algebra.
So in the steady state,

   k = [0.45/(0.15)]^[1/(1-0.5)] = 3^2 = 9

Copyright (c) 2007, Alan G. Isaac