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Questions and Answers of Economics

Given the behavior of velocity shown in Figure would it make more sense for the Federal Reserve to formulate targets for M1 or M2?
Distinguish between the expenditure lag and the policy lag in stabilization policy. Does monetary or fiscal policy have the shorter expenditure lag? What about the policy lag?
Explain why their contrasting views on the shape of the aggregate supply curve lead some economists to argue much more strongly for stabilization policies to fight unemployment and other economists
Explain why lags make it possible that policy actions intended to stabilize the economy will actually destabilize it.
Many observers think that the Federal Reserve succeeded in using deft applications of monetary policy to “fine-tune” the U.S. economy into the full-employment zone in the 1990s without worsening
During the year 2007, U.S. economic performance deteriorated sharply. Can this decline be blamed on inferior monetary or fiscal policy?
The following table provides data on nominal gross domestic product and the money supply (M1 definition) in recent selected years. Compute velocity in each year. Can you see any trend? How does it
Use a supply-and-demand diagram similar to Figure to show the choices open to the Fed following an unexpected decline in the demand for money. If the Fed is following a monetarist policy, what will
Which of the following events would strengthen the argument for the use of discretionary policy, and which would strengthen the argument for rules?a. Structural changes make the economy’s
The money supply (M) is the sum of bank deposits (D) plus currency in the hands of the public(Call that C). Suppose the required reserve ratio is 20 percent and the Fed provides $50 billion in bank
Explain how the U.S. government managed to accumulate a debt of over $9 trillion. To whom does it owe this debt? Is the debt a burden on future generations?
Comment on the following: “Deficit spending paves the road to ruin. If we keep it up, the whole nation will go bankrupt. Even if things do not go this far, what right have we to burden our children
Explain the difference between crowding out and crowding in. Given the current state of the economy, which effect would you expect to dominate today?
Explain the difference between the budget deficit and the national debt. If the deficit gets turned into a surplus, what happens to the debt?
Explain in words why the structural budget might show a surplus while the actual budget is in deficit. Illustrate your answer with a diagram likeFigure.
If the Federal Reserve lowers interest rates, what will happen to the government budget deficit? (What will happen to tax receipts and interest expenses?) If the government wants to offset the
When inflation and unemployment fell together in the 1990s, some observers claimed that policy makers no longer faced a trade-off between inflation and unemployment. Were they correct?
“There is no sense in trying to shorten recessions through fiscal and monetary policy because the effects of these policies on the unemployment rate are sure to be temporary.” Comment on both the
Why is it said that decisions on fiscal and monetary policy are, at least in part, political decisions that cannot be made on “objective” economic criteria?
What is a Phillips curve? Why did it seem to work so much better in the period from 1954 to 1969 than it did in the 1970s?
Explain why expectations of inflation affect the wages that result from labor-management bargaining.
What is meant by “rational” expectations? Why does the hypothesis of rational expectations have such stunning implications for economic policy? Would believers in rational expectations want to
It is often said that the Federal Reserve Board typically cares more about inflation and less about unemployment than the administration. If this is true, why might presidents often worry about what
The year 2007 closed with the unemployment rate around 5 percent, real GDP barely growing, inflation above 2 percent and apparently rising a bit, and the federal budget showing a large deficit.a.
Show that if the economy’s aggregate supply curve is vertical, fluctuations in the growth of aggregate demand produce only fluctuations in inflation with no effect on output.
Long-term government bonds now pay approximately 5 percent nominal interest. Would you prefer to trade yours in for an indexed bond that paid a 3 percent real rate of interest? What if the real
You have a dozen shirts and your roommate has six pairs of shoes worth roughly the same amount of money. You decide to swap six shirts for three pairs of shoes. In financial terms, neither of you
After the removal of a quota on sugar, many U.S. sugar farms go bankrupt. Discuss the pros and cons of removing the quota in the short and long runs.
Country A has a mercantilist government that believes it is always best to export more than it imports. As a consequence, it exports more to Country B every year than it imports from Country B. After
Under current trade law, the president of the United States must report periodically to Congress on countries engaging in unfair trade practices that inhibit U.S. exports. How would you define an
Suppose the United States finds Country X guilty of unfair trade practices and penalizes it with import quotas. So U.S. imports from Country X fall. Suppose, further, that Country X does not alter
The following table describes the number of yards of cloth and barrels of wine that can be produced with a week€™s worth of labor in England and Portugal. Assume that no other inputs are
Suppose that the United States and Mexico are the only two countries in the world and that labor is the only productive input. In the United States, a worker can produce 12 bushels of wheat or 2
The following table presents the demand and supply curves for microcomputers in Japan and the United States.a. Draw the demand and supply curves for the United States on one diagram and those for
What items do you own or routinely consume that are produced abroad? From what countries do these items come? Suppose Americans decided to buy fewer of these things. How would that affect the
If the dollar appreciates relative to the euro, will the German camera you have wanted become more or less expensive? What effect do you imagine this change will have on American demand for German
How are the problems of a country faced with a balance of payments deficit similar to those posed by a government regulation that holds the price of milk above the equilibrium level?
Explain why the members of the Bretton Woods conference in 1944 wanted to establish a system of fixed exchange rates. What flaw led to the ultimate breakdown of the system in 1971?
In 2003 and 2004, market forces raised the international value of the Japanese yen. Why do you think the government of Japan was unhappy about this currency appreciation? (Japan was trying to emerge
Use supply and demand diagrams to analyze the effect of the following actions on the exchange rate between the dollar and the yen:a. Japan opens its domestic markets to more foreign competition.b.
For each of the following transactions, indicate how it would affect the U.S. balance of payments if exchange rates were fixed:a. You spent the summer traveling in Europe.b. Your uncle in Canada sent
We learned in this chapter that successful speculators buy a currency when demand is weak and sell it when demand is strong. Use supply and demand diagrams for two different periods (one with weak
For years, the U.S. government has been trying to get Japan and the European Union to expand their economies faster. Explain how more rapid growth in Japan would affect the U.S. economy.
If inflation is lower in Germany than in Spain (as it is), and the exchange rate between the two countries is fixed (as it is, because of the monetary union), what is likely to happen to the balance
Explain why a currency depreciation leads to an improvement in a country’s trade balance.
Explain why American fiscal policy is less powerful and American monetary policy is more powerful than indicated in the closed-economy model described earlier in this book.
Given what you now know, do you think it was a good idea for the United States to adopt a policy mix of tight money and large government budget deficits in the early 1980s? Why or why not? What were
In 2007 and 2008, the international value of the dollar fell. This development was viewed with alarm in Japan. Why?
Use an aggregate supply-demand diagram to analyze the effects of a currency appreciation.
Explain why X - IM = (S - I) - (G - T). Now multiply both sides of this equation by –1 to getIM - X = (I - S) + (G - T) And remember that the trade deficit, IM - X, is the amount we have to borrow
Suppose consumption and investment are described by the following:C = 150 + 0.75DI I = 300 + 0.2Y - 50rHere DI is disposable income; Y is GDP, and r, the interest rate, is measured in percentage
Suppose the consumption function is C = $500 billion + 0.9Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier
1. Show, by using a graph, and briefly explain the international parity conditions in equilibrium.2. Describe the relative purchasing power parity condition and comment it in terms of short-run and
1. Explain how the supply and demand for currencies can be viewed as the foreign exchange rate determination.2. Explain how the asset market approach can be used in forecasting the future spot
Marginal revenue product is defined as the change in total revenue that results from the employment of an additional unit of a resource. A widget producer wishes to determine how the addition of
Answer each of the following questions using economic theory covered in this lesson.See the table below, and answer each of the questions.a. If the market represented in exhibit above is allowed to
Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60 percent larger). But Canadian trade is twice as large, relative to
Mexico and Brazil have very different trading patterns. While Mexico trades mainly with the United States, Brazil trades about equally with the United States and with the European Union. In addition,
Equation says that trade between any two countries is proportional to the product of their GDPs. Does this mean that if the GDP of every country in the world doubled, world trade would quadruple?Tij
Over the past few decades, East Asian economies have increased their share of world GDP. Similarly, intra–East Asian trade—that is, trade among East Asian nations—has grown as a share of world
A century ago, most British imports came from relatively distant locations: North America, Latin America, and Asia. Today, most British imports come from other European countries. How does this fit
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. a. Graph Home’s
Home is as described in problem 1. There is now also another country, Foreign, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is
Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples.a. Graph the relative demand curve along with the relative supply
Suppose that instead of 1,200 workers, Home has 2,400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between
Chinese workers earn only $.75 an hour; if we allow China to export as much as it likes, our workers will be forced down to the same level. You can’t import a $10 shirt without importing the $.75
Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably
Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about
How does the fact that many goods are non traded affect the extent of possible gains from trade?
We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each country has only one factor of production,
In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana,
An economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depend on
The marginal product of labor curves corresponding to the production functions in problem 2 are as follows:a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions described in problems 2 and 3. Initially,
In Home and Foreign there are two factors each of production, land, and labor used to produce only one good. The land supply in each country and the technology of production are exactly the same. The
Using the numerical example in problem 5, assume now that Foreign limits immigration so that only 2 workers can move there from Home. Calculate how the movement of these two workers affects the
Studies of the effects of immigration into the United States from Mexico tend to find that the big winners are the immigrants themselves. Explain this result in terms of the example in the question
Go back to the numerical example with no factor substitution that leads to the production possibility frontier in Figurea. What is the range for the relative price of cloth such that the economy
In the United States, where land is cheap, the ratio of land to labor used in cattle raising is higher than that of land used in wheat growing. But in more crowded countries, where land is expensive
The world’s poorest countries cannot find anything to export. There is no resource that is abundant—certainly not capital or land, and in small poor nations not even labor is abundant. Discuss.
The U.S. labor movement—which mostly represents blue-collar workers rather than professionals and highly educated workers—has traditionally favored limits on imports from less-affluent countries.
Recently, computer programmers in developing countries such as India have begun doing work formerly done in the United States. This shift has undoubtedly led to substantial pay cuts for some
Explain why the Leontief paradox and the more recent Bowen, Leamer, and Sveikauskas results reported in the text contradict the factor-proportions theory.
In the discussion of empirical results on the Heckscher-Ohlin model, we noted that recent work suggests that the efficiency of factors of production seems to differ internationally. Explain how this
Assume that Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (automobiles) to Norway. Illustrate the gains from trade between the two
In the trade scenario in problem 1, due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential
In some economies relative supply may be unresponsive to changes in prices. For example, if factors of production were completely immobile between sectors, the production possibility frontier would
The counterpart to immobile factors on the supply side would be lack of substitution on the demand side. Imagine an economy where consumers always buy goods in rigid proportions—for example, one
Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze the impact on Japan’s terms of trade of the following events:a. A war in the Middle East
The Internet has allowed for increased trade in services such as programming and technical support, a development that has lowered the prices of such services relative to those of manufactured goods.
Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is the same in the two countries. X is capital-intensive; A is
Economic growth is just as likely to worsen a country’s terms of trade as it is to improve them. Why, then, do most economists regard immiserizing growth, where growth actually hurts the growing
From an economic point of view, India and China are somewhat similar: Both are huge, low-wage countries, probably with similar patterns of comparative advantage, which until recently were relatively
Suppose that Country X subsidizes its exports and Country Y imposes a “countervailing” tariff that offsets the subsidy’s effect, so that in the end, relative prices in Country Y are unchanged.
Explain the analogy between international borrowing and lending and ordinary international trade.
Which of the following countries would you expect to have intertemporal production possibilities biased toward current consumption goods, and which biased toward future consumption goods?a. A country
For each of the following examples, explain whether it is a case of external or internal economies of scale:a. Most musical wind instruments in the United States are produced by more than a dozen
It is often argued that the existence of increasing returns is a source of conflict between countries, since each country is better off if it can increase its production in those industries
Give two examples of products that are traded on international markets for which there are dynamic increasing returns. In each of your examples, show how innovation and learning-by-doing are
Evaluate the relative importance of economies of scale and comparative advantage in causing the following:a. Most of the world’s aluminum is smelted in Norway or Canada.b. Half of the world’s

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