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Economics
Per capita real GDP in country S is only half as great as per capita real GDP in country T.Country T's rate of economic growth is 4 percent. The government of country S, however, enacts policies that
Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. How can there be positive unemployment in
Explain whether each of the following events would cause a movement along or a shift in the position of the LRAS curve, other things being equal. In each case, explain the direction of the movement
Explain whether each of the following events would cause a movement along or a shift in the position of the AD curve, other things being equal. In each case, explain the direction of the movement
This year, a nation's long-run equilibrium real GDP and price level both increased. Which of the following combinations of factors might simultaneously account for both occurrences? a. An isolated
Explain how, if at all, each of the following events would affect equilibrium real GDP and the long run equilibrium price level. a. A reduction in the quantity of money in circulation b. An income
For each question, suppose that the economy begins at the long-run equilibrium point A in the diagram on the facing page. Identify which of the other points on the diagram-points B, C, D, or E-could
In Ciudad Barrios, El Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for business, up to 150 people are already waiting in
Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $15 trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115. What
Continuing from Problem 10-2, suppose that the full-employment level of nominal GDP in the following year rises to $17.7 trillion. The long-run equilibrium price level, however, remains unchanged. By
Suppose that the position of a nation's long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this
Suppose that during a given year, the quantity of U.S. real GDP that can be produced in the long run rises from $14.9 trillion to $15.0 trillion, measured in base-year dollars. During the year, no
Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Other things being equal, which of the following factors might
Suppose that there is a sudden rise in the price level. What will happen to economy wide planned spending on purchases of goods and services? Why?
Assume that the economy is in long-run equilibrium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a rise in the price level
Consider the diagram below when answering the questions that follow.a. Suppose that the current price level is P2. Explain why the price level will decline toward P1. b. Suppose that the current
Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were
Suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. If policymakers wish to prevent the equilibrium price level from changing
As in Problem 11-10, suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. In this case, however, suppose that policymakers wish
Based on your answers to Problems 11-10 and 11-11, can policymakers stabilize both the price level and real GDP simultaneously in response to a short-lived but sudden rise in oil prices? Explain
For each question that follows, suppose that the economy begins at the short-run equilibrium point A. Identify which of the other points on the diagram-point B, C, D, or E-could represent a new
Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign
Consider a country with an economic structure consistent with the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate higher future profitability from
"There is absolutely no distinction between the classical model and the model of long-run equilibrium discussed in Chapter 10." Is this statement true or false? Support your answer.
A nation in which the classical model applies experiences a decline in the quantity of money in circulation. Use an appropriate aggregate demand and aggregate supply diagram to explain what happens
Suppose that the classical model is appropriate for a country that has suddenly experienced an influx of immigrants who possess a wide variety of employable skills and who have reputations for saving
Suppose that the Keynesian short-run aggregate supply curve is applicable for a nation's economy. Use appropriate diagrams to assist in answering the following questions: a. What are two factors that
What determines how much real GDP responds to changes in the price level along the short-run aggregate supply curve?
At a point along the short-run aggregate supply curve that is to the right of the point where it crosses the long-run aggregate supply curve, what must be true of the unemployment rate relative to
Suppose that the stock market crashes in an economy with an upward-sloping short-run aggregate supply curve, and consumer and business confidence plummets. What are the short-run effects on
Classify each of the following as either a stock or a flow. a. Myung Park earns $850 per week. b. Time Warner purchases $100 million in new computer equipment this month. c. Sally Schmidt has $1,000
Consider the diagram on the top of the facing page, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram to answer the following
Consider the table below when answering the following questions. For this hypothetical economy, the marginal propensity to save is constant at all levels of real GDP, and investment spending is
Consider the table below when answering the following questions. For this hypothetical economy, the marginal propensity to consume is constant at all levels of real GDP, and investment spending is
Calculate the multiplier for the following cases. a. MPS = 0.25 b. MPC = 5/6 c. MPS = 0.125 d. MPC = 6/7
Assume that the multiplier in a country is equal to 4 and that autonomous real consumption spending is $1 trillion. If current real GDP is $15 trillion, what is the current value of real consumption
The multiplier in a country is equal to 5, and households pay no taxes. At the current equilibrium real GDP of $14 trillion, total real consumption spending by households is $12 trillion. What is
At an initial point on the aggregate demand curve, the price level is 125, and real GDP is $15 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250
At an initial point on the aggregate demand curve, the price level is 100, and real GDP is $15 trillion. After the price level rises to 110, however, there is an upward movement along the aggregate
In an economy in which the multiplier has a value of 3, the price level has decreased from 115 to 110. As a consequence, there has been a movement along the aggregate demand curve from $15 trillion
Suppose that Congress and the president decide that the nation's economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do
Consider the diagram in the next column, in which the current short-run equilibrium is at point A, and answer the questions that follow.a. What type of gap exists at point A?b. If the marginal
Currently, a government's budget is balanced. The marginal propensity to consume is 0.80. The government has determined that each additional $10 billion it borrows to finance a budget deficit pushes
A government is currently operating with an annual budget deficit of $40 billion. The government has determined that every $10 billion reduction in the amount it borrows each year would reduce the
Assume that the Ricardian equivalence theorem is not relevant. Explain why an income-tax-rate cut should affect short-run equilibrium real GDP.
Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. Assuming that Ricardian equivalence holds true, what is the effect on equilibrium
Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor
Explain how time lags in discretionary fiscal policymaking could thwart the efforts of Congress and the president to stabilize real GDP in the face of an economic downturn. Is it possible that these
Determine whether each of the following is an example of a direct expenditure offset to fiscal policy. a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys
Determine whether each of the following is an example of indirect crowding out resulting from an expansionary fiscal policy action. a. The government provides a subsidy to help keep an existing firm
The U.S. government is in the midst of spending more than $1 billion on seven buildings containing more than 100,000 square feet of space to be used for study of infectious diseases. Prior to the
Determine whether each of the following is an example of a discretionary fiscal policy action. a. A recession occurs, and government-funded unemployment compensation is paid to laid-off workers. b.
Determine whether each of the following is an example of an automatic fiscal stabilizer. a. A government agency arranges to make loans to businesses whenever an economic downturn begins. b. As the
Consider the diagram below, in which the current short-run equilibrium is at point A, and answer the questions that follow.a. What type of gap exists at point A? b. If the marginal propensity to
To reduce the size of the deficit (and reduce the growth of the net public debt), a politician suggests that "we should tax the rich." The politician makes a simple arithmetic calculation in which he
Suppose that the Office of Management and Budget provides the estimates of federal budget receipts, federal budget spending, and GDP at the right, all expressed in billions of dollars. Calculate the
It may be argued that the effects of a higher public debt are the same as the effects of a higher deficit. Why?
What happens to the net public debt if the federal government operates next year with a: a. Budget deficit? b. Balanced budget? c. Budget surplus?
What is the relationship between the gross public debt and the net public debt?
Explain how each of the following will affect the net public debt, other things being equal. a. Previously, the government operated with a balanced budget, but recently there has been a sudden
Until 1946, residents of the island of Yap used large doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the stones, the stones were often
Take a look at the map of the locations of the Federal Reserve districts and their headquarters in Figure 15-6 on page 329. Today, the U.S. population is centered just west of the Mississippi
Draw an empty bank balance sheet, with the heading "Assets" on the left and the heading "Liabilities" on the right. Then place the following items on the proper side of the balance sheet:a. Loans to
The Federal Reserve purchases $1 million in U.S. Treasury bonds from a bond dealer, and the dealer's bank credits the dealer's account. The reserve ratio is 15 percent. Assuming that no currency
Suppose that the value of the potential money multiplier is equal to 4. What is the reserve ratio?
Consider a world in which there are no currency and depository institutions issue only transactions deposits. The reserve ratio is 20 percent. The central bank sells $1 billion in government
Assume a 1 percent reserve ratio and no currency leakages. What is the potential money multiplier? How will total deposits in the banking system ultimately change if the Federal Reserve purchases $5
During the late 1970s, prices quoted in terms of the Israeli currency, the shekel, rose so fast that grocery stores listed their prices in terms of the U.S. dollar and provided customers with
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was
Considering the following data (expressed in billions of U.S. dollars), calculate M1 and M2. Currency........................................................850 Savings
Identify whether each of the following items is counted in M1 only, M2 only, both M1 and M2, or neither: a. A $1,000 balance in a transactions deposit at a mutual savings bank b. A $100,000 time
Match each of the rationales for financial intermediation listed below with at least one of the following financial intermediaries: insurance company, pension fund, savings bank. Explain your
Identify whether each of the following events poses an adverse selection problem or a moral hazard problem in financial markets. a. A manager of a savings and loan association responds to reports of
In what sense is currency a liability of the Federal Reserve System?
In what respects is the Fed like a private banking institution? In what respects is it more like a government agency?
Let's denote the price of a nonmaturing bond (called a consol) as Pb. The equation that indicates this price is Pb = I/r, where I is the annual net income the bond generates and r is the nominal
Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, what should the Fed do
Suppose that the Fed implements each of the policy changes you discussed in Problem 16-10. Now explain how the net export effect resulting from these monetary policy actions will reinforce their
Suppose that the Federal Reserve wishes to keep the nominal interest rate at a target level of 4 percent. Draw a money supply and demand diagram in which the current equilibrium interest rate is 4
Imagine working at the Trading Desk at the New York Fed. Explain whether you would conduct open market purchases or sales in response to each of the following events. Justify your recommendation. a.
Consider the following diagram of the market for bank reserves, in which the current equilibrium value of the federal funds rate, 2.50 percent, also corresponds to the Federal Open Market Committee's
Explain the concept of the neutral federal funds rate in your own words, and then answer the following questions. a. Suppose that the Federal Open Market Committee's current target for the federal
Based on Problem 16-1, imagine that initially the market interest rate is 5 percent and at this interest rate you have decided to hold half of your financial wealth as bonds and half as holdings of
You learned in Chapter 11 that if there is an inflationary gap in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust upward, causing the aggregate
Explain why the net export effect of a contractionary monetary policy reinforces the usual impact that monetary policy has on equilibrium real GDP per year in the short run.
Suppose that, initially, the U.S. economy was in an aggregate demand-aggregate supply equilibrium at point A along the aggregate demand curve AD in the diagram on the top of the next column. Now,
Suppose that the quantity of money in circulation is fixed but the income velocity of money doubles. If real GDP remains at its long-run potential level, what happens to the equilibrium price level?
Suppose that following the events in Problem 16-6, the Fed cuts the money supply in half. How does the price level now compare with its value before the income velocity and the money supply changed?
Consider the following data: The money supply is $1 trillion, the price level equals 2, and real GDP is $5 trillion in base-year dollars. What is the income velocity of money?
Consider the data in Problem 16-8. Suppose that the money supply increases by $100 billion and real GDP and the income velocity remain unchanged.a. According to the quantity theory of money and
Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force. a. How would this affect the actual unemployment rate? b.
Both the traditional Keynesian theory discussed in Chapter 11 and the new Keynesian theory considered in this chapter indicate, that the short-run aggregate supply curve is horizontal. a. In terms of
The real-business-cycle approach attributes even short-run increases in real GDP largely to aggregate supply shocks. Rightward shifts in aggregate supply tend to push down the equilibrium price
Normally, when aggregate demand increases, firms find it more profitable to raise prices than to leave prices unchanged. The idea behind the small-menu-cost explanation for price stickiness is that
The policy relevance of new Keynesian inflation dynamics based on the theory of small menu costs and sticky prices depends on the exploitability of the implied relationship between inflation and real
The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. Make lists of possible factors affecting workers and firms that you believe are likely to
What distinguishes the non-accelerating inflation rate of unemployment (NAIRU) from the natural rate of unemployment?
When will the natural rate of unemployment and the NAIRU differ? When will they be the same?
Suppose that more unemployed people who are classified as part of frictional unemployment decide to stop looking for work and start their own businesses instead. What is likely to happen to each of
People called "Fed watchers" earn their living by trying to forecast what policies the Federal Reserve will implement within the next few weeks and months. Suppose that Fed watchers discover that the
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