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Economics 18th edition Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn - Solutions

Refer to columns 1 and 6 in the table for question 9. Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate
Refer to the table on the next page in answering the questions that follow:a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in
Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports X n are independent of the level of real GDP and constant at I g = 30 and Xn = 10. Recall also that, in equilibrium, the real output
Answer the following questions, which relate to the aggregate expenditures model:a. If Ca is $100, Ig is $50, X n is –$10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an economy is currently $200, Ca is $100, Ig is $50, X n is –$10, and G is $30, will the economy’s
What is Say’s law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter)? Use production possibilities analysis to demonstrate Keynes’ view on this matter.
Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?
Distinguish between “real-balances effect” and “wealth effect,” as the terms are used in this chapter. How does each relate to the aggregate demand curve?
What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run curve relatively flat to the left of the full-employment output and relatively
Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below:a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical
Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output: InputQuantity Real GDP150.0 ......... $400112.5 ......... 30075.0 ......... 200a. What is productivity in this economy?b. What is the
What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. Assume all other things remain constant. a. A widespread fear of depression on the part of
Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?a. An increase in
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect.
Why does a reduction in aggregate demand reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?
Explain: “Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.” In each case, specify the price-level outcomes.
Use shifts of the AD and AS curves to explain (a) The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s. (b) How a strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though
In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.
Go to the OPEC Web site, www.opec.org, and find the current “OPEC basket price” of oil. By clicking on that amount, you will find the annual prices of oil for the past 5 years. By what percentage is the current price higher or lower than 5 years ago? Next, go to the Bureau of Economic Analysis
A change in the price level alters the location of the aggregate expenditures schedule through the real-balances, interest- rate, and foreign purchases effects. The aggregate demand curve is derived from the aggregate expenditures model by allowing the price level to change and observing the effect
With the price level held constant, increases in consumption, investment, government, and net export expenditures shift the aggregate expenditures schedule upward and the aggregate demand curve to the right. Decreases in these spending components produce the opposite effects.
Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Why the
What are government’s fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? How does the “ratchet effect” affect
Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 28.7).Recessionary and inflfl ationary expenditure gapsExplain how equal-size increases in G and T could eliminate a
Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?
Define the standardized budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is GDP 3 (not GDP2) in the economy depicted in Figure.Built-in stabilityIf the economy is operating at GDP 2, instead of
Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy
Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowding-out effect, and why might it be
Assume that, without taxes, the consumption schedule for an economy is as shown below:GDP, Consumption,Billions Billions$100 ..........$120200 .......... 200300 .......... 280400 .......... 360500 .......... 440600 .......... 520700 .......... 600a. Graph this consumption schedule
How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally held public debt? Contrast the effects of
True or false? If false, explain why. a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP.b. An internally held public debt is like a debt of the left hand owed to the right hand.c. The Federal Reserve and Federal government agencies hold more than
Why might economists be quite concerned if the annual interest payments on the debt sharply increased as a percentage of GDP?
Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the stock of capital, and economic growth. How might investment in public capital and complementarities between public capital and private capital alter
What is the index of leading economic indicators, and how does it relate to discretionary fiscal policy?
What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.
Explain and evaluate the following statements: a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible.b. Money is whatever society says it is.c. In most economies of the world, the debts of
What are the components of the M1 money supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic value? What near-monies are included in the M2 money supply?
What “backs” the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money’s purchasing power?
Suppose the price level and value of the dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to .50, what is the value of the dollar? What generalization can you draw from your answers?
How is the chairperson of the Federal Reserve System selected? Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What are the composition and purpose of the Federal Open Market Committee (FOMC)?
What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’ banks? What are the seven basic functions of the Federal Reserve System?
Following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not? a. Upon taking office, the U.S. president appoints seven people to the Federal Reserve Board, including a chair. Each
What are the major categories of firms that make up the U.S. financial services industry? Did the bank and thrift share of the financial services market rise, fall, or stay the same between 1980 and 2007? Are there more or fewer banks today than a decade ago? Why are the lines between the
How does a debit card differ from a credit card? How does a stored-value card differ from both? Suppose that a person has a credit card, debit card, and stored-value card. Create a fictional scenario in which the person uses all three cards in the same day. Explain the person’s logic for using
Over the years, the Federal Reserve Banks have printed many billions of dollars more in currency than U.S. households, businesses, and financial institutions now hold. Where is this “missing” money? Why is it there?
Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?
Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of
Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced. Do you agree? Explain why or why not.
When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed. Explain.
Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?
Assume that Jones deposits $500 in currency into her checkable-deposit account in First National Bank. A half-hour later Smith obtains a loan for $750 at this bank. By how much and in what direction has the money supply changed? Explain.
Suppose the National Bank of Commerce has excess reserves of $8000 and outstanding checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?
Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent:a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount.b. By
The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank that is added to reserves. What level of excess reserves does the bank now have?
Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5000 in securities to the Federal Reserve Bank in its district, receiving a $5000 increase in reserves in return. What level of excess reserves
Suppose a bank discovers that its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds market? Now assume the bank finds that its reserves will be substantially and permanently deficient. What remedy is available to
Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Joe, who deposits the $100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which? (a) Security
Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is 25 percent.a. What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking system might
Explain how the bank panics of 1930 to 1933 produced a decline in the nation’s money supply. Why are such panics highly unlikely today?
What is the basic determinant of?(a) The transactions demand (b) The asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show the impact of an increase
Assume that the following data characterize a hypothetical economy: money supply = $2—billion; quantity of money demanded for transaction = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the
Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. Compute and enter in the spaces provided in the accompanying table either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the
Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the impact of each of the following transactions on commercial bank reserves: a. Federal Reserve Banks purchase securities from banks.b. Commercial banks borrow from Federal Reserve Banks at the discount rate.c. The Fed
In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed. Do not cumulate your answers; that is,
What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy in a highly divided national political environment?
Distinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. What change in the Federal funds rate would you recommend? How would your recommended change get accomplished? What impact would the actions have on
Explain the links between changes in the nation’s money supply, the interest rate, investment spending, aggregate demand, and real GDP (and the price level).
What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? Why is this possibility significant to policymakers?
How do mortgage backed securities work? Why did banks think that selling mortgage backed securities would relieve them of the risks involved with mortgage lending? How did the banks indirectly come to once again be exposed to mortgage lending risks? What happened to bank reserves during the
Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investment? What if the Federal Reserve raises the
How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes by the nickname “fixed income”?
Mutual funds are very popular. What do they do? What different types of mutual funds are there? And why do you think they are so popular with investors?
Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chance that it will be worth $140 in a year. What
Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the company will pay dividends of $2 per year on that
This question will compare two different arbitrage situations. Recall that arbitrage should equalize rates of return. We want to explore what this implies about equalizing prices. In the first situation, two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A
Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about an investor who puts all of his money into only a single risky stock? Can he properly ignore diversifiable risk?
If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?
In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which would you consider
Consider the Security Market Line (SML). What determines its vertical intercept? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?
Suppose that the Federal Reserve wants to increase stock prices. What should it do to interest rates?
Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’ dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk
Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?
Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?
Which of the following statements are true? Which are false? Explain why the false statements are untrue.a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output.b. The long-run aggregate supply curve assumes that nominal wages are
Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow:a. What will be the level of real output in the short run if the price level
Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and
Between 1990 and 2007, the U.S. price level rose by about 61 percent while real output increased by about 63 percent. Use the aggregate demand–aggregate supply model to illustrate these outcomes graphically.
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of unemployment, and vice versa. What is this
Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to explain why these policies might at first
What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.
What is the Laffer Curve and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?
Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?
On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax increase matter?
The mainstream view of macroeconomic instability emphasizes sticky prices. To answer the following questions, modify the aggregate supply curve in the extended AD-AS model introduced in Chapter 35. First, imagine that both input and output prices are fixed. What does the aggregate supply curve look
According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?
State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP have to fall
Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic
Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph

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