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Questions and Answers of Economics

Suppose that the goal of the fiscal authority is to set government spending so as to achieve economic efficiency, while the goal of the monetary authority is to achieve stability of the price level
Some macroeconomists have argued that it would be beneficial for the government to run a deficit when the economy is in a recession, and a surplus during a boom. Does this make sense? Carefully
In the New Keynesian model, how should the central bank change its target interest rate in response to each of the following shocks. Use diagrams and explain your results.(a) There is a shift in
Suppose that the central bank sets its interest rate target to achieve efficiency in response to temporary shocks to total factor productivity. Using diagrams, determine what the economy’s
In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as
Suppose, in the sticky price model, that there is deficient financial liquidity, as we studied in Chapter and that there is a positive output gap. What will be the effect of a reduction in the
Suppose that consumption expenditures and investment expenditures are very inelastic with respect to the real interest rate. What does this imply about the power of monetary policy relative to fiscal
Assume a two-period model where national income is 100 in the current period, and 120 in the future period. The world real interest rate is assumed to be 10% per period. The representative consumer
Use the first model in this chapter to answer this question. Suppose that governments in the rest of the world impose a tax on lending to foreigners. Determine how this affects consumption plus
Suppose in the first model in this chapter that there is a limited commitment friction and the possibility the nation could default in the current or future periods. Suppose that, if the nation does
Suppose, as in Chapter that in the first model in this chapter there is limited commitment in the credit relationships between the small open economy and the rest of the world. There is some portion
Use the second model in this chapter, with production and investment, to answer this question. The government in a small open economy is concerned that the current account deficit is too high. One
In Chapter 13, we studied how persistent total factor productivity shocks in a closed economy can provide an explanation for business cycles. In the second model studied in this chapter, with
Suppose, in the second model in this chapter, with production and investment, that there is an increase in credit market frictions, as studied in Chapter. What are the effects on aggregate output and
Suppose that there is a cost to carrying out transactions in the foreign exchange market. That is, to purchase one unit of foreign currency requires e(1 + a) units of domestic currency, where e is
In the equilibrium small open-economy model, suppose that total factor productivity increases temporarily.(a) If the exchange rate is flexible, determine the effects on aggregate output, absorption,
Suppose in the model that government expenditures increase temporarily. Determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price
Suppose that better transaction technologies are developed that reduce the domestic demand for money. Use the monetary small open-economy model to answer the following:(a) Suppose that the exchange
Consider a country with a flexible exchange rate, and which initially has a current account surplus of zero. Then, suppose there is an anticipated increase in future total factor productivity.(a)
Suppose a flexible exchange rate. There is an increase in the degree of uncertainty in credit markets, which affects firms but not consumers, as considered in Chapter 9.(a) Determine the effects on
The domestic central bank increases the supply of money under a flexible exchange rate regime, leading to a depreciation of the nominal exchange rate. If the government had imposed capital controls
Suppose that capital controls take the form of a total ban on capital inflows, but all capital outflows are permitted. Also suppose that initially the current account surplus is zero. Determine the
Suppose in the New Keynesian open-economy model, that there is an increase in future total factor productivity.(a) Under a flexible exchange rate, what are the equilibrium effects? Should economic
Suppose in the New Keynesian open-economy model, that there is a positive output gap. There is also a liquidity trap at the world level, in that r* = 0. Is there anything that economic policy can do
Consider the absence-of-double-coincidence economy depicted in Figur. Determine who would trade what with whom if good 2 were used as a commodity money. Explain your results.
In the Diamond–Dybvig banking model, suppose that the banking contract includes a suspension of convertibility provision according to which the bank allows only the first tN depositors in line in
As an alternative to the economy depicted in Figure, suppose that there are three types of people, but now the person who consumes good 1 produces good 3, the person who consumes good 2 produces good
In the monetary intertemporal model, suppose the central bank issues money in exchange for capital, and rents this capital out to firms each period, thus earning the market real interest rate r on
Suppose, in the monetary intertemporal model, that the government can pay interest on money, financing this interest with lump-sum taxes on consumers. If the nominal interest rate on money is the
Suppose that consumers are concerned about theft, and so they are willing to use banks for some of their transactions even if the nominal interest rate is zero. Further, suppose that, the more
Suppose that there are shocks total factor productivity which cause aggregate output to fluctuate. What does this imply for the Friedman rule, that is, how should the central bank conduct monetary
How would we modify the Friedman rule in the context of a New Keynesian sticky price model like the one in Chapter, assuming that monetary policy is the only policy that can be used to close output
Consider the following assets: (i) A work of art; (ii) A United States Treasury bill; (iii) A share in Microsoft; (iv) A loan to a close relative; (v) A loan to General Motors. For each asset, answer
In the Diamond-Dybig banking model, suppose that, instead of a bank, consumers can trade shares in the production technology. That is, each consumer invests in the production technology in period 0.
Alter the Diamond-Dybvig model in the following way. Suppose that there are two assets, an illiquid asset that returns 1+r units of consumption goods in period 2 for each unit invested in period 0,
Explain how moral hazard arises in each of the following situations:(a) A mother promises her daughter that she will help her with her homework during the coming school year but only if the daughter
Suppose that the private sector does not have rational expectations, but instead follows an adaptive expectations scheme. That is, the private sectors expected inflation rate is what the inflation
Suppose that the economy is in a long-run equilibrium where the inflation rate is greater than the optimal rate i*, and then the central bank acts to reduce the inflation rate to i*.(a) Suppose that
Suppose that the inflation rate is higher than i*, that the central bank announces it will reduce the inflation rate, and that it actually proceeds to do this. Answer the following:(a) Suppose that
Suppose that the central bank is in a repeated relationship with the private sector. If the inflation rate is i = i* and output is Y = YT, then suppose the reward each period to the central bank is
What is your opportunity cost of reading a novel this evening?
Your roommate is thinking of permanently drop-ping out of school this semester. If his tuition payment for this semester is non-refundable, should he take it into account when making his decision?
Give three examples of activities accompanied by external costs or benefits.
How can the cost-benefit model be useful for studying the behavior of people who do not think explicitly in terms of costs and benefits?
Jamal has a flexible summer job. He can work every day but is allowed to take a day off anytime he wants. His friend Don suggests they go to the amusement park on Tuesday. The admission charge for
The meal plan at University A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 lb of food per semester. University B charges students
Bill and Joe live in Ithaca, New York. At 2 pm, Bill goes to the local Ticketmaster and buys a $30 ticket to a basketball game to be played that night in Syracuse (50 miles north). Joe plans to
Two types of radar weather- detection devices are available for commercial passenger aircraft: the “state-of-the-art” machine and another that is significantly less costly, but also less
A group has chartered a bus to New York City. The driver costs $100, the bus costs $500, and tolls will cost $75. The driver’s fee is nonrefundable, but the bus may be canceled a week in advance at
Residents of your city are charged a fixed weekly fee of $6 for refuse collection. They may put out as many cans as they wish. The average household puts out three cans per week. Now, suppose your
Suppose that random access memory (RAM) can be added to your computer at a cost of $8 per gigabyte. Suppose also that the value to you, measured in terms of your willingness to pay, of an additional
Suppose in Problem 11 the cost of RAM falls to $4 per gigabyte. How many gigabytes of memory should you purchase now? Suppose additionally that your benefit for an additional gigabyte of memory rises
Yesterday you were unexpectedly given a free ticket to a Dave Matthews concert scheduled for April 1. The market price of this ticket is $75, but the most you could sell it for is only $50. Today you
Mr. Smith recently faced a choice between being (a) an economics professor, which pays $60,000/ yr, or (b) a safari leader, which pays $50,000/ yr. After careful deliberation, Smith took the safari
Tom is a mushroom farmer. He invests all his spare cash in additional mush-rooms, which grow on otherwise useless land behind his barn. The mushrooms double in size during their first year, after
Dana has purchased a $ 40 ticket to a rock concert. On the day of the con-cert she is invited to a welcome- home party for a friend returning from abroad. She cannot attend both the concert and the
You have just purchased a new Ford Taurus for $20,000, but the most you could get for it if you sold it privately is $15,000. Now you learn that Toyota is offering its Camry, which normally sells for
What is the difference between “scarcity” and “shortage”?
What would the supply curve look like for a good that is not scarce? Assuming the good is useful, what would its demand curve look like? Explain why a positive price for a commodity implies that it
Suppose you are a government official and need to collect revenue by taxing a product. For political reasons, you want the burden of the tax to fall mostly on consumers, not firms (who have been
Which would a rational poor person be more likely to accept and why? a. A $50,000 Mercedes (immediate resale value = $30,000)b. $35,000 cash
Identify each of the following as (1) a change in demand or (2) a change in the quantity demanded.a. Grape consumption falls because of a consumer boycott.b. Grape consumption falls because of a tax
Assume that tea and lemons are complements and that coffee and tea are substitutes.a. How, if at all, will the imposition of an effective ceiling price on tea affect the price of lemons? Explain.b.
The market for DVDs has supply and demand curves given by Ps = 2Qs and Pd = 42 - Qd, respectively.a. How many units will be traded at a price of $35? At a price of $14? Which participants will be
Suppose a newly released study shows that battery- powered toys harm a child’s development and recommends that parents adjust their purchasing behavior accordingly. Use diagrams to show the effect
Using diagrams show what changes in price and quantity would be expected in the following markets under the scenarios given:a. Crude oil: As petroleum reserves decrease, it becomes more difficult to
For each scenario in Problem 5, state whether the effect is a change in demand or just a change in quantity demanded.
Suppose demand for seats at football games is P = 1900 - (1/50) Q and supply is fixed at Q = 90,000 seats.a. Find the equilibrium price and quantity of seats for a football game (using algebra and a
The demand for apartments is P = 1200 - Q while the supply is P = Q units. The government imposes rent control at P = $300/ month. Suppose demand grows in the market to P = 1400 - Q.a. How is excess
Suppose demand is P = 600 - Q and supply is P = Q in the soybean market, where Q is tons of soybeans per year. The government sets a price support at P = $500/ton and purchases any excess supply at
Hardware and software for computers are complements. Discuss the effects on the equilibrium price and quantity. a. In the software market, when the price of computer hardware falls. b. In the
How would the equilibrium price and quantity change in the market depicted below if the marginal cost of every producer were to increase by $2/lb?
The government, fearful that a titanium shortage could jeopardize national security, imposes a tax of $2/oz on the retail price of this rare metal. It collects the tax from titanium sellers. The
In the market for titanium described in Problem 1 (with no tax), suppose that a price floor of $4/oz results in sales of only 2 tons/yr (with no tax). Describe a transaction that will make some
Suppose the titanium market in Problem 1, with a tax of $2/oz, experiences growth in the demand for titanium because of newfound medical uses. The new demand curve is P = 8 - Q. Find the change in
Suppose instead the titanium market in Problem 2, with no tax but a price floor at $4/oz, suffers a reduction in supply because of dwindling titanium reserves. The new supply curve is P = 2 + Q. How
Suppose state government levies a tax of $9 on each DVD sold, collected from sellers. a. What quantity of DVDs will be sold in equilibrium? b. What price do buyers pay? c. How much do buyers now
President Reagan negotiated a “voluntary” import quota on Japanese cars sold in the United States in the early 1980s. Some of his advisers had recommended that he impose a higher import tax
Many studies on rats and mice have established that charred meat grilled over hot coals causes’ cancer. Since the government cannot easily regulate home cooking methods, an alternative method has
Supply is P = 4Q, while demand is P = 20, where P is price in dollars per unit and Q is units of output per week. a. Find the equilibrium price and quantity (using both algebra and a graph). b. If
Repeat Problem 9, but instead suppose the buyer pays the tax, demand is P = 28 - Q, and supply is P = 20.
For the tax described in Problem 5, a. What fraction of the tax does the seller bear? b. What fraction of the tax does the buyer bear?
Explain in your own words how the slope of an indifference curve provides information about how much a consumer likes one good relative to another.
True or false: If the indifference curve map is concave to the origin, then the optimal commodity basket must occur at a corner equilibrium, except possibly when there are quantity discounts.
If Ralph were given $10, he would spend none of it on tuna fish. But when asked, he claims to be indifferent between receiving $10 worth of tuna fish and a $10 bill. How could this be?
Acme Seed Company charges $2/lb for the first 10 lb you buy of marigold seeds each week and $1/lb for every pound you buy thereafter. If your income is $100/wk, draw your budget constraint for the
Same as Problem 1, except now the price for every pound after 10 lb/wk is $4/ lb.
Originally PX is $120 and PY is $80. True or false: If PX increases by $18 and PY increases by $12, the new budget line will be shifted inward and parallel to the old budget line. Explain.
Martha has $150 to spend each week and cannot borrow money. She buys malted milk balls and the composite good. Suppose that malted milk balls cost $2.50 per bag and the composite good costs $1 per
In Problem 5, suppose that in an inflationary period the price of the composite good increases to $1.50 per unit, but the price of malted milk balls remains the same.a. Sketch the new budget
In Problem 6, suppose that Martha demands a pay raise to fight the inflation. Her boss raises her salary to $225/wk.a. Sketch the new budget constraint.b. What is the opportunity cost of an
Picabo, an aggressive skier, spends her entire income on skis and bindings. She wears out one pair of skis for every pair of bindings she wears out.a. Graph Picabo’s indifference curves for skis
Suppose Picabo in Problem 8 has $3,600 to spend on skis and bindings each year. Find her best affordable bundle of skis and bindings under both of the preferences described in the previous problem.
For Alexi, coffee and tea are perfect substitutes: One cup of coffee is equivalent to one cup of tea. Suppose Alexi has $90/mo to spend on these beverages, and coffee costs $0.90/cup while tea costs
Eve likes apples but doesn’t care about pears. If apples and pears are the only two goods available, draw her indifference curves.
Koop likes food but dislikes cigarette smoke. The more food he has, the more he would be willing to give up to achieve a given reduction in cigarette smoke. If food and cigarette smoke are the only
Paula, a former actress, spends all her income attending plays and movies and likes plays exactly three times as much as she likes movies.a. Draw her indifference map.b. Paula earns $120/wk. If play
For each of the following, sketch:a. A typical person’s indifference curves between garbage and the composite good.b. Indifference curves for the same two commodities for Oscar the Grouch on Sesame
Boris budgets $9/wk for his morning coffee with milk. He likes it only if it is prepared with 4 parts coffee, 1 part milk. Coffee costs $1/oz, milk $0.50/oz. How much coffee and how much milk will
The federal government wants to support education but must not support religion. To this end, it gives the University of Notre Dame $2 million with the stipulation that this money be used for secular

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