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business
micro economics

Economics 6th edition R. Glenn Hubbard - Solutions

Use the following graph to answer the questions.a. What is the value of equilibrium real GDP?b. What is the value of the MPC?c. What is the value of the multiplier?d. What is the value of unplanned changes in inventories when real GDP has each of the following values?i. $10 trillionii. $12
What is the multiplier effect? Use a 458-line diagram to illustrate the multiplier effect of a decrease in government purchases.
What is the formula for the multiplier? Explain why this formula is considered to be too simple.
In Figure 23.13 on page 796, the economy is initially in equilibrium at point A. Aggregate expenditure and real GDP both equal $9.6 trillion. The increase in investment of $100 billion increases aggregate expenditure to $9.7 trillion. If real GDP increases to $9.7 trillion, will the economy be in
An opinion column in the New York Times quotes an economist's analysis of the effect of government infrastructure spending on new bridges and highways in the United States: "The investment multiplier would give a further kick to the U.S. economy." a. What does the economist mean by the "investment
If the multiplier had a value of 4 in 1929, how large must the change in autonomous expenditure have been to have caused the decline in real GDP between 1929 and 1933 shown in the table on page 799? If the multiplier had a value of 2, how large must the change in autonomous expenditure have been?
Use the information in the following table to answer the questions. Assume that the values represent billions of 2009 dollars.a. What is the equilibrium level of real GDP?b. What is the MPC?c. Suppose net exports increase by $400 billion. What will be the new equilibrium level of real GDP? Use the
An article published in an economics journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Assume that the macroeconomy can be divided into three sections. Section A consists of the poorest
Explain whether each of the following would cause the value of the multiplier to be larger or smaller. a. An increase in real GDP increases imports. b. An increase in real GDP increases interest rates. c. An increase in real GDP increases the marginal propensity to consume. d. An increase in real
Explain the difference between aggregate expenditure and aggregate demand.
Explain which components of aggregate expenditure are affected by a change in the price level.
Explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.
Explain whether you agree with the following statement: "The reason the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services."
Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did. Will this change make the aggregate demand curve steeper or less steep? Briefly explain.
Write a general expression for the aggregate expenditure function. If you think of the aggregate expenditure function as a line on the 458-line diagram, what would be the intercept and what would be the slope, using the general values represented by letters?
Find equilibrium GDP using the following macroeconomic model (where the numbers, with the exception of the MPC, represent billions of dollars). 1. C = 1,500 + 0.75Y ....................... Consumption function 2. I = 1,250 .................................. Planned investment function 3. G = 1,250
For the macroeconomic model in problem 23A.2, write the aggregate expenditure function. For GDP of $16,000, what is the value of aggregate expenditure, and what is the value of the unintended change in inventories? For GDP of $12,000, what is the value of aggregate expenditure, and what is the
What relationship does the aggregate demand curve show? What relationship does the aggregate supply curve show?
A reporter for the Wall Street Journal wrote, "A strong dollar and weak growth overseas portend downward pressure on U.S. exports." a. What does the reporter mean by a "strong dollar"? b. What does the reporter mean by "weak growth overseas"? c. Briefly explain why the combination of a strong
If real GDP in the United States declined by more during the 2007-2009 recession than did real GDP in Canada, China, and other trading partners of the United States, would the effect be to increase or decrease U.S. net exports? Briefly explain.
Explain the three reasons the aggregate demand curve slopes downward.
What are the differences between the AD curve and the demand curve for an individual product, such as apples?
What variables cause the AD curve to shift? For each variable, identify whether an increase in that variable will cause the AD curve to shift to the right or to the left and also indicate which component(s) of GDP-consumption, investment, government purchases, or net exports-will change.
Explain how each of the following events would affect the aggregate demand curve. a. An increase in the price level b. An increase in government purchases c. Higher state income taxes d. Higher interest rates e. Faster income growth in other countries f. A higher exchange rate between the dollar
From August 2009 to August 2015, the Standard & Poor's Index of 500 stock prices more than doubled, while the consumer price index increased by just over 10 percent. Briefly explain what effect, if any, these changes had on the aggregate demand curve.
Consider the two aggregate demand curves in the following graph. What would cause a movement from point A to point B on AD1? What would cause a movement from point A to point C?
An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, which decreases total spending in the economy." Briefly explain whether you agree.
Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve. a. Firms become more optimistic and increase their spending on machinery and equipment. b. The federal government increases taxes in an attempt to reduce a budget deficit. c. The U.S. economy
Explain why the long-run aggregate supply curve is vertical.
Consider the variables that shift long-run aggregate supply and the variables that shift short-run aggregate supply. Match each of the following scenarios with one of the three graphs of long-run aggregate supply and short-run aggregate supply.a. The expected future price level decreases. b.
The American Trucking Association anticipates a shortage of truck drivers in coming years as the number of retirees exceeds the number of new drivers who enter the profession. The number of train boxcars is also expected to fall by over 40 percent in coming years because federal regulations limit
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." If a firm faces declining sales during a recession, why might the firm's managers
An article in the Economist discussing the 2007-2009 recession states that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" a. During a recession, couldn't firms reduce their labor costs by
What are menu costs? If menu costs were eliminated, would the short-run aggregate supply curve be a vertical line? Briefly explain.
What variables cause the long-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the long-run aggregate supply curve to shift to the right or to the left.
Why does the short-run aggregate supply curve slope upward?
What variables cause the short-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left.
Explain how each of the following events would affect the long-run aggregate supply curve. a. A higher price level b. An increase in the labor force c. An increase in the quantity of capital goods d. Technological change
A student was asked to draw an aggregate demand and aggregate supply graph to illustrate the effect of an increase in aggregate supply. The student drew the following graph:The student explains the graph as follows: An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this
Consider the short-run aggregate supply curves in the following graph. What would cause a movement from point A to point B on SRAS1? What would cause a movement from point A to point C?
An article in the Economist noted that "the economy's potential to supply goods and services [is] determined by such things as the labour force and capital stock, as well as inflation expectations." Do you agree with this list of the determinants of potential GDP? Briefly explain.
Explain how each of the following events would affect the short-run aggregate supply curve. a. An increase in the price level b. An increase in what the price level is expected to be in the future c. A price level that is currently higher than expected d. An unexpected increase in the price of an
Describe the relationship of the AD, SRAS, and LRAS curves when the economy is in long-run macroeconomic equilibrium.
The following graphs show either aggregate demand or short-run aggregate supply shifting to the right or to the left.a. Match the following scenarios to the appropriate graph.i. An increase in the expected price levelii. An increase in households' expectations of their future incomeiii. A decrease
Why might a supply shock lead to stagflation?
Suppose the economy enters a recession. If government policymakers-Congress, the president, and members of the Federal Reserve-do not take any policy actions in response to the recession, which of the alternatives listed below is the likely result? Be sure to carefully explain why you chose the
An article in the Economist noted that in the first half of 2015, the value of Canadian oil exports declined and that "energy firms, which account for around a third of capital spending, are expected to slash investment by nearly 40% this year." As a result, real GDP in Canada declined during the
Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium.a. Assume that there is a large increase in demand for U.S. exports. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is the
Edward Leamer of the University of California, Los Angeles, has argued that "housing is the business cycle." Why would spending on housing be likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment?
Consider the data in the following table for 1969 and 1970 (where the values for real GDP and potential GDP are in 2009 dollars):a. In 1969, actual real GDP was greater than potential GDP. Briefly explain how this is possible. b. Even though real GDP in 1970 was slightly greater than real GDP in
Use the graph below to answer the following questions. a. Which of the points A, B, C, or D can represent a long-run equilibrium? b. Suppose that initially the economy is at point A. If aggregate demand increases from AD1 to AD2, which point represents short-run equilibrium? Which point represents
In early 2009, Christina Romer, who was then the chair of the Council of Economic Advisers, and Jared Bernstein, who was then an economic adviser to Vice President Joseph Biden, forecast how long they expected it would take for real GDP to return to potential GDP, assuming that Congress passed
What are the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model?
Jet fuel is the largest operating cost for Delta Air Lines. In 2015, Delta's CEO Richard Anderson announced that the firm was likely to save more than $2 billion during the year because of lower fuel prices. Are firms like airlines that have costs that are dependent on raw material prices likely to
In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing more than potential GDP increases? What is the result of aggregate demand increasing less than potential GDP increases?
Briefly discuss the factors that caused the recession of 2007-2009.
Consider the information in the following table for the first two years of the Great Depression (where the values for real GDP and potential GDP are in 2009 dollars):a. The table shows that something happened during 1929-1930 that has not happened during the recessions of the past 50 years. What is
An article in the New York Times in early 2015 stated that economists at the Federal Reserve were forecasting that "real GDP would expand at a faster pace than potential output in 2015" and that the inflation rate during 2015 would be about 1 percent.a. Fill in the blank cells in the table with
In the following graph, suppose that the economy moves from point A in year 1 to point B in year 2. Using the graph, briefly explain your answer to each of the questions.a. What is the growth rate in potential GDP from year 1 to year 2?b. Is the unemployment rate in year 2 higher or lower than in
Explain whether you agree with the following statement: The dynamic aggregate demand and aggregate supply model predicts that a recession caused by a decline in AD will cause the inflation rate to fall. I know that the 2007-2009 recession was caused by a fall in AD, but the inflation rate was not
In a speech in late 2011, President Barack Obama argued, "Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago." What did the president mean by the "housing bubble"? How can a housing bubble bring on a recession?
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find data on real GDP (GDPCA) and the GDP price deflator (USAGDPDEFAISMEI) for 1960, 1973, 1975, and 2007.a. In an AD-AS graph, using the actual values for real GDP and the GDP price deflator,
Using data from the St. Louis Federal Reserve (research.stlouisfed.org/ fred2/) FRED database, examine the experience of the U.S. economy during the 1990s. The U.S. economy experienced a positive supply shock with the spread of information communication technology and the Internet after 1995. a.
During the 2007-2009 period, the economies of the United Kingdom and the United States experienced similar problems. High oil prices and a housing bubble affected both economies. The financial crisis in the United States also affected investment in the United Kingdom, both by limiting credit and by
On January 1, 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. According to an article in the Wall Street Journal, even 10 years later many Germans continued using the deutsche mark, and many stores in Germany continued to accept it.
What are the four functions of money? Can something be considered money if it does not fulfill all four functions?
Why do businesses accept paper currency when they know that, unlike a gold coin, the paper the currency is printed on is worth very little?
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zélie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the
An article in the New York Times in 2015 noted, "A rising number of Greeks in rural areas are swapping goods and services in cashless transactions since the government shut down banks on June 28 for three weeks." If Greeks were able to swap goods and services for other goods and services, did it
According to Peter Heather, a historian at King's College London, during the time of the Roman Empire, the German tribes east of the Rhine River (the area the Romans called Germania) produced no coins of their own but used Roman coins instead: Although no coinage was produced in Germania, Roman
Suppose that Congress passes a new law that requires all firms to accept paper currency in exchange for whatever they are selling. Briefly discuss who would gain and who would lose from this legislation.
Friedrich Schneider, an economist at the Johannes Kepler University of Linz in Austria, made the following observation about China: "The average Chinese trusts neither the Chinese banks nor the Communist Party." a. If Schneider is correct, how might businesses and consumers prefer to carry out
In 2015, some business startups were offering the service of transferring money in the form of bitcoins among individuals and businesses in developing countries. At the same time, an article in the Wall Street Journal noted that in the United States, "Most ordinary consumers remain wary of using an
The U.S. penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high, and it has cost the U.S. Treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist François Velde of the
Why does the Federal Reserve use two definitions of the money supply rather than one?
Distinguish among money, income, and wealth. Which one of the three does the central bank of a country control?
Briefly explain whether each of the following is counted in M1. a. The coins in your pocket b. The funds in your checking account c. The funds in your savings account d. The traveler's checks that you have left over from a trip e. Your Citibank Platinum MasterCard
Briefly explain whether you agree with the following statement: "I recently read that more than half of the money the government prints is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as government statistics indicate.
An article in the New York Times contains the statement: "Income is only one way of measuring wealth." Do you agree that income is a way of measuring wealth?
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. Briefly explain how this action will affect M1 and M2.
Based on a Survey of Consumer Payment Choice, researchers from the Federal Reserve Bank of Boston estimated that the average consumer, 18 years of age and older, held about $340 in currency. However, as noted in the chapter, there is actually about $4,000 of currency for every person in the United
Consider the following simplified balance sheet for a bank:a. If the required reserve ratio is 0.10, or 10 percent, how much in excess reserves does the bank hold?b. What is the maximum amount by which the bank can expand its loans?c. If the bank makes the loans in part (b), show the immediate
Briefly explain whether you agree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."
Suppose you deposit $2,000 in currency into your checking account at a branch of Bank of America, which we will assume has no excess reserves at the time you make your deposit. Also assume that the required reserve ratio is 0.20, or 20 percent.a. Use a T-account to show the initial effect of this
Suppose you decide to withdraw $100 in cash from your checking account. Draw a T-account showing the effect of this transaction on your bank's balance sheet.
Give the formula for the simple deposit multiplier. If the required reserve ratio is 20 percent, what is the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000? Is this maximum increase likely to occur? Briefly explain.
Following the financial crisis of 2007-2009, Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2015 only one new bank opened in the United States. According to an article in the
The following is from an article on community banks: "Their commercial-lending businesses, funded by their stable deposit bases, make them steady earners." What is commercial lending? In what sense are loans "funded" by deposits?
In a newspaper column, author Delia Ephron described a conversation with a friend who had a large balance on her credit card with an interest rate of 18 percent per year. The friend was worried about paying off the debt. Ephron was earning only 0.4 percent interest on her bank certificate of
An economist commented on the situation a bank faces when making personal loans to subprime borrowers: "You have to be alert to the trade-off between serving consumers and being viewed as taking advantage of them." If banks charge subprime borrowers a higher interest on loans than they charge prime
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. If the required reserve ratio is 0.10, or 10 percent, and Wells Fargo currently has no excess reserves, what is the maximum
An article in the Wall Street Journal on the shadow banking system contained the following observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems." Why might people who have invested in a money market mutual fund,
An article in the Wall Street Journal reported in 2015 that the People's Bank of China, which is the central bank of China, "is freeing up cash by reducing the amount that banks must keep in reserve." What monetary policy tool was the People's Bank of China using? In what sense did this policy
Why does an open market purchase of Treasury securities by the Federal Reserve increase bank reserves? Why does an open market sale of Treasury securities by the Federal Reserve decrease bank reserves?
What is the "shadow banking system"? Why were the financial firms of the shadow banking system more vulnerable than commercial banks to bank runs?
In an article in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in 1913, President Woodrow] Wilson had to retain the support of ... northeastern lawmakers while convincing southern and western Democrats that
Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. a. Use a T-account to show the effect of this transaction on FNB's balance sheet. Remember that the funds a bank has on deposit at the Fed count as part of its
An article in the New York Times states that "the Bank of Japan, the central bank ... is creating money on a vast scale by buying government bonds." How can a central bank "create money" by buying bonds? Doesn't the government create money by printing currency? Briefly explain.
Suppose that the Federal Reserve engages in an open market sale of $25 million in U.S. Treasury bills to banks. In the T-accounts for the Fed and for the banking system shown here, fill in the missing information.

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