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business
micro economics

Questions and Answers of Micro Economics

What is meant by "crowding out"? Explain the difference between crowding out in the short run and in the long run.
Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP. a. Is this outcome most
According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the London Business School, "Almost half of American families did not adjust their consumption following
We saw that in calculating the stimulus package's effect on real GDP, economists in the Obama administration estimated that the government purchases multiplier has a value of 1.57. John F. Cogan,
Why would a recession accompanied by a financial crisis be more severe than a recession that did not involve a financial crisis? Were the large budget deficits in 2009 and 2010 primarily the result
Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy
A report from the International Monetary Fund in late 2014 contained the following observations: "Five years after the global financial crisis, the economic recovery continues but remains weak. ...
In what ways does the federal budget serve as an automatic stabilizer for the economy?
In 2015, an article in the Wall Street Journal noted that "Prime Minister Shinzo Abe is expected to unveil a plan to balance Japan's budget in five years ... as a step toward reducing the country's
A political columnist wrote the following: Today ... the main purpose of governments issuing bonds is to let craven politicians launch projects they know the public, at the moment, would rather not
What is the cyclically adjusted budget deficit or surplus? Suppose that real GDP is currently at potential GDP, and the federal budget is balanced. If the economy moves into a recession, what will
Why do few economists believe it would be a good idea to balance the federal budget every year?
Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their readers' questions regarding the federal government's debt. Two of the questions were: a. Why is
In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argue that the European Union, an organization of 28 countries in Europe, should appoint "a
The following is from a message by President Herbert Hoover to Congress, dated May 5, 1932: I need not recount that the revenues of the Government as estimated for the next fiscal year show a
In February 2013, the Congressional Budget Office (CBO) forecast that the federal budget deficit for fiscal year 2013 would be approximately $850 billion. In May 2013, the CBO revised down its
An article in the Wall Street Journal in 2015 noted that an official of the European Union was forecasting that "Greece faces two years of recession amid sharp budget cuts." What typically happens to
It seems that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. Why then have the tax laws become increasingly complicated?
Some economists and policymakers have argued in favor of a "flat tax." A flat tax would replace the current individual income tax system, with its many tax brackets, exemptions, and deductions, with
Suppose that an increase in marginal tax rates on individual income affects both aggregate demand and aggregate supply. Briefly describe the effect of the tax increase on equilibrium real GDP and the
Writing in the Wall Street Journal, Martin Feldstein, an economist at Harvard University, argues that "behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in
The International Monetary Fund (IMF) publishes The World Economic Outlook. Go to www.imf.org and look at the most recent version available. The IMF measures the output gap as the difference between
The Congressional Budget Office (CBO) provides data on the actual and cyclically adjusted budget deficits. You can find data for the years 1965-2014 at https://www.cbo.gov/sites/default/ f
The International Monetary Fund (IMF) publishes The World Economic Outlook. Go to www.imf.org and find the IMF data for the cyclically adjusted budget deficit as a percentage of potential GDP (which
Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to
Use a graph to show the change in the aggregate demand curve resulting from an increase in government purchases if the government purchases multiplier equals 2. On the same graph, show the change in
Using your understanding of multipliers, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. Similarly, explain why a decrease in the marginal
In 2012, the ratio of imports to GDP was 14 percent in Japan and 83 percent in Belgium. On the basis of this information, can you draw any conclusions about the relative sizes of the government
What is the Phillips curve? Draw a graph of a short-run Phillips curve.
An article in the Wall Street Journal has the headline "Don't Look Now, but Market Inflation Expectations Are Falling." If inflation turns out to be lower than households and firms had previously
Robert Shiller asked a sample of the general public and a sample of economists the following question: "Do you agree that preventing high inflation is an important national priority, as important as
When Robert Shiller asked a sample of the general public what they thought caused inflation, the most frequent answer he received was "corporate greed." Do you agree that greed causes inflation?
In its 2014 Annual Report, Goodyear noted, "The increasing strength of the U.S. dollar created unfavorable foreign currency translation for many of our businesses around the world." a. What did the
What actions should the Fed take if it wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and
Why did economists during the early 1960s think of the Phillips curve as a "policy menu"? Were they correct to think of it in this way? Briefly explain.
Why did Milton Friedman argue that the Phillips curve did not represent a permanent trade-off between unemployment and inflation? In your answer, be sure to explain what Friedman meant by the
Given that the Phillips curve is derived from the aggregate demand and aggregate supply model, why do we use the Phillips curve analysis? What benefits does the Phillips curve analysis offer compared
In macroeconomics courses in the 1960s and early 1970s, some economists argued that one of the U.S. political parties was willing to have higher unemployment in order to achieve lower inflation and
The text discussed how if Ford and the UAW fail to accurately forecast the inflation rate, the real wage will be different than the company and the union expected. Why, then, do the company and the
In congressional testimony, former Federal Reserve Chairman Ben Bernanke said: Another significant factor influencing medium term trends in inflation is the public's expectations of inflation. These
In early 2015, an article in the Economist noted that it was possible that in the United States, "the NAIRU may already have been reached and inflation will start accelerating; the Fed should act
In a speech in September 1975, Fed Chairman Arthur Burns said the following: There is no longer a meaningful trade-off between unemployment and inflation. In the current environment, a rapidly rising
What is the relationship between the short-run Phillips curve and the long-run Phillips curve?
Why is it inconsistent to believe that the long-run aggregate supply curve is vertical and the long-run Phillips curve is downward sloping?
Use the following information to draw a graph showing the short-run and long-run Phillips curves:Natural rate of unemployment = 5 percentCurrent rate of unemployment = 4 percentExpected inflation
Consider the long-run Phillips curve and the short-run Phillips curve in this graph. What would cause a movement from point A to point B? What would cause a movement from point A to point C?
In 1968, Herbert Stein, who would later serve on President Nixon's Council of Economic Advisers, wrote: "Some who would opt for avoiding inflation would say that in the long run such a policy would
In the next column are four graphs and four economic scenarios, each of which would cause either a movement along the short-run or long-run Phillips curve or a shift in the short-run or long-run
In 2015, an article in a publication of the Federal Reserve Bank of San Francisco noted, "FOMC participants have steadily lowered their estimates of the natural rate of unemployment . . . over the
Over time, the Federal Reserve Board of Governors has changed its estimate of the nonaccelerating inflation rate of unemployment (NAIRU). The following are the board's NAIRU estimates for selected
Why do workers, firms, banks, and investors in financial markets care about the future rate of inflation? How do they form their expectations of future inflation? Do current conditions in the economy
What does it mean to say that workers and firms have rational expectations?
Why did Robert Lucas and Thomas Sargent argue that the Phillips curve might be vertical in the short run? What difference would it make for monetary policy if they were right?
During a time when the inflation rate is increasing each year for a number of years, are adaptive expectations or rational expectations likely to give the more accurate forecasts? Briefly explain.
An article in the Economist states that, "Robert Lucas . . . showed how incorporating expectations into macroeconomic models muddled the framework economists prior to the 'rational expectations
In an article in Forbes, Paul Roderick Gregory, an economist at the University of Houston, commented on the use of monetary policy to fight a recession: "Those who devise stimulus programs must know
If both the short-run and long-run Phillips curves are vertical, what will be the effect on the inflation rate and the unemployment rate of an expansionary monetary policy? Use a Phillips curve graph
An article in the Economist observes that "a sudden unanticipated spurt of inflation could lead to rapid economic growth." a. Briefly explain the reasoning behind this statement. b. Does it matter
What was the "Volcker disinflation"? What happened to the unemployment rate during the period of the Volcker disinflation?
Robert Lucas said, "In practice, it is much more painful to put a modern economy through a deflation than the monetary theory we have would lead us to expect. I take this to mean that we have 'price
An opinion column in the Wall Street Journal notes, "In a democracy, the tradeoff for a central bank's independence is accountability to the nation's elected leadership." a. Why would a country want
In an opinion column in the Wall Street Journal, Stanford University economist John Taylor, originator of the Taylor rule, argued, "As I see it, the broader evidence in the United States and in many
What changes did the Dodd-Frank Act make in the Fed's operations? List three key proposals for changes in the Fed's operations or structure.
Why do most economists believe that it is important for a country's central bank to be independent of the rest of the country's central government?
An article in the New York Times in 2015 quoted Minneapolis Fed President Narayana Kocherlakota as stating that "disinflation is worrisome." Most economists applaud the "Volcker disinflation" of the
Look again at the table on prices during the early 1930s on page 1001. Was there disinflation during 1933? Briefly explain.
Suppose the current inflation rate and the expected inflation rate are both 4 percent. The current unemployment rate and the natural rate of unemployment are both 5 percent. Use a Phillips curve
Suppose the inflation rate has been 15 percent for the past four years. The unemployment rate is currently at the natural rate of unemployment of 5 percent. The Federal Reserve decides that it wants
While many economists and policymakers supported the Fed's decision to maintain the federal funds rate at a nearzero level for over six years, Charles Schwab, the founder and chairman of a discount
In an opinion column in the New York Times, economist Justin Wolfers of the University of Michigan noted, "Over recent years, policy makers have also worked to lower long-term interest rates by
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2) and download annual unemployment data (UNRATE) for 1962 to the present. (To convert the data from a
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2) and download monthly data on the inflation rate expected by consumers as measured by the University
What is the relationship among the current account, the financial account, and the balance of payments?
An article in the Wall Street Journal refers to "debt-strapped emerging markets already struggling with current-account deficits." Why might we expect that countries running current account deficits
The late economist Herbert Stein described the accounts that comprise a country's balance of payments: A country is more likely to have a deficit in its current account the higher its price level,
In 2014, France had a current account deficit of €19.5 billion (approximately $25.9 billion). Did France experience a net capital outflow or a net capital inflow during 2014? Briefly explain.
Use the information in the following table to solve for the value of the statistical discrepancy and prepare a balance of payments account, like the one shown in Table 29.1 on page 1019.Assume that
In 2014, Germany had a balance of trade surplus of €217 billion and a current account surplus of €215 billion. Explain how Germany's current account surplus could be smaller than its trade
A news article notes, "China recorded a current-account surplus of $76.6 billion in the second quarter but that was offset by a deficit of the same amount on its capital and financial account." Is
An article in the Wall Street Journal about China's balance of payments contained the following observations: "A country's balance of payments still has to add up to zero. If foreign investors wish
An article in the New York Times has the headline "U.S. Trade Deficit Widened Over Summer." The first sentence in the article is, "The current-account trade deficit widened slightly in the
An article in the Wall Street Journal notes, "For every one yen rise in the value of the dollar, Fuji Heavy's full-year operating profit increases by ¥9.7 billion, the company says." Would Honda's
According to an article in the Wall Street Journal, in 2014, "The Australian dollar tumbled after muted inflation data scotched investors' expectations that the central bank would raise interest
In preparing their financial statements, U.S. firms with sales in foreign currencies have to engage in "foreign currency translations"; that is, they have to convert foreign currency values into U.S.
In the summer of 2015, the exchange rate of China's currency, the yuan, declined against other currencies. The lower value for the yuan was expected to have a negative effect on firms such as Apple
Why do foreign households and foreign firms demand U.S. dollars in exchange for foreign currency? Why do U.S. households and firms supply U.S. dollars in exchange for foreign currency?
What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?
On January 1, 2002, there were 15 member countries in the European Union. Twelve of those countries eliminated their own individual currencies and began using a new common currency, the euro. For a
Paul De Grauwe, an economist at the London School of Economics, wrote in the Economist that the quantitative easing policies of the European Central Bank "will contribute to a further weakening of
If we know the exchange rate between Country A's currency and Country B's currency and we know the exchange rate between Country B's currency and Country C's currency, then we can compute the
Graph the demand and supply of U.S. dollars for euros and label each axis. Show graphically and explain the effect on the demand and supply of dollars and the resulting change in the exchange rate
Use the graph to answer the following questions.a. Briefly explain whether the dollar appreciated or depreciated against the yen.b. Which of the following events could have caused the shift in demand
Explain the relationship between net exports and net foreign investment.
Former congressman and presidential candidate Richard Gephardt once proposed that tariffs be imposed on imports from countries with which the United States has a trade deficit. If this proposal were
What is the saving and investment equation? If national saving declines, what will happen to domestic investment and net foreign investment?
Writing in the New York Times, Simon Johnson, an economist at MIT, makes the argument that people outside the United States may at some point decide to "save less (in which case they may hold onto
In 2014, domestic investment in Japan was 21.7 percent of GDP, and Japanese national saving was 22.4 percent of GDP. What percentage of GDP was Japanese net foreign investment?
In 2014, France's net foreign investment was negative. Which was larger in France in 2014: national saving or domestic investment? Briefly explain.
Briefly explain whether you agree with the following statement: "Because in 2014 national saving was a larger percentage of GDP in the United States than in the United Kingdom, domestic investment
Look again at Solved Problem 29.3, where the saving and investment equation S = I + NX is derived. In deriving this equation, we assumed that national income was equal to Y. But Y only includes

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