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micro economics
Questions and Answers of
Micro Economics
Use the saving and investment equation to explain why the United States experienced large current account deficits in the late 1990s.
What happens to national saving when the government runs a budget surplus? What is the twin deficits idea? Did it hold for the United States in the 1990s? Briefly explain.
Why is the United States sometimes called the "world's largest debtor"?
An investment analyst recommended that investors "gravitate toward the stronger currencies and countries that are running current-account and fiscal surpluses," such as South Korea and Taiwan. a.
Section 29.4 states: "The budget surpluses of the late 1990s occurred at a time of then-record current account deficits." Holding everything else constant, what would the likely effect have been on
Why might "the continued willingness of foreign investors to buy U.S. stocks and bonds and foreign companies to build factories in the United States" result in the United States running a current
An article in GulfNews.com noted that in September 2012, the Indian government of Prime Minister Manmohan Singh made "urgently needed reforms to reduce the fiscal deficit and attract foreign
What is meant by a policy channel?
Why does monetary policy have a greater effect on aggregate demand in an open economy than in a closed economy?
Why does fiscal policy have a smaller effect on aggregate demand in an open economy than in a closed economy?
An article in the Economist quotes the finance minister of Peru as saying, "We are one of the most open economies of Latin America." What did he mean by Peru being an "open economy"? Is fiscal policy
Suppose that Federal Reserve policy leads to higher interest rates in the United States. a. How will this policy affect real GDP in the short run if the United States is a closed economy? b. How will
Suppose the federal government increases spending without also increasing taxes. In the short run, how will this action affect real GDP and the price level in a closed economy? How will the effects
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and download the most recent value and the value from the same month one year earlier from FRED for
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and download and plot the U.S. dollar-euro exchange rate (EXUSEU), the U.S. dollar-yen exchange
One way to gauge the general value of one currency relative to other currencies is to calculate the trade-weighted exchange rate, which is an index number similar to the consumer price index. The
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent values for the Japan/U.S. Foreign Exchange Rate (DEXJPUS) and the U.S.
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the most recent values from FRED for the Japan/U.S. Foreign Exchange Rate (DEXJPUS) and
How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?
Briefly explain whether you agree with the following statement: "The Federal Reserve is limited in its ability to issue paper currency by the amount of gold the federal government has in Fort Knox.
An article in the Atlantic referred to a poll of economists that found no support for the United States to readopt the gold standard: It prevents the central bank from fighting recessions by
The United States and most other countries abandoned the gold standard during the 1930s. Why would the 1930s have been a particularly diff icult time for countries to have remained on the gold
After World War II, why might countries have preferred the Bretton Woods system to reestablishing the gold standard? In your answer, be sure to note the important ways in which the Bretton Woods
What is the theory of purchasing power parity? Does the theory give a complete explanation for movements in exchange rates in the long run? Briefly explain.
Look again at the table on page 1050 that shows the prices of Big Macs and the implied and actual exchange rates. Indicate whether the U.S. dollar is overvalued or undervalued against each currency.
Fill in the missing values in the following table. Assume that the Big Mac is selling for $4.79 in the United States. Explain whether the U.S. dollar is overvalued or undervalued relative to each of
Britain decided not to join other European Union countries in using the euro as its currency. One British opponent of adopting the euro argued, "It comes down to economics. We just don't believe that
An article in USA Today argues, "Ironically, the euro's fall-and the benefit for German exports-is largely the result of eurozone policies that Germany has taken the lead in opposing . . .
In January 2007, before the financial crisis, the exchange rate was $1.30 per euro. In July 2008, during the financial crisis, the exchange rate was $1.58 per euro. Was this change in the
Although it is a member of the European Community, Denmark is not part of the eurozone; it has its own currency, the krone. Because the krone is pegged to the euro, Denmark's central bank is obliged
The German firm Bayer reported that its pharmaceutical group experienced a 21 percent increase in profit for the second quarter of 2015. The firm stated that the increase was partly the result of
Use the graph to answer the following questions.a. According to the graph, is there a surplus or a shortage of baht in exchange for U.S. dollars? Briefly explain. b. To maintain the pegged exchange
The Economist observed, "In Argentina, many loans were taken out in dollars: this had catastrophic consequences for borrowers once the peg collapsed." What does the article mean when it says that
Graph the demand and supply of Chinese yuan for U.S. dollars and label each axis. To maintain a pegged exchange rate, the Chinese central bank can use yuan to buy U.S. dollars. Indicate whether the
Briefly describe the four determinants of exchange rates in the long run.
In August 2015, after the Chinese central bank moved to decrease the value of the yuan in exchange for the dollar, a column in the Wall Street Journal offered this opinion: "China's trading partners
Which European countries currently use the euro as their currency? Why did these countries agree to replace their previous currencies with the euro?
What does it mean when one currency is "pegged" against another currency? Why do countries peg their currencies? What problems can result from pegging?
An article in the Toronto Star discussed the Canadian teams that play in the National Hockey League, the National Basketball Association, Major League Baseball, and Major League Soccer. The article
An article in the Economist discussed the situation facing the U.S. economy in mid-2015: "The combination of weaker-than-expected CPI inflation and some dovish comments in the minutes of the Federal
Consider this statement: It takes more than 120 yen to buy 1 U.S. dollar and more than 1.5 dollars to buy 1 British pound. These values show that the United States must be a much wealthier country
According to the theory of purchasing power parity, if the inflation rate in Australia is higher than the inflation rate in New Zealand, what should happen to the exchange rate between the
In December 2014, you needed 30 percent more pesos to buy one U.S. dollar than you had needed in December 2004. Over the same time period, the consumer price index in Mexico increased 49.5 percent,
What were the main factors behind the globalization of capital markets in the 1980s and 1990s?
Briefly describe the pattern of foreign investments in U.S. securities between 1995 and 2014.
Why are foreign investors more likely to invest in U.S. government bonds than in U.S. corporate stocks and bonds?
The text states that "the globalization of financial markets has helped increase growth and efficiency in the world economy." Briefly explain which aspects of globalization help to increase growth in
The global financial crisis of 2007-2009 led some economists and policymakers to suggest the reinstitution of capital controls-or limits on the flow of foreign exchange and financial investments
Go to the Web site of the Federal Reserve Bank of St. Louis Federal Reserve (FRED) (research.stlouisfed.org/fred2/) and find the most recent values for the Japan/U.S. Foreign Exchange Rate
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and find the values for the China/U.S. Foreign Exchange Rate (DEXCHUS) from 1981 to the most
The U.S. Treasury publishes data on capital flows. Treasury International Capital Flows can be found at www.treasury.gov/resource-center/ data-chart-center/tic/Pages/index.aspx. Go to "Monthly
What determined the exchange rates among currencies under the gold standard? Why did the gold standard collapse?
An article in the Economist observed that there were "some perturbing parallels between the gold standard and the euro." What parallels are there between the gold standard and the euro? What would
An article in the New York Times states, "On Aug. 15, 1971, President Nixon unhitched the value of the dollar from the gold standard." Is the author of this article correct that the United States
An opinion column in the New York Times offers the view that "zealous money printing in the 1960s led to the inevitable collapse of the Bretton Woods system (and complete fiat money was born)." a.
One economist has argued that the East Asian exchange rate crisis of the late 1990s was due to "the simple failure of governments to remember the lessons from the breakdown of the Bretton Woods
Economists Michael Bordo of Rutgers University and Angela Redish of the University of British Columbia have argued that the "Bretton Woods system functioned for a number of years but beginning in the
An article in the Economist notes that after the end of the Bretton Woods system, "the Europeans did not like leaving their currencies to the whims of the markets." What does it mean for a country to
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research. stlouisfed.org/fred2/) and find the Gold Fixing Price 10:30 a.m. (London time) in the London Bullion Market in U.S.
Briefly describe how the Bretton Woods system operated.
What role did the International Monetary Fund play in the Bretton Woods system?
What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?
Suppose that under the gold standard, there was 1/5 ounce of gold in a U.S. dollar and 1 ounce of gold in a British pound. Demonstrate that if the exchange rate between the dollar and the pound was
If a country is using the gold standard, what is likely to happen to its money supply if new gold deposits are discovered in the country, as happened in the United States with the gold discoveries in
An article in the Economist observes, "When the Depression [of the 1930s] struck, this gold standard became a noose around the necks of struggling economies." In what sense was the gold standard a
How does the current size of the U.S. budget deficit compare to the historical budget deficit or surplus for the time period since 1950?
How would an increase in the value of the pound sterling affect American businesses?
Much of the U.S. government debt is held by foreign investors as treasury bonds and bills. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners?
The following table lists foreign exchange rates between U.S. dollars and British pounds (GBP) during April. Which day would have been the best for converting $200 into British pounds? Which day
What was the main cause of the recession that began in 2007?
Go to the St. Louis Federal Reserve FRED database and find data on the three-month treasury bill rate (TB3MS), the three-month AA nonfinancial commercial paper rate (CPN3M), the 30-year treasury bond
Go to the St. Louis Federal Reserve FRED database and find data on the M1 money supply (M1SL) and the 10-year treasury bond rate (GS10). Add the two series into a single graph by using the "Add Data
How can the provision of several types of financial services by one firm be both beneficial and problematic?
If you were going to get a loan to purchase a new car, which financial intermediary would you use: a credit union, a pension fund, or an investment bank?
Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?
In 2008, as a financial crisis began to unfold in the United States, the FDIC raised the limit on insured losses to bank depositors from $100,000 per account to $250,000 per account. How would this
Describe who issues each of the following money market instruments: a. Treasury bills b. Certificates of deposit c. Commercial paper d. Repurchase agreement e. Fed funds
What is the difference between a mortgage and a mortgage-backed security?
A significant number of European banks held large amounts of assets as mortgage-backed securities derived from the U.S. housing market, which crashed after 2006. How does this demonstrate both a
Go to the St. Louis Federal Reserve FRED database, and find data on federal debt held by the Federal Reserve (FDHBFRBN), by private investors (FDHBPIN), and by international and foreign investors
Go to the St. Louis Federal Reserve FRED database, and find data on the total assets of all commercial banks (TLAACBM027SBOG) and the total assets of money market mutual funds (MMMFFAQ027S).
One of the factors contributing to the financial crisis of 2007-2009 was the widespread issuance of subprime mortgages. How does this demonstrate adverse selection?
How do conflicts of interest make the asymmetric information problem worse?
Why is simply counting currency an inadequate measure of money?
If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain.
It is not unusual to find a business that displays a sign saying "no personal checks, please." On the basis of this observation, comment on the relative degree of liquidity of a checking account
Assume that you are interested in earning some return on the idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check.
In April 2009, the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the year-over-year growth rate of the M1 money supply was 6.5%, while the growth rate
The table below shows hypothetical values, in billions of dollars, of different forms of money.a. Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of
In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the "double coincidence of wants" problem, even if a prisoner does not smoke?
Why did cavemen not need money?
Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the
Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler's checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1
Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market
True or False: With a discount bond, the return on the bond is equal to the rate of capital gain.
Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments, and complain whenever interest rates are low. Do they have a valid complaint?
Consider a bond with a 4% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current
A $1000-face-value bond has a 10% coupon rate, its current price is $960, and its price is expected to increase to $980 next year. Calculate the current yield, the expected rate of capital gain, and
Does bondholders fare better when the yield to maturity increases or when it decreases? Why?
Why would a government choose to issue a perpetuity, which requires payments forever, instead of a terminal loan, such as a fixed-payment loan, discount bond, or coupon bond?
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