Macroeconomics Principles For A Changing World 5th Edition Eric Chiang - Solutions

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One of the new taxes imposed by the 2010 Affordable Care Act is a tax on high-benefit health care plans (known as Cadillac plans) aimed at wealthy individuals who receive generous health insurance benefits from their employers. The tax, equal to 40% of the health care benefits exceeding an
One proposal that is frequently discussed is the introduction of a public option in which the government would essentially compete against private insurance companies for customers. Critics of the public option claim that it is simply another name for government-run health care. However, supporters
Suppose that improvements in health information management reduces the cost of supplying health care while at the same time an increased number of foreign tourists seek medical treatments in the United States. How would these two events affect the demand and/or supply in the health care
Explain how new medical technologies can result in higher health care expenditures. Under what conditions would such technologies lead to a reduction in health care expenditures?
The average life expectancy in the United States is lower than most other developed countries despite spending more on health care per person than any other country. What are some factors that might explain this outcome?
What is the difference between a government-run health care system and a single-payer health care system?
Provide two examples of moral hazard in the health care industry.
Explain some of the demographic and socioeconomic factors that increase the demand for health care.
Suppose the United States agrees to abolish all agricultural subsidies in order to satisfy concerns from developing nations. Besides the obvious impact such a policy will have on American farmers, who are other winners and losers from this policy?
Support for farm subsidies and trade protectionism is often argued as a way to protect American jobs. Yet, most workers on U.S. farms are migrant workers on temporary immigration visas. How is international trade related to immigration? Can the United States maintain trade protectionism in
If the price support level for corn is $3.70 per bushel and the current market price is $3.00 per bushel, how much of a subsidy payment would a farmer expect if she produces 50,000 bushels of corn?
Do tariffs and quotas affect the market price of protected crops the same as a subsidy based on price supports?
Suppose a bountiful rainfall and ideal weather creates a very large harvest in apples. How would this affect the market price of apples if demand for apples is inelastic? How would incomes be affected if apples are not supported by the U.S. farm bill?
Does trade protectionism guarantee a profit for American farmers? What other factors affect profit?
What are the factors that cause farm incomes to be volatile?
Why is the demand for farm products inelastic?
Suppose that you are given an opportunity to work in Tokyo over the summer as an English tutor, and you are provided with all living expenses and a 500,000-yen cash stipend that you plan to save and bring home. If the exchange rate is 120 yen per U.S. dollar, how much would your stipend be worth in
Assume that the following exchange rates prevail:Value of U.S. Dollar Brazil (real) 0.2545 Canada (dollar) 0.7492 Mexico (peso) 0.0531 New Zealand (dollar) 0.6697 How many Mexican pesos does it take to buy 1 New Zealand dollar? If you had 20 U.S. dollars, could you take a ferry ride in Canada if it
The loosening of travel restrictions by the U.S. government for travel to Cuba has led to a large increase in American tourists. However, when tourists exchange U.S. dollars for Cuban pesos, the Cuban government charges a 10% tax. This tax is not levied on any other foreign currency being exchanged
From 2014 to 2018, the annual number of tourists visiting Iceland more than doubled, attracted by its natural beauty, which includes hot springs, volcanoes, waterfalls, glaciers, and a chance of spotting the aurora borealis. How does this tourism boom affect the foreign exchange market for
When the dollar becomes stronger against major foreign currencies, does the price of French wine rise or fall in the United States? Would this be a good time to travel to Australia? What happens to U.S. exports?
If it costs 300 U.S. dollars to purchase an iPad in the United States and 400 Australian dollars to purchase one in Sydney, then according to purchasing power parity, the exchange rate between the Australian dollar and the U.S. dollar should be 4:3. Why might purchasing power parity be different
Mexican migrant workers in the United States often send money (known as remittances) to Mexico to support their families. In 2018, these remittances surpassed $30 billion. How are these transfers recorded in the balance of payments accounts?
If a country prefers to use fiscal policy to smooth fluctuations in its business cycle, would a fixed or flexible exchange rate system be more conducive to this objective? Explain.
If European economies have a serious bout of stagflation—high rates of both unemployment and inflation—will this affect the value of the dollar? Explain.
Assume that global warming and especially high temperatures in Northern California have rendered it impossible for wine grapes in the Napa Valley (and all over California) to grow properly. Unable to get California wines, demand jumps dramatically for Australian wines. How would this affect the
Describe the difference between the nominal and real exchange rates. What does rising inflation do to a country’s real exchange rate?
Describe the difference between fixed and flexible exchange rates.
If the euro appreciates by 30%, what will happen to exports of Mercedes-Benz automobiles (manufactured in Germany) to the United States?
What is the important difference between the current account and the financial account, given that the sum of the two values must equal 0?
If the price of one euro changes from $1.10 to $1.20, does the value of the euro appreciate or depreciate against the dollar? Does the value of the U.S. dollar appreciate or depreciate against the euro?
Explain what the balance of trade is, and how it is calculated. What factors contribute to our trade deficit?
The following figure shows the production possibilities frontiers (PPFs) for Italy and India for their domestic production of olives and tea. Without trade, assume that each is consuming olives and tea at point a.
Since before the Civil War, Hawaii had been a major producer and exporter of sugarcane. About the time Hawaii became a U.S. state in 1959, the sugar industry had already started its decline, and in 2016, the last sugar plantation in Hawaii closed. Explain how the sugar industry in Hawaii was
Migrant workers obtain temporary work permits to do jobs that most American workers avoid (such as picking fruit at the minimum wage), allowing U.S. farms to compete against low-cost imports. However, critics claim that if farm wages increase, these jobs can be filled by American workers. Given
Suppose Brazil developed a secret process that effectively quadrupled its output of coffee from its coffee plantations. This secret process enabled it to significantly undercut the prices of U.S. domestic producers. Would domestic producers receive a sympathetic ear to calls for protection from
Remittances from developed countries amount to over $500 billion each year.Most of these funds are sent by foreign workers and migrants to their home countries. Is this similar to the gains from trade discussed in this chapter, or are these workers just taking jobs that workers in developed
Why is there free trade between states in the United States but not necessarily between countries?
Some activist groups are calling for “fair trade laws” by which other countries would be required to meet or approach our environmental standards and provide wage and working conditions approaching those of developed nations in order to be able to trade with us. Is this just another form of
Expanding trade in general benefits all countries, or they would not willingly engage in trade. But we also know that consumers and society often gain while particular industries or workers lose. Because society and consumers gain, how might the government compensate the few losers for their loss?
Some American politicians claim that China’s trade policies are unfair to the United States and that a large tax (tariffs) should be placed on Chinese imports to protect American workers and industries. Why might such a policy sound better than it actually is in practice? What are the dangers of
How could free trade between the United States and China lead to more jobs in the United States?
What is the difference between an infant industry and a key industry? Why do producers in both industries desire protection against foreign imports?
Why does a quota generate a larger loss to the importing country than a tariff that restricts imports to the same quantity?
Who are the beneficiaries from a large U.S. tariff on French and German wines?Who are the losers?
If the United States has a comparative advantage in the production of strawberries compared to Iceland, how might trade affect the prices of strawberries in the two countries?
What is the difference between absolute and comparative advantage? Why would Stephen Curry, who is better than you at both basketball and mowing grass, still hire you to mow his lawn?
During the recession from December 2007 to June 2009, the U.S. economy lost a total of 7,163,000 jobs. How many jobs were lost per month, on average? Suppose that a healthy economy generates an average of 200,000 jobs per month. At this rate, how long would it take the economy to gain back the
The Phillips curve of the 1960s showed an inverse relationship between the inflation rate and unemployment. Use the following data on inflation and unemployment to plot a Phillips curve from 2014 to 2018. Does the same relationship between inflation and unemployment hold in 2014 to 2018 as it did
Almost every year, Congress is tasked with increasing the debt ceiling that allows the government to continue borrowing. In past decades, such legislation would pass easily because it was authorizing the payment of expenses already incurred. However, in recent years, some congressional leaders took
Over the last 25 years, the Fed has increased its transparency by providing more detailed policy announcements after its meetings. In response, investors have reacted more quickly in response to the announcements. Does greater transparency provide more or less support to the conclusions of the
Explain how the rise of automation in many industries can lead to both job gains and job losses in the overall economy.
Explain why those who favor the rational expectations approach to modeling the economy do not favor discretionary policymaking.
Explain how the credibility of policymakers’ (Congress and the Fed) commitment to keeping inflation low affects inflationary expectations when the economy is beset by a supply shock.
Describe a few government policies that could have prevented the financial crisis in 2007.
Why are inflationary expectations so important for policymakers to keep under control? When a supply shock such as an oil price spike occurs, does it matter how fast policymakers attempt to bring the economy back to full employment? Explain.
Why would policymakers want to drive unemployment below the natural rate, given that inflation would result?
How does a negative supply shock (a huge natural disaster or significant energy price spike) affect the short-run Phillips curve? How does it affect the long-run Phillips curve?
Would policymakers prefer a Phillips curve with a steep or a flat slope? Why?
Explain why rational expectations does not mean that all individuals act rationally and are always correct.
Explain why inflation accelerates if policymakers use monetary and fiscal policy to keep unemployment below the natural rate.
Explain why the long-run Phillips curve makes it difficult (if not impossible) for policymakers to increase output and employment beyond full employment in the long run.
Why does the Phillips curve become very steep when unemployment is low and rather flat when unemployment is high?
In 2016 U.S. inflation was 1.2%, and output was 0.6% below its long-run potential. In 2019, an expanding U.S. economy caused inflation to increase to 1.6%, and output was 0.4% above its long-run potential.
Suppose a major earthquake disrupts production in many industries, causing SRAS0 to shift to SRAS1 in the following figure. What happens to the aggregate price level and aggregate output in this economy? If the government’s objective is to return aggregate output back to full employment as
When Greece faced a debt crisis in 2017, it was forced to adopt austerity measures that reduced wages of government workers as well as benefits enjoyed by much of the population. By cutting government spending, particularly investments in public projects, Greece managed to achieve a budget surplus
In 2019 President Trump nominated individuals to fill vacancies in the Federal Reserve’s Board of Governors who have been critical of the Fed in the past, even questioning its existence during the height of the quantitative easing years. How might bringing in nominees with strong political views
Explain how the housing bubble at the beginning of the 21st century led to the Taylor rule target exceeding the actual federal funds rate. How might the severity of the Great Recession been reduced had the federal funds rate been adjusted?
Suppose another spike in energy prices causes a negative supply shock. What type of monetary policy should the Fed use if the goal is to maintain price stability in the economy? What are the consequences of doing so?
When NASA scientists were operating the Mars rovers to make them drive across the Martian landscape and collect and analyze rocks and crevices, the scientists complained that the 20-minute delay between when they issued a command and when the rovers responded made their job more challenging.
If the Fed persistently uses expansionary monetary policy to keep interest rates very low, what are some of the risks that may occur?
It seems that each time the Fed raises interest rates, the stock market has an awful few days. Why do higher interest rates have such an impact on the stock market?
Suppose a rise in consumer confidence causes aggregate demand to increase, resulting in a short-run equilibrium that is above full employment output. What type of monetary policy might the Fed use to reduce inflationary pressures and to bring the economy back to full employment?
How do sticky wages and prices make monetary policy effective in the short run?
How is the impact of expansionary monetary policy different when the economy is considerably below full employment compared to when it is at full employment?
What does the equation of exchange, M × V = P × Q, help to explain?
Describe how open market operations alter the supply of money.
When the interest rate falls, why do people desire higher money balances?
Why is it important for the Federal Reserve Board to be independent of the executive branch of the federal government?
Suppose that the leakage-adjusted money multiplier can be calculated using a modification of the money multiplier formula:Suppose that the reserve requirement is 25%, but banks, on average, hold an additional 10% of their deposits as excess reserves. Further, assume that individuals and businesses
Assume that First Purity Bank begins with the balance sheet below and is fully loaned-up. Answer the questions that follow.1 What is the reserve requirement?2 If the bank receives a new deposit of $1 million and the bank wants to remain fully loaned-up, how much of this new deposit will the bank
Increased skepticism about the role of the Federal Reserve as well as the spread of misinformation (e.g., that increasing the money supply devalues the dollar and amounts to counterfeiting) have led some politicians to propose that the Federal Reserve be abolished. If this happens, monetary policy
Eric Keetch offered an interesting anecdote in the Financial Times:In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an
The reserve requirement sets the required percentage of deposits that must be held by the bank in cash or on deposit at the regional Federal Reserve Bank. Many banks have widespread branches and ATMs. How would the existence of branches and ATMs affect the level of excess reserves (above those
Alan Greenspan, a former Fed Chair, noted that “the Federal Reserve has to be independent in its actions and as an institution, because if Federal Reserve independence is in any way compromised, it undercuts our capability of protecting the value of the currency in society.” What is so
If the Fed announces that it has no plans to raise the federal funds rate in the following year, how might this announcement affect the actions of individuals and businesses, and what impact might this have on the economy?
The Federal Deposit Insurance Corporation (FDIC) insures individual bank accounts up to $250,000. Does the existence of this insurance eliminate the need for reserve requirements? Does it essentially prevent “runs” on banks?
During an economic expansion, banks tend to increase their willingness to lend.How does this trend influence the actual money multiplier?
The U.S. government produces billions of dollars in banknotes and coins for use in everyday transactions. Explain why issuing currency alone does not represent money creation.
Why are monetary policy lags generally shorter than fiscal policy lags?
For what type of borrowing do the federal funds rate and the discount rate apply?Which rate is used in more transactions in the United States?
What is the most common tool used by the Federal Reserve to conduct monetary policy, and how does it affect interest rates?
How do leakages reduce the money multiplier from its potential?
Why are checking account deposits considered a liability to the bank?
Describe the role required reserves play in determining how much money the banking system creates.
The yield for a perpetuity bond is determined by the simple formula?
Suppose a small country has the following monies in circulation:Cash/currency: $5 million Checkable deposits: $14 million Small-denomination time deposits: $15 million Savings deposits: $20 million Money market deposit accounts: $25 million Calculate the value of M1 and M2 for this country.
In late 2018, SpaceX CEO Gwynne Shotwell announced the company’s goal of sending people to the Moon by 2023 and to Mars within a decade. This announcement was tied to another round of investment funding from which the company hoped to raise $500 million from investors and to borrow $250 million
The rationale is that as people live longer, the benefits being collected exceed the amounts contributed during one’s working years, which is unsustainable. If such a proposal becomes law, how would this affect the incentives to work and save? How would this impact the market for loanable funds?
One of the proposals put forth by economists to address the future expected shortfall in Social Security funding is to raise the minimum age when one can begin collecting benefits from 62 to

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