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dynamic macroeconomics

Macroeconomics A Contemporary Introduction 8th Edition William A. McEachern - Solutions

(Sources of Inflation) Using the concepts of aggregate supply and aggregate demand, explain why inflation usually increases during wartime.
(Inflation) Here are some recent data on the U.S. consumer price index:Year CPI Year CPI Year CPI 1988 118.3 1994 148.2 2000 172.2 1989 124.0 1995 152.4 2001 177.1 1990 130.7 1996 156.9 2002 179.9 1991 136.2 1997 160.5 2003 184.0 1992 140.3 1998 163.0 2004 188.9 1993 144.5 1999 166.6 2005 195.3
(Types of Unemployment) Determine whether each of the following would be considered frictional, structural, seasonal, or cyclical unemployment:a. A UPS employee who was hired for the Christmas season is laid off after Christmas.b. A worker is laid off due to reduced aggregate demand in the
(Measuring Unemployment) Suppose that the U.S.noninstitutional adult population is 230 million and the labor force participation rate is 67 percent.a. What would be the size of the U.S. labor force?b. If 85 million adults are not working, what is the unemployment rate?
(Measuring Unemployment) Determine the impact on each of the following if 2 million formerly unemployed workers decide to return to school full time and stop looking for work:a. The labor force participation rateb. The size of the labor forcec. The unemployment rate
(Inflation) Why do people dislike inflation?
(Inflation) Why is a relatively constant and predictable inflation rate less harmful to an economy than a rate that fluctuates unpredictably?
(Inflation and Interest Rates) Explain as carefully as you can why borrowers would be willing to pay a higher interest rate if they expected the inflation rate to increase in the future.
(Inflation and Relative Price Changes) What does the consumer price index measure? Does the index measure changes in relative prices? Why, or why not?
(Anticipated Versus Unanticipated Inflation) If actual inflation exceeds anticipated inflation, who will lose purchasing power and who will gain?
(Sources of Inflation) What are the two sources of inflation?How would you illustrate them graphically?
(Case Study: Hyperinflation in Brazil) In countries such as Brazil and Russia, which had problems with high inflation, the increased use of another country’s currency(such as the U.S. dollar) became common. Why do you suppose this occurred?
(Official Unemployment Figures) Explain why most experts believe that official U.S. data underestimate the actual rate of unemployment. What factors could make the official rate overstate the actual unemployment rate?
(International Comparisons of Unemployment) How has the U.S. unemployment rate compared with rates in other major economies? Why should we be careful in comparing unemployment rates across countries?
(The Meaning of Full Employment) When the economy is at full employment, is the unemployment rate at 0 percent? Why or why not? How would a more generous unemployment insurance system affect the full employment figure?
(Case Study: High School Dropouts and Labor Market Dropouts) What has been the effect of a rising incarceration rate on labor market connections of young black men?
(Unemployment in Various Groups) Does the overall unemployment rate provide an accurate picture of the impact of unemployment on all U.S. population groups?
(Labor Force) Refer to Exhibit 1 in the chapter to determine whether each of the following statements is true or false.a. Some people who are officially unemployed are not in the labor force.b. Some people in the labor force are not working.c. Everyone who is not unemployed is in the labor force.d.
(Consumer Price Index) Calculate a new consumer price index for the data in Exhibit 4 in this chapter.Assume that current-year prices of Twinkies, fuel oil, and cable TV are $0.95/package, $1.25/gallon, and$15.00/month, respectively. Calculate the current year’s cost of the market basket and the
(Investment) Given the following data, answer questions a through c.Billions of Dollars New residential construction $500 Purchases of existing homes 250 Sales value of newly issued stocks and bonds 600 New physical capital 800 Depreciation 200 Household purchases of new furniture 50 Net change in
(Expenditure Approach to GDP) Given the following annual information about a hypothetical country, answer questions a through d.Billions of Dollars Personal consumption expenditures $200 Personal taxes 50 Exports 30 Depreciation 10 Government purchases 50 Gross private domestic investment 40
(Income Approach to GDP) How does the income approach to measuring GDP differ from the expenditure approach? Explain the meaning of value added and its importance in the income approach. Consider the following data for the selling price at each stage in the production of a 5-pound bag of flour sold
(Case Study: The Price Is Right) Compared to the fixedprice weighting system, how does the chain-weighted system better account for the economic incentives provided by price changes?
(Case Study: Price Check on Aisle 2) What is the hedonic method and why is it sometimes used to track changes in the consumer price index?
(GDP Price Index) The health expenditure component of the GDP price index has been rising steadily. How might this index be biased by quality and substitution effects? Are there any substitutes for health care?
(Consumer Price Index) One form of the CPI that has been advocated by lobbying groups is a “CPI for the elderly.” The Bureau of Labor Statistics currently produces only indexes for “all urban households” and“urban wage earners and clerical workers.” Should the BLS produce such an index
(Price Indexes) DVD players and HDTVs have not been part of the U.S. economy for very long. Both goods have been decreasing in price and improving in quality. What problems does this pose for people responsible for calculating a price index?9. (GDP and Depreciation) What is gross about gross
(Nominal GDP) Which of the following is a necessary condition—something that must occur—for nominal GDP to rise? Explain your answers.a. Actual production must increase.b. The price level must increase.c. Real GDP must increase.d. Both the price level and actual production must increase.e.
(Limitations of National Income Accounting) Explain why each of the following should be taken into account when GDP data are used to compare the “level of well-being” in different countries:a. Population levelsb. The distribution of incomec. The amount of production that takes place outside of
(Investment) In national income accounting, one component of investment is net changes in inventories.Last year’s inventories are subtracted from this year’s inventories to obtain a net change. Explain why net inventory increases are counted as part of GDP. Also, discuss why it is not
(Leakages and Injections) What are the leakages from and injections into the circular flow? How are leakages and injections related in the circular flow?
(National Income Accounting) Explain why intermediate goods and services usually are not included directly in GDP. Are there any circumstances under which they would be included directly?
(National Income Accounting) Define gross domestic product. Determine whether each of the following would be included in the 2007 U.S. gross domestic product:a. Profits earned by Ford Motor Company in 2007 on automobile production in Irelandb. Automobile parts manufactured in the United States in
(National Income Accounting) Identify the component of aggregate expenditure to which each of the following belongs:a. A U.S. resident’s purchase of a new automobile manufactured in Japanb. A household’s purchase of one hour of legal advicec. Construction of a new housed. An increase in
(Shifts in the PPF) Terrorist attacks foster instability and may affect productivity over the short and long term. Do you think the September 11, 2001, terrorist attacks on the World Trade Center and the Pentagon affected short- or long-term productivity in the United States? Explain your response
(Technological Change and Unemployment) What are some examples, other than those given in the chapter, of technological change that has caused unemployment?And what are some examples of new technologies that have created jobs? How do you think you might measure the net impact of technological
(Long-Term Productivity Growth) Suppose that two nations start out in 2007 with identical levels of output per work hour—say, $100 per hour. In the first nation, labor productivity grows by 1 percent per year. In the second, it grows by 2 percent per year.Use a calculator or a spreadsheet to
(Growth and the PPF) Use the production possibilities frontier (PPF) to demonstrate economic growth.a. With consumption goods on one axis and capital goods on the other, show how the combination of goods selected this period affects the PPF in the next period.b. Extend this comparison by choosing a
(Case Study: The Pursuit of Happiness) How would you explain the finding that people in high-income economies seem happier than people in low-income economies, but, over time, people in high income economies do not seem to become happier even though their country grows richer?
(Productivity) What factors might contribute to a low level of productivity in an economy? Regardless of the level of labor productivity, what impact does slow growth in labor productivity have on the economy’s standard of living?
(Convergence) Explain the convergence theory. Under what circumstances is convergence unlikely to occur?
(Technological Change and Unemployment) Explain how technological change can lead to unemployment in certain industries. How can it increase employment?
(Industrial Policy) Define industrial policy. What are some arguments in favor of industrial policy?
(International Productivity Comparisons) How does output per capita in the United States compare with output per capita in other major industrial economies?How has this comparison changed over time?
(Case Study: Computers and Productivity Growth)How has the increased use of computers affected U.S.productivity in recent years? Is the contribution of computers expected to increase or decrease in the near future? Explain.
(Rules of the Game) How do “rules of the game” affect productivity and growth? What types of “rules”should a government set to encourage growth?
(Basic and Applied Research) What is the difference between basic research and applied research? Relate this to the human genome project—research aimed at developing a complete map of human chromosomes, showing the location of every gene.
(Technology and Productivity) What measures can government take to promote the development of practical technologies?
(Output per Capita) Explain how output per capita can grow faster than labor productivity. Is it possible for labor productivity to grow faster than output per capita?
(Slowdown in Labor Productivity Growth) What slowed rate of growth in labor productivity during the 1974–1982 period?
(Labor Productivity) What two kinds of changes in the capital stock can improve labor productivity?How can each type be illustrated with a per-worker production function? What determines the slope of the per-worker production function?
(Productivity) As discussed in the text, per capita GDP in many developing countries depends on the fertility of land there. However, many richer economies have little land or land of poor quality. How can a country with little land or unproductive land become rich?
(Supply-Side Economics) One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended.What might happen if such a tax cut also shifted the aggregate demand curve?
(Aggregate Demand and Supply) Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?a. The
(Aggregate Demand and Supply) Review the information on demand and supply curves in Chapter 4. How do the aggregate demand and aggregate supply curves presented in this chapter differ from the market curves of Chapter 4?
(Case Study: Nearly Eight Decades of Real GDP and Price Levels) The price level grew slightly faster than real GDP between 1947 and 2006. Does this mean that the rising price level masked an actual decline in output? Why or why not?
(Stagflation) What were some of the causes of the stagflations of 1973 and 1979? In what ways were these episodes of stagflation different from the Great Depression of the 1930s?
(Demand-Side Economics) What is the relationship between demand-side economics and the federal budget deficit?
(Aggregate Demand Curve) Describe the relationship illustrated by the aggregate demand curve. Why does this relationship exist?
(Aggregate Demand and Aggregate Supply) Is it possible for the price level to fall while production and employment both rise? If it is possible, how could this happen? If it is not possible, explain why not.
(Aggregate Demand and Aggregate Supply) Why does a decrease of the aggregate demand curve result in less employment, given an aggregate supply curve?
(Leading Economic Indicators) Define leading economic indicators and give some examples. You may wish to take a look at the Conference Board’s index of leading economic indictors at http://www.conferenceboard.org/economics/indicators.cfm.
(Case Study: The Global Economy) How are economic fluctuations linked among national economies? Could a recession in the United States trigger a recession abroad?
(Economic Fluctuations) Why doesn’t the National Bureau of Economic Research identify the turning points in economic activity until months after they occur?
(Economic Fluctuations) Describe the various components of fluctuations in economic activity over time.Because economic activity fluctuates, how is longterm growth possible?
(Stocks and Flows) Differentiate between stock and flow variables. Give an example of each.
(The Human Body and the U.S. Economy) Based on your own experiences, extend the list of analogies between the human body and the economy as outlined in this chapter. Then, determine which variables in your list are stocks and which are flows.
(The National Economy) Why do economists pay more attention to national economies (for example, the U.S. or Canadian economies) than to state or provincial economies (such as California or Ontario)?
(Case Study: Rent Ceilings in New York City) Suppose the demand and supply curves for rental housing units have the typical shapes and that the rental housing market is in equilibrium. Then, government establishes a rent ceiling below the equilibrium level.a. What happens to the quantity of housing
(Equilibrium) Consider the following graph in which demand and supply are initially D and S, respectively.What are the equilibrium price and quantity? If demandincreases to D', what are the new equilibrium price and quantity? What happens if the government does not allow the price to change when
(Equilibrium) Assume the market for corn is depicted as in the table that appears below.a. Complete the table below.b. What market pressure occurs when quantity demanded exceeds quantity supplied? Explain.c. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain.d.
(Case Study: The Market for Professional Basketball) In what sense can we speak of a market for professional basketball? Who are the demanders and who are the suppliers? What are some examples of how changes in supply or demand conditions have affected this market?
(Markets) How do markets coordinate the independent decisions of buyers and sellers?
(Supply) If a severe frost destroys some of Florida’s citrus crop, would this lead to a shift of the supply curve or a movement along the supply curve?
(Changes in Supply) What kinds of changes in underlying conditions can cause the supply curve to shift?Give some examples and explain the direction in which the curve shifts.
(Demand) If chocolate is found to have positive health benefits, would this lead to a shift of the demand curve or a movement along the demand curve?
(Income Effects) When moving along the demand curve, income must be assumed constant. Yet one factor that can cause a change in the quantity demanded is the “income effect.” Reconcile these seemingly contradictory facts.
(Demand) Explain the effect of an increase in consumer income on the demand for a good.
(Substitution and Income Effects) Distinguish between the substitution effect and income effect of a price change.If a good’s price increases, does each effect have a positive or a negative impact on the quantity demanded?
(Changes in Demand) What variables influence the demand for a normal good? Explain why a reduction in the price of a normal good does not increase the demand for that good.
(Law of Demand) What is the law of demand? Give two examples of how you have observed the law of demand at work in the “real world.” How is the law of demand related to the demand curve?
(Tax Rates) Suppose taxes are related to income level as follows:Income Taxes$1,000 $200$2,000 $350$3,000 $450a. What percentage of income is paid in taxes at each level?b. Is the tax rate progressive, proportional, or regressive?c. What is the marginal tax rate on the first $1,000 of income? The
(Government) Complete each of the following sentences:a. When the private operation of a market leads to overproduction or underproduction of some good, this is known as a(n) ________.b. Goods that are nonrival and nonexclusive are known as __________.c. ________ are cash or in-kind benefits given
(Household Production) Many households supplement their food budget by cultivating small vegetable gardens. Explain how each of the following might influence this kind of household production:a. Both husband and wife are professionals who earn high salaries.b. The household is located in a city
(Evolution of the Household) Determine whether each of the following would increase or decrease the opportunity costs for mothers who choose not to work outside the home. Explain your answers.a. Higher levels of education for womenb. Higher unemployment rates for womenc. Higher average pay levels
(Government) Often it is said that government is necessary when private markets fail to work effectively and fairly. Based on your reading of the text, discuss how private markets might break down.
(Case Study: User-Generated Products) Why are users willing to help create certain products even though few, if any, users are paid for their efforts?
(Household Production) What factors does a householder consider when deciding whether to produce a good or service at home or buy it in the marketplace?
(Case Study: The Electronic Cottage) How has the development of personal computer hardware and software reversed some of the trends brought on by the Industrial Revolution?
(Households as Demanders of Goods and Services)Classify each of the following as a durable good, a nondurable good, or a service:a. A gallon of milkb. A lawn mowerc. A DVD playerd. A manicuree. A pair of shoesf. An eye exam g. A personal computer h. A neighborhood teenager mowing a lawn
(Economic Systems) The United States is best described as having a mixed economy. What are some elements of command in the U.S. economy? What are some elements of tradition?
(Case Study: Rules of the Game and Economic Development)Why is the standard of living higher in countries where doing business is easier? Why do govenments collect any taxes or impose any regulations at all?
(Shifting Production Possibilities) Determine whether each of the following would cause the economy’s PPF to shift inward, outward, or not at all:a. An increase in average length of annual vacationsb. An increase in immigrationc. A decrease in the average retirement aged. The migration of skilled
(Opportunity Cost) You can either spend spring break working at home for $80 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about$700. What’s your
(Case Study: The Opportunity Cost of College) During the Vietnam War, colleges and universities were overflowing with students. Was this bumper crop of students caused by a greater expected return on a college education or by a change in the opportunity cost of attending college? Explain.
(Economic Systems) What are the major differences between a pure capitalist system and a pure command system? Is the United States closer to a pure capitalist system or to a pure command system?
(Economic Questions) What basic economic questions must be answered in a barter economy? In a primitive economy? In a capitalist economy? In a command economy?
(Production Possibilities) “If society decides to use its resources efficiently (that is, to produce on its production possibilities frontier), then future generations will be worse off because they will not be able to use these resources.” If this assertion is true, full employment of
(Shifting Production Possibilities) In response to an influx of undocumented workers, Congress made it a federal offense to hire them. How do you think this measure affected the U.S. production possibilities frontier?Do you think all industries were affected equally?
(Production Possibilities) Under what conditions would an economy be operating inside its PPF? On its PPF? Outside its PPF?

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