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dynamic macroeconomics
Macroeconomics Principles For A Changing World 5th Edition Eric Chiang - Solutions
If the stock market and bond market are substitutes for one another, what is expected to happen to bond prices if the stock market increases sharply and investors move more money from bonds into stocks? If this occurs, what will happen to interest rates on bonds?
Why would it be better to put $1,000 each year into a retirement account than to wait ten years and put in $10,000 all at once? Would it make much of a difference in the long run?
Most individuals with average wealth choose to save their money using a financial intermediary such as a bank or a mutual fund. However, individuals with greater wealth are more likely to invest in individual stocks or directly in new or existing businesses. Explain why persons of different wealth
During an economic expansion when businesses are increasing their investment spending and individuals are more willing to increase their consumption, what happens to the demand and supply of loanable funds? What is the effect on real interest rates?
At many game centers (such as Dave & Buster’s), it is common for kids to play carnival-type games to win prize tickets, which are then redeemed for a variety of prizes based on the number of tickets earned. In what ways do these prize tickets illustrate the three functions of money?
List the following assets from most liquid to least liquid: a house (real estate);cash; a one-carat diamond; savings account deposits; 100 shares of Google stock;a Harley-Davidson motorcycle; a checking account; your old leather jacket.
What are some similarities and differences between cryptocurrency and U.S.dollars that are stored on a popular phone app?
What happens to savings if the real interest rate goes up? What happens to the demand for borrowing?
What gives money value if there is no gold or silver backing the currency?
What is the difference between a pension plan and a defined-contribution plan, such as a 401(k) account?
What is a barter economy? Explain why such an approach is difficult for a modern economy.
Describe the three functions of money.
Suppose an economy has a GDP of $40 billion and a national debt of $20 billion, and the average interest rate on this debt is currently 3%.
Suppose a small economy has two income tax rates: 15% for all income up to$50,000 and 30% for any income earned above $50,000. Suppose that prior to the recession, the economy had five workers earning the following salaries:
Several years ago, Italy and Spain began to include the estimated output of informal activities (such as the drug trade, prostitution, and other illicit activities)as part of its GDP without actually legalizing these activities. If these activities remain illegal and the government does not collect
From 2016 to 2019, interest rates on 30-year Treasury bonds rose from around 2.1% to 3.4%. What are the long-term implications of this change in financing the national debt and in managing the annual federal budget?
Suppose the economy (gross domestic product) is growing faster than the growth of the national debt held by the public (both domestic and foreign). How does this affect the ability of the government to manage the national debt? What arguments can you make to rebut the common assertion that the
A balanced budget amendment to the Constitution requiring Congress to balance the budget every year is introduced in Congress every so often. What sort of problems would the passage of such an amendment introduce for policymakers and the economy? What would be the benefit of the passage of such an
In a speech before the Economic Club of New York in 1962, President Kennedy argued that “it is a paradoxical truth that taxes are too high today and tax revenues are too low—and the soundest way to raise revenues in the long run is to cut rates now.” Is President Kennedy’s argument
Our current personal income tax system is progressive: Income tax rates rise with rising incomes and are lower for low-income individuals. Some policymakers favor a “flat tax” as a replacement for our modestly progressive income tax system. Most exemptions and deductions would be eliminated,
What are some major reasons why mandatory spending in the United States is increasing as a share of the federal budget?
One argument against using fiscal policies to smooth fluctuations in the business cycle is that their long lags may end up causing more harm than good. Provide an example that would support this argument and one that would not.
What factors determine whether the national debt is a cause for immediate concern?
How might interest paid on the national debt lead to greater income inequality?
What is one benefit to businesses when the government budget is in surplus?
Explain why changes in tax rates affect both aggregate demand and aggregate supply.
Explain why increasing government purchases of goods and services is expansionary fiscal policy. Would increasing taxes or reducing transfer payments be contractionary or expansionary? Why?
What is the main difference between discretionary spending and mandatory spending?
Use the following table and grid to answer the following questions.
In the following figure, the economy is initially in equilibrium at full employment at pointe. Assume that consumption falls by 100, leading to a shift in aggregate demand from AD0 to AD1.
In 2018 the United States and China entered into a trade dispute that led both countries to impose import tariffs on each other’s goods. Economists have concluded that the tariffs contributed to slower economic growth for both countries, though the effects were greater in China. Using aggregate
The U.S. economy has significantly expanded since recovering from the severe effects of the 2007–2009 recession. In 2019 the unemployment rate was under 4%, below the natural rate of unemployment. Given that the economy was at or beyond full employment, describe the effects of the multiplier when
Some advocates have suggested that the United States should move to a universal health care plan paid for at the federal level, like Medicare, which would be funded out of general tax revenues. Such a plan, it is argued, would guarantee quality health care to all. Ignoring all the controversy
As the Japanese yen appreciated in value during the 1980s and 1990s, more Japanese auto companies built manufacturing plants in other parts of Asia and in the United States. What impact did this have on net exports for the United States?Why did Japanese automakers build plants in the United States?
Why is consumer confidence very important in determining the equilibrium level of output and employment?
Why is cost-push inflation a more difficult problem for policymakers than demand-pull inflation?
Unemployment can be caused by a reduction in aggregate demand or short-run aggregate supply. Both changes are represented by a leftward shift of the curves.Does it matter whether the shift occurs in aggregate demand or short-run aggregate supply? Use the aggregate demand/aggregate supply framework
There is little doubt that artificial intelligence and automation have changed the economy. Machines are performing manual tasks at a faster and more consistent pace and are becoming better at replacing humans, even in service-oriented jobs, such as customer support. Show the impact of these
Provide and explain some factors that will shift the long-run aggregate supply curve.
Explain how imports and exports affect aggregate demand.
Explain why the aggregate supply curve is positively sloped during the short run and vertical in the long run.
Why is a supply shock (such as sudden rising prices for energy, food, or raw materials), doubly disruptive and harmful to the economy?
When the economy is operating at full employment, why is an increase in aggregate demand not helpful to the economy?
Describe the impact of rising interest rates on consumer spending.
Using the following aggregate expenditures table, answer the questions that follow. Income (Y), in $ Consumption (C), in $ Saving (S), in $ 2,200 2,320 -120 2,300 2,380 -80 2,400 2,440 -40 2,500 2,500 0 2,600 2,560 40
A proposal that has significant support among policymakers regardless of political party is the need to modernize the nation’s infrastructure, such as reinforcing thousands of bridges deemed structurally deficient and modernizing airports. Explain why such policies might not be as effective when
The U.S. tax cuts that went into effect in 2018 reduced the corporate tax rate and individual income tax rates. Tax analysts have determined that while most American taxpayers benefit from the policy, a large portion of the tax cuts is aimed at higher-income households. Explain how the effects of
In modern politics, the word “Keynesian” often is synonymous with “big government” spending. Does this characterization accurately reflect the role of government in spurring economic activity? How would a tax cut be characterized today versus in Keynes’s time?
How does the economy today differ from that during the Great Depression, the economy Keynes used as the basis for the macroeconomic model discussed in this chapter?
How would a country correct an inflationary gap using changes in government spending? How would it address a recessionary gap?
The simple aggregate expenditures model argues that one form of spending is just as good as any other; increases in any type of spending lead to equal increases in income. However, is there any reason to suspect that private investment might be better for the economy than government spending?
Other than reductions in interest rates that increase the level of investment by businesses, what factors would result in higher investment?
If the economy has an MPC equal to 0.80 and is currently $800 million below its full employment income, will a $150 million increase in investment spending bring the economy to its macroeconomic equilibrium, all else equal?
Explain how injections and withdrawals into an economy affect its income and output.
Explain why a $100 reduction in taxes does not have the same impact on output and employment as a $100 increase in government spending.
What does the paradox of thrift suggest would happen to output, income, and long-run savings if people increased their MPS in preparation for a recession?
If an economy’s spending multiplier is equal to 4, what is its MPC and MPS?
What are the factors that cause consumption to change at any given level of income?
Describe the important difference between the average propensity to consume(APC) and the marginal propensity to consume (MPC).
Suppose a new colony is created on the moon with the following production function: Output = A × (L + K + H + N). If L, K, H, and N each equal 5 and technology (A) equals 3, how much output would this new colony produce?
In 2018, U.S. GDP was approximately $20 trillion, while India’s GDP was approximately $2.5 trillion. However, India is growing faster than the United States.
Finland consistently ranks very high in global rankings of educational achievement in science and math. This was a result of a transformation in Finland’s public education system to one that focuses on small class sizes and highly trained teachers for primary and secondary education, which is
In 2016, the United Kingdom voted to leave the European Union in a decision referred to as Brexit. By doing so, policies such as the open movement of capital and labor along with free trade may be restricted. Subsequently, the United Kingdom’s growth rate slowed. What are some reasons why Brexit
When government policymakers debate how to manage a tight budget, they often choose to cut lofty programs such as space exploration, supersonic flights, and reforming the air traffic control system. How might this lead to a tradeoff between short-run and long-run growth?
Energy independence has been a goal for many decades. But only in the past decade has the increased focus on renewable energy sources, such as solar, wind, and water, taken on greater significance. How does achieving energy independence contribute to labor productivity and economic growth?
Per capita income (or output) is the general measure used to compare the standards of living between countries. If a country’s population growth is higher than its economic growth, what happens to per capita income? What are some of the limitations to using per capita income as a measure to
Higher levels of savings and investment lead to greater rates of economic growth.What can government do to encourage more savings and investment?
What role might foreign investment play in helping developing nations improve their growth rates and increase income levels?
If developing countries such as Vietnam and Ethiopia have growth rates more than double that of the United States or countries in Europe, why do they remain considerably poorer?
Why is a stable financial system crucial for economic growth
Why is investment in human capital good for both individuals and fostering economic growth for the economy as a whole?
In what ways do governments help to build technology and ideas?
What are some ways in which countries can improve labor productivity?
If a country’s GDP grows by 10% per year, why isn’t the number of years it takes to double the GDP simply 100%/10% = 10 years?
Although having abundant natural resources can be an advantage for a country, are they necessary to ensure economic growth and a prosperous economy?
The town of Villageton has 500 residents, of which 300 are employed, 30 are not working but actively seeking work, 80 are children in school, 40 are retirees, 30 are full-time college students, and 20 are institutionalized.
Suppose the country of Snowland uses the following market basket of goods to determine its consumer price index, with Year 1 being the base year with a CPI of 100.Nominal GDP is also provided Market Basket Items Year 1 Year 2 Year 3 Year 4 Loaf of bread $2.50 $2.80 $3.00 $3.10 Movie ticket $8.00
Many hotel chains are automating the check-in process by allowing guests to use their phones to download a scannable code that can be used to unlock their rooms, allowing one to bypass the front desk altogether upon arrival. How will this technological change affect employment in the hotel
A debate that regularly occurs in Congress concerns raising the debt ceiling, allowing the U.S. government to continue paying its obligations. A few years ago, one politician proposed that instead of raising the debt ceiling, the U.S. Treasury should just mint a trillion-dollar coin and use it to
In the beginning of a recovery after a recession, employment begins to rise, and the news media report these data on job growth. What effect would such a report have on the labor market? How would the report affect the unemployment rate?
The Bureau of Labor Statistics categorizes unemployed people into several groups, including job leavers, job losers, and discouraged workers. During a mild recession, which group would tend to increase the most? During a deep recession? During an economic expansion?
Assume you just lost your job and have decided to take a monthlong break to travel to Europe before looking for a new position. Just as you return home from your trip, you are interviewed by the Census Bureau about your employment status. How would you be classified (employed, unemployed, or not in
Suppose Mexico’s population grew by 10% over the past two decades due to increased immigration from Central America while Costa Rica’s population grew by 10% over the same period primarily due to rising life expectancy. Would the population growth have the same effect on the labor force and
Suppose you work hard at a job after graduation and after your first year, your effort is rewarded with a 3% raise when the average wage increase in your company is 2%.Then, the government releases its inflation report, which states that inflation is running at 5%. Given this information, did your
If you believe that inflation is going to increase significantly over the next few years and you are planning to purchase a new car, would it be advantageous to purchase the car now with a low fixed-interest-rate loan or wait a few years and purchase the car with your savings? Explain.
Describe the three types of unemployment. What types of government programs would be most effective in combating each type?
Why do teenagers and young people have high unemployment rates?
What is required for a person to be considered unemployed? How is the unemployment rate computed?
Why is the inflation rate a positive number when prices of certain goods, such as computers and televisions, fall dramatically due to technological advancement?
Who loses from unanticipated inflation? Who benefits?
Describe the three common indices used to measure inflation and the focus of each.
Calculate the value of national income. Which category (categories) is (are)not included in national income, but are included in the calculation of GDP using the income approach?
Compute the GDP using both expenditures and income approaches. What factor explains the difference between these measures?
Indicate whether each component is part of the expenditures approach to calculating GDP (put an “E” next to the component) or the income approach to calculating GDP (put an “I” next to the component).
Use the following list of GDP components and data (given in millions of $U.S.)to answer the following questions. Corporate profits 1,300 Gross private domestic investment 2,800 Consumption of nondurable goods 3,100 Exports 1,400 Proprietors' income 1,000 700 Taxes on production and imports Net
Ignoring net exports, which component has grown the fastest as a percent of GDP since 1965?
Which category has been the most volatile in terms of changes in the percent of GDP?
Which category (or categories) has increased as a percent of GDP from 1965 to 2015? Which category (or categories) has decreased? And which category(or categories) has not changed much from 1965 to 2015?
The following table lists gross domestic product (GDP), consumption (C), gross private domestic investment (I), government spending (G), and net exports(X − M ). Compute each as a percent of GDP for the six years presented.
According to the CIA’s World Factbook, in 2018 the tiny country of Equatorial Guinea had the highest GDP per capita in Africa (over $30,000 per year), even higher than more developed countries, such as Morocco, Egypt, or South Africa.But despite the significant overall income from the sale of its
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