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dynamic macroeconomics

Macroeconomics 4th Edition Glenn Hubbard, Anthony O'Brien - Solutions

The following table shows for Greece and Italy the hourly output per worker measured as quarts of olive oil and pounds of pasta:Calculate the opportunity cost of producing olive oil and pasta in both Greece and in Italy. Greece Italy Output per Hour of Work Olive Oil Pasta 4 2 4 8
Briefly explain whether you agree with the following argument:“Unfortunately, Bolivia does not have a comparative advantage with respect to the United States in the production of any good or service.” (Hint: You do not need any specific information about the economies of Bolivia or the United
In a newspaper column, Frank Wolak, a professor of economics at Stanford, referred to “the economic forces that lead to most children’s toys being developed in the United States and mass-produced in China and other developing countries.” What economic forces is he referring to? If a U.S.
Why do the goods that countries import and export change over time? Use the concept of comparative advantage in your answer.
A WTO publication calls comparative advantage “arguably the single most powerful insight in economics.” What is comparative advantage? What makes it such a powerful insight?
What is the difference between absolute advantage and comparative advantage? Will a country always be an exporter of a good where it has an absolute advantage in production? Briefly explain.
[Related to the Making the Connection on page 208]Douglas Irwin, a professor of economics at Dartmouth College, wrote the following in a column in the New York Times:General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win
Why might a smaller country, such as the Netherlands, be more likely to import and export larger fractions of its GDP than would a larger country, such as China or the United States?
Briefly explain whether you agree with the following statement:“Japan has always been much more heavily involved in international trade than are most other nations. In fact, today Japan exports a larger fraction of its GDP than Germany, Great Britain, or the United States.”
If the United States were to stop trading goods and services with other countries, which U.S. industries would be likely to see their sales decline the most? Briefly explain.
Briefly explain whether you agree with the following statement:“International trade is more important to the U.S.economy than to most other economies.”
Are imports and exports a smaller or larger fraction of GDP than they were 40 years ago?
Briefly explain whether the value of U.S. exports is typically larger or smaller than the value of U.S. imports.
The current ratio is equal to a firm’s current assets divided by its current liabilities. Use the information in Figure 6A.2 on page 201 to calculate Google’s current ratio on December 31, 2010. Investors generally prefer that a firm’s current ratio be greater than 1.5. What problems might a
Use the information in the following table on the financial situation of Starbucks Corporation as of October 3, 2010, to prepare a balance sheet for the firm. Be sure to include an entry for stockholders’ equity. Current assets $2,756 million Current liabilities 1,779 million Property and
Use the information in the following table for calendar year 2010 to prepare an income statement for McDonald’s Corporation’s. Be sure to include entries for operating income and net income. Revenue from company restaurants $16,233 million Revenue from franchised restaurants 7,841 million Cost
Suppose you buy the bond of a large corporation at a time when the inflation rate is very low. If the inflation rate increases during the time you hold the bond, what is likely to happen to the price of the bond?
Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 2 percent per year, and the interest rate is 10 percent. What is the most you would be willing to pay for a share of stock in eLake? If the interest rate is 5 percent, what is the most
[Related to Solved Problem 6A.1 on page 197]Before the start of the 2000 baseball season, the New York Mets decided they didn’t want Bobby Bonilla playing for them any longer. But Bonilla had a contract with the Mets for the 2000 season that would have obliged the Mets to pay him $5.9 million.
[Related to Solved Problem 6A.1 on page 197]A winner of the Pennsylvania Lottery was given the choice of receiving $18 million at once or $1,440,000 per year for 25 years.a. If the winner had opted for the 25 annual payments, how much in total would she have received?b. At an interest rate of 10
[Related to Solved Problem 6A.1 on page 197]Before the 2008 season, the New York Yankees signed second baseman Robinson Cano to a contract that would pay him the following amounts: $3 million for the 2008 season, $6 million for the 2009 season, $9 million for the 2010 season, and $10 million for
[Related to Solved Problem 6A.1 on page 197]If the interest rate is 10 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now?
What is the key difference between a firm’s income statement and its balance sheet? What is listed on the left side of a balance sheet? What is listed on the right side?
Compare the formula for calculating the present value of the payments you will receive from owning a bond to the formula for calculating the present value of the payments you will receive from owning a stock. What are the key similarities? What are the key differences?
Give the formula for calculating the present value of a bond that will pay a coupon of $100 per year for 10 years and that has a face value of $1,000.
Why is money you receive at some future date worth less to you than money you receive today? If the interest rate rises, what effect does this have on the present value of payments you receive in the future?
[Related to the Making the Connection on page 185]According to an article in the Wall Street Journal,“Currently, companies can issue shares privately without incurring onerous reporting obligations if they have fewer than 500 shareholders. The SEC is considering raising that limit, though it’s
According to a survey in 2007, 78 percent of corporate executives responding believed that the costs of complying with the Sarbanes-Oxley Act outweighed the benefits.The total costs of compliance were about $2.92 million per company. Is it possible to put a dollar value on the benefits of complying
An article in BusinessWeek stated that the Allstate Corporation, a large insurance company, would begin to require a simple majority vote of shareholders, rather than a two-thirds majority vote, to elect members to its board of directors and to remove directors in between annual meetings when
The following is from an article in USA Today:In what some call a worldwide corporategovernance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries and negotiating behind the scenes with businesses.What is corporate governance?
The board of directors of Advanced Micro Devices, Inc., issued guidelines on company stock ownership by executive officers and members of the board of directors, effective February 7, 2008. This statement details the number of required common stock shares of Advanced Micro Devices that should be
The Securities and Exchange Commission requires that every firm that wishes to issue stocks and bonds to the public make available its balance sheet and income statement.Briefly explain how information useful to investors can be found in these financial statements.
Dane decides to give up a job earning $100,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $20,000 a year.) His direct expenses include $50,000 per year paid to his assistants and $10,000 per year for utilities.Fans
Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo must buy his own pizza ovens. Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo
Paolo currently has $100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the $100,000 to start his restaurant or borrowing the $100,000 from a bank, which would charge him an annual interest
Would a business be expected to survive in the long run if it earned a positive accounting profit but a negative economic profit? Explain.
What is the difference between a firm’s balance sheet and a firm’s income statement?
What is the difference between a firm’s assets and its liabilities?Give an example of an asset and an example of a liability.
[Related to the Making the Connection on page 180] The following table shows information from August 26, 2011, about the stock price of Starbucks Corporation:a. How much did the price of Starbucks stock go up or down from the day before?b. Did the Starbucks stock price vary much during the day’s
[Related to the Making the Connection on page 180]Loans from banks are the most important external source of funds to businesses because most businesses are too small to borrow in financial markets by issuing stocks or bonds. Most investors are reluctant to buy the stocks or bonds of small
[Related to the Don’t Let This Happen to You on page 178]Briefly explain whether you agree or disagree with the following statement: “The total value of the shares of Microsoft stock traded on the NASDAQ last week was$250 million, so the firm actually received more revenue from stock sales than
The following appeared in an article in the Wall Street Journal about the bond market in high-income (or “developed”)countries (that is, the United States and countries in Europe) and the emerging-market countries (that is, Latin American and Asian countries):“In the developed markets, it’s
The French government issues bonds with 50-year maturities.Would such bonds be purchased only by very young investors who expect to still be alive when the bond matures?Briefly explain.
What effect would the following events be likely to have on the price of Google’s stock?a. A competitor launches a search engine that’s just as good as Google’s.b. The corporate income tax is abolished.c. Google’s board of directors becomes dominated by close friends and relatives of its
[Related to the Making the Connection on page 176] The following is from an article in the Wall Street Journal:Moody’s Investors Service. . . . said it was cutting Japan’s government bond rating to Aa3 from Aa2, citing “large budget deficits and the build-up in Japanese government debt since
[Related to the Chapter Opener on page 169] The owners of Facebook have had several opportunities to sell the company to larger firms or to make the firm a public corporation by selling stock. In 2009, the value of Facebook was estimated to be somewhere between $2 billion and$5 billion. So, selling
If you deposit $20,000 in a savings account at a bank, you might earn 1 percent interest per year. Someone who borrows$20,000 from a bank to buy a new car might have to pay an interest rate of 6 percent per year on the loan.Knowing this, why don’t you just lend your money directly to the car
Suppose you originally invested in a firm when it was small and unprofitable. Now the firm has grown to be large and profitable. Would you be better off if you had bought the firm’s stock or the firm’s bonds? Explain.
Suppose that a firm in which you have invested is losing money. Would you rather own the firm’s stock or the firm’s bonds? Explain.
What is the difference between direct finance and indirect finance? If you borrow money from a bank to buy a new car, are you using direct finance or indirect finance?
An article in BusinessWeek states that members of boards of directors believe that, in general, the compensation of CEOs is too high. However, most board members believe that the compensation of the CEO of their firm is appropriate.The article concludes: “Given this and that they work for the
[Related to Solved Problem 6.2 on page 174] The members of many corporate boards of directors have to be reelected by the firm’s stockholders every year. Some corporations, though, have staggered elections for their boards of directors, with only one-half or one-third of the members being up for
[Related to Solved Problem 6.2 on page 174] Briefly explain whether you agree with the following argument:“The separation of ownership from control in large corporations and the principal–agent problem mean that top managers can work short days, take long vacations, and otherwise slack off.”
Sales personnel, whether selling life insurance, automobiles, or magazine subscriptions, typically get paid on commission instead of a straight hourly wage. How does paying a commission help solve the principal–agent problem between the owner of a business and the sales force?
The principal–agent problem in a public corporation between ownership and top management results from asymmetric information. What information, if known, would prevent this principal–agent problem?
The principal–agent problem arises almost everywhere in the business world, and it also crops up even closer to home. Discuss the principal–agent problem that exists in the college classroom. Who is the principal? Who is the agent? What potential conflicts in objectives are there between this
Why is it important for a board of directors to have outside directors, as opposed to only inside directors?
What does it mean to say that there is a separation of ownership from control in large corporations?
[Related to the Making the Connection on page 172]Why might large existing firms be more likely to focus on improving existing goods and services than on introducing new ones? Why might small new firms take the opposite approach?
According to an article in the Economist magazine, historian David Faure has argued that the Chinese economy failed to grow rapidly during the nineteenth century because“family-run companies . . . could not raise sufficient capital to exploit the large-scale opportunities tied to the rise of the
Evaluate the following argument:I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy $10,000 of General Electric stock, and the company ends up going bankrupt. Because as a stockholder I’m part owner of the company, I
How would the establishment of limited liability for the owners of corporations affect the production possibilities frontier of a country over time?
Suppose that shortly after graduating from college, you decide to start your own business. Will you be likely to organize the business as a sole proprietorship, a partnership, or a corporation? Explain your reasoning.
[Related to the Making the Connection on page 159]How are the state insurance exchanges with the Small Business Health Option Program (SHOP) intended to help small businesses with their problem of limited risk pooling when buying health insurance for their employees?What is the adverse selection
[Related to the Chapter Opener on page 137] Why do small firms face more of a problem with risk pooling when buying insurance than do large firms?
[Related to the Making the Connection on page 157]How can providers of some medical services charge hundreds or thousands of dollars more than competitors and remain in business? Why don’t patients go to the providers that charge the lower price for the same medical service?
Nobel Laureate Robert Fogel of the University of Chicago has argued, “Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.”a. If Fogel is correct, should policymakers be concerned by
Ross Douthat, a political columnist, offers the following observations about the Medicare program:Certainly telling seniors to buy all their own health care is a complete political (and ethical)non-starter. But telling seniors to pay for more of their own health care—well, it’s hard to see how
Some economists and policymakers have argued that one way to control federal government spending on Medicare is to have a board of experts decide whether new medical technologies are worth their higher costs. If the board decides that they are not worth the costs, Medicare would not pay for them.
Figure 5.7 on page 155 shows that the Congressional Budget Office forecasts that only about 10 percent of the PPACA-related increase in spending on Medicare as a percentage of GDP will be due to the aging of the population.What factors explain the other 90 percent of the increase?
What arguments do economists and policymakers who believe that market-based reforms are the key to improving the health care system make in criticizing the PPACA?
What arguments do economists and policymakers who believe that the federal government should have a larger role in the health care system make in criticizing the PPACA?
In the United States, what has been the trend in health care spending as a percentage of GDP? Compare the increases in health care spending per person in the United States with the increases in health care spending per person in other high-income countries. What implications do current trends in
What is the Patient Protection and Affordable Care Act(PPACA)? Briefly list its major provisions.
[Related to the Making the Connection on page 150]Explain whether you agree with the following statement:Providing health care is obviously a public good.If one person becomes ill and doesn’t receive treatment, that person may infect many other people. If many people become ill, then the output
[Related to the Making the Connection on page 150]Is health care a public good? Briefly explain. Why does the government directly provide health care in some countries, such as the United Kingdom, but not in others?
An article in the Economist magazine contains the following description of the “classic adverse selection spiral”: “because[health insurance] premiums go higher, healthy people become even less likely to buy insurance, which drives premiums higher yet, and so on until the whole thing winks
[Related to Solved Problem 5.3 on page 149] An article in the Economist magazine argues that the real problem with health insurance is:The healthy people who decide not to buy insurance out of rational self-interest, and who turn out to be right. By not buying insurance, those (largely young)
A newspaper editorial observes:Doctors complain that high malpractice awards drive up their insurance premiums and that they are forced to practice “defensive medicine,”ordering unnecessary tests and procedures to protect themselves from possible lawsuits.Is there another economic explanation
[Related to the Don’t Let This Happen to You on page 148]Briefly explain whether you agree with the following statement:“The reluctance of healthy young adults to buy medical insurance creates a moral hazard problem for insurance companies.”
Under the Social Security retirement system, the federal government collects a tax on most people’s wage income and makes payments to retired workers above a certain age who are covered by the system. (The age to receive full Social Security retirement benefits varies based on the year the worker
Michael Kinsley, a political columnist, observes, “The idea of insurance is to share the risks of bad outcomes.” In what sense does insurance involve sharing risks? How does the problem of adverse selection affect the ability of insurance to provide the benefit of sharing risk?From Michael
What is the “lemons problem”? Is there a lemons problem with health insurance? Briefly explain.
Suppose you see a 2006 Volkswagen Jetta GLS Turbo Sedan advertised in the campus newspaper for $10,000. If you knew the car was reliable, you would be willing to pay $12,000 for it. If you knew the car was unreliable, you would only be willing to pay $8,000 for it. Under what circumstances should
Two health care analysts argue that in the United States,“we have arrived at a moment where we are making little headway in defeating various kinds of diseases. Instead, our main achievements today consist of devising ways to marginally extend the lives of the very sick.”a. Should “marginally
Why do comparisons in health care outcomes across countries often concentrate on measures such as life expectancy and infant mortality? Are there other measures of the quality of health care systems? Briefly explain.
If health care is a normal good, would we expect that spending on health care would increase or decrease over time? Briefly explain.
What is meant by the phrase “health care outcome”? How do health care outcomes in the United States compare with those of other high-income countries? What problems arise in attempting to compare health care outcomes across countries?
How was the public health movement in the United States in the late nineteenth and early twentieth centuries like a technological advance to the country’s production possibilities frontier?
In The Elusive Quest for Growth, William Easterly describes the bottom poor in Malawi as “the stunted poor, with thin bodies, short stature . . . , who experience frequent illnesses and a severe lack of food.” He reports that “In the poorest nations like Burundi, Madagascar, and Uganda,
In what sense have improvements in the health of the average American caused the U.S. production possibilities frontier to shift out? Panel (a) in Figure 5.2 on page 140 indicates that life expectancy in the United States declined between 1916 and 1918. What effect did this decline in life
Consider the following statement: “To some economists, nutritional status—measured for example by heights—suffers as a measure of living standards because height is not normally seen . . . as something that can be bought.”a. What is meant by “nutritional status”?b. Is income per person
How can changes over time in the average height of the people in a country be a measure of the country’s living standards?
Briefly discuss the ways in which the market for health care is different from and the ways in which it is similar to the markets for other goods and services.
Construct a table like the one in this appendix on page 134, but assume that the rent ceiling is $1,200 rather than$1,000.
The following graph shows a market in which a price floor of $3.00 per unit has been imposed. Calculate the values of each of the following:a. The deadweight lossb. The transfer of producer surplus to consumers or the transfer of consumer surplus to producersc. Producer surplus after the price
The following graphs illustrate the markets for two different types of labor. Suppose an identical minimum wage is imposed in both markets. In which market will the minimum wage have the largest impact on employment? Why? Wage S $4.50 Wage Labor (number of workers per year) $4.50 0 S Labor
Suppose that you have been hired to analyze the impact on employment from the imposition of a minimum wage in the labor market. Further suppose that you estimate the demand and supply functions for labor, where L stands for the quantity of labor (measured in thousands of workers) and W stands for
Why would economists use the term deadweight loss to describe the impact on consumer surplus and producer surplus from a price control?
[Related to the Making the Connection on page 119]Suppose the government imposes a payroll tax of $1 per hour of work and collects the tax from employers. Use a graph for the market for labor to show the effect of the payroll tax, assuming the special case of a vertical supply curve of labor. By

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