Macroeconomics A Contemporary Introduction 10th Edition William A. McEachern - Solutions

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13. Import Substitution Versus Export Promotion Explain why domestic producers who supply a good that competes with imports would prefer an import-substitution approach to trade policy rather than an export-promotion approach. Which policy would domestic consumers prefer and why?
12. Worlds Apart Per capita income most recently was 160 times greater in the United States than in the Congo. Suppose income per capita grows an average of 3 percent per year in the United States and 6 percent per year in the Congo. Assuming such growth rates continue indefinitely into the future,
11. Convergence Explain the convergence theory. Under what circumstances is economic convergence less likely to occur?
10. Foreign Aid and Economic Development It is widely recognized that foreign aid that promotes productivity in developing economies is superior to merely shipping consumer goods like food and clothing to these countries. Yet the latter is the approach frequently taken. Why do you think this is the
9. International Trade and Development From the perspective of citizens in a developing country, what are some of the benefits and drawbacks of international trade?
8. Foreign Aid and Economic Development Foreign aid, if it is to be successful in enhancing economic development, must lead to a more productive economy. Describe some of the problems in achieving such an objective through foreign aid.
7. Case Study: The Poorest Billion What three poverty traps help explain the plight of nations comprising the poorest billion people?
6. Classification of Economies What are the arguments for using real per capita income to compare living standards between countries? What weakness does this measure have?
5. Privatization How has privatization contributed to productivity?
4. Productivity and Development Among the problems that hinder growth in developing economies are poor infrastructure, lack of financial institutions and a sound money supply, a low saving rate, poor capital base, and lack of foreign exchange.Explain how these problems are interconnected.
3. Birth Rates Why is the birth rate in low-income countries much higher than in high-income countries?
2. Worlds Apart Compare developing and industrial market economies on the basis of each of the following general economic characteristics, and relate the differences to the process of development:a. Diversity of the industrial baseb. Child mortality ratesc. Educational level of the labor force
1. Developing Countries Why is agricultural productivity in developing countries usually so low?
10. Determining the Exchange Rate Use these data to answer the following questions about the market for British pounds:Quantity Quantity Pound Price Demanded Supplied(in $) (of pounds) (of pounds)$4.00 50 100 3.00 75 75 2.00 100 50a. Draw the demand and supply curves for pounds, and determine the
9. Balance of Payments Explain where in the U.S. balance of payments an entry would be recorded for each of the following:a. A Hong Kong financier buys some U.S. corporate stock.b. A U.S. tourist in Paris buys some perfume to take home.c. A Japanese company sells machinery to a pineapple company in
8. Balance of Payments The following are hypothetical data for the U.S. balance of payments. Use the data to calculate each of the following:a. Merchandise trade balanceb. Balance on goods and servicesc. Balance on current accountd. Financial account balancee. Statistical discrepancy Billions of
7. Merchandise Trade Balance Explain why a U.S. recession that occurs as the rest of the world is expanding will tend to reduce the U.S. trade deficit.
6. The Current System: Managed Float What is a managed float? What are the disadvantages of freely floating exchange rates that led countries to the managed float system?
5. Case Study: The Big Mac Index The Big Mac Index computed by The Economist magazine has consistently found the U.S. dollar to be undervalued against some currencies and overvalued against others. This finding seems to be at odds with the purchasing power parity theory. Explain why this index may
4. Purchasing Power Parity According to the theory of purchasing power parity, what will happen to the value of the dollar(against foreign currencies) if the U.S. price level doubles and price levels in other countries remain constant? Why is the theory more suitable for analyzing events in the
3. Arbitrageurs How do arbitrageurs help ensure that exchange rates are usually the same in markets around the world?
2. Foreign Exchange What is the difference between a depreciation of the dollar and a devaluation of the dollar?
1. Balance of Payments Suppose the United States ran a surplus in its balance on goods and services by exporting goods and services while importing nothing.a. How would such a surplus be offset elsewhere in the balance-of-payments accounts?b. If the level of U.S. production does not depend on the
14. Trade Restrictions Suppose that the world price for steel is below the U.S. domestic price, but the government requires that all steel used in the United States be domestically produced.a. Use a diagram like the one in Exhibit 7 to show the gains and losses from such a policy.b. How could you
13. Import Quotas How small must a quota be to have an impact?Using a demand-and-supply diagram, illustrate and explain the net welfare loss from imposing such a quota.Under what circumstances would the net welfare loss from an import quota exceed the net welfare loss from an equivalent tariff (one
12. Comparative Advantage The consumption possibilities frontiers shown in Exhibit 4 assume terms of trade of 1 unit of clothing for 1 unit of food. What would the consumption possibilities frontiers look like if the terms of trade were 1 unit of clothing for 2 units of food?
11. Comparative Advantage Suppose that each U.S. worker can produce 8 units of food or 2 units of clothing daily. In Fredonia, which has the same number of workers, each worker can produce 7 units of food or 1 unit of clothing daily. Why does the United States have an absolute advantage in both
10. Arguments for Trade Restrictions Firms hurt by lowercost imports typically argue that restricting trade will save U.S.jobs. What’s wrong with this argument? Are there ever any reasons to support such trade restrictions?
9. Arguments for Trade Restrictions Explain the national defense, declining industries, and infant industry arguments for protecting a domestic industry from international competition.
8. Case Study: The Doha Round and Round What were the major sticking points holding up progress in the Doha Round?
7. The World Trade Organization What is the World Trade Organization (WTO) and how does it help foster multilateral trade? (Check the WTO Web site at http://www.wto.org/.)
6. Trade Restrictions Exhibits 7 and 8 show net losses to the economy of a country that imposes tariffs or quotas on imported sugar. What kinds of gains and losses would occur in the economies of countries that export sugar?
5. Tariffs High tariffs usually lead to black markets and smuggling.How is government revenue reduced by such activity?Relate your answer to the graph in Exhibit 7 in this chapter.Does smuggling have any social benefits?
4. Reasons for International Specialization What determines which goods a country should produce and export?
3. Gains from Trade Complete each of the following sentences:a. When a nation has no economic interaction with foreigners and produces everything it consumes, the nation is in a state of ________.b. According to the law of comparative advantage, each nation should specialize in producing the goods
2. Reasons for Trade What are the primary reasons for international trade?
1. Profile of Imports and Exports What are the major U.S.exports and imports? How does international trade affect consumption possibilities?
17. Long-Run Phillips Curve Suppose the economy is at point d on the long-run Phillips curve shown in Exhibit 6. If that inflation rate is unacceptably high, how can policy makers get the inflation rate down? Would rational expectations help or hinder their efforts?
16. Rational Expectations Using an AD–AS diagram, illustrate the short-run effects on prices, output, and employment of an increase in the money supply that is correctly anticipated by the public. Assume that the economy is initially at potential output.
15. Policy Lags What lag in discretionary policy is described in each of the following statements? Why do long lags make discretionary policy less effective?a. The time from when the government determines that the economy is in recession until a tax cut is approved to reduce unemploymentb. The time
14. Problems with Active Policy Use an AD–AS diagram to illustrate and explain the short-run and long-run effects on the economy of the following situation: Both the natural rate of unemployment and the actual rate of unemployment are 5 percent.However, the government believes that the natural
13. Active Versus Passive Policy Discuss the role that each of the following plays in the debate between the active and passive approaches:a. The speed of adjustment of the nominal wageb. The speed of adjustment of expectations about inflationc. The existence of lags in policy creation and
12. Phillips Curves Describe the different policy trade-offs implied by the short-run Phillips curve and the long-run Phillips curve. What forces shift the long-run Phillips curve?
11. Potential GNP Why is it hard for policy makers to decide whether the economy is operating at its potential output level?Why is this uncertainty a problem?
10. Rational Expectations Suppose that people in an election year believe that public officials are going to pursue expansionary policies to enhance their reelection prospects. How could such expectations put pressure on officials to pursue expansionary policies even if they hadn’t planned to?
9. Rationale for Rules Some economists call for predetermined rules to guide the actions of government policy makers.What are two contrasting rationales that have been given for such rules?
8. Case Study: Central Bank Independence and Price Stability One source of independence for the Fed is the term length for members of the Board of Governors. In the chapter before last, we learned that the Fed is a “money machine.” Does this suggest another source of Fed independence from
7. Policy Credibility What is policy credibility and how is it relevant to the problem of reducing high inflation? How is credibility related to the time-inconsistency problem?
6. Anticipating Monetary Policy In 1995, the Fed began announcing its interest rate targets immediately following each meeting of the FOMC. Prior to that, observers were left to draw inferences about Fed policy based on the results of that policy.What is the value of this greater openness?
5. The Role of Expectations Some economists argue that only unanticipated increases in the money supply can affect real GDP. Explain why this may be the case.
4. Review of Policy Perspectives Why might an active policy approach be more politically popular than a passive approach, especially during a recession?
3. Active Versus Passive Policy According to advocates of passive policy, what variable naturally adjusts in the labor market, shifting the short-run aggregate supply curve to restore unemployment to the natural rate? Why does the active policy approach assume that the short-run aggregate supply
2. Active Policy Why do proponents of active policy recommend government intervention to close an expansionary gap?
1. Active Versus Passive Policy Contrast the active policy view of the behavior of wages and prices during a recessionary gap with the passive policy view.
20. Expansionary Monetary Policy and Inflation Between 2007 and 2012, assets on the Fed’s balance sheet increased from$0.9 trillion to $2.9 trillion. Why didn’t the resulting increase in bank reserves create higher inflation as of 2012?
19. Money Supply Versus Interest Rate Targets Assume that the economy’s real GDP is growing.a. What will happen to money demand over time?b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time?c. If the Fed changes the money supply to match the change in
18. Quantity Theory of Money What basic assumption about the velocity of money transforms the equation of exchange into the quantity theory of money? Also:a. According to the quantity theory, what will happen to nominal GDP if the money supply increases by 5 percent and velocity does not change?b.
17. Equation of Exchange Calculate the velocity of money if real GDP is 3,000 units, the average price level is $4 per unit, and the quantity of money in the economy is $1,500. What happens to velocity if the average price level drops to $3 per unit?What happens to velocity if the average price
16. Monetary Policy and an Expansionary Gap Suppose the Fed wishes to use monetary policy to close an expansionary gap.a. Should the Fed increase or decrease the money supply?b. If the Fed uses open-market operations, should it buy or sell government securities?c. Determine whether each of the
15. Monetary Policy and Aggregate Supply Assume that the economy is initially in long-run equilibrium. Using an AD–AS diagram, illustrate and explain the short-run and longrun impacts of an increase in the money supply.
14. Money and Aggregate Demand Would each of the following increase, decrease, or have no impact on the ability of open-market operations to affect aggregate demand? Explain your answer.a. Investment demand becomes less sensitive to changes in the interest rate.b. The marginal propensity to consume
13. Money Demand Suppose that you never carry cash. Your paycheck of $1,000 per month is deposited directly into your checking account, and you spend your money at a constant rate so that at the end of each month your checking account balance is zero.a. What is your average money balance during the
12. Quantitative Easing What’s the difference between ordinary open-market purchases and quantitative easing?
11. Money Supply Versus Interest Rate Targets In recent years the Fed’s monetary target has been the federal funds rate. How does the Fed raise or lower that rate, and how is that rate related to other interest rates in the economy such as the prime rate?
10. How Stable Is Velocity? What factors have led to changes in the velocity of M1 and M2 over the past three decades?
9. Supply of Money What does the shape of the money supply curve say about Fed policy? Describe the steps whereby an increase in the money supply leads to an increase in nominal output.
8. Too Big to Fail How has the Fed tried to reduce the likelihood that a large financial institution will go bankrupt? In the event that one does fail, what document aims to minimize the impact on the wider economy?
7. Velocity of Money Determine whether each of the following would lead to an increase or a decrease in the velocity of money:a. Increasing the speed of funds transfersb. Decreased use of credit cardsc. Decreasing the frequency that workers are paidd. Increased customer use of debit cards at
6. Equation of Exchange Using the equation of exchange, show why fiscal policy alone cannot increase nominal GDP if the velocity of money is constant.
5. Case Study: Greater Fed Transparency as a Policy Tool In what sense has greater Fed transparency served as an additional policy tool, given that the federal funds rate could go no lower?
4. Federal Funds Rate Why has the Federal Reserve chosen to focus on the federal funds rate rather than some other interest rate as a tool of monetary policy?
3. Monetary Policy What is the impact of a decrease in the required reserve ratio on aggregate demand?
2. Demand for Money If money is so versatile and can buy anything, why don’t people demand all the money they can get their hands on?
1. Demand for Money Determine whether each of the following would lead to an increase, a decrease, or no change in the quantity of money people wish to hold. Also determine whether there is a shift of the money demand curve or a movement along a given money demand curve.a. A decrease in the price
21. Monetary Control Suppose the money supply is currently$500 billion and the Fed wishes to increase it by $100 billion.a. Given a required reserve ratio of 0.25, what should it do?b. If it decided to change the money supply by changing the required reserve ratio, what change should it make?
20. Money Creation Suppose Bank A, which faces a reserve requirement of 10 percent, receives a $1,000 checking deposit from a customer.a. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show these changes on Bank A’s balance sheet.b. Assuming that the
19. Money Multiplier Suppose that the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05. How does this affect the simple money multiplier, assuming that excess reserves are held to zero and there are no currency leakages? What are the money multipliers for required reserve ratios
18. Reserve Accounts Suppose that a bank’s customer deposits$4,000 in her checking account. The required reserve ratio is 0.25. What are the required reserves on this new deposit? What is the largest loan that the bank can make on the basis of the new deposit? If the bank chooses to hold reserves
17. Money Creation Show how each of the following would initially affect a bank’s assets and liabilities.a. Someone makes a $10,000 deposit into a checking account.b. A bank makes a loan of $1,000 by establishing a checking account for $1,000.c. The loan described in part (b) is spent.d. A bank
16. Money Creation Show how each of the following initially affects bank assets, liabilities, and reserves. Do not include the results of bank behavior resulting from the Fed’s action. Assume a required reserve ratio of 0.05.a. The Fed purchases $10 million worth of U.S. government bonds from a
15. Monetary Aggregates Calculate M1 and M2 using the following information:Large-denomination time deposits $304 billion Currency and coin held by the nonbanking public $438 billion Checkable deposits $509 billion Small-denomination time deposits $198 billion Traveler’s checks $18 billion
14. The Fed Is a Money Machine Why is the Fed both literally and figuratively a money machine?
13. Federal Funds Market What is the federal funds market?How does it help banks strike a balance between liquidity and profitability?
12. Discount Rate What is the difference between the federal funds rate and the discount rate? What is the ultimate impact on the money supply of an increase in the discount rate?
11. Fed Tools of Monetary Control What three tools can the Fed use to change the money supply? Which tool is used most frequently? What are three limitations on the money expansion process?
10. Creating Money Often it is claimed that banks create money by making loans. How can commercial banks create money? Is the government the only institution that can legally create money?
9. Liquidity Versus Profitability Why must a bank manager strike a balance between liquidity and profitability on the bank’s balance sheet?
8. Reserve Accounts Explain why a reduction in the required reserve ratio cannot, at least initially, increase total reserves in the banking system. Is the same true of lowering the discount rate? What would happen if the Fed bought U.S. bonds from, or sold them to, the banking system?
7. Bank Deposits Explain the differences among checkable deposits, savings deposits, and time deposits. Explain whether each of these deposits represents a bank asset or a bank liability.
6. Money Aggregates Suppose that $1,000 is moved from a savings account at a commercial bank to a checking account at the same bank. Which of the following statements are true and which are false?a. The amount of currency in circulation will fall.b. M1 will increase.c. M2 will increase.
5. Banks Are Financial Intermediaries In acting as financial intermediaries, what needs and desires of savers and borrowers must banks consider?
4. Money Aggregates Determine whether each of the following is included in the M1 or M2 measures of the money supply:a. Currency held by the nonbanking publicb. Available credit on credit cards held by the nonbanking publicc. Savings depositsd. Large-denomination time depositse. Money market mutual
3. Case Study: Faking It Why did the U.S. government consider it important to redesign the $100 note in order to combat the effects of the “supernote”?
2. Money Aggregates What portion of Federal Reserve notes circulate outside the United States? How does this affect the United States?
1. Money Aggregates What are the two measures of the money supply and how is each measure defined?
18. Dodd-Frank Act What are some goals of the Dodd-Frank legislation, and what are some possible unintended consequences of the measure?
17. Incentive Problems and the Financial Crisis of 2008 What incentives motivated the behaviors that caused the financial crisis of 2008?
16. The Structure of U.S. Banking Discuss the impact of bank mergers on the structure of American banking. Why do banks merge?
15. Bank Deregulation Some economists argue that deregulating the interest rates that could be paid on deposits combined with deposit insurance led to the insolvency of many depository institutions. On what basis do they make such an argument?
14. Federal Reserve System What are the main powers and responsibilities of the Federal Reserve System?

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Macroeconomics A Contemporary Introduction 10th Edition William A. McEachern - Solutions

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