Essentials Of Economics 4th Edition R. Glenn Hubbard, Anthony P. O'Brien - Solutions

Suppose the federal government increases spending without also increasing taxes. In the short run, how will this action affect real GDP and the price level in a closed economy? How will the effects
Suppose that interest rates in Australia rise relative to those in other countries.a How will this policy affect real GDP in the short run if Australia is a closed economy?b How will this policy
An article in The Economist magazine described Ireland as ‘an extraordinarily open economy’ (The Economist, 2011).5 Is fiscal policy in Ireland likely to be more or less effective than it would
Australia’s net foreign debt has been rising as a proportion of GDP over time. What are the potential advantages and disadvantages of rising foreign debt for Australia? Would your analysis of
In 2010, China introduced some further flexibility into its exchange rate determination and allowed the value of the yuan to appreciate somewhat. According to a news article at the time:Economists at
An investment analyst recommended that investors‘gravitate toward the stronger currencies and countries that are running current-account and fiscal surpluses’, such as South Korea and Taiwan
If investment spending in Australia has been strong, why would this reduce apprehension about the size of the current account deficit? What does the current account deficit have to do with investment
Suppose a politician proposes that tariffs be imposed on imports from countries with which Australia has a trade deficit. If this proposal were enacted and if it were to succeed in reducing
Briefly explain whether you agree with the following statement: ‘Because in 2016 national saving was a smaller percentage of GDP in the United Kingdom than in Australia, domestic investment must
[Related to Making the connection 20.3] An economist in Spain noted that the Spanish economy was in recession during the early 1990s, but that ‘in 1992 and 1993 a series of [exchange rate]
Consider this statement: ‘It usually takes around 100 yen to buy one Australian dollar and more than two Australian dollars to buy one British pound. These values show that Australia must be a much
Following the floating of the Australian dollar in 1983, the trade-weighted index of the Australian dollar fell substantially. Does this indicate that the Australian dollar was overvalued or
Consider the following: An Australian manufacturing representative said that weak currencies overseas, particularly in Europe and Asia, had dragged down its sales 2 per cent worldwide, ultimately
What is the theory of purchasing power parity? Does it give a complete explanation for movements in exchange rates in the long run? Briefly explain.
If a country is using the gold standard, what is likely to happen to the country’s money supply if new gold deposits are discovered in the country? Is this change in the money supply desirable?
Australia and most other countries abandoned the gold standard during the 1930s. Why would the 1930s have been a particularly difficult time for countries to have remained on the gold standard?
Briefly explain whether you agree with the following statement: ‘The RBA is limited in its ability to issue paper currency by the amount of gold reserves it holds. To issue more paper currency, the
[Related to the opening case] A news article recently had the headline: ‘Export demand for education may rise on falling dollar’.a What does the headline mean when it refers to a ‘falling
Use the graph to answer the following questions.a Briefly explain whether the dollar appreciated or depreciated against the yen.b Which of the following events could have caused the shift in demand
Some exporting firms have argued that the Chinese government has been keeping the value of the Chinese yuan artificially low against other currencies, which gives Chinese exporters an advantage when
Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in Australian government budget deficits that increase
Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in interest rates in Europe by the European Central Bank
[Related to Don’t let this happen to you on page 678] If we know the exchange rate between country A’s currency and country B’s currency, and we know the exchange rate between country B’s
What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?
If the exchange rate between the Japanese yen and the Australian dollar expressed in terms of yen per dollar is¥110 = $1, what is the exchange rate when expressed in terms of dollars per yen?
[Related to Don’t let this happen to you, on page 675]In 2014, Germany had a surplus in the balance of trade in goods and services of 217 billion euros. Which was larger in that year: Germany’s
Use the information in the following table to prepare a balance of payments account like the one shown in Table 20.1. Assume the balance on the capital account is zero.All values are in billions of
A common argument against free trade is that it causes a loss of domestic production and jobs. If a country engages in free trade, is the total number of jobs in the country likely to decline?
Suppose you are explaining the benefits of free trade and someone states, ‘I don’t understand all the principles of comparative advantage and gains from trade. I just know that if I buy something
During the Global Financial Crisis of 2007–2008, the US government included a ‘Buy American’ condition as part of its stimulus package to US firms, requiring firms to purchase production inputs
Some politicians have suggested that the WTO work towards making certain labour standards part of every trade agreement, with sanctions imposed on countries that do not meet these labour standards.
[Related to Solved problem 19.2] Australia currently grows cherries and imports them. Assume that the Australian government decides to restrict international trade in cherries by imposing a quota
A student makes the following argument: ‘Tariffs on imports of foreign goods into Australia will cause the foreign companies to add the amount of the tariff to the prices they charge Australians
The United States has about 9000 rice farmers and these farmers receive subsidy payments from the US government of around US$90 000 per farmer. These payments result in US farmers producing much more
Australia produces oranges and also imports oranges from other countries.a Draw a graph showing the supply and demand for oranges in Australia. Assume that Australia can import as much as it wants at
The European Union is an organisation of many European countries. Almost 40 per cent of the entire EU budget(around 50 billion euros) consists of protection and subsidies to EU farmers. These
[Related to Solved problem 19.1] The following table shows the hourly output per worker in two industries in Chile and Argentina.a Explain which country has an absolute advantage in the production of
What is meant by a country specialising in the production of a good? Is it typical for countries to be completely specialised? Briefly explain.
The following table shows the hourly output per worker for Greece and Italy measured as quarts of olive oil and pounds of pasta.Calculate the opportunity cost of producing olive oil and pasta in both
Briefly explain whether you agree with the following argument: ‘Unfortunately, Bolivia does not have a comparative advantage with respect to Australia in the production of any good or service.’
Suppose, on average, workers in the Chinese consumer white goods industry produce less output per hour than Australian workers producing the same goods. Despite this fact, China exports large
What is the difference between absolute advantage and comparative advantage? Will a country always be an exporter of a good in which it has an absolute advantage in production?
Why might a smaller country, such as Singapore, 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 most other nations. In fact, today Japan exports a
If Australia were to stop trading goods and services with other countries, which Australian industries would be likely to see their sales decline most? Briefly explain.
Briefly explain whether you agree or disagree with the following statement: ‘International trade is more important to the Australian economy than to most other economies.’
Using your understanding of the multiplier process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. Similarly, explain why a decrease in the
Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier and the balanced budget multiplier if the marginal propensity to
In macroeconomics in the 1960s and early 1970s, it was often taught that an economy could have higher unemployment in order to achieve lower inflation, or that higher inflation may be the result of
Use the following two graphs to answer the following questions. Assume that the natural rate of unemployment is 5 per cent and that the inflation rate in the first year is 2 per cent.a Briefly
Why did Milton Friedman argue that the Phillips curve did not represent a permanent trade-off between unemployment and inflation? In your answer, make sure you explain what Friedman meant by the
Is it possible for cuts in marginal tax rates to result in an increase in total taxes collected?
Suppose that an increase in marginal tax rates on individual income affects both aggregate demand and aggregate supply. Briefly describe the effect of the tax increase on equilibrium real GDP and the
Some economists and policy-makers have argued in favour of a ‘flat tax’. A flat tax would replace the current individual income tax system, with its many tax brackets, exemptions and deductions,
Explain the effect that each of the following fiscal policy measures could have on aggregate supply:a The reduction of taxes on capital gains b Reducing the higher marginal individual income tax
A news article discussing Japan’s budget deficit noted that ‘Prime Minister Shinzo Abe is expected to unveil a plan to balance Japan’s budget in five years . . . as a step toward reducing the
[Related to Making the connection 18.3] A news article in 2015 noted that an official of the European Union was forecasting that ‘Greece faces two years of recession amid sharp budget cuts’
What is the structural budget deficit or surplus? Suppose that the economy is currently at potential GDP and the federal budget is balanced. If the economy moves into a recession, what will happen to
Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP.a Is this most likely to
According to a news article written in December 2008, the severe recession in the United States began in December 2007, but many policy-makers and economists did not recognise that the country was in
What is meant by crowding out? What is the difference between financial crowding out and resource crowding out?
[Related to Solved problem 18.1] Briefly explain whether you agree or disagree with the following statement: ‘Real GDP is currently $2.2 trillion and potential GDP is $2.1 trillion. If the
Suppose that real GDP for an economy is currently $13.1 trillion, potential GDP is $13.5 trillion, the government purchases multiplier is 2 and the tax multiplier is −1.6.a Holding other factors
In The General Theory of Employment, Interest and Money, John Maynard Keynes wrote:If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which
Explain whether you agree or disagree with the following statement: ‘Some economists claim that the Australian economic downturn of 2008–2009 was caused by a decline in investment. This can’t
The hypothetical information in the following table shows what the situation will be in 2019 if the government does not use fiscal policy:a If the government wants to move real GDP to its potential
Use the following graph to answer these questions.a If the government does not take any policy actions, what will be the values of real GDP and the price level in 2019?b What actions can the
[Related to Don’t let this happen to you] Is it possible for the government to carry out an expansionary fiscal policy if the Reserve Bank of Australia does not simultaneously increase financial
Assume that the economy is in equilibrium at potential GDP and then the demand for housing sharply declines.What actions could the government take to move the economy back to potential GDP?
Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy.a The company income tax rate is
According to government forecasts, the ‘Baby Boomers’will start becoming eligible for the age pension in increasing numbers. As a result, the annual growth rate of social security and welfare
In Australia, what are the major sources of federal government revenue, and what are the major sources of federal government expenditure?
Briefly explain whether each of the following is: (i) an example of a discretionary fiscal policy, (ii) an example of an automatic stabiliser, or (iii) not an example of fiscal policy.a The federal
What is the difference between federal purchases and federal expenditures? Are federal expenditures higher today than they were in 1970?
Suppose a corrupt government of a country wants to vastly increase expenditure on armaments. Why would the independence of the country’s central bank have any relevance in this situation?
Do you think that the RBA is truly independent of the government in its determination of monetary policy?Provide evidence for your answer.
What arguments do economists make in support of the independence of the RBA and what arguments are used against the independence of the RBA?
In what ways is the RBA more independent of the federal government than other institutions like, for instance, the Federal Treasury?
[Related to Making the connection 17.3] If measures of consumer inflation such as those that remove volatile items, or the RBA’s trimmed-mean measures, are better measures of the inflation rate
Keynes is reported to have remarked that using an expansionary monetary policy to pull an economy out of a deep recession can be like ‘pushing on a string’.Briefly explain what you think Keynes
Most of the countries of the European Union use a common currency, the euro, and have a common monetary policy determined by the European Central Bank. What are the implications for any member
Between 2005 and early 2008, oil prices and house prices in Australia rose significantly, increasing the cost of living for Australians. During the same period, the RBA increased interest rates eight
[Related to Solved problem 17.2] The hypothetical information in the following table shows what the situation will be in 2018 if the RBA does not use monetary policy.a If the RBA wants to keep real
[Related to Solved problem 17.2] Use the following graph to answer these questions.a If the RBA does not take any policy action, what will be the level of real GDP and the price level in year 2?b If
[Related to Making the Connection 17.2] An article in The Wall Street Journal in 2015 reported that the interest rate on five-year German government bonds had become negative: ‘The negative yield
In 2010, the RBA increased the cash rate four times. This was done even though the annual rate of inflation, as measured by the CPI, averaged only 2.8 per cent. Why do you think the RBA increased the
How might firms’ expectations that the rates of return on new investments are too low make monetary policy less effective in ending a recession?
Suppose a newspaper headline read: ‘Companies invest as interest rates reach a 20-year low’.Explain the connection between this headline and the monetary policy pursued by the RBA during that
In explaining why monetary policy did not pull Japan out of a recession in the early 2000s, an official at the Bank of Japan was quoted as saying that despite ‘major increases in the money
If the RBA believes that the inflation rate is about to increase above its target rate, what actions could it take?Should it always take this action whenever the inflation rate exceeds its target
If the RBA believes the economy is about to fall into a recession, what actions could it take?
[Related to Making the connection 17.1] This feature article claims that Ebenezer Scrooge promoted economic growth more when he was a miser and saved most of his income than when he reformed and
[Related to Solved problem 17.1] The federal government in Australia has been running large budget deficits. The government has stated that it will take actions that will turn the budget deficits
Firms care about their after-tax rate of return on investment projects. In the market for loanable funds, graph and explain the effect of an increase in taxes on business profits. (For simplicity,
Use the following graph to answer the questions.a With the shift in the demand for loanable funds, what happens to the equilibrium real interest rate and the equilibrium quantity of loanable funds?b
Use the following graph to answer the questions:a Does the shift from S1 to S2 represent an increase or a decrease in the supply of loanable funds?b With the shift in supply, what happens to the
If the RBA did not act to sterilise overnight liquidity changes, what would be the likely effect on nominal interest rates caused by the following?a The federal government transfers the goods and
If the RBA purchases $100 million worth of Commonwealth Government Securities, assuming all else remains the same (ceteris paribus), predict what will happen to interest rates. Explain your reasoning.
Explain the effect that each of the following has on the demand for money curve.a A decrease in real GDP b An increase in interest rates c An increase in the general level of prices
Draw a demand and supply graph showing equilibrium in the money market. Suppose the RBA wants to lower the equilibrium interest rate. Show on the graph how the RBA would accomplish this objective.

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Essentials Of Economics 4th Edition R. Glenn Hubbard, Anthony P. O'Brien - Solutions

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