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

In the aftermath of the Global Financial Crisis, the Australia government gave cash hand-outs of up to $900 to most taxpayers as part of a policy aimed to stimulate economic growth. What impact would this have had on the cash rate if there were no intervention on the overnight money market by the
The RBA has stated that:Both the Reserve Bank and the Government agree on the importance of low and stable inflation . . . a flexible mediumterm inflation target is the appropriate framework for achieving medium-term price stability. (Reserve Bank of Australia, 2016)7 Explain why the RBA targets
A statement from the International Monetary Fund (IMF)made the following observation about the financial system:These institutions and markets provide a framework for carrying out economic transactions and monetary policy and help to channel savings into investment, thereby supporting economic
Suppose you can receive an interest rate of 3 per cent on a term deposit at a bank that is charging borrowers 7 per cent on new car loans. Why might you be unwilling to loan money directly to someone who wants to borrow from you to buy a new car, even if that person offers to pay you an interest
Why is the financial system of a country important for long-run economic growth? Why is it vital for economic growth that firms have access to adequate sources of funds?
Briefly explain whether you agree with the following statement: ‘Assets are things of value that people own.Liabilities are debts. Therefore, a bank will always consider a demand account deposit to be an asset, and a car loan to be a liability.’
Consider the following simplified balance sheet for a bank:a If the bank holds a reserve ratio of 10 per cent, how much in excess of the required reserves is the bank holding?b What is the maximum amount by which the bank can expand its loans?c If the bank makes the loans in (b), show the immediate
[Related to Solved problem 16.1] Suppose you deposit$2000 in currency into your savings account at a branch of the Commonwealth Bank, which we will assume has no excess reserves at the time you make your deposit. Also assume that the bank maintains a reserve ratio of 0.2, or 20 per cent.a Use a
‘Most of the money supply of Australia is created by banks making loans.’ Briefly explain whether you agree with this statement.
‘Banks don’t really create money, do they?’ was the challenge that a retired professor of economics was known to have used in her Australian economic history course to ascertain what her students remembered from their introductory economics course about the creation of money. She reported
Suppose you decide to withdraw $100 in cash from your bank deposit account. Draw a T-account showing the effect of this transaction on your bank’s balance sheet.
What is the largest asset and the largest liability of a typical bank?
[Related to Making the Connection 16.3] In 2015, some business start-ups were offering the service of transferring money in the form of bitcoins between individuals and businesses in developing countries. At the same time, a news article noted that in the United States, ‘Most ordinary consumers
Suppose you decide to withdraw $100 in currency from your bank demand deposit account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
Assume that you have $2000 in currency in a shoebox in your cupboard. One day you decide to deposit the money in a demand deposit account. Briefly explain how this will affect M1.
Briefly explain whether each of the following is counted in M1.a The coins in your pocket b The funds in your building society demand deposit account c The funds in your bank demand deposit account d Your MasterCard credit card limit
What is the main difference between the M1 and broader definitions of the money supply?
On 1 January 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. However, even a decade later, many Germans were still using the deutsche mark to make purchases, with many stores in Germany continuing to accept it. Briefly explain how it is
According to Peter Heather, a historian at the University of Oxford, during the Roman Empire the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead:Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily
In the late 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these
[Related to Making the connection 16.2] A news article provided the following description of a hospital in Zimbabwe in 2010:People lined up on the veranda of the American mission hospital here from miles around to barter for doctor visits and medicines, clutching scrawny chickens, squirming goats
[Related to the opening case] A news article in 2015 noted, ‘A rising number of Greeks in rural areas are swapping goods and services in cashless transactions since the government shut down banks on June 28 for three weeks’ (Karagiannopoulos, 2015).2 If Greeks were able to swap goods and
Why do businesses accept paper (plastic in Australia)currency when they know that, unlike a gold coin, the paper the currency is printed on is worth very little?
What variables cause the SRAS curve to shift? For each variable, identify whether an increase in that variable will cause the SRAS curve to shift to the right or to the left.
Why does the short-run aggregate supply (SRAS) curve slope upwards?
[Related to Solved problem 14.3] In 1924, the famous US novelist F. Scott Fitzgerald wrote an article for the widely read US weekly magazine The Saturday Evening Post titled ‘How to live on $36 000 a year’, in which he wondered how he and his wife had managed to spend all of that very high
Which type(s) of unemployment is Job Services Australia intended to address?
What are the costs to individuals of being unemployed?Is the cost to society of unemployment equal to the sum of the costs to the individuals? Why or why not?
[Related to Solved problem 14.2] Calculate the missing values in the table of data collected in the labour force survey. WORKING AGE POPULATION Employment Unemployment Unemployment rate Labour force II million 5.5% Labour force participation rate 62%
Hundreds of thousands of jobs were eliminated from the Australian economy in 2018. Does this mean that the unemployment rate also rose during this year? Explain.
Prior to each federal election in Australia, the government always claims that they have created hundreds of thousands of jobs during their term of government. Is this claim correct? Briefly explain your answer.
The rapid increases in the labour force participation rate of women slowed down after 1990. Why might this slowdown have occurred? Discuss whether you think the labour force participation rate for women eventually might be equal to the rate for men.
What are the problems in measuring the unemployment rate? In what ways does the official ABS measure of the unemployment rate understate the true degree of unemployment? In what ways might the official ABS measure overstate the true degree of unemployment?
How is the unemployment rate calculated? What are the three conditions someone needs to meet to be counted as unemployed?
What role do you think the government could play to increase the accumulation of knowledge capital?
Why is the role of the entrepreneur much more important in the new growth theory than in the traditional economic growth model?
People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in The New York Times quotes a financial analyst as arguing that ‘the core driver’ of economic growth in China
Use the graph below to explain whether the following statements are true or false.a The movement from point A to point B shows the effects of technological change.b The economy can move from point B to point C only if there are no diminishing returns to capital.c To move from point A to point C the
Which of the following will result in a movement along Japan’s per-worker production function, and which will result in a shift of Japan’s per-worker production function? Briefly explain.a Capital per hour worked increases from ¥5 million per hour worked to ¥6 million per hour worked.b The
What is new growth theory? How does new growth theory differ from the growth theory developed by Robert Solow?
What are the consequences for economic growth of diminishing returns to capital? How are some economies able to maintain high growth rates despite diminishing returns to capital?
Using the per-worker production function graphs from Figure 13.5 and Figure 13.6, show the effect on real GDP per hour worked of an increase in capital per hour worked, holding technology constant. Now, again using the perworker production function graph, show the effect on real GDP per hour worked
[Related to Solved problem 13.2] Two reasons for the rapid economic growth of China over the past two to three decades have been the massive movement of workers from agriculture to manufacturing jobs and the transformation of parts of its economy into a market system (Federal Reserve Bank of
[Related to Solved problem 13.2] Economists state that increasing productivity over time is the most effective way to increase the living standards of the country. Do you agree? Briefly explain.
Labour productivity in the agricultural sector of Australia is more than 30 times higher than in the agricultural sector of China. What factors would cause Australian labour productivity to be so much higher than Chinese labour productivity?
a If Australian GDP per capita continued to grow at a rate of 3 per cent per year, how many years would it take for real GDP per capita to double?b The economy of China has boomed since the late 1970s, having periods of double-digit economic growth rates. At a 6 per cent growth rate in real GDP,
Use the table to answer the following questions.a Calculate the economic growth rate for each year from 2016 to 2020.b Calculate the average annual economic growth rate for the period 2016 to 2020. YEAR 2016 BILLIONS OF DOLLARS IN CONSTANT PRICES 1075 2017 1120 2018 1160 2019 1175 2020 1200
[Related to Making the connection 13.4] Think about the relationship between economic prosperity and life expectancy. What implications does this relationship have for the size of the health care sector of the economy? In particular, is this sector likely to expand or contract in coming years?
After reading about economic growth in this chapter, elaborate on the importance of growth in GDP, particularly real GDP per capita, to the quality of life of a country’s population.
What is the ‘rule of 70’? If real GDP per capita grows at a rate of 7 per cent per year, how many years will it take to double?
Use the data in the following table to calculate the GDP deflator for each year (values are in billions of dollars):Which year from 2016 to 2020 saw the largest percentage increase in the price level as measured by the GDP deflator? Briefly explain. NOMINAL GDP REAL GDP $ 2016 13377 12959 2017
Briefly explain whether you agree or disagree with the following statement: ‘Nominal GDP in a country declined between 2019 and 2020; therefore, the GDP deflator must also have declined.’
When world oil prices fell in 2015 and 2016, some economists in some countries were estimating very little impact on real GDP but a negative effect on nominal GDP.What must the economists have been expecting the effect of lower oil prices to be on the inflation rate? Briefly explain.
Briefly explain whether you agree or disagree with the following statements.a ‘If nominal GDP is less than real GDP, then the price level must have fallen during the year.’b ‘Whenever real GDP declines, nominal GDP must also decline.’c ‘If a recession is so severe that the price level
[Related to Making the connection 13.2] An article in The Wall Street Journal notes that many economists believe that GDP data for India are unreliable because ‘the average firm employs just a handful of people and the overwhelming majority of the adult population works off the books and far from
The typical Australian works fewer than 40 hours per week today and worked 49 hours per week in 1920. Does this fact make the economic wellbeing of Australians today versus 1920 higher or lower than indicated by the difference in real GDP per capita today versus 1920?Explain.
What would you expect to happen to household production as unemployment rises during a recession?What would you expect to happen to household production as unemployment falls during an economic expansion? Would you therefore expect the fluctuation in actual production—GDP plus household
Why is GDP an imperfect measure of economic wellbeing? What types of production does GDP not measure? Even if GDP included these types of production, why would it still be an imperfect measure of economic wellbeing?
An artist buys scrap metal from the local steel mill as raw material for her metal sculptures. Last year she bought $5000 worth of scrap metal. During the year, she produced 10 metal sculptures that she sold for$800 each to the local art gallery. The gallery sold all of them to local art collectors
[Related to Don’t let this happen to you] Briefly explain whether you agree with the following statement: ‘In years when people buy many company shares, investment will be high and, therefore, so will GDP.’
[Related to Solved problem 13.1] Suppose that a simple economy produces only the following four goods and services: textbooks, hamburgers, shirts and cotton.Assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate nominal GDP for
Is the value of a house built in 2000 and resold in 2018 included in the GDP of 2018? Why or why not? Would the services of the real estate agent who helped sell (or buy) the house in 2018 be counted in GDP for 2018? Why or why not?
Which component of GDP will be affected by each of the following transactions? If you believe that none of the components of GDP will be affected by the transactions, briefly explain why.a You purchase a new apartment.b You purchase a second-hand car.c An overseas person studies a degree at an
Briefly explain whether each of the following transactions represents the purchase of a final good:a The purchase of wheat from a wheat farmer by a bakery b The purchase of a submarine by the federal government c The purchase of French wine by an Australian consumer d The purchase of a new machine
A student remarks: ‘It doesn’t make sense that intermediate goods are not counted in GDP. A computer chip is an intermediate good, and without it, a PC won’t work. So why don’t we count the computer chip in GDP?’Provide an answer for the student’s question.
Macroeconomic conditions affect the decisions firms and families make. Why, for example, might a university student after graduation enter the job market during an economic expansion but apply for postgraduate study during a recession?
What is the difference between the value of a firm’s final product and the value added by the firm to the final product?
In the circular flow of expenditure and income, why must the value of total production in an economy equal the value of total income?
If the Australian Bureau of Statistics added up the values of every good and service sold during the year, would the total be larger or smaller than GDP?
Draw a Lorenz curve showing the distribution of income for the group of five people in the following table. NAME ANNUAL EARNINGS David $70,000 Lena 60000 Sharon 50000 Robert 40000 Jeff 30000
Explain whether you agree or disagree with the following statement: ‘For a given demand curve, the excess burden of a tax will be greater when supply is less price elastic than when it is more price elastic.’ Illustrate your answer with a demand and supply graph.
Recall the definition of a normal good given in Chapter 3.Is environmental protection a normal good? If so, is there any connection between this fact and the observation that developing countries are generally less concerned about clean air than are richer countries? Briefly explain.How do the
In October 2011, Denmark introduced a ‘fat tax’—a tax on all foods with a saturated fat content above 2.3 per cent. It was the first country in the world to do so. By the end of 2012, the tax was abolished, deemed a failure. Explain the externality issues that the fat tax was aiming to
[Related to Solved problem 11.1] The following graph also illustrates the situation in the dry cleaning market. In contrast to question 4.9, the social cost of the pollution rises as the quantity of items cleaned per week rises. In addition, there are two demand curves, one for a smaller city, DS,
[Related to Solved problem 11.1] The fumes from dry cleaners can contribute to air pollution. Suppose the following diagram illustrates the situation in the dry cleaning market:a Explain how a government can use a tax on dry cleaning to bring about the efficient level of production.What should the
Many antibiotics that once were effective in eliminating infections are no longer as effective because bacteria have evolved to become resistant to them. Some bacteria are now resistant to all but one or two existing antibiotics.Some policy-makers have argued that pharmaceutical companies should
Nutritional guidelines urge adults to eat at least five serves of vegetables and two serves of fruit each day.Does consuming fruit and vegetables have a positive externality? Should the government subsidise the consumption of fruit and vegetables? Briefly explain.
Why do most economists favour taxes or tradable emissions allowances above the command and control approach to pollution?
What does it mean for a producer or consumer to internalise an externality? What would cause a producer or consumer to internalise an externality?
[Related to Making the connection 11.2] We know that owners of apple orchards and owners of beehives are able to negotiate private agreements. Is it likely that as a result of these private agreements, the market supplies the efficient quantities of apple trees and beehives? Are there any
[Related to Don’t let this happen to you on page 342]Briefly explain whether you agree or disagree with the following statement: ‘Sulphur dioxide emissions cause breathing difficulties for people with respiratory problems.The total benefit to society is greatest if we completely eliminate
[Related to Making the connection 11.1] In the first years following the banning of leaded petrol, lead levels in the air in Australia declined sharply and there were important health benefits. Should the government take action to reduce lead levels in the air further? How should government go
a When will the private cost of producing a good differ from the social cost? Give an example.b When will the private benefit from consuming a good differ from the social benefit? Give an example.
[Related to Don’t let this happen to you, page 333]According to the private interest view of government regulatory policy, much regulation arises due to the successful lobbying of interest groups as they attempt to increase their own economic rents at the expense of the rest of society. Does this
Briefly explain why a competitive market that is in equilibrium leads to an economically efficient level of output.
Because the market fails to lead to an economically efficient outcome in many cases, does this mean that the market is not good at allocating resources throughout the economy?
In a competitive market, imposing a minimum wage(above the market equilibrium) should reduce the level of employment. Will this also be true if the labour market is a monopsony? Explain.
The total amount of oil in the Earth is not increasing. Does this mean that in the market for oil, the supply curve is perfectly inelastic? Explain.
[Related to Solved problem 10.3] If the interest rate is 10 per cent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1085 upon maturity two years from now?
In some jobs, the harder you work, the more you earn.Some workers would rather work harder and earn more;others would rather work less hard, even though as a result they earn less. Suppose, though, that all workers at a company fall into the ‘work harder and earn more’ group.Suppose, also, that
Many companies that pay workers an hourly wage require some minimum level of acceptable output.Suppose a company that has been using this system decides to switch to a piece-rate system under which workers are compensated on the basis of how much output they produce, but where they are also free to
What are the two ways that the productivity of a firm’s employees may increase when a firm moves from straight-time pay to commission or piece-rate pay?
Dating back to the 1850s, Australia had some form of what became known in the early twentieth century as the‘White Australia Policy’ whereby white Anglo-Saxon migrants were favoured for immigration into Australia. The Immigration Restriction Act was passed in parliament in 1901, making the
During the 1970s, many women changed their minds about whether they would leave the labour force after marrying and having children or whether they would be in the labour force most of their adult lives. In other words, many more women ended up being in the labour force than expected to be when
[Related to Solved problem 10.2] Use the following graphs to answer the questions.a What is the equilibrium quantity of chemical engineers hired, and what is the equilibrium wage?b What is the equilibrium quantity of pharmacists hired, and what is the equilibrium wage?c Briefly discuss why chemical
[Related to Don’t let this happen to you] A student remarks, ‘I don’t think the idea of marginal revenue product really helps explain differences in wages. After all, a ticket to a football game costs much less than university fees, yet football players are paid much more than university
The prize money of players in major tennis tournaments is determined by negotiation between the players’ union and the appropriate tennis authorities. How does this fact explain why professional sportspeople are paid more than university lecturers? Briefly explain.
[Related to the opening case] An article in the The Wall Street Journal on the use of driverless trucks at Rio Tinto’s Australian mines observes:The new equipment cut many driving jobs . . . But the reductions will be partly offset by new types of work. The company now needs more network
In AD 541, an outbreak of bubonic plague hit the Byzantine Empire. Because the plague was spread by flea-infested rats that often lived on ships, ports were hit particularly hard. In some ports more than 40 per cent of the population died.The emperor Justinian was concerned that the wages of
Sean Astin, who played the hobbit Sam in The Lord of the Rings movies, wrote the following about an earlier film he had appeared in:Now I was in a movie I didn’t respect, making obscene amounts of money (five times what a teacher makes, and teachers do infinitely more important work). (Astin with

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

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