Questions and Answers of Foundations Macroeconomics

On a graph of the circular flow model, indicate in which real or money flow each entry in List 2 belongs.List 2 LIST 2 General Motors pays its workers wages. IBM pays a dividend to its stockholders.
Which of the following statements about U.S. production is correct?A. Government goods and services and export goods and services each account for the same percentage of total production.B. Capital
Which points are attainable? Explain why.Figure 1 shows an economy’s PPF and identifies some production points. Use this figure to work Problems 2 to 4.Figure 1 FIGURE 1 Cars (thousands per week)
Which points are efficient and which points are inefficient? Explain why.Figure 1 shows an economy’s PPF and identifies some production points. Use this figure to work Problems 2 to 4.Figure 1
Which points illustrate a tradeoff? Explain why. Figure 1 shows an economy’s PPF and identifies some production points. Use this figure to work Problems 2 to 4.Figure 1 FIGURE 1 Cars (thousands per
How does an economy grow? Explain why economic growth is not free.
Who has a comparative advantage in producing snowboards? Who has a comparative advantage in producing skis?Tony and Patty produce skis and snowboards. Tables 1 and 2 show their production
If Tony and Patty specialize and trade, what are the gains from trade?Tony and Patty produce skis and snowboards. Tables 1 and 2 show their production possibilities. Each week, Tony produces 5
The people of Foodland have 40 hours of labor a day to bake pizza and bread. Table 1 shows the maximum quantity of either pizza or bread that Foodland can bake with different quantities of labor. Can
GM and the UAW agree on restructuring workers’ jobs. This restructuring, with no change in the wage rate, will save GM billions in labor costs. How will this cost-cutting agreement change GM’s
Oil prices breached the $100-a-barrel mark Wednesday after OPEC said it could not reach an agreement about raising crude production. Draw a graph to show the oil market in equilibrium. Suppose that
Explain why the dry weather will lead to a rise in the price of bread.Use the following information to work Problems 7 and 8.Pricier bread and cereal. Coming soon?Wheat and corn prices surged about
Use graphs to show why the price of corn has risen and show its effect on the price of cereals.Use the following information to work Problems 7 and 8.Pricier bread and cereal. Coming soon?Wheat and
If after heavy rain and low production, the weather improves and coffee growers enjoy bumper crops, how does• The demand for coffee change?• The supply of coffee change?• The price of coffee
Is the demand for this good elastic, unit elastic, or inelastic? When the price of a good increased by 10 percent, the quantity demanded of it decreased by 2 percent.
China is estimated to become the world’s largest luxury goods market over the next decade, boosted by rising incomes and a transition from saving to spending culture. Are luxury goods normal goods
If the price of a wool sweater did not change, calculate the cross elasticity of demand for wool sweaters with respect to the price of home heating oil. Are home heating oil and wool sweaters
Calculate the U.S. price elasticity of supply of corn. Is this supply elastic?Use the following information to work Problems 8 and 9.Record U.S. corn crop, up 24%, is forecast The USDA reported that
Calculate the world price elasticity of supply of corn.Use the following information to work Problems 8 and 9.Record U.S. corn crop, up 24%, is forecast The USDA reported that world corn production
In May 2011, higher food prices forced consumers to cut spending.Source: CNN Money, June 4, 2011 Is the demand for food elastic or inelastic? Explain your answer.
“In a market in which demand is price inelastic, producers can gouge consumers and the government must set high standards of conduct for producers to ensure that consumers gets a fair deal.” Do
On Figure 1, mark two points: Point A at which production is efficient but too much coffee is produced for allocative efficiency; and point B, the point of allocative efficiency.Use Figure 1, which
If the price of a DVD rises to $20, what is the change in consumer surplus? Figure 1 shows the demand curve for DVDs and the market price of a DVD.Figure 1 FIGURE 1 Price (dollars per DVD) 25+ 20 15
If the price of a DVD falls to $10, what is the change in producer surplus?Figure 1 shows the supply curve of DVDs and the market price of a DVD.Figure 1 FIGURE 1 Price (dollars per DVD) 20 15 10 5
At the market equilibrium, what are consumer surplus, producer surplus, and total surplus? Is the market for paper efficient? Why or why not?Figure 1 shows the market for paper.Figure 1 FIGURE 1
Lobbyists for a group of news magazines persuade the government to pass a law that requires producers to sell 50 tons of paper a day. Is the market for paper efficient? Why or why not? Shade the
Interior Secretary Ken Salazar said he hoped American families would take the opportunity during these hard times to enjoy an affordable weekend vacation in our national parks. Most Americans live
Explain what moral hazard is and why and how deposit insurance induces a moral hazard problem.
Give two examples of fixed exchange rates within Canada.
Describe the role of the IMF.
If an increase in the current account deficit finances an increase in domestic investment, what implications does this have for the future performance of the economy?
Why is it appropriate to use a small open-economy model to explain events in Canada?
Explain what the New Keynesian model predicts about comovements in the data if monetary policy is conducted optimally.
How does the New Keynesian model fit the key business cycle facts.
What is the key difference between the New Keynesian model and the models.
What happens when monetary policy is subject to the zero lower bound? Is there anything that the central bank can do in such circumstances to affect prices and real economic activity?
Explain how shifts in money demand create problems if the central bank wants to control the price level and inflation.
List four factors that can cause a shift in money demand.
What are the effects of an increase in credit market risk on aggregate economic activity? How does this matter for the current financial crisis?
Explain what a sectoral shock is. What are the macroeconomic effects of a sectoral shock and what are empirical examples of sectoral shocks?
How does asymmetric information affect the default premium and the firm's investment choice?A. Banks must charge all borrowers a higher interest rate on loans in order to ensure they are able to pay
How can a country overcome barriers to technology adoption?
What can cause barriers to the adoption of technology?
What are the three factors that account for growth in GDP?
What are three potential explanations for the Beveridge relation?
What is the Beveridge curve, and why is it important?
In the two-sided search model, what are the effects of an increase in the EI benefit?
How will an increase in the EI benefit affect the long-run unemployment rate in the one-sided search model, and why?
How does an increase in the EI benefit affect the reservation wage in the one-sided search model, and why?
How do demographic factors affect the participation rate.
Is the unemployment rate procyclical or countercyclical?
What are the four key determinants of the unemployment rate?
What is the role of the government in the one-period closed-economy model?
Why do macroeconomists work with seasonally adjusted data?
Explain what chain-weighting is.
What are government transfers? Explain why they are not included in GDP.
What is investment?
What three approaches are used to measure GDP?
How has the Canadian economy performed during the financial crisis and the recent global recession?
What has driven the increase in trade between Canada and the rest of the world?
How have unemployment rates behaved recently in Canada and the United States?
What are two possible causes of a productivity slowdown?
What are the theories of the business cycle that we will study?
List six fundamental macroeconomic questions.
What are two striking business cycle events in Canada during the past 100 years?
How much richer was the average Canadian in 2014 than in 1870?
Discuss four reasons why the Ricardian equivalence proposition is not likely to hold exactly.
What is the effect on interest rates and the money supply of an open-market purchase of Treasury bills?
Define monetary base. What is the relationship between the monetary base and the money supply in an all-currency economy?
According to the Keynesian model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run.
A closed economy has the following AD and AS curves: AD curve Y = 300 + 30(M/P) AS curve Y = Y + 10(P + Pe ) Here, Y̅ = 500 and M = 400. a. Suppose that Pe = 60. What are the
Figure 7.2 shows that before the 1990s, M1+ velocity generally rose over time. Suggest some explanations for this upward trend. Velocity of M1+ Velocity of M2 2011 1975 1979 1983 1987 1991 1995
According to the growth accounting approach, what are the three sources of economic growth? From what basic economic relationship is the growth accounting approach derived?
What is the key difference that determines whether an international transaction appears in the current account or the capital account?
Define a budget deficit. How does it differ from a budget surplus?
Suppose that the production function is With this production function, the marginal product of labour is The capital stock is K = 25. The labour supply curve is where ω is the real
The GDP deflator in Econoland is 200 on January 1, 2010. The deflator rises to 242 by January 1, 2012, and to 266.2 by January 1, 2013. a. What is the annual rate of inflation over the two-year
For the purpose of assessing an economy's growth performance, which is the more important statistic real GDP or nominal GDP? Why?
In 1993, the debate heated up in Canda about the North American Free Trade Agreement (NAFTA), which proposed reducing barriers to trade (such as taxes on, or limits to, imports) among Canada, the
Prices were much higher in Canada in 2013 than in 1914. Does this fact mean that people were economically better off in 1914? Why, or why not?
Go to the Statistics Canada website (www.statcan. gc.ca) and find “National Economic Accounts.” Opening that link takes you to another link on Gross Domestic Product. There you will find data on
Suppose there are two countries. In the rich country, the representative consumer has Hr units of human capital and total factor productivity is zr. In the poor country, the representative consumer
Suppose that you had the special powers to travel in time and to carry out any experiment you wanted on the economy. If you could turn back the clock to the time of the Great Depression, what
It has been argued that Greece, which effectively has a fixed exchange rate with the rest of the EMU, would have done better after the 2008–2009 recession if it were not part of the EMU and
Suppose in the NKRE model that from time 0 until time T -1, the natural rate of interest is r1*, where r1* < -π*, and from time T on the natural rate of interest is r2* > 0. Also, suppose that
In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital.a. Suppose that the central bank does nothing. What will be the effect on current
Suppose that the central bank observes a drop in real GDP but does not know what caused this drop.a. How would the central bank respond if it believed that GDP dropped because of a decline in total
Suppose that the central bank can influence expectations about inflation, by promising to increase the money supply in the future. In a liquidity trap, what effect does this have? Use a diagram to
Suppose that there are two groups of consumers in the population, constrained and unconstrained, with equal numbers of each. The constrained consumers look like the ones in Figure 10.5, while the
Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that is a constant, b. a. Determine how this consumer’s choice of current consumption,
Suppose that z, the marginal product of efficiency units of labour, increases in the endogenous growth model. What effects does this have on the rates of growth and the levels of human capital,
Suppose, there are two countries, A and B, and each is a Solow growth model economy. In each country, a fraction a of the population is rich and a fraction 1 -a is poor. Suppose that rich people save
Might differences across countries in population growth account for the persistence in income disparity across countries? Use the Solow growth model to address this question and discuss.
Consider the data in the table below:a. Calculate the Solow residual for each year from 2004 to 2014.b. Calculate percentage rates of growth in output, capital, employment, and total factor
Modify the Solow growth model by including government spending, as follows. The government purchases G units of consumption goods in the current period, where G = g N and g is a positive
Adapt the two-sided search model to include government activity as follows. Suppose that the government can operate firms, subject to the same constraints as private firms. In particular, the
Suppose that there is technological change that reduces the costs of recruiting for firms. Using the two-sided search model, determine the effects on the unemployment rate, the vacancy rate, the
Suppose the government’s goal is to reduce the unemployment rate. Some legislators propose that the government should give a subsidy s to any firm that hires a worker. Others argue that it would be
Suppose that the government makes it more difficult to qualify for employment insurance, for example, by increasing the duration of employment required before collecting EI benefits during an
Suppose there is an increase in total factor productivity, which implies that all firms offer higher wages. In the one-sided search model of unemployment, determine the effects of this on the

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