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foundations macroeconomics
Foundations of Macroeconomics 8th edition Robin Bade, Michael Parkin - Solutions
A bank has $500 million in checkable deposits, $600 million in savings deposits, $400 million in small time deposits, $950 million in loans to businesses, $500 million in government securities, $20 million in currency, and $30 million in its reserve account at the Fed. Calculate the bank’s
What can the Fed do to increase the quantity of money and keep the monetary base constant? Explain why the Fed would or would not.Change the currency drain ratio.Change the required reserve ratio.Change the discount rate.Conduct an open market operation.
Use the table, which shows a banks balance sheet, to work Problem. The desired reserve ratio on all deposits is 5 percent and there is no currency drain.Calculate the banks excess reserves. If the bank uses all of these excess reserves to make a loan, what is the quantity of
If the Fed makes a decision to cut the quantity of money, explain the short-run effects on the quantity of money demanded and the nominal interest rate.
The Fed conducts an open market purchase of securities. Explain the effects of this action on the nominal interest rate in the short run and the value of money in the long run.
If the velocity of circulation is growing at 1 percent a year, the real interest rate is 2 percent a year, the nominal interest rate is 7 percent a year, and the growth rate of real GDP is 3 percent a year, calculate the inflation rate, the growth rate of money, and the growth rate of nominal GDP.
Suppose that the government passes a new law that sets a limit on the interest rate that credit card companies can charge on overdue balances. As a result, the nominal interest rate charged by credit card companies falls from 15 percent a year to 7 percent a year. If the average income tax rate is
What is hyperinflation? Is Venezuela in a hyperinflation?
Compare inflation in Venezuela in 2016 with that in Germany in 1923. Why did Germany print money in 1923 and create hyperinflation? Why is Venezuela printing money today? Why does a high inflation rate bring looting and social unrest?
Why did inflation increase during the 1970s? In which decades did velocity growth break the link between money growth and inflation?
Explain what causes inflation. Why is it easier to predict the decade-average inflation rate than the inflation rate in a single year?
If the Fed doubled the quantity of money and nothing else changed, what would happen to the price level in the short run and the long run? What would happen to the inflation rate?
Suppose that banks launch an aggressive marketing campaign to get everyone to use debit cards for every conceivable transaction. They offer prizes to new debit card holders and introduce a charge on using a credit card. How would the demand for money and the nominal interest rate change?
Draw a graph of the money market to illustrate equilibrium in the short run. If the growth rate of the quantity of money increases, explain what happens to the real interest rate and the nominal interest rate in the short run.
The Fed conducts an open market sale of securities. Explain the effects of this action in the short run on the nominal interest rate and in the long run on the value of money and the price level.
Explain how the open market operation described in the news clip will change the quantity of money in China.
In the open market operation described in the news clip, explain whether the Peoples Bank of China buys or sells securities. Illustrate the effects of the open market operation on the balance sheets of the banks and the central bank.The Peoples Bank of China (the central
The table shows a banks balance sheet. The bank has no excess reserves and there is no currency drain. Calculate the banks desired reserve ratio. Liabilities Assets (millions of dollars) 20 Checkable deposits 5 Savings deposits 75 Reserves at the Fed Cash in vault 80 120
Explain the Fed’s policy tools and briefly describe how each works.
Suppose that banks had deposits of $500 billion, a desired reserve ratio of 4 percent and no excess reserves. The banks had $15 billion in notes and coins. Calculate the banks’ reserves at the central bank.
Terry takes $100 from his checking account and deposits the $100 in his savings account. What is the immediate change in M1 and M2?
Monica transfers $10,000 from her savings account at the Bank of Alaska to her money market fund. What is the immediate change in M1 and M2?
What are the three functions that money performs? Which of the following items perform some but not all of these functions, and which perform all of these functions? Which of the items are money?A checking account at the Bank of AmericaA dimeA debit card
What is money? Would you classify any of the following items as money? Store coupons for noodlesStore coupons for noodlesA $100 Amazon.com gift certificateFrequent flier milesCredit available on your Visa cardThe dollar coins that a coin collector owns
The numbers in the second column of the table are the Federal Reserves estimates of personal wealth at the end of each year. The numbers in the third column are the Bureau of Economic Analysiss estimates of personal saving each year. In which years did the change in wealth
On January 1, 2016, Sophie’s Internet Cafe owned 10 computer terminals valued at $8,000. During 2016, Sophie’s bought 5 new computer terminals at a cost of $1,000 each, and at the end of the year, the market value of all of Sophie’s computer terminals was $11,000. What was Sophie’s gross
Explain why the supply of loanable funds and the demand for loanable funds decreased during the global financial crisis of 2007-2008. Draw a graph of the loanable funds market before the crisis and use your graph to illustrate the source and effects of the crisis on saving, investment, and the real
Read Eye on Financial Markets on p. 263. What would the real interest rate and quantity of loanable funds have been in 2013 if the supply of loanable funds had been at its 2007 level? Explain your answer.
The German government’s budget was balanced in 2014 and moved into a surplus of $13 billion in 2015. Helped by higher tax revenues, the budget surplus was twice as high as expected.Explain the effect of Germany’s budget surplus on the loanable funds market in Germany. How will the budget
Rio de Janeiro requested federal funding to help pay for public services during the Olympics, at a time when Brazil’s federal government revenue has fallen and created a large deficit.Draw a graph of the loanable funds market in Brazil. Suppose that the Brazilian government borrows the required
With an increase in political tension, many governments increased defense spending, which decreased government budget surpluses. Show, on a graph, the effects of a decrease in government budget surpluses if there is no Ricardo-Barro effect. Explain how the effects differ if there is a partial
What is the market for financial capital? What is financial capital? Explain why, when the real interest rate rises, the demand for loan able funds does not change but the quantity of funds demanded decreases.
Mike takes a summer job washing cars. During the summer, he earns an after-tax income of $3,000 and he spends $1,000 on goods and services. What was Mike’s saving during the summer and the change, if any, in his wealth?
Of the preconditions for economic growth and the policies that might achieve faster growth, which are already present in Silicon Valley (and the rest of the U.S. economy), and which, if any, might need to be strengthened?
Describe and illustrate in a graph what happened in the economy in the table if in year 1, capital per hour of labor was 30 and in year 2 it was 40.
The table describes labor productivity in an economy. What must have occurred in this economy during year 1?
Explain how an increase in physical capital and an increase in human capital change labor productivity. Use a graph to illustrate your answer.
Distinguish between a low and high incomes and a low and high economic growth rates. What are the key features of an economy that are present when incomes are high or fast growing and absent when incomes are low and stagnating or growing slowly? Provide an example of an economy withLow income and
Read Eye on Rich and Poor Nations. Which nations are the richest and which are growing the fastest? What are the conditions that lead to higher incomes and faster growing incomes?
China’s real GDP growth rate has fallen from 10 percent a year to 6.8 percent a year. At the same time, the distribution of income has become more unequal. Suggestions for dealing with these problems include encouraging the growth of small firms, expanding the services sector, and investing more
What can governments in Africa do to encourage economic growth and raise the standard of living in their countries?
Draw productivity curves to illustrate the changes in labor productivity that occurred in the U.S. economy in the 1960s and contrast the change with that after 2007. What were the new technologies that arrived in the 1960s?
What were the sources of labor productivity growth in the U.S. economy during the fifty years since 1960? How did the 1960s differ from the more recent decades?
Explain how an increase in human capital changes labor productivity. Do diminishing returns arise? Provide an example of an increase in human capital. Use a graph of the productivity curve to illustrate your answer.
Explain how advances in technology change labor productivity. Do diminishing returns arise? Provide an example of an advance in technology. Use a graph of the productivity curve to illustrate your answer.
If the quantity of money is $3 trillion, real GDP is $10 trillion, the price level is 0.9, the real interest rate is 2 percent a year, and the nominal interest rate is 7 percent a year, calculate the velocity of circulation, the value of M ´ V, and nominal GDP.
Calculate the real interest rate.In 2007, the United States was at full employment. The quantity of money was growing at 6.4 percent a year, the nominal interest rate was 4.4 percent a year, real GDP grew at 1.9 percent a year, and the inflation rate was 2.9 percent a year. Use this information to
Was the velocity of circulation constant? In 2007, the United States was at full employment. The quantity of money was growing at 6.4 percent a year, the nominal interest rate was 4.4 percent a year, real GDP grew at 1.9 percent a year, and the inflation rate was 2.9 percent a year. Use this
Draw a graph to illustrate the demand for money. On the graph show the effect of an increase in real GDP and the effect of an increase in the number of families that have a credit card.
The money multiplier _______A. Increases if banks increase their desired reserve ratioB. Increases if the currency drain ratio increasesC. Is 1 if the desired reserve ratio equals the currency drain ratioD. Decreases if banks increase their desired reserve ratio
An open market _______ of $100 million of securities ______A. Purchase; increases bank reservesB. Sale; increases bank reservesC. Purchase; decreases the Fed’s liabilitiesD. Sale; increases the Fed’s liabilities
A commercial bank creates money when it does all the following except ______.A. Decreases its excess reservesB. Makes loansC. Creates depositsD. Puts cash in its ATMs
The Fed’s policy tools include all the following except _______.A. Required reserve ratio and open market operationsB. Quantitative easingC. Discount rateD. Taxing banks’ deposits at the Fed
Commercial banks’ assets include ________.A. Bank deposits of individuals and businesses and bank reservesB. Loans to individuals and businesses and government securitiesC. Bank reserves and the deposits in M2D. Government securities and borrowed funds
Rick withdraws $500 from his savings account, keeps $100 as currency, and deposits $400 in his checking account.A. M1 increases by $400 and M2 decreases by $500.B. M1 does not change, but M2 decreases by $500.C. M1 does not change, but M2 decreases by $400.D. M1 increases by $500 and M2 does not
Money in the United States today includes _______.A. Currency and deposits at both banks and the FedB. The currency in people’s wallets, stores’ tills, and the bank deposits that people and businesses ownC. Currency in ATMs and people’s bank depositsD. The banks’ reserves and bank deposits
A commodity or token is money if it is ________.A. Generally accepted as means of paymentB. A store of valueC. Used in a barter transactionD. Completely safe as a store of value
If the currency drain ratio in China is 10 percent of deposits, by how much did the money multiplier change when the required reserve ratio changed as described in the news clip?The People’s Bank of China lowered the required reserve ratio from 17.5 percent to 17 percent, noting that it remained
If the currency drain ratio in China is 10 percent of deposits and the desired reserve ratio equals the required reserve ratio, calculate the money multipliers in China and compare it with the U.S. money multiplier.The People’s Bank of China lowered the required reserve ratio from 17.5 percent to
Compare the required reserve ratio in China and the required reserve ratio on check able deposits in the United States today.The People’s Bank of China lowered the required reserve ratio from 17.5 percent to 17 percent, noting that it remained much higher than in other countries.
If there is no currency drain, what is the quantity of loans and the quantity of total deposits when the bank has no excess reserves?The Peoples Bank of China lowered the required reserve ratio from 17.5 percent to 17 percent, noting that it remained much higher than in other countries.
If real GDP increases from $5 billion to $5.25 billion and the population increases from 2 million to 2.02 million, real GDP per person increases by ___ percent.A. 5.0B. 1.0C. 2.5D. 4.0
If the population growth rate is 2 percent, real GDP per person will double in 7 years if real GDP grows by ______ percent per year.A. 7B. 10C. 12D. 14
All of the following increase labor productivity except _________.A. The accumulation of skill and knowledgeB. An increase in capital per hour of laborC. An increase in consumptionD. The employment of a new technology
The increase in real GDP per hour of labor that results from an increase in capital per hour of labor ________A. Is constant and independent of the quantity of capitalB. Is larger at a small quantity of capital than at a large quantity of capitalC. Is smaller at a small quantity of capital than at
The increase in real GDP per hour of labor that results from an advance in technology makes labor _______ productive ________.A. More; at all quantities of capitalB. Less; and capital more productiveC. More; only at a large quantity of capitalD. More; and capital less productive
The classical growth theory is that real GDP per person ______.A. Only temporarily rises and then returns to the subsistence levelB. Grows foreverC. Is constant and does not changeD. Increases as the population grows
In new growth theory, the source of economic growth is ______.A. More leisureB. New and better jobsC. The persistent want for a higher standard of livingD. An ever increasing growth rate of capital per hour of labor
An economy can achieve faster economic growth without ______.A. Markets and property rightsB. People being willing to save and investC. Incentives to encourage the research for new technologiesD. An increase in the population growth rate
An increase in the government budget deficit _______.A. increases private saving and investmentB. increases private saving and decreases investmentC. increases the supply of private saving and decreases investmentD. decreases private saving and investment
Crowding out occurs when ______.A. households’ budgets are in deficit and saving decreasesB. the government budget is in surplus, so people have paid too much taxC. the government budget is in deficit and the real interest rate risesD. the government budget is in deficit but taxpayers are
A government budget surplus _______.A. increases the supply of loanable fundsB. raises the real interest rateC. decreases the demand for loanable funds and lowers the real interest rateD. decreases net taxes, increases disposable income, and increases saving
An increase in expected profit _______ the real interest rate and ________ the quantity of loanable funds.A. decreases; decreasesB. increases; decreasesC. decreases; increasesD. increases; increases
The supply of loanable funds increases ________.A. when the demand for loanable funds increasesB. when people increase saving as the real interest rate risesC. when disposable income increases or wealth decreasesD. if net taxes decrease or expected future income increases
In the loanable funds market, an increase in ________.A. the real interest rate increases the demand for loanable fundsB. expected profit increases the demand for loanable fundsC. expected profit doesn’t change the demand for loanable funds, but the quantity of loanable funds demanded increasesD.
If the price of a U.S. government bond is $50 and the owner of the bond is entitled to $2.50 income each year, then the interest rate on the bond is ____.A. 0.2 percentB. 5 percentC. 10 percentD. 20 percent
Financial capital is the ___________.A. money used to buy stocks and bondsB. money used to buy physical capitalC. funds that savers supply and buyers of physical capital borrowD. money in the bank
Cindy takes a summer job and earns an after-tax income of $8,000. Her living expenses during the summer were $2,000. What was Cindy’s saving during the summer and the change, if any, in her wealth?
The Fed buys $2 million of securities from AIG. If AIG’s bank has a desired reserve ratio of 0.1 and there is no currency drain, calculate the bank’s excess reserves as soon as the open market purchase is made, the maximum amount of loans that the banking system can make, and the maximum amount
The monetary base and the change in its components.If the desired reserve ratio is 5 percent, the currency drain ratio is 20 percent of deposits, and the central bank makes an open market purchase of $1 million of securities, calculate the change in.
The quantity of money, and how much of the new money is currency and how much is bank deposits. If the desired reserve ratio is 5 percent, the currency drain ratio is 20 percent of deposits, and the central bank makes an open market purchase of $1 million of securities, calculate the change in.
Why do you think the IMF required countries with large deficits, like those in Eastern Europe, to cut spending rather than increase it?The International Monetary Fund (IMF) reported that it acted effectively in combating the global recession, especially in Eastern Europe. The IMF made $163 billion
Explain how an increase in government expenditure will change the government’s budget balance and the loanable funds market.The International Monetary Fund (IMF) reported that it acted effectively in combating the global recession, especially in Eastern Europe. The IMF made $163 billion available
The Center for Economic and Policy Research in Washington, D.C. claims that the IMF didn’t allow developing countries that were looking for loans to expand their deficits sufficiently. Would these countries have weathered the global recession better if they had obtained larger loans from the
Explain why the U.S. saving rate might have increased and its effect on the supply of loanable funds.The U.S. saving rate increased from –0.1 percent in 2011 to 2.0 percent in 2012 to 2.4 percent in 2013, to 2.9 percent in 2014, and to 3.0 percent in 2015.
How can the saving rate be negative? Why might a negative saving rate be something to worry about? How might U.S. saving be increased?The U.S. saving rate increased from –0.1 percent in 2011 to 2.0 percent in 2012 to 2.4 percent in 2013, to 2.9 percent in 2014, and to 3.0 percent in 2015.
The stock market boom of 2002–2007 increased wealth by trillions of dollars. Explain the effect of this increase in wealth on the equilibrium real interest rate, investment, and saving.The U.S. saving rate increased from –0.1 percent in 2011 to 2.0 percent in 2012 to 2.4 percent in 2013, to 2.9
On January 1, 2016, Terry’s Towing Service owned 4 tow trucks valued at $300,000. During 2016, Terry’s bought 2 new trucks for a total of $180,000. At the end of 2016, the market value of all of the firm’s trucks was $400,000. What was Terry’s gross investment? Calculate Terry’s
Calculate U. S. net investment and gross investment during 2013.The Bureau of Economic Analysis reported that the U.S. capital stock was $49.6 trillion at the end of 2012, $51.2 trillion at the end of 2013, and $53.6 trillion at the end of 2014. Depreciation in 2013 was $1.6 trillion, and gross
Calculate U.S. depreciation and net investment during 2014.The Bureau of Economic Analysis reported that the U.S. capital stock was $49.6 trillion at the end of 2012, $51.2 trillion at the end of 2013, and $53.6 trillion at the end of 2014. Depreciation in 2013 was $1.6 trillion, and gross
China invests almost 50 percent of its annual production in new capital compared to 15 percent in the United States. Capital per hour of labor in China is about 25 percent of that in the United States. Explain which economy has the higher real GDP per hour of labor, the faster growth rate of labor
How would you explain the disconnect between the advances in technology described in the news clip and the pace of real GDP growth?Dear Silicon Valley: Forget flying cars, give us economic growth We have made enormous advances in computing technology. In Silicon Valley at Alphabet’s X labs,
Thinking about the perpetual motion machine of economic growth, what are the missing ingredients that make some of today’s amazing technologies fail to deliver faster economic growth?Dear Silicon Valley: Forget flying cars, give us economic growth We have made enormous advances in computing
If these growth rates continue, in what year would real GDP be twice what it was in 2006?Use the following information to work Problem. China’s growth rate of real GDP in 2005 and 2006 was 10.5 percent a year and its population growth rate was 0.5 percent a year.
If these growth rates continue, in what year would real GDP per person be twice what it was in 2006?Use the following information to work Problem. China’s growth rate of real GDP in 2005 and 2006 was 10.5 percent a year and its population growth rate was 0.5 percent a year.
Two island economies, Cocoa Island and Plantation Island, are identical in every respect except one. A survey tells us that at full employment, people on Cocoa Island spend 1,000 hours a day on job search, while the people on Plantation Island spend 2,000 hours a day on job search. Which economy
Where are all the workers?The baby boomers—people born between 1946 and 1964—are retiring and the percentage of adult Americans working or actively looking for a job is at its lowest level in nearly forty years.How would you expect the change in the labor force described in the news clip to
Read Eye on U.S. Potential GDP on p. 202 and then explain why U.S. potential GDP per worker per week is greater than that in Europe. What could induce Europeans to work the same hours as Americans and would that close the gap between potential GPD per worker in the two economies?
Draw a graph of the demand for and supply of labor in Korea and the United States. Mark a point at the equilibrium quantity of labor per person per week and the real wage rate in each economy. Explain the difference in the two labor markets.In Korea, real GDP per hour of labor is $22, the real wage
Draw a graph of the production functions in Korea and the United States. Mark a point on each production function that shows potential GDP per hour of work in each economy. Explain the difference in the two production functions.
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