Questions and Answers of Foundations Macroeconomics

Sara has $200 in currency and $2,000 in a bank account on which the bank pays no interest. The inflation rate is 2 percent a year. Calculate the amount of inflation tax that Sara pays in a year.
If the velocity of circulation is constant, real GDP is growing at 3 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 7 percent a year, calculate the
Plot the short-run Phillips curve and aggregate supply curve for 2018 and mark the points A, B, C, and D on each curve that correspond to the data in the left part of the table.The left part of the
Explain the process by which a decrease in durable goods orders at a constant price level changes equilibrium expenditure and real GDP.U.S. durable goods orders slump most in three years, the
What determines the decrease in aggregate demand resulting from a decrease in durable goods orders?U.S. durable goods orders slump most in three years, the Commerce Department reported that orders
Calculate saving at each level of disposable income. Over what range of disposable income does consumption expenditure exceed disposable income? Calculate autonomous consumption expenditure.The table
Calculate the marginal propensity to consume. At what level of disposable income will saving be zero? If expected future income increases, in which direction will the consumption function change?The
Compare the shift of the AD curve with the $1 trillion increase in investment. Explain the magnitude of the shift of the AD curve.The figure shows the aggregate demand curve in an economy. Suppose
If investment increases by $1 trillion, calculate the change in the quantity of real GDP demanded if the price level is constant at 105.The figure shows the aggregate demand curve in an economy.
If investment increases by $0.5 trillion, calculate the change in equilibrium expenditure and the multiplier.In an economy with no exports and no imports, autonomous consumption is $1 trillion, the
If real GDP is $30 trillion, explain the process that takes the economy to equilibrium expenditure. If real GDP is $40 trillion, explain the process that takes the economy to equilibrium
If real GDP is $30 trillion, calculate disposable income, consumption expenditure, and aggregate planned expenditure. What is equilibrium expenditure?In an economy with no exports and no imports,
What determines the increase in aggregate demand resulting from an increase in durable goods orders?U.S. durable goods orders rebound strongly, the Commerce Department reported that orders for
Explain the process by which an increase in durable goods orders at a constant price level changes equilibrium expenditure and real GDP.U.S. durable goods orders rebound strongly, the Commerce
If investment crashes to $0.55 million but nothing else changes, what is equilibrium expenditure and what is the multiplier?The table shows real GDP, Y, the components of planned expenditure, and
Calculate the marginal propensity to consume and the marginal propensity to import. What is equilibrium expenditure?The table shows real GDP, Y, the components of planned expenditure, and aggregate
Find the value of Q, R, S, T, U, and V.The table shows real GDP, Y, the components of planned expenditure, and aggregate planned expenditure (in millions of dollars) in an economy in which taxes are
Calculate consumption expenditure at each level of disposable income. Over what range of disposable income is there dissaving? Estimate the level of disposable income at which saving is zero.The
Calculate the marginal propensity to consume. If wealth increases by $10 trillion, in which direction will the consumption function change?The table shows disposable income and saving in an economy.
The U.K. economy in 2016 was close to full employment. Use the AS-AD model to show the effect on U.K. real GDP of the effects of Brexit described in the news clip.Brexit means a bumpy road ahead for
Explain the effects of a fall in the value of the U.K. pound and lower spending by businesses and households on U.K. aggregate demand and aggregate supply.Brexit means a bumpy road ahead for the U.K.
When Martin Feldstein describes the Fed’s monetary policy as “easy,” he means that the Fed has created a lot of money, has made money grow at a fast rate, and has pushed interest rates down.
Why might Martin Feldstein be right? If he is right, what is he implying about the equation of exchange and the quantity theory of money?Robert F. Stauffer, Emeritus Professor of Economics at Roanoke
Why might Robert Stauffer be right? If he is right, what is he implying about the equation of exchange and the quantity theory of money?Robert F. Stauffer, Emeritus Professor of Economics at Roanoke
Read Eye on Creating Money on pp. 292—293. By how much did the monetary base increase and why didn’t M2 increase by the same percentage?
When the Fed increased the monetary base between 2008 and 2014, which component of the monetary base increased most: banks’ reserves or currency? What happened to the reserves that banks borrowed
What happened to the money multiplier between 2008 and 2014? What would the money multiplier have been if the currency drain ratio had increased? What would the money multiplier have been if the
What are the three functions that money performs? Which of the following items perform some but not all of these functions and which of the items are money?An antique clockAn S&L savings
What is the quantity theory of money? Define the velocity of circulation and explain how it is measured.
Naomi buys $1,000 worth of American Express travelers’ checks and charges the purchase to her American Express card. What is the immediate change in M1 and M2?
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
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
Use the table, which shows a bank€™s balance sheet, to work Problem. The desired reserve ratio on all deposits is 5 percent and there is no currency drain.Calculate the bank€™s
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
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
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
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
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
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 People€™s Bank of China buys or sells securities. Illustrate the effects of the open market operation on the
The table shows a bank€™s balance sheet. The bank has no excess reserves and there is no currency drain. Calculate the bank€™s desired reserve ratio. Liabilities Assets (millions
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
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
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
The numbers in the second column of the table are the Federal Reserve€™s estimates of personal wealth at the end of each year. The numbers in the third column are the Bureau of Economic
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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 People€™s Bank of China lowered the required reserve
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
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
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
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
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
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
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

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