Questions and Answers of International Economics Theory

In each of the following cases, calculate the change that occurs in the level of output as a result of the multiplier effect.a. Government purchases of goods and services increase by $600 million,
The multiplier effect is larger or smaller depending on whether households spend more or less of their additional income. What effect might the expectation of a recession have on the multiplier? What
Take a large sheet of paper and construct a circular flow model that illustrates all of the leakages and injections in the macroeconomy.
Fiscal and monetary policies are designed to influence the level of economic activity through their impacts on total spending. Using the circular flow model, identify the leakages and injections each
Identify the major spending categories and the major revenue sources of the federal government.
Suppose that the legislators in a particular state are choosing three strategies to raise revenue: (1) imposing a progressive income tax; (2) imposing a sales tax on food; and (3) imposing a 1
Determine whether each of the following taxes is progressive, proportional, or regressive.a. A sales tax of 7 percent on medicineb. A state income tax with three brackets: 3 percent for income under
Give some arguments for and against a federal personal income tax that would be proportional rather than progressive. Who stands to win and who stands to lose from a flat tax?
Identify the tax base in each of the examples in Question 2.Question 2 Determine whether each of the following taxes is progressive, proportional, or regressive.a. A sales tax of 7 percent on
Suppose that government policymakers are concerned about a forecasted recession. As a consequence, they want to increase spending in the economy by $10 billion and can follow any one of three
Explain how automatic stabilization stimulates spending in a recession and dampens spending during periods of demand-pull inflation. How does automatic stabilization affect the federal budget deficit?
Do you favor legislation requiring the federal government to balance its budget? Why?What are the economic implications of your position?
Explain whether the economy will expand, contract, stay the same, or inflate with each of the following fiscal actions taken alone. Assume the economy is not at full employment unless stated
Off-budget entitlement programs such as Medicare have grown in recent years. Could Congress reasonably limit spending for Medicare given the demographics of the country?
If the U.S. economy fell into a serious recession, what could Congress do to counter that recession? Specifically, how could it use each of its fiscal policy tools?
You are invited to participate in a commission that is exploring the future of the Social Security system. What recommendations might you make?
What effect would each of the following, taken alone, have on a federal budget that is currently balanced? How would the budgetary changes, where they occur, affect the national debt?a. An increase
Locate the most recent figures for the national debt. Has it increased or decreased in recent years? What type of effect will this debt have on future generations?
How does crowding out affect businesses?
Crowding out, where businesses and households are forced out of the market for borrowed funds by federal government borrowing, occurs because businesses and households are sensitive to interest rate
List the basic functions of money and explain how a $20 bill fulfills each of these functions.
In the campaign to become the GOP candidate for president in 2012, Ron Paul suggested returning the U.S. economy to a gold standard. Do you agree with him? Are there any circumstances under which a
If demand deposits are a medium of exchange, and if a medium of exchange is generally accepted as payment for goods and services, why is it sometimes difficult to pay with a check?
What are the basic components of M1 and M2? How do these two measures differ? In your opinion, which is a better measure of the money supply? Why?
“Regulation of financial depository institutions should be eliminated. These institutions should be free to sell their products like any other business in a free-enterprise system. As long as the
Answer the following questions concerning financial depository institutions.a. What distinguishes commercial banks from other financial depository institutions?Why are commercial banks so
Suppose the economy were in a recession and someone said to you, “If we simply started producing more, the recession and unemployment problems would go away.” How would you evaluate this
Personal consumption expenditures grow at a relatively constant rate over time, while investment spending fluctuates widely. What reasons might explain why personal consumption expenditures are more
Changes in the level of economic activity are related to changes in the spending of households, businesses, government units, and buyers in the foreign sector.a. How do personal consumption
What complications are created for businesses and the economy in general as a result of the administration of regulatory and antitrust policies in an increasingly global environment?
The antitrust laws are designed to control the growth of monopoly power in specific markets. What are some economic reasons for concern over monopoly power? Are there any noneconomic reasons for
What would be the effect of each of the following on Uptown Bank’s excess reserves and loan-making ability if the bank had $600 million in deposits, a 5 percent reserve requirement, and actual
From the end of 2008 to the time of publication of this text, the price to borrow money was extremely low and savers were earning very little on CDs and other saving accounts. In your opinion, were
Identify four basic components used to develop a model and explain how macroeconomic models can be influenced by history.
“When the economy is facing high rates of unemployment and inflation, policymakers must decide which of these problems to curb at the expense of the other.” Is this statement accurate? What types
Show how the classical economists thought about aggregate supply by graphing the classical aggregate supply curve. Explain why they believed that this represented the economy.
Would you consider yourself to be classical, new classical, Keynesian, new Keynesian, monetarist, or other in your attitude toward macroeconomic policies? On what reasoning is your preference based?
Draw an aggregate demand curve for the classical model on the graph above. Explain what happens in the economy when this demand increases and illustrate it on the graph. Prices and Wages 0 Full
What is the natural rate hypothesis and what problems does it cause for those wishing to pursue aggressive macroeconomic policies? What problems might adaptive and rational expectations cause for the
Fill in the column below (where all figures are in billions) by indicating whether the economy is expanding, contracting, or at equilibrium. On the graph following, draw a “Spending equals
Macroeconomic policy proposals are frequently tied to political agendas. In your opinion, which of the policies that you have studied is politically the most desirable, and which is the least
Using the information from number 4 above, explain how the relationship between Leakages and Injections influences economic conditions in the last column.
Just as macroeconomic problems affect economic theory, they also affect the arts—visual, art, music, and literature—of the day. Give an example of how a piece of visual art, a song, a novel, or a
Explain how interest rate, wealth, and foreign trade effects are important to aggregate demand in the new classical model.
How do the assumptions underlying the various theories you have studied in this chapter help to explain why debates on the proper role of government in macroeconomic activity can become so heated?
What is the difference between short-run and long-run aggregate supply in the new classical model?
One lesson from this chapter is that the popularity of an economic theory depends in part on its ability to offer solutions for current, pressing problems. Because economic theories move in and out
Fill in the following table by providing, for each listed school of thought, the variables on which the theory is built, the conclusions with regard to the macroeconomy, and the role of government
Would a person maximize satisfaction by buying a $15 product that adds twice as much satisfaction as a $5 product? Why? Would the person maximize satisfaction by buying the$15 product if the price of
Over the years, the amount of income spent on services in the United States has grown to the point where it is larger than the amount spent on both durable goods, such as automobiles, and nondurable
An individual maximizes economic well-being by making spending and earning decisions, and a business maximizes profit by deciding how much of its product to produce and sell. These decisions are
Can you explain in economic terms why someone with a so-called sweet tooth might be more than willing to buy an expensive chocolate mousse cake but would not consider buying a high-quality steak?
Explain differences in the three basic forms of business: proprietorship, partnership, and corporation. What are the advantages and disadvantages of each form for the owners?
What factors should a person consider when choosing between two job offers?
What is the difference between a stock and a bond? Why might it be necessary for a firm to issue bonds in order to acquire another firm? What are some factors that would cause the price of a
Suppose that you are a business organization consultant, and three people come to you, each wanting to start a business. The first person wants to start an organic vegetable farm with her sister, the
What is the difference among a conglomerate merger, horizontal merger, and vertical merger? Give some examples of each.
“Paying higher salaries to its workers, or incurring higher costs to increase its share of the market, does not mean that a firm is giving up the objective of maximum profit.Instead, it means that
Suppose a coworker says, “What’s required for a business to maximize profit is very simple: Produce the lowest-quality product you can, don’t worry about the environment, and pay the lowest
In a proprietorship, the owner is often the manager, but in a corporation the owners are often different from the managers. What advantages and disadvantages might there be in having a separation of
Companies sometimes provide funds to colleges and universities for buildings or stadiums. Do you think this is done because of a civic motivation or is it a marketing tool?
In this chapter you have been introduced to marginal benefit, marginal utility, marginal revenue, social marginal benefit, marginal cost, and social marginal cost. To what specifically does each term
In each of the following situations, determine what the decision maker might be seeking to maximize and indicate (1) some factors that should be included in the calculation of costs and (2) some
Explain why(a) net benefit increases when marginal benefit exceeds marginal cost; (b)net benefit is at a maximum when marginal benefit equals marginal cost; and(c) net benefit falls when marginal
What could be opportunity costs of each of the following actions?a. Moving from a smaller home that takes 40 percent of your income to own and maintain to a larger “home of your dreams” that
In what respects are the following maximizing decisions similar to each other and in what respects are they different?a. The decision by a person about how much cake to eatb. The decision by a
Some cities have extensive codes regulating property use, from the type and size of fences and signs that are permitted to maintenance standards that require grass to be cut and yards to be free of
The following table gives the utility points received by a person from each additional hour of exercise per week, as well as the points that each additional hour costs. Using this table, answer the
The emission of toxins into the air is a well-known example of a negative externality.What are some of the costs imposed on society by these emissions? In answering this question, be sure to consider
Suppose that your neighbor has just closed her books from her first year in the retail flower business and is ecstatic with the profit her accountant says she has earned. The store grossed $250,000
Because pesticides and herbicides used by farmers are increasingly poisoning groundwater and streams, would you back a proposal to ban their use? Why?
Using the following cost and revenue information, answer the questions below the table.a. What are the marginal revenue and marginal cost of each additional unit of output?b. What is the
Cost-benefit analysis can be applied to a wide range of economic and noneconomic decisions. Give five examples of noneconomic situations where the cost-benefit analysis developed in this chapter
Use public choice theory to explain the following.a. Low voter turnout for the election of a few candidates for minor officesb. Voting along party lines instead of judging each candidate’s
Although DDT, a pesticide, has been banned in the United States, it is used extensively in many other nations, primarily to curb malaria caused by mosquito bites. In some parts of the world, malaria
What is the producing sector? Give some examples. How does this differ from the industry classification?
Can you construct a production function for earning an A in this course?a. What are the necessary inputs?b. How much of each input is required?c. How are the inputs combined?d. Does the production
A friend believes that, as far as the costs of operating a business are concerned, shortrun costs are the costs that are incurred within the current year and long-run costs are those spread over a
List some possible explanations for the differences in production techniques used by two pizza restaurants: One is an independent mom-and-pop operation and the other is part of a national chain.
The short-run average total cost curve and the long-run average total cost curve are similarly shaped. What causes the short-run average total cost curve to slope down and then up? What causes the
Technological change can cause creative destruction. Give a recent example of the process of creative destruction. What products and jobs were affected in your examples?
The Law of Diminishing Returns was introduced in this chapter and the Law of Diminishing Marginal Utility was introduced in Chapter 11. Are there any similarities between these two Laws?
Why does a firm incur fixed costs over the short run when its output is zero, and why do fixed costs not change as the level of output changes? Why do a firm’s short-run total variable costs
Indicate whether each of the following is probably a fixed factor or a variable factor in the short run.a. Fertilizer used to grow crops on a farmb. The heat required to keep the pipes in a warehouse
Suppose a proposal is offered to consolidate the more than 75 towns surrounding a large city into a few larger towns. What economies of scale affecting fire, police, administrative, and other
What is the Law of Diminishing Returns and why does it affect short-run but not longrun production? How will the Law of Diminishing Returns affect the productivity of each additional student washing
How might a business’s ability to take advantage of economies of scale affect the price it charges for its product, its profitability, and its competitiveness with rival sellers? What concerns
Complete the following table of short-run costs. From the information in the completed table, plot a total cost curve on the left-hand graph that follows the table and an average total cost curve and
Identify the three phases of a long-run average total cost curve. What is the reason for the behavior of long-run average total cost in each phase?
Into which of the four market structures would you place each of the following? Why would you make the classification?a. A small organic farm growing herbs, arugula, and tomatoes on 5 acresb. A large
Pure competition is said to be the most competitive of all the market structures. If this is true, why is it that no one firm is concerned with what any other firm does in a purely competitive market?
How do firms in each of the four market structures differ in terms of their number of rivals, control over price, product differentiation, ability to earn economic profit over the long run, and
You have a friend who thinks the market for automobiles should be changed from oligopolistic to monopolistically competitive by breaking the existing firms into a large number of smaller firms. Do
What is the relationship between price and average total cost when a firm operates with an economic profit, takes a loss, or breaks even? Illustrate, in the accompanying graphs, the relationship
A market is defined according to the geographic area in which sellers compete for buyers and the extent to which buyers view sellers’ products as substitutes. What, in your opinion, would be the
Explain the process that drives purely competitive firms to operate efficiently, receive a price equal to lowest average cost, and earn no economic profit in the long run.
In the United States, people keep increasing their purchases over the Internet. Does this growth in Internet shopping increase competition for retail stores, or are these different markets? Explain
Why does a firm in pure competition operate efficiently in the long run, while firms in the other three market structures do not? Why is it important to consumers that a firm operate efficiently?
Why might a seller in an oligopoly market where mutual interdependence and rivals’responses are important choose to increase its sales through an advertising campaign rather than by lowering the
Monopolistically competitive sellers face downward-sloping demand curves, and pure competitors face perfectly horizontal demand curves. What is the difference in the competitive environments of these

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