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Macroeconomics Principles Applications And Tools 8th Edition Arthur OSullivan ,Steven Sheffrin ,Stephen Perez - Solutions

In the 1950s and 1960s, countries in _______ used tariffs and other policies to nurture domestic industries.
If only one firm can exist in a market, a government may try to subsidize the firm so that the country can share in the _______ profits.
The _______ industry argument is often given to provide a rationale for tariffs for new firms.
Auctioning Import Licenses. In the text we explained that tariffs can be set to have the same effects as import quotas. However, if the government gives import licenses to producers, it will not
Tariffs and the Poor. Historically, apparel and textiles were subject to high tariffs. Explain why this might hurt low-income consumers more than highincome consumers. (Related to Application 1 on
Tariffs on Computer Chips. Suppose a country imposed tariffs on computer chips to protect its chipmaking industries. What other types of firms in that economy might object to this policy?
Incentives for Smuggling. If a country bans imports, smugglers may try to penetrate its markets. Suppose Chipland bans shirt imports, causing some importers to bribe customs officials who “look the
Threatening to impose a tariff on a country’s exports if it doesn’t open up its markets to trade is an example of a _______ policy.
From the perspective of the government, a _______ (tariff/quota) is better.
The equilibrium price under an import quota is _______ (above/below) the price that occurs with an import ban and _______ (above/below) the price that occurs with free trade.
If a country bans the importation of a particular good, the market equilibrium is shown by the intersection of the _______ curve and the _______ curve.
Who Benefits in the Short Run? Suppose a country is about to open its markets for trade. In the short run, would you rather be employed in an industry with a comparative advantage or a comparative
Measuring the Gains from Trade. Consider two countries, Tableland and Chairland, each capable of producing tables and chairs. Chairland can produce the following combinations of chairs and tables:All
Benefits from Trade. In Country U, the opportunity cost of a computer is 10 pairs of shoes. In Country C, the opportunity cost of a computer is 100 pairs of shoes.a. Suppose the two countries split
Finding Comparative Advantage. In one minute, Country B can produce either 1,000 TVs and no computers or 500 computers and no TVs. Similarly, in one minute Country C can produce either 2,400 TVs or
Countries will always export the goods in which they have absolute advantage. (True/False)
Suppose a country has a comparative advantage in shirts but not computer chips. Workers in the chip industry will be _______ with trade.
The terms of trade is the rate at which two goods can be _______ for one another.
A country has a comparative advantage if it has a lower _______ cost of producing a good.
Why Has the United States Not Instituted a VAT? The United States differs from virtually all developed countries in that it does not have a VAT.What important aspect of the U.S. political system
Tax Policy and National Savings. Suppose the government launches a new program that allows individuals to place funds of up to $2,000 in a taxfree account. Do you believe that this will have a
Traditional and Roth IRAs. With a traditional IRA, you get to deduct the amount you contribute from your current taxable income, invest the funds free from tax, but then pay taxes on the full amount
Under our current corporate tax system, earnings from corporations that are paid out as dividends are taxed _______ times.
Most capital gains accrue to low-income individuals because there are more of them. _______ (True/False)
A sales tax that is levied at all stages of production is known as a(n) _______ tax.
Suppose there is a consumption tax of 20 percent. An individual earns $100 and saves $30. Her tax will be equal to _______ .
Targeting Gold? Some observers have suggested that the Fed use gold as an indicator of inflation and tighten monetary policy when gold prices rise. What are the pros and cons of this policy?
The Fed on Autopilot. Some economists believe that the Federal Reserve should follow strict rules for the conduct of monetary policy. These rules would require the Fed to make adjustments to interest
What Rate for Inflation Targeting? An economist suggests that what matters for financial markets is a stable inflation rate, not a zero inflation rate. As long as inflation is stable, all individuals
Targeting the Price Level with Supply Shocks.Suppose the Fed has brought the inflation rate down to zero to stabilize the price level. An adverse supply shock (such as an increase in the world price
Price-level targeting is the same as inflation targeting.(True/False)
Economist _______ developed a rule for monetary policy that maintains a low rate of inflation but allows the Fed to adjust interest rates when output deviates from potential.
In _______ , inflation targeting was adopted in 1992, and elected officials determine the precise inflation targets that the central bank must meet.
Proponents of inflation targeting argue that it would make central banks more _______ if they were committed to a long-run inflation target.
Policy Options for the Federal Budget. The Web site for the Congressional Budget Office ( www.cbo.gov ) contains its projections for future budget surpluses and deficits as well as options for
Tax Smoothing or Strategic Tax Policy? Assume the pressures of an aging population and increases in health-care costs will increase total federal spending in the future significantly.a. Under the
Fiscally Troubled States Today. A number of major states, for example California, have been experiencing fiscal problems. Although no states have defaulted on their debts in recent years, a number of
Interest Rates, Primary Surpluses, and Government Debt. The gap between taxes and spending, excluding interest on the debt, is known as the primary surplus . Suppose there is $100 million of
percent Use the data to answer the following questions:a. What are the deficit/GDP ratio and debt/GDP ratio? How do these ratios compare to the same ratios in the United States today? To what period
Debt and Deficits in Belgium. Here are some data for Belgium in 1989:GDP: 6,160 billion Belgian francs Debt: 6,500 billion Belgian francs Deficit: 380 billion Belgian francs Interest Rate on Bonds:
When a central bank purchases new government bonds, it is _______ the deficit.
Proponents of Ricardian equivalence believe that deficits do not really matter as long as taxes are raised in the future. (True/False)
If a government runs a deficit, it will _______ its outstanding debt.
Unprofitable Government Enterprises and Inflation.In some developing countries, governments are forced to support large enterprises that persistently lose substantial sums of money. Why might this
Hyperinflation and Barter. Some economists and journalists noticed that during the recent hyperinflation in Zimbabwe that the economy was turning to a barter economy. Why do you think this would
Ending Hyperinflations and the Independence of Central Banks. Why is it important to create an independent central bank, one that is not subservient to the rest of the government, in order to stop a
Hyperinflations cannot occur unless the growth rate of _______ is very high.
Economists call inflation “hyperinflation” when the inflation rate exceeds _______ percent per month.
During hyperinflations the velocity of money tends to _______ sharply.
To finance a budget deficit, a government can either borrow from the public or create _______ .
Velocity of Money in the United States. Using the Federal Reserve Bank of St. Louis Web site( www.research.stlouisfed.org/fred2 ), calculate the velocity of M1 and M2 in 1960 and 2000. How have they
Using the Quantity Equation. If the growth rate of money is 10 percent per year, annual inflation is 7 percent, and the growth rate of velocity is 1 percent per year, what is the growth rate of real
Interest Rates and the Velocity of Money. When interest rates are high, people hold less money. How would this affect the velocity of money?
If the growth of the money supply is 4 percent a year, velocity decreases by 1 percent, and there is no growth in real output, the inflation rate equals _______ .
If we know the growth of velocity, income, and the money supply, we can explain the _______ rate.
The quantity equation links money, velocity, real income, and _______ .
The velocity of money is defined as _______ income divided by the supply of money.
Buying Gold to Protect against Inflation. Consider the following statement: “Since gold is a commodity and prices of commodities by definition increase with inflation, buying gold will protect me
Pay Incentives for Fed Officials? In the private sector, the pay of executives is typically tied to the performance of their company. Could this work in the public sector as well? Suppose pay for the
Public Pronouncements and Fed Officials. In addition to political and institutional factors, public pronouncements also affect the credibility of the Fed.When Alan Blinder, a Princeton University
When the Bank of England became independent, inflation expectations .
The evidence shows that lower inflation rates are associated with central bank .
In the face of an upward shift in the aggregate supply curve, the Fed can increase the supply of money. This will prevent a recession, but will cause an increase in _______ .
An aggressive union will shift the aggregate supply curve _______ , causing prices to and real GDP to _______ .
Oil Price Changes, Vacancies, and the Natural Rate.During the mid-1970s, changes in oil prices required products to be produced by different types of firms in different locations. This raised the
Hysteresis and the Natural Rate of Unemployment.In economics the term “hysteresis” means that the history of the economy has a lingering effect on current economic performance. During the
Explaining a Movement in the Inflation Rate. In Figure 16.1 you can see that inflation rose between 1988 and 1989 with little change in the unemployment rate. Can you explain why?
Targeting the Natural Rate? Because the natural rate of unemployment is the economists’ notion of what constitutes “full employment,” it might seem logical for the Fed to use monetary policy to
In the late 1980s, as unemployment fell below the natural rate, inflation _______ .
The increase in the fraction of young people in the labor force that occurred when the baby-boom generation came of working age tended to _______(raise/lower) the natural rate of unemployment.
Robert E. Lucas, Jr., explained business cycles with rational expectations. (True/False)
If inflation increases less than expected, the actual unemployment rate will be _______ (above/below) the natural rate.
Examples of Money Illusion. What do the following two quotes have in common?a. “My wages are going up 5 percent a year. If only inflation weren’t 5 percent a year, I would be rich.”b. “My
Taxes, Inflation, and Interest Rates. If a business borrows funds at 10 percent per year, the business has a 40 percent tax rate, and the annual inflation rate is 5 percent, what are the real
Money Neutrality, Long Run Inflation, and the Natural Rate. Explain carefully the relationship between the concept of monetary neutrality and the idea that the natural rate is independent of the long
Nominal and Real Interest Rates. In Japan in the 1990s interest rates were near zero on government bonds. Some economists said that it was still possible to stimulate investment by creating negative
A firm that expects higher profits from higher prices but does not recognize its costs are increasing is suffering from _______ .
If the growth rate of money increases from 3 to 5 percent, initially interest rates will _______ .
Countries with higher rates of money growth have _______ interest rates.
The expected real rate of interest is the nominal interest rate plus the expected inflation rate.(True/False)
Milton Friedman and the Great Depression.Economist Milton Friedman was an opponent to activist stabilization policy. His views on economic policy were greatly influenced by his interpretation of the
David Ricardo and John Stuart Mill are known as _______ economists.
Today, some economists might claim that Say’s law holds in the _______ run, but not _______ the run.
Keynes’s objection to Say’s law was that it is possible for demand to create its own supply. _______(True/False)
Professors Don _______ and Franco _______ developed the adjustment-process model used in this chapter.
Tax Increases and Crowding In. Using an aggregate demand and aggregate supply graph, show how tax increases for consumers today will eventually lead to lower interest rates and crowd in investment
Elderly Relying on Income from Their Past Savings. Explain why elderly people relying on income from their investments might want to have an increase in long run government spending for its effects
Real Rates, Nominal Rates, and Inflation. Milton Friedman emphasized that, in the long run, increases in the money growth rate (which cause higher inflation) would raise interest rates, not lower
Increasing Health Spending and Economic Growth. Analyze how the following factors associated with increased spending on health care might affect economic growth. (Related to Application 3 on page 328
Can Monetary Policy Prevent Crowding Out?Explain what is wrong with this quote: “In the long run, we do not have to worry about increased government spending causing crowding out, because the Fed
Understanding Japanese Fiscal Policy. Japan’s finance ministry agreed to income tax cuts to combat a decade-long recession in the 1990s—but only if national sales taxes were increased several
A decrease in government spending will _______ interest rates in the long run.
An increase in the money supply will have no effect on the real rate of interest in the long run. (True/False)
If output is above below employment, we expect wages and prices to rise, money demand to increase, and interest rates to fall. _______ (True/False)
As the price level increases, the demand for money _______ and interest rates _______ .
Investigating Political Business Cycles. Use the Web site for the Federal Reserve Bank of St. Louis( www.research.stlouisfed.org/fred2 ) to find historical data on unemployment rates. Use these data
Changing Views of Liquidity Traps. After he became Federal Reserve Chairman, Ben Bernanke no longer advocated a policy of increasing expectations of inflation in order to escape from a liquidity
Understanding the Liquidity Trap. The adjustment process can run into problems during a liquidity trap when interest rates are driven close to zero and the economy remains below full employment. Both
Stabilization Policy and the Speed of Adjustment.Economists who believe the transition from the short run to the long run occurs rapidly do not generally favor using active stabilization policy. Use
Foreign Firms Close Their Markets: Short-Run and Long-Run Effects. Suppose the economy is at full employment and foreign firms close their markets and U.S. firms start to produce more for

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