Introductory Economics 1st Edition Michael Veseth - Solutions

Answer the questions in Ques tion 1 in the case when the economy is experiencing high levels of inflation.
Suppose that the economy is experiencing high levels of unemployment. What would be the traditional Keynesian policy recommendation to deal with this problem? What would the monetarists suggest? If the monetarists are correct, what would traditional policies do to the economy? If the traditional
Who is correct-the monetarists or the nonmonetarists?
What should be the proper role of monetary and fiscal policies?
How does the monetarist model of economic policy differ from traditional Keynesian theory?
Why do monetarists hold a different view of the economy?
Who are the monetarists?
Are government and Federal Reserve policies currently working together or working in opposite directions? How can you tell?
Suppose that the government wished to implement a tax cut.They will need to find additional funds to replace the revenues lost from taxes. What are the options? What are the effects on the economy? If the economy is in a deep depression, which is the best alternative?
What effect does the existence of a variable lag in monetary policy have on your answers to the preceding two questions?
What is the best policy if the goal of economic pol icy is to"cool off" aggregate demand?
What is the "best" policy for the government or the FRS to undertake if the economy is faced with the problem of unemployment?
Do monetary and fiscal policies always work together?
Does it make any difference how government spending programs are financed?
Are monetary and fiscal policies equally inflationary?
Which policy is better?
What is the difference between monetary and fiscal policies?
Evaluate the argument that low interest rates on deposits tend to guarantee consumers low interest rates on loans.
Should interest rates be paid on checking account balances? Are they in any way different from savings account balances? Explain.
Which side of this debate do you agree with? Can you find flaws in any of the arguments presented? Should interest rate regulations be done away with?
Suppose that the FRS undertakes a $10 billion open market pur- chase and that banks have a reserve requirement of 10 per- cent. What will happen to the money supply, credit supply, interest rates, aggregate de- mand, and RGNP? Can you tell exactly how much RGNP will change? Why or why not?
The FRS is nearly always work- ing to increase the money sup- ply. Why, then, are not interest rates constantly falling?
When would a business investor be interested in the real interest rate and when would he or she pay attention to the nominal rate of interest? Does it make a difference to our analysis?
Graphically show how interest rate ceilings in one segment of the credit market can cause dis- intermediation.
High interest rates induce hold- ers of stock certificates to sell those stocks and put funds in the credit market instead of the stock market. Low interest rates cause an opposite flow of funds. What, then, is the rela- tionship between interest rates and prices on the stock market? If you thought
How can the FRS act to increase or decrease aggregate demand?
How do changes in the interest rate affect aggregate demand?
How is the "inflation premium" built into interest rates?
What is disintermediation and what causes it?
How are interest rates set?
What factors affect the demand for credit?
What is the difference between the stock market and the credit market?
Suppose that the FRS buys $50 9.million in bonds on the open market. Trace the impact of this action on the banking system, the money supply, and the amount of loans in the economy. What will be the total impact of this action on the money supply? What factors could make the total impact less than
Define the following terms:0 Required reserves 0 Excess reserves O Open market sale 0 Open market purchase 0 Discount rate
Modern banks are fractionalreserve banks. What does that mean? How can you possibly put your trust in a bank (and also put your money there)when they behave the way that a fractional-reserve bank does?
What is the prime interest rate today? Does this level of interest rate make sense in terms of the determinants of interest rates discussed in the text? Justify your answer.
Under what circumstances would a negative interest rate make sense? Is this likely to happen today?
Which would likely have the higher interest rate: a car loan in 1 965 or a house loan in 1 977? Explain.
Who or what "backs up" the money in your pocket? Does it make a difference to you? Explain.
Suppose that you are a Peace Corps worker in primitive New Guinea. The tribe that you are working with trades using the barter system. The tribe is prosperous and growing. Convince the chief of the tribe of the advantages of using a money system instead of barter.
What role does the Federal Reserve System play in the economy?
How can banks "create" money?
How do modern banks work?
What factors determine the interest rate?
What is money?
Where do you stand on this issue? Should taxes be cut so that the economy can ride down the Laffer Curve? Explain your stand.
Have you ever had any dealings with the underground economy? What kinds of transactions are likely to exist in the underground? Would you ex pect more cash to be used (as opposed to checks or credit cards) in this part of the economy? Why or why not?
How can we tell which part of the Laffer Curve we are on now? Is there any way to prove the matter one way or another?
Suppose that Congress has decided that it is desirable to increase aggregate supply by giving a tax break to people and firms who invest to raise the capacity of the economy. What impact would this have on the distribution of income? Is it likely to be popular? Who would this action benefit in the
Suppose that it has been decided that aggregate demand should be increased, through some sort of fiscal policy, by$40 billion in total. This can be done either by purchasing new military aircraft, cutting income taxes, or increasing welfare benefits. Assuming an MPC of 60 percent, how big would
Who owes the national debt? Is there any justification for the government going into debt when they can always raise the money they need by increasing taxes?
Should all taxes be progressive?Regressive? Proportional? What is your opinion of your state's tax system-is it progressive, regressive, or proportional? Is it about the same as those of neighboring states?
The corporate income tax is a tax on businesses. Do you think that it is progressive, regressive, or proportional? Defend your choice.
Suppose that the government increased Social Security benefits by $35 billion, and also raised Social Security taxes by $35 billion to pay for the increased benefits. What wou Id be the impact of this action on the economy? Would the distribution of income within the economy change?
Suppose that the government cut both taxes and government spending by $25 billion. What would happen to the economy?
Suppose that the government increases taxes by $1 2 billion.What are the initial and eventual impacts of this action on aggregate demand? Would the eventual impact be different if the MPC were 90 percent?
Suppose that government spending increases by $17 billion. What will be the initial impact on income? What will be the eventual impact on aggregate demand? Would the total impact be different if the MPC were 50 percent?
How big of a problem is the national debt?
What is deficit spending?
Who pays the major taxes in our economy?
Are all taxes the same in their impact on the economy?
How effective are fiscal policies in solving our national economic problems?
How do government spending, taxation, and transfer payments policies affect the national economy?
Evaluate the argument that controls would reduce inflationary expectations.
Suppose that you have been appointed Wage and Price Czar.You must decide which wages and prices will be allowed to rise. How would you choose?Try to develop objective criteria for your actions.
Do you favor or oppose wage and price controls? Can you find faults with the arguments on either side of this argument?
The wholesale price index and the level of inventory accumulations are leading indicators of what is happening to the economy. Using these two statistics, we can determine what is going on with respect to aggregate demand and aggregate supply and guess what the future holds for the economy. Find
Use AD-AS analysis to determine the types of changes that must have been going on in the economy during the 1 950s, 1 960s, and 1 970s (review the historical data in Chapter 1 for information concerning these periods).
We discussed the Phillips Curve in Chapter 1.The Phillips Curve shows a trade-off between inflation and unemployment. Use AD-AS curve analysis to determine what kinds of situations are described by the Phillips Curve. When does the Phillips Curve not work?
In discussing inflation, we noted that inflationary expectations induce workers, consumers, businesses, and everyone else to behave as if inflation were going to occur in the future and so act to protect themselves from it by gaining wage increases and so on. How do these activities affect
To see some of the problems caused by wage and price controls, suppose that tuition at your school were to be frozen by Congress. In response to this, your school determines that it has to cut enrollment by 1 O percent. Devise an equitable way to determine who stays and who must go (i.e., who is
Suppose that oil were to be come very much more expensive, but that the amount which was spent on imported oil increased because oil is such a necessity. What would be the impact of this on aggregate demand? On aggregate supply?On the economy? Does this help explain the economic problems resulting
What impact would an increase in investment spending have on the economy in the short run?In the long run? Are the two answers different?
What would a downwardsloping aggregate supply curve mean? Is this type of economy likely?
How can both inflation and unemployment be fought at the same time?
What are the causes of inflation?
What are the causes of unemployment?
What is the relationship between changes in the price level and total production?
What factors affect the aggregate supply?
For individual families, saving is a good thing because it helps us allocate our income over time and so gives us a more desirable consumption pattern. In the aggregate, however, the"paradox of thrift" prevails. Use the circular-flow and bathtub models to determine what would happen if a// families
Why is the aggregate demand curve downward-sloping? What would an upward-sloping AD curve mean? What would a vertical AD curve mean? What wou Id a horizontal AD curve mean? Which shape makes the most sense?
An increase in total spending can go for either increased quantities of goods and ser vices, higher prices, or both.Can you show how this works for an individual market using supply and demand curves?
Joe Smith earns $500 per week.Suppose that the Smith family's APC is 80 percent. How much do they spend and save? Suppose that their MPC is 70 percent. What would happen to spending and saving (and their APC) if income were to rise by$100 per week? Does this make sense?
Another name for net exports spending is the balance of trade. What impact does a deficit in the balance of trade (negative net exports) have on total spending, income, and aggregate demand?
Make a l ist of ways that the government sector can cause total spending in the economy to rise in order to fight unemployment. How many of these ways are currently being used?
How does the inflation affect the demand for goods and services?
What is consumption spending and how is it related to income?
What is the macroeconomic equi librium? Is the equilibrium a good place for the economy to be?
How do saving and investment, government spending and taxes, imports and exports affect the economy?
What is the relationship between total spending and national income?
Suppose that, in some less developed nation, the following facts hold:a. What has happened to GNP over this period?b. What has happened to RGNP over this period?c. What has happened to per capita RGNP?
If the population is growing at a rate of 5 percent per year, how fast does GNP have to grow in order to maintain a constant per capita RGNP?
In this chapter we have talked exclusively about measures of economic activity. Would it be possible to measure societal well-being in order to determine if we are happier today than we were in years past or to compare nations? What kind of things would you measure in such an index of well-being?
Determine which of the following transactions would be counted in GNP and briefly state why each is or is not part of GNP:O Joel Smith buys a stamp from the post office.0 Joe L. Smith buys a birthday present for Joel Smith.D Jo Lee Smith buys typing paper for use in her stenographer business.D Jim
How has the economy performed in recent years as measured by these different measures?
What is per capita real gross national product?
What is real gross national product?
Is GNP a good measure of our national welfare?
What is gross national product?
Why is it necessary to measure economic activity?

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Introductory Economics 1st Edition Michael Veseth - Solutions

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