Questions and Answers of Issues in economics

Why would a cut in the rate of growth from 2 percent to 1 percent have more than a 10 percent impact if it lasted 10 years?
Why is it that some believe that slowing growth is a cause of a declining middle class and others believe the causality is reversed? Could it be both?
How was “quantitative easing” different from what the Federal Reserve normally does?
Explain each of the following in terms of whether they were discretionary fiscal policy, non-discretionary fiscal policy, or monetary policy: TARP, the AIG bailout, the 2009 stimulus package, the
Explain the role of the credit default swap and why the attempt to make things safer for investors made things worse for everyone?
Explain why the Federal Reserve felt it necessary to bail out AIG and what result it was attempting to avoid?
Explain why securitization contributed to the problem of people buying homes using mortgages for which they did not know all the details (such as the negative-amortization mortgages referred to in
Explain how mortgage securitization makes it easier to borrow money to buy a house but harder to deal with when a house is sold for a loss?
Explain why to whom a country owes its money matters in terms of the true burden a national debt will have on future generations?
Suppose the deficit were to be $300 billion during normal times, but increases to $500 billion because we are in a recession, then increases again to $600 billion because the government attempts to
Why might you distinguish between borrowing to rebuild roads and bridges and borrowing to increase food stamp allocations?
If you ranked eras in terms of times in which the national debt was the biggest, what measures could you use and why? How would the measures differ when ranking the deficits of the 1940s, 1980s, and
One political party believes government spending is too high; another party thinks it is too low. Which party will argue for current-services budgeting as a practice for setting government budgets?
Explain what would transpire for new government expenditures to crowd out other economic activity?
In order of magnitude, rank the following spending from greatest to smallest: Social Security, national defense, Medicare, federal support for education, space exploration, and foreign aid?
Explain how mandatory spending comes about relative to discretionary spending. Then assign the following programs to each: interest payments on the debt, national defense, Social Security, food
Explain how the 2010–2013 quantitative easing through the Federal Reserve purchase of mortgage- backed securities is different in style from what it usually does?
Explain how lowering the reserve ratio affects the economy?
Explain the difference between the discount rate and the federal funds rate?
Explain how open-market operations work?
Assign the correct label to the corresponding events/ policy actions that occurred during the 2007–2011 time period. Events/policy actions: TARP, the 2009 stimulus package, the 2010 extension of
Explain how the built-in economic stabilizers work in the U.S. economy?
Which lag described in this chapter is the concept of “shovel-ready” intended to combat?
List and explain the three ways that the Federal Reserve controls the money supply (i.e., tools of the monetary authority)?
Discuss the shape of the aggregate supply curve by listing and explaining the reasons behind the various ranges?
Define aggregate demand. Then, list and explain the intuitive reasons why aggregate demand is downward sloping?
Explain the chain of events that connect an overall price increase to a decrease in aggregate demand using the interest rate effect?
Suppose a president says: “We are in a crisis and on the verge of another Great Depression. We need to increase government spending to give the economy a boost.” What determinant of aggregate
If we want our president to “do something” about the economy, what do we usually have in mind? How can we use the aggregate demand–aggregate supply model to show that what we have in mind will
Of the reasons that the aggregate demand curve and the demand curve are downward sloping, each has one labeled the “real balance effect.” How are they different?
Why is there usually a positive relationship between the time a bond will mature (how long the investor has to wait to get her money) and the interest rate on that bond?
Why is it that $400 per month paid over five years will not be enough to buy a $24,000 car?
Why is the present value of money to be paid in the future less than the amount to be paid, but the future value of money invested now and withdrawn later is greater than the original investment?
Suppose you walked into an unemployment office and found the following people: a laid-off mall Santa Claus, an unemployed auto-industry worker (who is subject to callback by their company), a woman
What are the key differences between monopolistic competition and perfect competition?
Imagine an owner of a firm is thinking about raising prices. Describe the consequences of doing so as a monopolist, oligopolist, monopolistic competitor, and perfect competitor?
If your college leadership sought your advice on setting tuition, why would it matter if your college was the only college for miles?
Does raising the price always increase revenue for the firm raising the price?
Suppose your favorite sports team is losing by an insurmountable score. What does the shutdown condition suggest the team should do? Explain why.
What key assumption for perfect competition would lead you to believe that fast food is not a perfectly competitive industry? Explain why.
Suppose you hear the following: “They just increased taxes on cigarettes and on high- priced cigars.” Use the concept of elasticity to describe who will be hurt by those taxes. Is a change in the
Give an example of a situation where the government compels you to do something you do not want to do. Why might that be a reasonable requirement? When might it be unreasonable?
Give an example of something you hate to do, and imagine that you could pay someone else to do that thing for you. Explain why both you and the person you pay could end up better off?
Give an example of a good that you believe has inelastic demand (not perfectly inelastic) for most people. Then explain why you believe that is the case?
Give an example of a good that you believe has perfectly inelastic demand for most people. Then explain why you believe that is the case?
If there is an alteration in the price of an input used to produce a good, why is that a change in supply when an alteration in the price of the good itself is a change in the quantity supplied?
If there is an alteration to the price of a complement to a good, why is that a change in demand when an alteration in the price of the good itself is a change in the quantity demanded?
Suppose you have been given money by your friends and sent to get beverages for a party. Use your demand for those beverages to illustrate why the concept of the “real balance effect” will mean
Use your own demand for pizza to illustrate the notion of diminishing marginal utility. Explain why that concept means your demand for pizza-by-the-slice is downward sloping.
Suppose you were to analyze the state and the economy at the moment. You say to your friends, “The economy has been growing more slowly in the last 10 years than it did in the previous 20 years.
If you get a 25 percent pay increase, you are better off. Explain why some people would not be better off if their employer gave them a 25 percent pay increase.
Suppose you hear a political candidate claim credit or lay blame for an economic outcome. How can you tell whether the candidate is correct? What would you need to know?
Suppose you decided to study all last week for this exam instead of doing anything fun. What was the opportunity cost of doing so? Why might the opportunity cost (defined in terms of fun lost) be
Suppose you buy a new car. What is the opportunity cost of doing so?
Use the aggregate supply-aggregate demand model to determine which of the following will lead to higher aggregate output.a. A tax increaseb. A spike in world oil pricesc. A cut in interest ratesd. A
The impact of Walmart on its suppliers isa. Unambiguously positive.b. Unambiguously negative.c. Positive and negative in that Walmart enlarges the market for their products but demands a much lower
The earnings of African Americans relative to whites hasa. Increased from 40 percent in the 1920s to 90 percent today.b. Increased from 50 percent in the 1950s to around 60 percent in the 1970s,
We can measure how much someone values the personal touch of a small grocery store by using the amount extra they pay at that store even when there is a Walmart in town. Economists call thata.
The reason the ECB did not want the Greeks to exit the euro was thata. Greece was viewed as a valuable member in temporary distress.b. Greece was viewed as so unimportant that it did not want the
The impact of a new Walmart on a community’s workers isa. Only positive in that new jobs are created.b. Only negative because better-paying jobs at competitors are lost. c. Positive and
The impact of a new Walmart on a community’s consumers isa. Significantly positive for those that get lower pricesb. Somewhat negative for those that prefer a personal touch (if stores offering it
How academics look at the evidence on how much women make relative to men is an issue that very much depends ona. Which year you look at.b. Which state you look at.c. Whether you categorize some
A 60-month car loan (where no down payment was made) with a 6 percent interest rate and a monthly payment of $500 would allow the borrower to buy aa. $35,500 car.b. $30,000 car.c. $25,863 car.d.
The reason the European Central Bank (ECB) didn’t engage in the kind of expansionary monetary policy that the Federal Reserve did for the United States was thata. The ECB didn’t view the problem
The present value of a $1,000 payment received two years from now at 5 percent annual interest will be less than $900 because ofa. Taxes.b. Compounding.c. Withholding.d. Double jeopardy.
The reason the Greek’s didn’t use a plan similar to TARP to save their banks was thata. The Greek Central Bank had no funds.b. The interest rates Greece would have had to pay on the loans would
The proximate cause of the Greek problem wasa. Vast overspending during the previous decade.b. Lax tax collections during the previous decade.c. A burst housing bubble.d. Both a) and b).
In the past 40 years work stoppages havea. Plummeted.b. Remained constant.c. Increased slowly.d. Increased rapidly.
The suit against Microsoft accused it ofa. Using its own innovation to thwart competition.b. Using its Windows monopoly to foster other monopolies.c. Incorporating more innovations into the Office
The proximate cause of the Spanish problem wasa. Vast overspending during the previous decade.b. Lax tax collections during the previous decade.c. A burst housing bubble.d. Both a & b.
Using an interest rate of 5%, which figure has the smallest present value?a. $5,000b. $5,050 to be received two years from nowc. $5,075 to be received three years from nowd. $5,500 to be received ten
Labor unions have greater representation in ________ employees.a. Public b. Servicec. Manufacturingd. Retail
The cause of the European financial crisis had its origins ina. The creation of the euro.b. Vast overspending in Germany.c. Un-competitive tax collections in Greece.d. Speculative home buying in
Using an interest rate of 5 percent, which figure has the largest present value?a. $5,000b. $5,050 to be received two years from nowc. $5,075 to be received three years from nowd. $5,500 to be
A union that trains and restricts supply has an effect on the supply curve that moves it to the ______ and, at a point, makes it _______.a. Left; verticalb. Left; horizontalc. Right; verticald.
Suppose your grandmother told you (today) that she had set aside an amount of money in a savings account baring 3 percent interest that was sufficient to give you a $5,000 graduation present in
Under perfect competition marginal resource cost ________ supply, under monopsony marginal resource cost _______ supply.a. Equals; equalsb. Equals; is greater thanc. Equals; is less thand. Is greater
Standard Oil’s trust involved monopolizinga. Gas stations only.b. Oil exploration only.c. Refining.d. All aspects of the petroleum industry.
When evaluating whether or not to make an investment one should focus on the _____ because doing so takes into account anticipated inflation.a. Nominal interest rateb. Real interest ratec. Exchange
When there are many employers in a city and one union, the model that economists use is one fora. Monopoly.b. Monopsony.c. Perfect competition.d. Monopolistic competition.
Using the monopoly power in one area to compel costumers to buy goods in another areaa. Is a violation of the Sherman Anti-Trust Act.b. Is legal, but bad business practice.c. Is illegal but would be
When there is only one employer in a city, the model that economists use is one fora. Monopoly.b. Monopsony.c. Perfect competition.d. Monopolistic competition.
Monopoly creates prices that are _____ which would exist under perfect competition.a. Lower than that.b. Equal to that.c. Greater than that.d. More volatile than that.
An increase in the expected inflation rate in one country willa. Strengthen its currency.b. Weaken its currency.c. Have no impact on the exchange rate between its currency and other currencies.
In the market for loanable dollars, an increase in the profitability of investments overall will be revealed ina. An increase in the supply of loan-able dollars.b. An increase in the demand for
If one country determines it wants a fixed exchange rate with anothera. It can do nothing on its own, it must have the cooperation of the other country.b. It only needs to announce its desired
When evaluating a business decision, an economist will often resort to the use of present value becausea. The profits may not be large enough to warrant the time and attention of the investor.b. The
One of the concerns about monopolies is that theya. Reduce the motivation to innovate.b. Reduce the motivation to make a profit.c. Hire people at an excessive level.d. Waste resources in pursuit of
The dollar to yuan exchange rate will equala. The yuan to dollar exchange rate.b. The reciprocal of the yuan to dollar exchange rate.c. The yuan to euro exchange rate.d. The square of the yuan to
Antitrust law is designed to limit the impact ofa. Monopoly.b. Oligopoly.c. Monopolistic competition.d. Perfect competition.
From one country’s perspective a strong currency isa. Always good.b. Always bad.c. Good for some people and bad for others.
The principal-agent problem centers on the separation ofa. Supply and demand.b. Investors and savers.c. Owners and managers.d. Interest and dividends.
What two numbers “balance”?a. The current account and exports.b. The capital account and the current account.c. Exports and imports.d. Short term investment income and short term investment
A stock market existsa. Only to service the sale of new issues, called IPOs.b. To provide liquidity to all stocks, including recent IPOs.c. Help policy makers predict the future.d. To make the rich
Stock market crashes tend to result when stocks get _______ their fundamental values.a. Too far belowb. Too close toc. Too far aboved. Confused with.
If you invested in 20 different companies and chose those companies at random, you would be counting on the _______ market hypothesis and its implication that you would do as well as you would with
A stock index isa. Essentially the weighted sum of stock prices.b. The simple sum of stock prices.c. The geometric average of stock prices.d. The consensus view of professional economists.
The rational criminal model draws a parallel to the thought processes ofa. Investors.b. Educators.c. Law enforcement officers.d. Politicians.
Of these, economists consider this the worst:a. Inflation of 5 percent.b. Recession.c. Deflation of 5 percent.d. Depression
On a graph of real gross domestic product over time, recessions appear asa. Relatively short and shallow drops on an otherwise increasing path.b. Long, sharp declines on an otherwise increasing

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