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macroeconomic theory

Principles Of Macroeconomics 4th Edition Robert Frank, Ben Bernanke - Solutions

5. Suppose that the public switches from doing most of its shopping with currency to using checks instead.If the Fed takes no action, what will happen to the national money supply? Explain. LO1, LO5
4. What is money? Why do people hold money even though it pays a lower return than other financial assets? LO4
3. Give two ways that the financial system helps to improve the allocation of savings. Illustrate with examples. LO3
2. Stock prices surge, but the prices of government bonds remain stable. What can you infer from the behavior of bond prices about the possible causes of the increase in stock values? LO2
1. Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond?Explain. LO2
9. For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment.Show all your diagrams. LO5a. The legislature passes a 10 percent investment tax credit. Under this program, for every $100 that a firm
8. The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available.248 CHAPTER 8 SAVING, CAPITAL FORMATION, AND FINANCIAL MARKETS Number of
7. Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the home’s value. If properly maintained, the house’s real value is not expected to change. The real
6. Obtain a recent copy of the Survey of Current Business, published by the Bureau of Economic Analysis, in the library or online at www.bea.gov. In the national data portion of the Survey, find nominal data on GDP, consumption, government purchases of goods and services, total government
5. In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. LO2a. Household saving 200 Business saving 400 Government purchases of goods and services 100 Government transfers and interest payments 100 Tax
4. Individual retirement accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds in
3. Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms of the basic motivations for saving. LO3a. Ellie learns she is pregnant.b. Vince reads in the paper
2. State whether each of the following is a stock or a flow, and explain. LO1a. The gross domestic product.b. National saving.c. The value of the U.S. housing stock on January 1, 2005.d. The amount of U.S. currency in circulation as of this morning.e. The government budget deficit.f. The quantity
1.a. Corey has a mountain bike worth $300, a credit card debt of $150, $200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. Construct Corey’s balance sheet and calculate his net worth. For each remaining part, explain how the
6. Name one factor that could increase the supply of saving and one that could increase the demand for saving. Show the effects of each on saving, investment, and the real interest rate.
5. Why do increases in real interest rates reduce the quantity of saving demanded? (Hint: Who are the“demanders” of saving?) LO3
4. Household saving rates in the United States are very low. Is this fact a problem for the U.S. economy?Why or why not? LO2
3. Define national saving, relating your definition to the general concept of saving. Why does the standard U.S. definition of national saving potentially understate the true amount of saving being done in the economy? LO2
2. Give three basic motivations for saving. Illustrate each with an example. What other factors would psychologists cite as being possibly important for saving? LO3
1. Explain the relationship between saving and wealth, using the concepts of flows and stocks. Is saving the only means by which wealth can increase?Explain. LO1
10. Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the United States is exceptionally strong, relative to other countries? Areas where the United States is less strong than
9. Discuss the following statement, using concrete examples where possible to illustrate your arguments: For advances in basic science to translate into improvements in standards of living, they must be supported by favorable economic conditions. LO3, LO5
8. Hester’s Hatchery raises fish. At the end of the current season she has 1,000 fish in the hatchery. She can harvest any number of fish that she wishes, selling them to restaurants for $5 apiece. Because big fish make little fish, for every fish that she leaves in the hatchery this year, she
7. Harrison, Carla, and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour using a standard paintbrush, and Fred can paint 80 square feet per hour. Any of the three can paint 200 square feet per hour using a roller. LO3a. Assume Harrison, Carla, and Fred have only
6. The Good’n’Fresh Grocery Store has two checkout lanes and four employees.Employees are equally skilled, and all are able to either operate a register(checkers) or bag groceries (baggers). The store owner assigns one checker and one bagger to each lane. A lane with a checker and a bagger can
5. Joanne has just completed high school and is trying to determine whether to go to junior college for two years or go directly to work. Her objective is to maximize the savings she will have in the bank five years from now. If she goes directly to work, she will earn $20,000 per year for each of
4. Here are data for Germany and Japan on the ratio of employment to population in 1979 and 2003:Using data from Table 7.1, find average labor productivity for each country in 1979 and in 2003. How much of the increase in output per person in each country over the 1979–2003 period is due to
3. The “graying of America” will substantially increase the fraction of the population that is retired in the decades to come. To illustrate the implications for U.S. living standards, suppose that over the 46 years following 2006 the share of the population that is working returns to its 1960
2. Calculate how much higher U.S. labor productivity will be in the year 2028(relative to 2008) if LO1a. productivity continues to grow by 3.1 percent per year.b. productivity growth falls to 1.4 percent per year, its average rate during the period 1973–1995. (Note: You do not need to know the
1. Richland’s real GDP per person is $10,000, and Poorland’s real GDP per person is $5,000. However, Richland’s real GDP per person is growing at 1 percent per year and Poorland’s is growing at 3 percent per year. Compare real GDP per person in the two countries after 10 years and after 20
8. Discuss the following statement: “Because the environment is fragile and natural resources are finite, ultimately economic growth must come to an end.”
7. What major contributions can the government make to the goal of increasing average labor productivity?LO5
6. Discuss how talented entrepreneurs and effective managers can enhance average labor productivity.LO3
5. What was the cause of the resurgence in U.S. labor productivity growth since 1995? How do we know? LO3
4. You have employed five workers of varying physical strength to dig a ditch. Workers without shovels have zero productivity in ditchdigging. How should you assign shovels to workers if you don’t have enough shovels to go around? How should you assign any additional shovels that you obtain?
3. What is human capital? Why is it economically important?How is new human capital created? LO3
2. Why do economists consider growth in average labor productivity to be the key factor in determining long-run living standards? LO2
1. What has happened to real GDP per person over the past century? What implications does this have for the average person? Are the implications different for countries in different regions (e.g., Japan versus Ghana)?
10. The Economic Report of the President (ERP), prepared annually by the President’s Council of Economic Advisers, is available in the library or online(www.gpoaccess.gov/eop). ERP includes both useful articles on recent economic developments and a statistical section that provides historical
9. The towns of Sawyer and Thatcher each has a labor force of 1,200 people. In Sawyer, 100 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Thatcher, every member of the labor force was unemployed for 1 month and employed for 11 months.
8. For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer. LO5a. Ted lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed over a year.b. Alice was laid off
7. Ellen is downloading labor market data for the most recent month, but her connection is slow and so far this is all she has been able to get:Unemployment rate 5.0%Participation rate 62.5%Not in the labor force 60 million Find the labor force, the working-age population, the number of employed
6. Here is a report from a not-very-efficient BLS survey taker: “There were 65 people in the houses I visited, 10 of them children under 16 and 10 retired; 25 people had full-time jobs, and 5 had part-time jobs. There ware 5 full-time homemakers, 5 full-time students over age 16, and 2 people who
5. Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. LO3a. Suppose that electronic equipment is introduced that increases the marginal product of skilled workers (who can use the equipment to produce more toys
4. How would each of the following factors be likely to affect the economywide supply of labor? LO2a. The mandatory retirement age is increased.b. Increased productivity causes real wages to rise.c. War preparations lead to the institution of a national draft, and many young people are called up.d.
3. How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? LO3a. Demand for the type of car made by the plant increases.b. A sharp increase in the price of gas causes many commuters to switch to mass transit.c. Because of
2. Production data for Bob’s Bicycle Factory are as follows:Other than wages, Bob has costs of $100 (for parts and so on) for each bike assembled.a. Bikes sell for $130 each. Find the marginal product and the value of the marginal product for each worker (don’t forget about Bob’s cost of
1. Data on the average earnings of people of different education levels are available from the Bureau of the Census (try online at www.census.gov/hhes/www/income/histinc/incpertoc.html). Using these data, prepare a table showing the earnings of college graduates relative to high school graduates
7. List three types of unemployment and their causes.Which of these types is economically and socially the least costly? Explain.
6. What are the costs of a high unemployment rate?Do you think providing more generous government benefits to the unemployed would increase these costs, reduce these costs, or leave them unchanged?Discuss. LO5
5. True or false: A high participation rate in an economy implies a low unemployment rate. Explain. LO4
4. What are two major factors contributing to increased inequality in wages? Briefly, why do these factors raise wage inequality? Contrast possible policy responses to increasing inequality in terms of their effects on economic efficiency. LO3
3. Why have real wages risen by so much in the United States in the past century? Why did real wage growth slow for 25 years beginning in the early 1970s? What has been happening to real wages recently? LO3
2. Acme Corporation is considering hiring Jane Smith.Based on her other opportunities in the job market, Jane has told Acme that she will work for them for$40,000 per year. How should Acme determine whether to employ her? LO2
1. List and discuss the five important labor market trends given in the first section of the chapter. LO1
10. Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. LO5a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should
9. On January 1, 2009, Albert invested $1,000 at 6 percent interest per year for three years. The CPI on January 1, 2009, stood at 100. On January 1, 2010, the CPI (times 100) was 105; on January 1, 2011, it was 110; and on January 1, 2012, the day Albert’s investment matured, the CPI was 118.
8. Let’s revisit the problem of calculating the shoe-leather costs of inflation at Woodrow’s Hardware. Calculate shoe-leather costs (relative to the original situation, in which Woodrow goes to the bank once a week) assuming that LO4a. Inflation is 5 percent rather than 10 percent.b. Inflation
7. Here are the actual per-gallon prices for unleaded regular gasoline for June of each year between 1978 and 1986, together with the values of the CPIs for those years. For each year from 1979 to 1986, find the CPI inflation rate and the change in the relative price of gasoline, both from the
6. The typical consumer’s food basket in the base year 2008 is as follows:30 chickens at $3.00 each 10 hams at $6.00 each 10 steaks at $8.00 each A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2009. Hams rise to $7.00 each, and the price of steaks is
5. Here is a hypothetical income tax schedule, expressed in nominal terms, for the year 2008:Family income Taxes due (percent of income)$20,000 10 $20,001–$30,000 12 $30,001–$50,000 15 $50,001–$80,000 20 $80,000 25 The legislature wants to ensure that families with a given real income are not
4. A report found that the real entry-level wage for college graduates declined by 8 percent between 1990 and 1997. The nominal entry-level wage in 1997 was$13.65 per hour. Assuming that the findings are correct, what was the nominal entry-level wage in 1990? You will need to use data from Problem
3. According to the U.S. Census Bureau (http://www.census.gov/), nominal income for the typical family of four in the United States (median income) was$24,332 in 1980, $32,777 in 1985, $41,451 in 1990, and $62,228 in 2000. In purchasing power terms, how did family income compare in each of those
2. Here are values of the CPI (multiplied by 100) for each year from 1990 to 2000. For each year beginning with 1991, calculate the rate of inflation from the previous year. What happened to inflation rates over the 1990s? LO1
1. Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows:20 pizzas at $10 each Rent of apartment, $600 per month Gasoline and car maintenance, $100 Phone service (basic service plus 10 long-distance calls), $50 In the
8. True or false: If both the potential lender and the potential borrower correctly anticipate the rate of inflation, inflation will not redistribute wealth from the creditor to the debtor. Explain.
7. How does inflation affect the real return on holding cash? LO5
6. “It’s true that unexpected inflation redistributes wealth, from creditors to debtors, for example.But what one side of the bargain loses, the other side gains. So from the perspective of the society as a whole, there is no real cost.” Do you agree?Discuss. LO4
5. Give two reasons why the official inflation rate may understate the “true” rate of inflation. Illustrate by examples. LO3
4. Describe how indexation might be used to guarantee that the purchasing power of the wage agreed to in a multiyear labor contract will not be eroded by inflation. LO2
3. Why is it important to adjust for inflation when comparing nominal quantities (for example, workers’average wages) at different points in time?What is the basic method for adjusting for inflation?LO2
2. What is the difference between the price level and the rate of inflation in an economy? LO1
1. Explain why changes in the cost of living for any particular individual or family may differ from changes in the official cost-of-living index, the CPI. LO1
10. We discussed how the opportunity cost of sending children to school affects the level of school enrollment across countries. The United Nations Human Development Report 2007 reports the following data for per capita income in 2005(in the equivalent of U.S. dollars): LO4 Canada 33,375 Denmark
9. The government is considering a policy to reduce air pollution by restricting the use of “dirty” fuels by factories. In deciding whether to implement the policy, how, if at all, should the likely effects of the policy on real GDP be taken into account? Discuss. LO4
8. Data on U.S. GDP is available from the Bureau of Economic Analysis (www.bea.gov). Download NIPA Table 1.1.6. (Real Gross Domestic Product, Chained Dollars) and do the following: LO2a. Make a table like Table 4.2 for the most recent year available.b. Discuss how, if at all, the sizes of
7. The nation of Potchatoonie produces hockey pucks, cases of root beer, and back rubs. Here are data on prices and quantities of the three goods in the years 2000 and 2007.122 CHAPTER 4 SPENDING, INCOME, AND GDP Assume that 2000 is the base year. Find nominal GDP and real GDP for both years. LO3
6. Here are some data for an economy. Find its GDP. Explain your calculation.Consumption expenditures $600 Exports 75 Government purchases of goods and services 200 Construction of new homes and apartments 100 Sales of existing homes and apartments 200 Imports 50 Beginning-of-year inventory stocks
5. For each of the following transactions, state the effect both on U.S. GDP and on the four components of aggregate expenditure. LO2a. Your mother buys a new car from a U.S. producer.b. Your mother buys a new car imported from Sweden.c. Your mother’s car rental business buys a new car from a
4. MNLogs harvested logs (with no inputs from other companies) from their property in northern Minnesota. They sold these logs to MNLumber for$1,500 and MNLumber cut and planed the logs into lumber. MNLumber then sold the lumber for $4,000 to MNFurniture. MNFurniture used the lumber to produce 100
3. Intelligence Incorporated produces 100 computer chips and sells them for $200 each to Bell Computers. Using the chips and other labor and materials, Bell produces 100 personal computers. Bell sells the computers, bundled with software that Bell licenses from Macrosoft at $50 per computer, to PC
2. How would each of the following transactions affect the GDP of the United States? LO1a. The U.S. government pays $1 billion in salaries for government workers.b. The U.S. government pays $1 billion to Social Security recipients.c. The U.S. government pays a U.S. firm $1 billion for newly
1. George and John, stranded on an island, use clamshells for money. Last year George caught 300 fish and 5 wild boars. John grew 200 bunches of bananas.In the two-person economy that George and John set up, fish sell for 1 clamshell each, boars sell for 10 clamshells each, and bananas go for 5
5. Would you say that real GDP per person is a useful measure of economic well-being? Defend your answer.
4. Al’s Shoeshine Stand shined 1,000 pairs of shoes last year and 1,200 pairs this year. He charged $4 for a shine last year and $5 this year. If last year is taken as the base year, find Al’s contribution to both nominal GDP and real GDP in both years.Which measure would be better to use if
3. Give examples of each of the four types of aggregate expenditure. Which of the four represents the largest share of GDP in the United States?Can an expenditure component be negative?Explain. LO2
2. A large part of the agricultural sector in developing countries is subsistence farming, in which much of the food that is produced is consumed by the farmer and the farmer’s family. Discuss the implications of this fact for the measurement of GDP in poor countries. LO1
1. Why do economists use market values when calculating GDP? What is the economic rationale for giving high-value items more weight in GDP than low-value items? LO1
15. Twenty-five years ago, tofu was available only from small businesses operating in predominantly Asian sections of large cities. Today tofu has become popular as a high-protein health food and is widely available in supermarkets throughout the United States. At the same time, tofu production has
14. What will happen to the equilibrium quantity and price of corn if the price of butter (a complement) increases and the price of fertilizer decreases? LO4
13. What will happen to the equilibrium price and quantity of apples if apples are discovered to help prevent colds and a fungus kills 10 percent of existing apple trees? LO4
12. What will happen to the equilibrium quantity and price of potatoes if population increases and a new, higher-yielding variety of potato plant is developed? LO4
11. Suppose the current issue of the New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and
10. How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?LO4
9. Use supply and demand analysis to explain why hotel room rental rates near your campus during parents’ weekend and graduation weekend might differ from the rates charged during the rest of the year. LO4
8. What will happen to the equilibrium price and quantity of beef if the price of chickenfeed increases? LO4
7. What will happen to the equilibrium price and quantity of fish if fish oils are found to help prevent heart disease? LO4
6. How will an increase in the birth rate affect the equilibrium price of land? LO4
5. What will happen to the equilibrium price and quantity of oranges if the wage paid to orange pickers rises?
4. An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will his claim affect the supply (not the quantity supplied) of binoculars in Tucson stores? LO2

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