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macroeconomic theory

Macroeconomics 17th Edition Campbell McConnell, Stanley Brue - Solutions

“The United States can produce X more efficiently than can Great Britain. Yet we import X from Great Britain.”Explain.
KEY QUESTION To the right are hypothetical production possibilities tables for New Zealand and Spain. Each country can produce apples and plums.Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following:a. What is each country’s
Suppose nation A can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for nation B are 60 units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Why? What are the
Distinguish among land-, labor-, and capital-intensive commodities, citing one nontextbook example of each.What role do these distinctions play in explaining international trade? What role do distinctive products, unrelated to cost advantages, play in international trade?
Quantitatively, how important is international trade to the United States relative to other nations?
THE EQUATION OF EXCHANGE—WHAT IS THE CURRENT VELOCITY OF MONEY? In the equation of exchange, MV PQ, the velocity of money, V, is found by dividing nominal GDP ( PQ) by M, the money supply. Calculate the velocity of money for the past 4 years. How stable was V during that period? Is V increasing
LAST WORD Compare and contrast the Taylor rule for monetary policy with the older, simpler monetary rule advocated by Milton Friedman.
You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Table 17.1and your knowledge of macroeconomics,
KEY QUESTION Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage
Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive”fiscal policy advocated by new classical economists.Explain: “The problem with a balanced-budget amendment is that it would, in a sense, require active fiscal policy—but
Answer parts a andb, below, on the basis of the following information for a hypothetical economy in year 1: money supply $400 billion; long-term annual growth of potential GDP 3 percent; velocity 4.Assume that the banking system initially has no excess reserves and that the reserve requirement is
Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
KEY QUESTION Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the
Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig.They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic
Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
KEY QUESTION Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP
State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability?How might adverse aggregate supply factors cause instability, according to mainstream economists?
KEY QUESTION Use the aggregate demand–aggregate supply model to compare the “old” classical and the Keynesian interpretations of (a) the aggregate supply curve and (b) the stability of the aggregate demand curve. Which of these interpretations seems more consistent with the realities of the
AID-DEPENDENCY RATIOS—WHICH NATIONS ARE THE MOST DEPENDENT? Use the search function at the World Bank Web site, www.worldbank.org , to find the most recent data on “aid-dependency ratios.” Create a top 10 list of nations that have the highest ratios of aid received as a percentage of GNI
THE WORLD BANK GROUP—MILLENNIUM DEVELOPMENT GOALS Go to the World Bank Web site, www.worldbank.org , and identify the five major agencies that make up the World Bank Group. What are the specifics of the Bank Group’s millennium development goals? What are the estimated costs of achieving these
LAST WORD Explain how civil wars, population growth, and public policy decisions have contributed to periodic famines in Africa.
KEY QUESTION Use Figure 16W.2(changing the box labels as necessary) to explain rapid economic growth in a country such as South Korea or Chile. What factors other than those contained in the figure might contribute to that growth?
Do you think that IACs such as the United States should open their doors wider to the immigration of low-skilled DVC workers in order to help the DVCs develop? Do you think that it is appropriate for students from DVC nations to stay in IAC nations to work and build careers?
What types of products do the DVCs typically export?How do those exports relate to the law of comparative advantage? How do tariffs by IACs reduce the standard of living of DVCs?
Do you favor debt forgiveness to all the DVCs, just the poorest ones, or none at all? What incentive problem might debt relief create? Would you be willing to pay $20 a year more in personal income taxes for debt forgiveness? How about $200 dollars? How about $2000 dollars?
What were the trends in government-provided foreign aid versus private capital flows to the DVCs in the 1990s? Why do you think those trends occurred?
Do you think that the nature of the problems the DVCs face requires government-directed as opposed to a privateenterprise-directed development process? Explain why or why not.
KEY QUESTION Because real capital is supposed to earn a higher return where it is scarce, how do you explain the fact that most international investment flows to the IACs (where capital is relatively abundant) rather than to the DVCs(where capital is very scarce)?
Discuss and evaluate:a. The path to economic development has been blazed by American capitalism. It is up to the DVCs to follow that trail.b. The problem with the DVCs is that income is too equally distributed. Economic inequality promotes saving, and saving is a prerequisite of investment.
KEY QUESTION Assume a DVC and an IAC presently have real per capita outputs of $500 and $5000, respectively. If both nations have a 3 percent increase in their real per capita outputs, by how much will the per capita output gap change?
Explain how the absolute per capita income gap between rich and poor nations might increase, even though per capita income (or output) is growing faster in DVCs than in IACs.
What are the characteristics of a developing nation? List the two basic avenues of economic growth available to such a nation. State and explain the obstacles that DVCs face in breaking the poverty barrier. Use the “vicious circle of poverty” concept to outline steps a DVC might take to
PRODUCTIVITY AND TECHNOLOGY—EXAMPLES OF INNOVATIONS IN COMPUTERS AND COMMUNICATIONS Recent innovations in computers and communications technologies are increasing productivity. Lucent Technologies(formerly Bell Labs), at www.lucent.com/minds/discoveries, provides a timeline of company innovations
WHAT’S UP WITH PRODUCTIVITY? Visit the Bureau of Labor Statistics Web site, www.bls.gov . In sequence, select Productivity and Costs, Get Detailed Statistics, and Most Requested Statistics to find quarterly growth rates(annualized) for business output per hour for the last six quarters. Is the
U.S. ECONOMIC GROWTH—WHAT ARE THE LATEST RATES? Go to the Bureau of Economic Analysis Web site, www.bea.gov , and use the data interactivity feature to find National Income and Product Account Table 1.1. What are the quarterly growth rates (annualized) for the U.S. economy for the last six
LAST WORD Based on the information in this chapter, contrast the economic growth rates of the United States and China over the last 25 years. How does the real GDP per capita of China compare with that of the United States?Why is there such a huge disparity of per capita income between China’s
What is meant when economists say that the U.S. economy has “a higher safe speed limit” than it had previously? If the New Economy has a higher safe speed limit, what explains the series of interest-rate hikes engineered by the Federal Reserve in 2004 and 2005.
Provide three examples of products or services that can be simultaneously consumed by many people. Explain why labor productivity greatly rises as the firm sells more units of the product or service. Explain why the higher level of sales greatly reduces the per-unit cost of the product.
KEY QUESTION Relate each of the following to the New Economy:a. The rate of productivity growthb. Information technologyc. Increasing returnsd. Network effectse. Global competition
Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage.
DYNAMIC TAX SCORING—WHAT IS IT, AND WHO WANTS IT? Go to www.google.com and search for information on“dynamic tax scoring.” What is it? How does it relate to supply-side economics? Which political groups support this approach, and why? What groups oppose it, and why?
THE LAFFER CURVE—DOES IT SHIFT? Congress did not substantially change Federal income tax rates between 1993 and 2000. Visit the Bureau of Economic Analysis Web site, www.bea.gov/ , and use the interactive feature for National Income and Product Accounts tables to find Table 3.2 on Federal
LAST WORD Suppose that a tax cut involves two alternative schemes: (a) a $2 tax cut or tax rebate for each of the 10 people in the breakfast club, or (b) a tax savings for each of the 10 in proportion to their previous bill. If the two schemes were put to a majority vote, which do you think would
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of unemployment, and vice versa. What is this
KEY QUESTION Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and
KEY QUESTION Suppose the full-employment level of real output ( Q) for a hypothetical economy is $250 and the price level ( P) initially is 100.Use the short-run aggregate supply schedules below to answer the questions that follow:a. What will be the level of real output in the short run if the
THE FEDERAL RESERVE ANNUAL REPORT Visit the Federal Reserve’s Web site at www.federalreserve.gov, and select Monetary Policy and then Monetary Policy Report to the Congress to retrieve the current annual report (Sections 1 and 2). Summarize the policy actions of the Board of Governors during the
CURRENT U.S. INTEREST RATES Visit the Federal Reserve’s Web site at www.federalreserve.gov , and select Economic Research and Data, then Statistics: Releases and Historical Data, Selected Interest Rates (weekly), and Historical Data to find the most recent values for the following interest rates:
KEY QUESTION Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate.What change in the Federal funds rate would you recommend? How would your recommended change get accomplished? What impact would the
KEY QUESTION In the accompanying table you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed. Do not cumulate your answers;
Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the impact of each of the following transactions on commercial bank reserves:a. Federal Reserve Banks purchase securities from banks.b. Commercial banks borrow from Federal Reserve Banks.c. The Fed reduces the reserve ratio.
KEY QUESTION Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. Compute and enter in the spaces provided in the accompanying table either the interest rate that the bond would yield to a bond buyer at each of the bond prices
KEY QUESTION Assume that the following data characterize a hypothetical economy: money supply $200 billion;quantity of money demanded for transactions $150 billion;quantity of money demanded as an asset $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall
KEY QUESTION What is the basic determinant of ( a ) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show the
RESERVE REQUIREMENTS—ANY CHANGES TO TABLE 13.1? Go to the Fed’s Web site, www.federalreserve.gov/, and select “Monetary Policy.” Then, in order, select Reserve Requirements and find the link to “low-reserve amounts and exemptions.” Does any part of Table 13.1 need updating? If so,
ASSETS AND LIABILITIES OF ALL COMMERCIAL BANKS IN THE UNITED STATES The Federal Reserve, at www.federalreserve.gov/releases/h8/Current/, provides an aggregate balance sheet for commercial banks in the United States. Check the current release, and look in the asset column for “Loans and leases.”
LAST WORD Explain how the bank panics of 1930 to 1933 produced a decline in the nation’s money supply. Why are such panics highly unlikely today?
KEY QUESTION Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is 25 percent.a. What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking
Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Joe, who deposits the $100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which (a)Security
Suppose a bank discovers that its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds market?Now assume the bank finds that its reserves will be substantially and permanently deficient. What remedy is available to
Suppose again that the Third National Bank has reserves of$20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5000 in securities to the Federal Reserve Bank in its district, receiving a $5000 increase in reserves in return. What level of excess reserves
The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank that is added to reserves. What level of excess reserves does the bank now have?
KEY QUESTION Suppose that Continental Bank has the simplified balance sheet shown on the previous page and that the reserve ratio is 20 percent:a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent
Suppose the National Bank of Commerce has excess reserves of $8000 and outstanding checkable deposits of$150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?
Assume that Jones deposits $500 in currency into her checkable-deposit account in First National Bank. A halfhour later Smith obtains a loan for $750 at this bank. By howmuch and in what direction has the money supply changed?Explain. Assets Liabilities and net worth (1) (2) Reserves $22,000
Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?
KEY QUESTION “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.”Explain.
“Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Do you agree? Explain why or why not.
KEY QUESTION Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank?What is the
Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?
What the monetary multiplier is and how to calculate it.
How a bank can create money through granting loans.
Why the U.S. banking system is called a “fractional reserve” system.
CURRENCY TRIVIA Visit the Web site of the Federal Reserve Bank of Atlanta, www.frbatlanta.org/publica/brochure/fundfac/money.htm , to answer the following questions: What are the denominations of Federal Reserve Notes now being printed? What was the largest-denomination Federal Reserve Note ever
WHO ARE THE MEMBERS OF THE FEDERAL RESERVE BOARD? The Federal Reserve Board Web site, www.federalreserve.gov/BIOS/ , provides a detailed biography of the seven members of the Board of Governors. What is the composition of the Board with regard to age, gender, education, previous employment, and
How does a debit card differ from a credit card? How does a stored-value card differ from both? Suppose that a person has a credit card, debit card, and stored-value card. Create a fictional scenario in which the person uses all three cards in the same day. Explain the person’s logic for using
What are the major categories of firms that make up the U.S. financial services industry? Did the bank and thrift share of the financial services market rise, fall, or stay the same between 1980 and 2005? Are there more or fewer bank firms today than a decade ago? Why are the lines between the
Following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not?a. Upon taking office, the U.S. president appoints seven people to the Federal Reserve Board, including a chair.Each
KEY QUESTION Suppose the price level and value of the dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to .50, what is the value of the dollar? What generalization can you draw from your
KEY QUESTION What are the components of the M 1 money supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic value? What near-monies are included in the M2 money supply? What distinguishes the M 2 and MZM
Explain and evaluate the following statements:a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible.b. Money is whatever society says it is.c. In most economies of the world, the debts of
TEXT TABLE 11.1, COLUMN 3—WHAT ARE THE LATEST NUMBERS? Go to the Congressional Budget Office Web site, www.cbo.gov , and select Historical Budget Data.Find the historical data for the actual budget deficit or surplus (total). Update column 2 of text Table 11.1 . Next, find the historical data for
LEADING ECONOMIC INDICATORS—HOW GOES THE ECONOMY? The Conference Board, at www.conferenceboard.org/ , tracks the leading economic indicators. Check the summary of the index of leading indicators and its individual components for the latest month. Is the index up or down? Which specific components
What is the index of leading economic indicators, and how does it relate to discretionary fiscal policy?
Why might economists be quite concerned if the annual interest payments on the debt sharply increased as a percentage of GDP?
True or false? If false, explain why.a. The total public debt is more relevant to an economy than the public debt as percentage of GDP.b. An internally held public debt is like a debt of the left hand owed to the right hand.c. The Federal Reserve and Federal government agencies hold more than
KEY QUESTION How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally held public debt? Contrast the
ADVANCED ANALYSIS (For students who were assigned Chapter 9) Assume that, without taxes, the consumption schedule for an economy is as shown below:a. Graph this consumption schedule, and determine the size of the MPC.b. Assume that a lump-sum (regressive) tax of $10 billion is imposed at all levels
KEY QUESTION Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowding-out effect, and why
Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy
KEY QUESTION Define the standardized budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is GDP 3 (not GDP 2) in the economy depicted in Figure 11.3 . If the economy is operating at GDP 2, instead of
Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?
(For students who were assigned Chapter 9) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 9.7). Explain how equal-size increases in G and T could eliminate a recessionary gap
KEY QUESTION What are government’s fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand–aggregate supply model to show the impact of these policies on the price level. Which of these fiscal options do you think might be favored by a person who wants to
KEY QUESTION Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate
What is the role of the Council of Economic Advisers(CEA) as it relates to fiscal policy? Class assignment: Determine the names and educational backgrounds of the present members of the CEA.
Suppose that the price level is constant and that investment decreases sharply. How would you show this decrease in the aggregate expenditures model? What would be the outcome for real GDP? How would you show this fall in investment in the aggregate demand–aggregate supply model, assuming the

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