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macroeconomic theory

Macroeconomics 17th Edition Campbell McConnell, Stanley Brue - Solutions

Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not the aggregate demand curve.”
THE RECESSION OF 2001—WHICH COMPONENT OF AD DECLINED THE MOST? Use the interactive feature of the Bureau of Economic Analysis Web site, www.bea.gov, to access the National Income and Product Account Tables.From Table 1.2 find the levels of real GDP, personal consumption expenditures (C), gross
FEELING WEALTHIER; SPENDING MORE? Access the Bureau of Economic Analysis Web site, www.bea.gov, interactively via the National Income and Product Account Tables.From Table 1.2 find the annual levels of real GDP and real consumption for 1996 and 1999. Did consumption increase more rapidly or less
LAST WORD Go to the OPEC Web site, www.opec.org, and find the current “OPEC basket price” of oil. By clicking on that amount, you will find the annual prices of oil for the past 5 years. By what percentage is the current price higher or lower than 5 years ago? Next, go to the Bureau of Economic
In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.
Use shifts of the AD and AS curves to explain (a) the U.S.experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b)how a strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though
Explain: “Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.” In each case, specify the price-level outcomes.
Why does a reduction in aggregate demand reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect.
KEY QUESTION Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?a.
KEY QUESTION What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. Assume all other things remain constant.a. A widespread fear of depression on the
KEY QUESTION Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output:a. What is productivity in this economy?b. What is the per-unit cost of production if the price of each input unit is $2?c. Assume
KEY QUESTION Suppose that the aggregate demand and supply schedules for a hypothetical economy are as shown below:a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical
Why is the long-run aggregate supply curve vertical?Explain the shape of the short-run aggregate supply curve.Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?
Distinguish between “real-balances effect” and “wealth effect,” as the terms are used in this chapter. How does each relate to the aggregate demand curve?
Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?
GDP GAP AND EXPENDITURE GAP The St. Louis Federal Reserve Bank at www.research.stlouisfed.org/fred2 provides data on both real GDP (chained 2000 dollars) and real potential GDP for the United States. Both sets of data are located as links under “Gross Domestic Product and Components.” What was
THE MULTIPLIER—CALCULATING HYPOTHETICAL CHANGES IN GDP Go to the Bureau of Economic Analysis at www.bea.gov , and use the BEA interactivity feature to select National Income and Product Account Tables. Then find Table 1.1, which contains the most recent values for GDP Ca Ig G ( X M). Assume
LAST WORD What is Say’s law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use production possibilities analysis to demonstrate Keynes’ view on this matter.
Answer the following questions, which relate to the aggregate expenditures model:a. If C a is $100, I g is $50, X n is $10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an economy is currently $200, C a is $100, I g is $50, X n is $10, and G is $30, will the economy’s
ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption C 50 0.8 Y. Assume further that planned investment I g and net exports X n are independent of the level of real GDP and constant at I g 30 and X n 10.Recall also that, in equilibrium, the
KEY QUESTION Refer to the table below in answering the questions that follow:a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in
KEY QUESTION Refer to columns 1 and 6 in the table for question 9.Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not induce a shift in the
Explain graphically the determination of equilibrium GDP for a private economy through the aggregate expenditures model. Now add government purchases (any amount you choose) to your graph, showing its impact on equilibrium GDP. Finally, add taxation (any amount of lump-sum tax that you choose) to
Assume that, without taxes, the consumption schedule of an economy is as follows:GDP, Consumption, Billions Billions $100 $120 200 200 300 280 400 360 500 440 600 520 700 600a. Graph this consumption schedule and determine the MPC.b. Assume now that a lump-sum tax is imposed such that the
KEY QUESTION The data in columns 1 and 2 in the accompanying table are for a private closed economy:a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.b. Now open up this economy to international trade by including the export and import figures of columns 3and
Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the initial decline in aggregate expenditures. What would be the ratio of a decline in
Using the consumption and saving data in question 2 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level?What are saving and planned investment at the $300 billion level of
KEY QUESTION Assuming the level of investment is$16 billion and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and MPS?Possible Real Domestic Levels
What is an investment schedule and how does it differ from an investment demand curve?
How economists integrate the international sector(exports and imports) and the public sector(government expenditures and taxes) into the aggregate expenditures model.
How changes in equilibrium real GDP can occur and how those changes relate to the multiplier.
How economists combine consumption and investment to depict an aggregate expenditures schedule for a private closed economy.
INVESTMENT INSTABILITY—CHANGES IN REAL PRIVATE NONRESIDENTIAL FIXED INVESTMENT The Bureau of Economic Analysis provides data for real private nonresidential fixed investment in table form at www.bea.gov. Access the BEA interactively and select National Income and Product Account Tables. Find
THE BEIGE BOOK AND CURRENT CONSUMER SPEND- ING Go to the Federal Reserve Web site, federalreserve.gov, and select About the Fed and then Federal Reserve Districts and Banks. Find your Federal Reserve District.Next, return to the Fed home page and select Monetary Policy and then Beige Book. What is
LAST WORD What is the central economic idea humorously illustrated in Art Buchwald’s piece, “Squaring the Economic Circle”? How does the central idea relate to recessions, on the one hand, and vigorous expansions, on the other?
ADVANCED ANALYSIS Suppose that the linear equation for consumption in a hypothetical economy is C 40 .8Y.Also suppose that income (Y ) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d ) the average propensity to
ADVANCED ANALYSIS Linear equations for the consumption and saving schedules take the general form C a bYand S a (1 b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption
Why is the actual multiplier for the U.S. economy less than the multiplier in this chapter’s simple examples?
KEY QUESTION What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier?The MPS? What will the multiplier be when the MPS is 0,.4, .6, and 1? What will it be when the MPC is 1, .90, .67,.50, and 0? How much of a change in GDP will result if firms increase their
KEY QUESTION Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yielding between 15 and 20
KEY QUESTION Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year’s net revenue. What is the expected rate of return? If the real interest rate at which funds can be borrowed to
What are the basic determinants of investment? Explain the relationship between the real interest rate and the level of investment. Why is investment spending unstable? How is it possible for investment spending to increase even in a period in which the real interest rate rises?
KEY QUESTION Complete the following table:a. Show the consumption and saving schedules graphically.b. Find the break-even level of income. Explain how it is possible for households to dissave at very low income levels.c. If the proportion of total income consumed (APC)decreases and the proportion
Explain why an upward shift of the consumption schedule typically involves an equal downshift of the saving schedule.What is the exception to this relationship?
Explain how each of the following will affect the consumption and saving schedules (as they relate to GDP) or the investment schedule, other things equal:a. A large increase in the value of real estate, including private houses.b. A decline in the real interest rate.c. A sharp, sustained decline in
Precisely how do the APC and the MPC differ? Why must the sum of the MPC and the MPS equal 1? What are the basic determinants of the consumption and saving schedules?Of your personal level of consumption?
Very briefly summarize the relationships shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment demand curve, and (d) the multiplier effect. Which of these relationships are direct (positive) relationships and which are inverse (negative) relationships? Why are
WHAT IS THE CURRENT U.S. INFLATION RATE? Visit the Bureau of Labor Statistics Web Site, www.bls.gov/news.release/cpi.toc.htm, and select Consumer Price Index Summary. What month (and year) is summarized? What was the CPI-U for the month? What was the rate of inflation (change in the CPI-U) for the
WHAT IS THE CURRENT U.S. UNEMPLOYMENT RATE?Visit the Bureau of Labor Statistics Web Site, www.bls.gov/news.release/empsit.toc.htm, and select Employment Situation Summary. What month (and year) is summarized? What was the unemployment rate for that month? How does that rate compare with the rate in
LAST WORD Suppose that stock prices were to fall by 10 percent in the stock market. All else equal, would the lower stock prices be likely to cause a decrease in real GDP? How might they predict a decline in real GDP?
Evaluate as accurately as you can how each of the following individuals would be affected by unanticipated inflation of 10 percent per year:a. A pensioned railroad worker.b. A department-store clerk.c. A unionized automobile assembly-line worker.d. A heavily indebted farmer.e. A retired business
Explain how hyperinflation might lead to a severe decline in total output.
Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP?
KEY QUESTION If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? What is the “rule of 70”? How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and
Explain how an increase in your nominal income and a decrease in your real income might occur simultaneously.Who loses from inflation? Who loses from unemployment?If you had to choose between (a) full employment with a 6 percent annual rate of inflation and (b) price stability with an 8 percent
KEY QUESTION Assume that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being
Since the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?
KEY QUESTION Use the following data to calculate (a) the size of the labor force and (b) the official unemployment rate:total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10.
What factors make it difficult to determine the unemployment rate? Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic problem? What are the consequences of a negative GDP gap? What are the noneconomic effects of unemployment?
KEY QUESTION What are the four phases of the business cycle? How long do business cycles last? How do seasonal variations and long-run trends complicate measurement of the business cycle? Why does the business cycle affect output and employment in capital goods industries and consumer durable goods
Briefly describe the growth record of the United States.Compare the rates of growth of real GDP and real GDP per capita, explaining any differences. Compare the average growth rates of Japan and the United States between 1997 and 2005. To what extent might growth rates understate or overstate
KEY QUESTION Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year 2.What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2.What is the growth rate of GDP per capita?
Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades?
GDPS IN THE AMERICAS—HOW DO NATIONS COMPARE? Visit the World Bank Web site, www.worldbank.org , and type “GDP” in the search space. Find the latest data for total GDP (not PPP GDP) for the North and South America countries listed. Arrange the countries by highest to lowest GDPs, and express
NOMINAL GDP AND REAL GDP—BOTH UP? Visit the Bureau of Economic Analysis Web site, www.bea.gov, and access the BEA interactively by selecting National Income and Product Account Tables. Select Frequently Requested NIPA Tables, and use Tables 1.1 and 1.2 to identify the GDP (nominal GDP) and real
UPDATE THE KEY NATIONAL INCOME AND PRODUCT ACCOUNT NUMBERS Go to the Bureau of Economic Analysis Web site, www.bea.gov, and access the BEA interactively by selecting National Income and Product Account Tables. Select Frequently Requested NIPA Tables, and find Table 1.1 on GDP. Update the data in
Which of the following are included in this year’s GDP?Explain your answer in each case.a. Interest on an AT&T corporate bond.b. Social Security payments received by a retired factory worker.c. The unpaid services of a family member in painting the family home.d. The income of a dentist.e. The
KEY QUESTION The following table shows nominal GDP and an appropriate price index for a group of selected years.Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.Nominal GDP, Price Index Real GDP, Year Billions (2000 100) Billions 1964 $
KEY QUESTION Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken.Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2000 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the GDP
Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions.Compensation of employees $194.2 U.S. exports of goods and services 17.8 Consumption of fixed capital 11.8 Government purchases 59.4 Taxes on production and imports 14.4 Net
KEY QUESTION Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the
Define net exports. Explain how U.S. exports and imports each affect domestic production. Suppose foreigners spend$7 billion on U.S. exports in a specific year and Americans spend $5 billion on imports from abroad in the same year.What is the amount of the United States’ net exports? Explain how
Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no
THE DOHA ROUND—WHAT IS THE CURRENT STATUS?Determine and briefly summarize the current status of the Doha Round of trade negotiations by accessing the World Trade Organization site, www.wto.org. Is the round still in progress or has it been concluded with an agreement? If the former, when and
FOREIGN EXCHANGE RATES—THE YEN FOR DOLLARS The Federal Reserve System Web site, www.federalreserve.gov/releases/H10/hist/, provides historical foreignexchange-rate data for a wide variety of currencies. Look at the data for the Japanese yen from 1995 to the present. Assume that you were in Tokyo
TRADE BALANCES WITH PARTNER COUNTRIES The U.S. Census Bureau, at www.census.gov/foreign-trade/statistics, lists the top trading partners of the United States(imports and exports added together) as well as the top 10 countries with which the United States has a trade surplus and a trade deficit.
Explain: “Free-trade zones such as the EU and NAFTA lead a double life: They can promote free trade among members, but they pose serious trade obstacles for nonmembers.” Do you think the net effects of trade blocs are good or bad for world trade? Why? How do the efforts of the WTO relate to
If the European euro were to decline in value (depreciate) in the foreign exchange market, would it be easier or harder for the French to sell their wine in the United States? Suppose you were planning a trip to Paris. How would depreciation of the euro change the dollar cost of your trip?
KEY QUESTION True or False? “U.S. exports create a demand for foreign currencies; foreign imports of U.S. goods create a supply of foreign currencies.” Explain. Would a decline in U.S. consumer income or a weakening of U.S. preferences for foreign products cause the dollar to depreciate or to
Suppose that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the hypotheti cal nations of Canswicki and Tunata:Canswicki: 1 can baby formula 2 cans tuna fish Tunata: 1 can baby formula 4 cans tuna fish In what product should each nation specialize?
KEY QUESTION The following are production possibilities tables for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U.a. Are comparative-cost conditions such that the two areas should
Describe the four major economic flows that link the United States with other nations. Provide a specific example to illustrate each flow. Explain the relationships between the top and bottom flows in Figure 5.1 .
How and why government sometimes interferes with free international trade.
STATE TAXES AND EXPENDITURES PER CAPITA—WHERE DOES YOUR STATE RANK? Go to the Census Bureau site, www.census.gov/govs/www/state.html, and find the table that ranks the states by tax revenue and expenditures per capita for the latest year. Where does your home state rank in each category? Where
PERSONAL DISTRIBUTION OF INCOME—WHAT IS THE TREND? Visit the U.S. Census Bureau Web site at www.census.gov/hhes/income/midclass/index.html and select Data Highlights. Since 1970, how has the share of aggregate household income received by the lowest and highest income quintiles (fifths) changed?
LAST WORD What do economists mean when they refer to Social Security as a pay-as-you-go plan? What is the Social Security trust fund? What is the nature of the long-run fiscal imbalance in the Social Security retirement system?What are the broad options for addressing this problem?
KEY QUESTION Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings between $10,000 and $20,000 and a 30 percent tax on income between $20,000 and $30,000. Any income above $30,000 is taxed at 40 percent. If your income is$50,000, how much will you
Use the circular flow diagram to show how each of the following government actions simultaneously affects the allocation of resources and the distribution of income:a. The construction of a new high school.b. A 2-percentage-point reduction of the corporate income tax.c. An expansion of preschool
Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government: (a) French fries, (b) airport screening, (c) court systems, (d) mail delivery, and (e) medical care. State why you
KEY QUESTION What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV?
What divergences arise between equilibrium output and efficient output when (a) negative externalities and (b) positive externalities are present? How might government correct these divergences? Cite an example (other than the text examples) of an external cost and an external benefit.
CHANGES IN DEMAND—BABY DIAPERS AND RETIREMENT VILLAGES Other things equal, an increase in the number of buyers for a product or service will increase demand. Baby diapers and retirement villages are two products designed for different population groups. The U.S. Census Bureau Web site,
FARM COMMODITY PRICES—SUPPLY AND DEMAND IN ACTION The U.S. Department of Agriculture, www.nass.usda.gov/, publishes charts on the prices of farm products.Go to the USDA home page and select “Find charts and maps” and then “Agricultural Prices.” Choose three farm products and determine
KEY QUESTION Refer to the table in question 8.Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government
Supply curve S:a. reflects an inverse (negative) relationship between price and quantity supplied.b. reflects a direct (positive) relationship between price and quantity supplied.c. depicts the collective behavior of buyers in this market.d. shows that producers will offer more of a product for
Demand curve D is downsloping because:a. producers offer less of a product for sale as the price of the product falls.b. lower prices of a product create income and substitution effects that lead consumers to purchase more of it.c. the larger the number of buyers in a market, the lower the product
BARTER AND THE IRS Bartering occurs when goods or services are exchanged without the exchange of money. For some, barter’s popularity is that it enables them to avoid paying taxes to the government. How might such avoidance occur? Does the Internet Revenue Service (IRS), www.irs.ustreas.gov/,
DIAMONDS—INTERESTED IN BUYING ONE? Go to the Internet auction site eBay at www.ebay.com and select the category Jewelry and Watches and then Loose Diamonds and Gemstones. How many loose diamonds are for sale at the moment? Note the wide array of sizes and prices of the diamonds. In what sense is

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