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macroeconomics

Questions and Answers of Macroeconomics

The Social Security payroll tax is split equally between the employee and the employer. Would it make any difference if the entire tax were imposed on employees? Would employees be helped if all the
A friend just inherited $50,000. She informs you of her investment plans and asks for your advice. “I want to put it into the stock market and use it for my retirement in 30 years. What do you
Suppose that more expansionary monetary policy leads to inflation and higher nominal interest rates. How is this likely to affect the value of stocks? Explain.
Alphabet (Google) stock rose from $208 at year-end 2005 to $1,337 per share at year-end 2018. Google has made sizable profits but never paid a dividend. Why were people willing to pay such a high
If an investment adviser gives you some hot new stock tip, is it likely to be a “sure thing”? Why or why not? If you have a stockbroker and purchase the stocks promoted by the broker, are you
Nominal interest rates were historically low during 2010–2020, and they trended slightly downward. What impact did the low and declining interest rates have on stock prices during this period? Why?
What is an indexed equity mutual fund? What is a managed equity mutual fund? How will the administrative costs of the two differ?
What is the random walk theory of stock prices? What does it indicate about the ability of “experts” to forecast accurately the future direction of stock prices?
Are stocks a risky investment? How can one reduce the risk accompanying stock market investments?
According to Keynes, when the economy is in a recession, increased government spending can bring the economy back to full employment. This spending could be on conducting a war with the military or
Is savings harmful or beneficial to the economy? Contrast the views of Keynes and Hayek on this issue.
Without government intervention, would the economy fluctuate more or less over the business cycle? Contrast the views of Keynes and Hayek on this issue. Be sure to address both the inherent stability
Can markets generally be counted on to achieve desirable outcomes and adjust quickly and appropriately to changes, or are they rigid and subject to frequent problems that need correction? Discuss the
Can government intervention generally be counted on to act more like a benevolent social planner, fixing problems with the best interest of citizens as the goal, or will government tend to cater
The Paycheck Protection Program provided unemployment recipients with a $600 per week payment in addition to their regular unemployment benefits. If the regular unemployment benefits replaced 50
Was the U.S. policy response to the COVID-19 pandemic effective? Did it reduce the harm imposed on individuals and businesses? Did it reduce the length of the crisis? Provide an assessment of the
Has the COVID-19 crisis led to permanent changes in various sectors of the U.S. economy? If so, please provide examples.
Assess the response of the Federal Reserve to the COVID-19 crisis. Has monetary policy been too restrictive, too expansionary, or about right? Use data from https://fred.stlouisfed.org/ on
Did the United States adopt additional trade restrictions during and after the COVID-19 crisis? If so, cite evidence.
What is the ratchet effect? Is there evidence that the COVID-19 crisis generated a ratchet effect with regard to the expenditures and borrowing levels of the federal government? Explain.
Why did housing prices rise rapidly during 2002–2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 even before the 2008–2009 recession began?
What were the major causes of the Great Recession of 2008–2009?
If owners have little or no equity in their houses, how will this influence the likelihood that they will default on their mortgage? Why?
What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the house, and creditworthiness of the borrower) between 1995 and 2005? Why did the credit
When mortgage originators sell mortgages to Fannie Mae, Freddie Mac, and investment banks the originators have no additional liability for possible default by the borrower. How will this arrangement
How does economic instability during the past sixty years compare with instability prior to World War II? Is there any evidence that stabilization policy has either increased or decreased economic
The chair of the Council of Economic Advisers has requested that you write a short paper explaining how economic policy can be used to stabilize the economy and achieve a high level of economic
State in your own words the adaptive-expectations hypothesis. How does the theory of rational expectations differ from that of adaptive expectations?
What is the index of leading indicators? Why is it useful to macro policy-makers?
How would you expect the actual rate of unemployment to compare with the natural rate of unemployment in the following cases? a. Prices are stable and have been stable for the last four years.b. The
What are some of the practical problems that limit the effective use of discretionary monetary and fiscal policy as stabilization tools?
Will the national debt have to be paid off at some time in the future? What will happen if it is not?
How does debt financing influence the welfare of future generations? Does it make any difference whether the debt is financed by domestic citizens or foreigners? Explain.
Prior to the mid-1970s, many economists thought that inflation would lead to a lower rate of unemployment. Why? Did the early fallacious view of the Phillips curve contribute to the inflationary
Answer the following questions: a. What is the most important thing the Fed can do to promote economic stability? b. Can expansionary monetary policy reduce interest rates and stimulate a higher
Why is debt financing so difficult to control? How has widespread acceptance of Keynesian macroeconomics influenced debt financing? Does the high level of the federal debt threaten the welfare of
Is the current level of the federal debt dangerously high? How would an increase in interest rates influence the dangers accompanying the federal debt? Carefully explain your answers.
What are unfunded government liabilities? In what respect are unfunded liabilities similar to debt financing? Are unfunded liabilities attractive to politicians? Why or why not?
What are the three major sources of economic growth? Explain why each makes it possible for the people of a nation to produce more output and achieve higher income levels.
How does economic growth influence the living standards of people? Does it really make much difference whether an economy grows at 2 percent or 4 percent annually? Discuss.
What is creative destruction? Is it good or bad for economic growth? Explain.
What is the rule of 70? If the annual growth rate of a country was 5 percent, how many years would it take for income to double?
Why is competition important for the efficient use of resources? What must a firm do in order to compete effectively? Competitive forces often result in firms being driven out of business. How does
In a market economy, what must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure? How important is innovation as
When examining the linkage between institutional quality and economic performance, why is it important to consider both the quality of institutions and indicators of performance such as the growth of
How do the income levels, growth rates, and poverty levels of countries with institutions and policies more consistent with economic freedom compare with those that are less free? Is this surprising?
When governments restrict entry into various markets, impose price controls, and use taxes, subsidies, and regulatory favors to politically direct the allocation of goods and services, how will this
Is economic freedom the same thing as democracy? Could a country have democratic political institutions and still have relatively little economic freedom? Could a country have a high degree of
Suppose that you have just been appointed to a high-level position in the economic analysis unit of the State Department. The secretary of state has asked you to prepare a memo describing the key
Describe the general pattern of economic growth over the past 1,000 years. What was the growth rate of real per capita GDP prior to 1800? What happened to the growth rate of per capita GDP following
Why did Thomas Malthus believe that per person income could never rise much above the subsistence level? Given the era of his writings, was Malthus’s view on this topic surprising? Why or why not?
What are the three geographic disadvantages that Jeffery Sachs argues have adversely affected the development process? Explain why each would tend to reduce development.
How will reductions in transportation and communication cost influence the volume of international trade? How will they influence gains from entrepreneurship? How will they impact capital investment
What is the Transportation-Communication Revolution? What impact has it had on economic development?
What area of the world is most affected by geographic disadvantages? How has this impacted the development of this region?
What is the virtuous cycle of development? How does it impact the growth of developing countries? What impact will it have on the poverty rate?
How has the poverty rate of the world changed since 1980? What are the major factors underlying this change? Explain your responses.
What happened to the relative income of people living in poor countries compared to those living in high-income countries during 1800–1980? What has happened to this income ratio since 1990?
If there were no high-income developed countries like those of Western Europe, North America, and Japan, would less-developed countries like Hong Kong, South Korea, China, and India have been able to
Why do nations adopt sound economic institutions? How was institutional development impacted by whether Europeans planned to settle permanently in an area? Have history, geography, and technology
After centuries of stagnation, why did developing countries begin to grow during the past half-century? Explain your response.
How do the growth rates of developing countries during recent decades compare with those of the United States, western Europe, and Japan during the decades following the Industrial Revolution? Is
Why are per capita incomes so low in Africa? Have poor economic institutions contributed to the low income levels? Have geographic disadvantages contributed to the low income levels of Africa?
Does democracy ensure that a country will adopt sound institutions and achieve a high income level? Can you name a country with a high per person income that is not democratic? Can you name a country
What determines the exchange rate? If a nation’s currency appreciates in the foreign exchange market, how will this impact net exports? Explain.
Does fiscal policy have a strong impact on aggregate demand? Did the shift of the federal budget from deficit to surplus during the 1990s weaken aggregate demand? Did the government spending
Marginal tax rates were cut substantially during the 1980s, and although rates were increased in the early 1990s, the marginal rates applicable in the highest income brackets were still well below
In the early stages of the Keynesian revolution, macroeconomists emphasized fiscal policy as the most powerful and balanced remedy for demand management. Gradually, shortcomings of fiscal policy
In your own words, explain why aggregate demand is inversely related to the price level. Why does the explanation for the inverse relationship between price and quantity demanded for the aggregate
What is the relationship between an economy’s production possibilities curve and its long-run aggregate supply curve? Why is the long-run aggregate supply curve vertical?
Why does the short-run aggregate supply curve slope upward to the right? If the prices of both resources and goods and services increased proportionally (by the same percentage), would business firms
If the price level in the current period is higher than buyers and sellers anticipated, what will tend to happen to real wages and the level of employment? How will the profit margins of businesses
What is the current money interest rate on ten-year government bonds? Is this also the real interest rate? Why or why not?
If the real interest rate in the loanable funds market increases, what will happen to the net inflow of foreign capital? Explain.
Explain why it’s possible to temporarily achieve output levels beyond the economy’s long-run potential. Why can’t the high rates of output be sustained?
If the price level in the current period is lower than buyers and sellers anticipated, how will output and employment be affected? What is likely to happen to the rate of unemployment?
How are the following related to each other? a. The long-run equilibrium rate of output b. The potential real GDP of the economy c. The output rate at which the actual and natural rates of
Does inflation transfer wealth from lenders to borrowers? Why or why not?
If a bond pays $1,000 per year in perpetuity (each year in the future), what will the market price of the bond be when the long-term interest rate is 10 percent? What would it be if the interest rate
What is a trade deficit? How is a trade deficit related to the net inflow of foreign capital? If the investments (both real and financial) of foreigners in the United States are greater than those of
Explain how and why each of the following factors would influence current aggregate demand in the United States: a. Increased fear of recession. b. Increased fear of inflation. c. Rapid growth of
Indicate how each of the following would influence U.S. aggregate supply in the short run:a. An increase in real wage rates. b. A severe freeze that destroys half the orange trees in Florida. c. An
When an economy dips into a recession, consumers will often be relatively pessimistic about the future for an extended period of time. How will this pessimism affect the speed and strength of the
What is the difference between an anticipated and an unanticipated increase in aggregate demand? Provide an example of each. Which is more likely to result in a temporary spurt in the growth of real
Assume that both union and management representatives agree to wage increases because they expect prices to rise 10 percent during the next year. Explain why the unemployment rate will probably
During 2015, there was a substantial increase in stock prices and a reduction in the world price of crude oil. What impact would these two changes have on aggregate demand and aggregate supply in the
When actual output exceeds an economy’s full-employment output, how will the self-correcting mechanism direct the economy to long-run equilibrium? Why can’t the above normal output be maintained?
When an economy dips into a recession, what generally happens to interest rates? Why? How will this affect the recovery process?
Consider an economy with the following aggregate demand (AD) and aggregate supply (AS) schedules. These schedules reflect the fact that, prior to the period we’re examining, decision makers entered
Suppose that an unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for U.S. exports. What impact will this change have on the price level, output, and employment
(a) Housing prices rose sharply between 2002 and midyear 2006. Use the AD–AS model to illustrate the impact of the housing price increases on output and employment. (b) During 2007 and 2008,
What determines the equilibrium rate of output in the Keynesian model? Why did Keynes think the Great Depression lasted so long and the unemployment rate remained so high throughout the 1930s?
What do Keynesians think cause fluctuations in output? What must be done to maintain full-employment capacity?
What is the multiplier principle? What determines the size of the multiplier? Does the multiplier make it more or less difficult to stabilize the economy? Explain.
From a stabilization standpoint, why is proper timing of a change in fiscal policy important? Is it easy to time fiscal policy changes properly? Why or why not?
According to the Keynesian view, what fiscal policy actions should be taken if the unemployment rate is high and current GDP is well below potential output?
Are discretionary changes in fiscal policy likely to be instituted in a manner that will help smooth the ups and downs of the business cycle? Why or why not?
What are automatic stabilizers? Explain their major advantage.
An increase in aggregate demand will tend to increase real output by a larger amount when unemployment is widespread than when the economy is operating at or near full employment.” Is this
If uncertainty about the future causes households to increase their saving and reduce their consumption spending during a recession, how will this affect the economy? Explain. If households save

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