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macroeconomics

Questions and Answers of Macroeconomics

How did Keynesian analysis change the views of economists and policy-makers with regard to the appropriateness of a balanced budget?
Even though the United States was in the midst of a historically long economic expansion, the federal government ran large budget deficits (more than 3 percent of GDP) during 2016–2019. Would a
Suppose that you are a member of the Council of Economic Advisers. The president has asked you to prepare a statement on the question, “What is the proper fiscal policy for the next twelve
What is the crowding-out effect? How does it modify the implications of the basic Keynesian model with regard to fiscal policy? How does the new classical theory of fiscal policy differ from the
What impact will budget deficits have on the exchange rate value of the dollar? How will this impact net exports and aggregate demand? Explain.
Suppose that the government provides each taxpayer with a $1,000 tax rebate financed by issuing additional Treasury bonds. Outline alternative views that predict how this fiscal action will influence
Will increases in government spending financed by borrowing help promote a strong recovery from a severe recession? Why or why not?
Outline the supply-side view of fiscal policy. How does this view differ from the various demand-side theories? Would a supply-side economist be more likely to favor a $1,000 rebate to all taxpayers
If the government becomes more heavily involved in subsidizing some businesses and sectors of the economy while levying higher taxes on others, how will this influence the quantity of rent seeking?
How do persistently large budget deficits affect capital formation and the long-run rate of economic growth? Do the proponents of the Keynesian, crowding-out, and new classical theories agree on the
The American Wind Energy Association argues for additional government support because wind-generated electricity creates more employment per kilowatt-hour than the alternatives: 27 percent more jobs
What is meant by the statement “This asset is illiquid”? List some things you own and rank them from most liquid to most illiquid.
What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills
What makes money valuable? Does money perform an economic service? Explain. Could money perform its function better if there were twice as much of it? Why or why not?
Describe the business of banking. How do banks generate revenue? What is their biggest liability?
Why are banks able to maintain reserves that are only a fraction of the demand and saving deposits of their customers? Is your money safe in a bank? Why or why not?
Suppose you withdraw $100 from your checking account. How does this transaction affect (a) The supply of money, (b) The reserves of your bank,(c) The excess reserves of your bank?
Currently, the excess reserves of banks are very large. If banks used these excess reserves to extend additional loans, what would happen to the money supply? Explain. If the Fed wanted to keep the
How will the following actions affect the money supply? a. A reduction in the discount rate b. An increase in the reserve requirements c. Purchase by the Fed of $100 million in U.S. securities
What’s wrong with this way of thinking? “When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy,
How has the size of the Fed’s holdings of U.S. government securities and other financial assets changed since 2009? How has this change influenced the ability of the federal government to finance
If the Fed wants to expand the money supply, why is it more likely to do so by purchasing bonds and other financial assets rather than by lowering reserve requirements?
What is the monetary base? During the decade following 2010, what happened to the ratio of the monetary base divided by the M1 money supply? Why? What happened to bank reserves relative to checking
Why is the actual deposit expansion multiplier generally less than the potential deposit expansion multiplier?
How would the following influence M1 and M2 money supply figures? a. An increase in the quantity of U.S. currency held overseas b. A shift of funds from interest-earning checkable deposits to money
Suppose that the Federal Reserve purchases a bond for $100,000 from Donald Truck, who deposits the proceeds in the Manufacturer’s National Bank.a. How will this transaction impact the supply of
Prior to their elimination in March of 2020, what impact did the approximately 10 percent reserve requirement have on the reserve holdings of banks? Why?
Why do people hold money? How will an increase in the interest rate influence the amount of money that people will want to hold?
How would each of the following influence the quantity of M1 money you would want to hold? a. A decrease in the interest rate earned on savings deposits.b. An increase in the expected rate of
What is the opportunity cost of the following? a. Purchasing a $100,000 house b. Holding the house for one year c. Obtaining $1,000 d. Holding the $1,000 in your checking account for one year
Historically, shifts toward a more expansionary monetary policy have often been associated with increases in real output. Is this surprising? Why or why not? Can an expansion in the money supply
If the Fed shifts to a more restrictive monetary policy, it will generally sell some of its current holdings of bonds in the open market. How will this action influence each of the following? Briefly
Has monetary policy exerted a stabilizing impact on the U.S. economy during the past decade? Why or why not?
Many economists believe that there is a “long and variable time lag” between the time a change in monetary policy is instituted and the time its primary impact on output, employment, and prices
Historically, when interest rates are high, the inflation rate is high. High interest rates are a major cause of inflation.” Evaluate this statement.
Is expansionary monetary policy responsible for the historically low real and nominal interest rates of 2008–2020? Why or why not?
What is the quantity theory of money? Is the theory valid?
Did monetary policy contribute to the economic crisis of 2008? Why or why not? How did monetary policy makers respond to this crisis? Has their response created an environment for future stability
What impact did the near zero interest rates of 2009–2015 have on the incentive of people to hold money balances? How did the low interest rates affect the velocity of money? What impact did they
How did the Fed respond to the COVID-19 crisis and accompanying recession? Did the Fed’s response help to promote recovery and future economic stability? Why or why not?
List the major phases of the business cycle and indicate how real GDP, employment, and unemployment change during these phases. Are the time periods of business cycles and the duration of the various
Explain why even an efficiently functioning economic system will have some unemployed resources.
Classify each of the following as employed, unemployed, or not in the labor force:a. Brown is not working; she applied for a job at Walmart last week and is awaiting the result of her
What is full employment? When full employment is present, will the rate of unemployment be zero? Explain.
Is the natural rate of unemployment fixed? Why or why not? How are full employment and the natural rate of unemployment related? Is the actual rate of unemployment currently greater or less than the
How are the following related to one another? a. The actual rate of unemployment b. The natural rate of unemployment c. Cyclical unemployment d. Potential GDP.
How does the unemployment rate of teenagers and persons age 20 to 24 compare with the rate for older workers? Are the rate differences between the younger and older workers surprising? Why or why
How has Google impacted the job search process? How has Google impacted the ability of workers to find job opportunities consistent with their skills and preferences? Why is this important?
People are classified as unemployed if they are not currently working at a job and if they made an effort to find a job during the past four weeks. Does this mean that there were no jobs available?
What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?
The nominal salary paid to the president of the United States along with data for the consumer price index (CPI) are given for various years below.a. Calculate the president’s real salary measured
When employees are dismissed from employment for reasons other than poor performance, unemployment benefits should replace 100 percent of their prior earnings while they are searching for a new
Suppose that the consumer price index (CPI) at year end 2019 was 300 and twelve months later, at year end 2020, the CPI was 306. What was the inflation rate during 2020?
What is the source of frictional unemployment? Does frictional unemployment indicate that an economy is working poorly? How does the job search accompanying frictional unemployment influence the
Data for nominal GDP and the GDP deflator (2010 = 100) in 2017 and 2018 for six major industrial countries are presented in the accompanying Table A.a. Use the data provided to calculate the 2017 and
My money wage rose by 6 percent last year, but inflation completely erased these gains. How can I get ahead when inflation continues to wipe out my increases in earnings?” What’s wrong with this
Analyze the impact of an increase in the minimum wage from the current level to $25 per hour. How would the following be affected?a. Employment of people previously earning less than $25 per hour b.
How will a substantial increase in demand for housing affect the wages and employment of carpenters, plumbers, and electricians?
Suppose that college students in your town persuaded the town council to enact a law setting the maximum price for rental housing at $400 per month. Will this help or hurt college students who rent
What is the difference between a price ceiling and a price floor? If a price ceiling for a good is set below the market equilibrium, what will happen to the quality and future availability of the
To be meaningful, a price ceiling must be below the market price. Conversely, a meaningful price floor must be above the market price. What impact will a meaningful price ceiling have on the quantity
The tax on cigarettes in New York City is one of the highest in the nation––$5.85 per pack. Does this tax raise a lot of revenue for New York City? Why or why not? What are some of the secondary
What is a black market? What are some of the main differences in how black markets operate relative to legal markets?
What is the Laffer curve? What are the important implications of the Laffer curve?
What is meant by the incidence of a tax? Explain why the statutory and actual incidence of a tax often differ.
What impact do government grants and loans to college students have on the cost of going to college? Are students the primary beneficiary of these subsidies? Discuss.
What is the nature of the deadweight loss accompanying taxes? Why is it often referred to as an “excess burden”?
Suppose Congress were to pass legislation requiring that businesses employing workers with three or more children pay these employees at least $30 per hour. How would this legislation affect the
We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $75,000 or more) in order to collect more tax revenue from the wealthy.” Will the burden of the
Should policy makers seek to set the tax on an economic activity at a rate that will maximize the revenue derived from the tax? Why or why not? Explain.
Suppose the government subsidizes the production and sale of spinach. What impact would this have on the price and output of spinach? Who would benefit and who would lose from this subsidy?
Several states have laws prohibiting businesses from increasing prices in response to a natural disaster such as a hurricane or during a declared state of emergency like the COVID-19 pandemic. In
Why is it important for producers to be able to prevent nonpaying customers from receiving a good?
In response to the terrorist attacks of September 11, 2001, airline security screening increased dramatically. As a result, the travel time of airline passengers has increased substantially. Would it
What are the distinguishing characteristics of “public goods”? Give two examples of a public good. Why are public goods difficult for markets to allocate efficiently?
Which of the following are public goods? Explain, using the definition of a public good. a. An antimissile system surrounding Washington, D.C. b. A fire department c. Tennis courts d. Yellowstone
Explain in your own words what is meant by external costs and external benefits. Why may market outcomes be less than ideal when externalities are present?
English philosopher John Locke argued that the protection of each individual’s person and property (acquired without the use of violence, theft, or fraud) was the primary function of government.
“If it’s worth doing, it’s worth doing to the best of your ability.” What is the economic explanation for why this statement is frequently said but rarely followed in practice? Explain.
Unless quality and price are regulated by government, travelers would have no chance for a fair deal. Local people would be treated well, but the traveler would have no way to know, for example, who
If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic efficiency be affected? Explain.
What are external costs? When are they most likely to be present? When external costs are present, what is likely to be the relationship between the market output of a good and the output consistent
Elementary education is obviously a public good. After all, it is provided by the government.” Evaluate this statement.
What are the necessary conditions for economic efficiency? In what four situations might a market fail to achieve ideal economic efficiency?
What is market failure? If market failure is present, does this imply that government intervention will lead to a more efficient allocation of resources? Why or why not?
Apply the Economic efficiency criterion to the role of government. When would a government intervention be considered economically efficient? When would a government intervention be considered
Are voters likely to be well informed on issues and the positions of candidates? Why or why not?
What is public-choice analysis? What are economists and others involved in public-choice analysis attempting to do?
What is rent-seeking? When is it likely to be widespread? How does it influence economic efficiency? Explain.
The political process sometimes leads to economic inefficiency because we elect the wrong people to political office. If the right people were elected, a democracy governed by majority rule would
What are “bootleggers and Baptists” coalitions? Why are “bootleggers and Baptists” coalitions highly attractive to rent-seekers and politicians? How do these coalitions impact government
The average person is more likely to make a well-informed choice when purchasing a personal computer than when voting for a congressional candidate.” Is this statement true? Why or why not?
Government action is based on majority rule, whereas market action is based on mutual consent. The market allows for proportional representation of minorities, but minorities must yield to the views
Voters should simply ignore political candidates who play ball with special-interest groups and vote instead for candidates who will represent all the people when they are elected. Government will
If a project is efficient (its total benefits exceed its total costs), would it be possible to allocate the cost of the project in a manner that would provide net benefits to each voter? Why or why
When an economic function is turned over to the government, social cooperation replaces personal self-interest.” Is this statement true? Why or why not?
What is the shortsightedness effect? How does it influence the attractiveness of government borrowing? Explain.
Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries such as airlines, railroads, and
When politicians decide what is bought and sold, the first thing that will be bought and sold is politicians.” What is the central point of this statement? Is it true?
Because government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises.” Evaluate this view.

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