Macroeconomics Private And Public Choice 2nd Edition James D Gwartney; Richard Stroup; A H Studenmund - Solutions

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1. What is a positive statement? Must positive statements be testable?
4. If you can sometimes get a high grade on an exam without studying, does it mean that additional studying does not lead to higher grades?Explain your answer.
3. What is the fallacy of composition?
2. What types of misinterpretation result from confusing correlation and causation?
1. What is the relationship between correlation and causation?
9. Why is inflation considered a macroeconomic topic?
8. Why is the market for running shoes considered a microeconomic topic?
7. Why do economic predictions refer to the behavior of groups of people rather than individuals?
6. Why are observation and prediction more difficult in the social sciences?
5. Why do economists hold other things constant (ceteris paribus)?
4. What is a hypothesis? How do we determine whether it is tentatively accepted?
3. Why must economic theories be abstract?
2. What is the purpose of a theory?
1. What are economic theories?
4. What is rational behavior?
3. How are self-interest and selfishness different?
2. What does rational self-interest involve?
1. What do economists mean by self-interest?
Annual growth rate of per capita GNP
Annual growth rate of population
Annual growth rate of GNP
. True or false? The stepwise regression technique is very powerful in identifying the optimal combination of factors for use in a stock-return model. Portfolio managers always should use it.
4.17. What kinds of tests or techniques can an analyst use to choose factors for(a) a fundamental factor model?(b) an economic factor model?
4.13. (a) What are three of the biggest drawbacks of using macroeconomic factors?(b) What is one of the biggest benefits of using economic factors in stock-return models?CHAPTER 4: Factors and Factor Choice 133Date Price7/13/2004 11.31 7/14/2004 11.41 7/15/2004 11.28 7/16/2004 11.57 7/19/2004
. Given the data in the following table on the stock RRI, please do the following:
. (a) Why might fundamental liquidity factors be important for QEPM?(b) What do you think is more relevant in this regard, average daily trading volume, market capitalization, or float-weighted capitalization? Explain.
. All else equal, would you prefer a low D/E ratio or a high D/E ratio company in your portfolio? What are some other measures of fundamental financial risk?
h) Attractive investment opportunities that induce U.S. investors to buy stock in Mexican firms.
(g) An economic boom in Mexico inducing Mexicans to buy more U.S.·made automobiles, trucks, electric appliances, and television sets
f) Ten percent inflation in both the United States and Mexico
(e) Inflation in the United States while prices are stable in Mexico
(d) Lower interest rates in the United States inducing Mexican investors to borrow dollars and then exchange them for pesos
(c) Higher interest rates in Mexico inducing U.S. citizens to move their financial investments from U.S. to Mexican banks
of Mexican oil fields
(b) An increase in the U.S. purchase of crude oil from Mexico as a result of the
(a) An increase in the quantity of drilling equipment purchased in the United States by Pemex, the Mexican oil company, as a result of a Mexican oil discovery
4. Suppose that the exchange rate between the United States and Mexico freely fluctuates in the open market. Indicate which of the following will cause the dollar to appreciate (or depreciate) relative to the peso.
3. Do you think that the United States should continue to follow a policy of flexible exchange rates? Why? Under what circumstances would a nation prefer flexible rates?
c) Would accepting the shoes worsen our unemployment and balance of payments problems? Explain.
(b) If foreigners were willing to give (dump?) 100,000 pairs of shoes to American consumers, do you think it would be bad business to accept them?
(a) Would excluding foreign goods from the U.S. market help to solve our problem of"ever-worsening inflation"? Exphiin.
. "We are never going to strengthen the dollar, cure our balance of payments problem, lick our high unemployment and eliminate an ever-worsening inflation, as long as the United States sits icily by as a dumping ground for shoes, television sets, apparel, steel, automobiles, etc." (Spokesman for
(b) "Economic analysis suggests that there is good reason to expect trade restrictions to exist in the real world." Could both (a) and (b) be true? Explain.
3. (a) "Tariffs and import quotas promote economic inefficiency and reduce the real income of a nation. Economic analysis suggests that nations can gain by eliminating trade restrictions."
5. Relative to the no-trade alternative, international exchange and specialization
The trade sector comprises approximately 7 percent of the U.S. CNP. Major import items include petroleum, automobiles, machinery, steel, coffee, and meats and fish. The major U.S. exports are chemicals, motor vehicles, electrical equipment, grains, and aircraft.
5. Outline a tax-based incomes policy (TIP) proposal. Do you think TIP could reduce the rate of inHation without retarding real economic growth? Why or why not?
3. "The economic events of the I 970s illustrate the failure of macroeconomic policy. I f economists were as smart as they let on, w e would have experienced neither the high rate of unemployment nor the business instability of the decade." Indicate why you either agree or disagree with this view.
(d) Taxation of unemployment compensation payments as regular income
(c) Exemption of teen-aged workers from minimum wage legislation
(b) An increase in the minimum wage rate
(a) Higher benefit levels for unemployed workers
2. Explain in your own words how each of the following would affect the long-run average rate of unemployment:
1 . The chairman of the Council of Economic Advisers has requested that you write a short paper on how we can permanently reduce the rate of unemployment. Be sure to make specific proposals. I ndicate why your recommendations will work. Submit the paper to your instructor, and he will pass it along
(d) The likelihood that discretionary macropolicy will stabilize the economy
(c) The major cause of economic instability
(b) The impact of fiscal policy on the level of output and employment
(a) The impact of monetary policy on the level of output and employment
4. Indicate how monetarists and Keynesians differ on the following issues:
1970s." Evaluate this view, presenting empirical evidence to defend your position.
3. "Inappropriate monetary and fiscal policy was the major cause of economic instability during the 1930s, and it is the major cause of economic instability in the
(b) Does the layman sometimes refer to money when wealth would be more descriptive of what he means?
(a) Is this statement true? Explain.
2. "One never has too much money."
(c) Does the experience of the 1930s indicate that monetary policy exerts little influence on the level of economic activity? Explain.
(b) Was monetary policy ineffective or inappropriate during the 1930s? Check the money supply data.
(a) Do you agree with this view? Why or why not?
1. "During the Great Depression, monetary policy appeared to be unable to provide much stimulus to the economy" (quotation from an economist).
if the following of the
what is the
7. Monetarists do not believe that monetary policy can permanently fix interest rates
6. Monetarists believe that, if erratic monetary policy were eliminated, the economy would be relatively stable. They stress that consumption, the major component of national income, is a function primarily of long-run expected income, and will tend to moderate temporary fluctuations in income.
5. Monetarists believe that economic instability is almost exclusively the result of erratic fluctuations in the money supply. Monetary acceleration initially leads to a higher real income, but inflation will eventually result. Responding to the inflation, the monetary authorities will inevitably
4. Monetarists believe that there is a direct link between the money market and other basic aggregated markets. Thus, an increase in the supply of money will create an excess supply of money balances. People will attempt to reduce their money balances by spending the excess supply of money in
3. Monetarists emphasize that households and business firms demand money because, like other goods, it yields a stream of services. People demand money by refraining from the purchase of goods. The demand for money is a function of (a) the price level, (b)income, (c) the price of closely related
z. Many early Keynesians, influenced by the Great Depression, thought that an increase in the supply of money would be completely offset by a reduction in its velocity.Under these conditions, monetary policy would influence neither aggregate demand nor prices. Modern Keynesians believe that
1. The early classical economists thought that the velocity of money was constant and that real output was independent of monetary factors. Therefore, an increase in the stock of money meant proportional increase in prices.
7. Why did the early followers of Keynes believe that monetary policy would be ineffective during a recession? Why did they believe that market economies would be plagued by stagnation resulting from a chronic shortage of investment demand relative to the supply of saving? Why do most Keynesians
(d) The demand for the services of tax consultants Be specific, and carefully explain your reasoning.
(c) Tax revenues
(b) The rate of inflation
(a) Current output
6. How would each of the following be affected by a 20 percent across the board reduction in tax rates?
5. "The economic stimulus of deficit spending is based on money illusion. When the government issues bonds to finance its deficit, it is promising to levy future taxes so that future taxation for current taxation. The stimulus results because taxpayers, failing to recognize fully their greater
4. "Macropolicy has been oversold. For years, textbooks told us that it would stabilize the economy and eliminate the business cycle. The historical record is inconsistent with this view. It suggests that improper macropolicy caused the Great Depression, the slow rate of growth during the 1 950s,
3. Suppose that you have just been appointed chairman of the Council of Economic Advisers. Prepare a press release outlining your views on unemployment, inflation, and proper macropolicy, both monetary and fiscal, for the next three years.
2. Will a budget deficit be more expansionary if it is financed by borrowing from the Federal Reserve or from the general public? Explain.
l . What impact do Keynesians believe that an increase in the supply of money would have on (a) interest rates, (b) the level of investment, (c) aggregate demand, (d)employment, and (e) prices? Fully explain your answer.
7 . Keynesians believe that a market-directed capitalist economy is inherently unstable.However, proper monetary and fiscal policies can be used to keep the economy on a stable course. Macropolicy should reflect economic conditions. A planned budget deficit and monetary acceleration are appropriate
6. In the Keynesian model, monetary policy would be ineffective as a tool to stimulate demand if (a) the economy were in the liquidity trap as evidenced by a perfectly horizontal demand for money schedule, (b) investment were insensitive to a decline in the interest rate as indicated by a
5. Both monetary policy and fiscal policy were considerably more expansionary during the period from 1 966 to 1978 than during the two decades following W or1d War I I. The expansionary macropolicy was a major factor contributing to the inflation of the period.
4. There are two ways in which the Treasury can finance a deficit: by borrowing from the public and borrowing from the Fed. The former method will increase the supply of bonds (and reduce the availability of loanable funds with which to finance private investment), causing the interest rate to
3. According to the Keynesian view, expansionary monetary policy will reduce the interest rate, thereby stimulating investment and leading to an increase in aggregate demand. A restrictive monetary policy will increase the interest rate, thereby discouraging investment and reducing aggregate
2. Interest is either a direct or an opportunity cost of every capital investment. Ceteris paribus, as the interest rate increases, the quantity of capital investment will decline.Businessmen will undertake the projects that they expect to be most profitable. As the interest rate increases, some of
I . There is a negative relationship between the quantity of money demanded and the interest rate. An increase in the supply of money, according to Keynesian theory, will cause people to use their excess money balances to buy bonds. Bond prices will rise, and the interest rate will decline, at
(f) Sale by the Fed of $20 million of U .S. securities to a private investor
(e) An increase in the discount rate
(d) Sale by the U .S. Treasury of $10 million of newly issued bonds to a commercial bank
(c) Purchase by the Fed of $10 million of U .S. securities from a commercial bank
(b) An increase in the reserve requirements

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Macroeconomics Private And Public Choice 2nd Edition James D Gwartney; Richard Stroup; A H Studenmund - Solutions

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