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macroeconomics

Macroeconomics Private And Public Choice 3rd Edition James D Gwartney - Solutions

1.3 It is often argued that the rich nations are getting richer and the poor are getting poorer. Is this view correct? Is it an oversimplification? Explain.
1.2 Explain the logic of the vicious circle of underdevelopment. How can a poor nation break out of this circle?
1.1 Suppose that you are an economic adviser to the president of Mexico. You have been asked to suggest policies to promote economic growth and a higher standard of living for the citizens of Mexico. Outline your suggestions and discuss why you believe that they would be helpful.
7 What's Wrong with This Way of Thinking?"The government can change from fixed to flexible exchange rates, but we will continue to run a balance of payments deficit because foreign goods, produced with cheap labor, are simply cheaper than goods produced in the United States."CHAPTER
6 Given the inflation of the early 1 980s, the Reagan administration advocated restrictive monetary policy coupled with a reduction in tax rates designed to stimulate saving, investment, and long-run economic growth. What impact is the administration's macropolicy likely to have on the value of the
5 "The value of the dollar on the exchange market will continue to fall as long as our balance of trade is running a deficit." Evaluate.
4 Suppose that the exchange rate between the United States and Mexico freely fluctuated in the open market. Indicate which of the following would cause the dollar to appreciate (or depreciate) relative to the peso.(a) An increase in the quantity of drilling equipment purchased in the United States
3 Do you think the United States should continue to follow a policy of flexible exchange rates? Why? Under what circumstances would a nation prefer flexible rates?
2 " If a current account deficit means that we are getting more items from abroad than we are giving to foreigners, why is it considered a bad thing?" Comment.
1 " 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 idly by as a dumping ground for shoes, television sets, apparel, steel, automobiles, etc." (spokesperson for
6 What's Wrong with This Economic Experiment?A researcher hypothesizes that higher tariffs on imported automobiles will cause total employment in the United States to increase. Automobile tariffs are raised and the following year employment in the U.S. auto industry increases by 100,000, compared
5 Suppose that the United States and other oil-importing nations levied a tariff on crude oil that was equal to the import price (approximately $34 per barrel in 1 982)minus $20 per barrel. Thus, an increase in the i mport price (above $20 per barrel) would automatically raise the tariff by an
4 "Tariffs and quotas are necessary to protect the high wages of the American worker."Do you agree or disagree? Why?
3 Can both (a) and (b) be true? Explain.(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."(b) "Economic analysis suggests that there is good reason to expect trade
2 Do you think that the United States could benefit if all barriers to trade among North American nations were eliminated? Would Canada gain? Mexico? Why or why not?
1 Suppose that at the time of the Civil War the United States had been divided into two countries and that through the years no trade existed between the two. How would the standard of living in the "divided" United States have been affected? Explain.
6 Why was the unemployment rate so high during the 1 970s? Was the high unemployment rate indicative of a sluggish demand for labor? What do you think will happen to the unemployment rate in the late 1980s?
5 Why do you think that the economic growth rate of the United States has been so slow compared to that of other industrial nations? Should we be concerned about our sagging growth rate? Why or why not?
4 How does the microeconomic approach to the problems of unemployment and economic growth differ from the traditional emphasis on monetary and fiscal policy?Is the microeconomic approach a substitute for traditional monetary and fiscal policy?Explain.
3 "The economic events of the 1970s illustrate the failure of macroeconomic policy.If economists were as smart as they let on, we 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.
2 The early part of this chapter outlined the economic conditions present when Ronald Reagan became president. How have conditions changed? Has his program effectively combated inflation, unemployment, instability, and high interest rates? What grade would you give the president's economic program?
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. Indicate why your recommendations will work. Submit the paper to your instructor, and she or he will pass it
6 Outline the major economic problems that plagued the U.S. economy during the 1970s. How would each of the following explain these problems: (a) Keynesians,(b) monetarists, (c) supply-side economists, and (d) proponents of the rational expectations view? Are there substantial points of agreement
5 The analysis summarized by Exhibits 7 and 8 assumes adaptive expectations. How would the outcome differ if people adjusted quickly to changes in macropolicy, as the rational expectations hypothesis implies?
4 "The high rates of interest during the 1 970s are reflective of the Fed's tight money policies. If the Fed would loosen monetary growth a little more, lower interest rates and more rapid economic growth would result." Indicate why you either agree or disagree with this view.
3 Compare and contrast the rational expectations hypothesis with the adaptive expectations hypothesis. If expectations are formed "rationally" rather than "adaptively,"will it be easier or more difficult to decelerate the inflation rate without causing an economic recession? Explain.
2 State in your own words the adaptive expectations hypothesis. Explain why adaptive expectations imply that macroacceleration will only tempqrarily reduce the rate o(unemployment.
1 "In order to achieve the nonperfectionist's goal of high enough output to give us no more than 3 percent unemployment, the price index might have to rise by as much as 4 to 5 percent per year." (Paul Samuelson and Robert Solow, American Economic Association meetings, December 1959)(a) Do you
7 Do you think that the proposed constitutional amendment that would mandate a balanced budget is a good idea? Why or why not?
6 Explain why monetarists believe that, in the short run, expansionary monetary policy will stimulate output and employment. Explain why monetarists believe that, in the long run, monetary policy will primarily affect the level of prices without having any major impact on output, although gyrations
5 Indicate why you either agree or disagree with the position that economic instability would be reduced if a monetary rule requiring the Federal Reserve to increase the money supply at a constant rate (for example, 3 percent annually) were adopted.
4 What evidence is there to support the monetarist view that budget deficits crowd out private spending? Do you think that fiscal policy is important? Why or why not?Cite empirical evidence in support of your position.
3 Indicate how monetarists and Keynesians differ on the following issues.(a) The impact of monetary policy on the levels of output and employment(b) The impact of fiscal policy on the levels of output and employment(c) The major cause of economic instability(d) The likelihood that discretionary
2 "Inappropriate monetary and fiscal policy was the major cause of economic instability during the 1930s, and it was the major cause of inflation in the 1 970s." Evaluate this view, presenting empirical evidence to defend your position.
1."One never has too much money."(a) Is this statement true? Explain.(b) Does the layperson sometimes refer to money when wealth would be more descriptive of what he or she means? Explain.
7 Why did the early followers of Keynes believe that m onetary policy would be ineffective during a recession? Why did they believe that at such a time market economies would be plagued by stagnation? Why do most Keynesians reject these views today?CHAPTER
6 How would each of the following be affected by a 20 percent across-the-board reduction in tax rates?(a) Current output(b) The rate of inflation(c) Tax revenues(d) The demand for the services of tax consultants Be specific, and carefully explain your reasoning.
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 bondholders can be paid back with interest. Bond financing is merely a substitution of future taxation for current taxation.
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 1950s, and
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 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.
1 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? Explain your answer fully.
6 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, it waters down the value of paper money already in circulation. Thus, it takes more money to buy
5 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 $ 1 0 million of U.S. securities from a commercial bank(d) Sale by the U.S. Treasury of $ 1 0 million of newly issued bonds to a
4 Explain how the creation of new reserves would cause the supply of money to increase by some multiple of the newly created reserves.
3 "People are poor because they don't have very much money. Yet central bankers keep money scarce. If poor people had more money, poverty could be eliminated."Explain the confused thinking this statement reveals and why it is misleading.
2 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?
1 Why can banks continue to hold reserves that are only a fraction of the demand deposits of their customers? Is your money safe in a bank? Why or why not?
7 Given current economic conditions, how would an increase in aggregate demand influence output, employment, and price? Discuss.
6 When the Reagan administration took office, its fiscal strategy was to cut taxes and government expenditures. The administration believed that this strategy, with time, would effectively combat the high rate of inflation without causing a major recession.Evaluate the Reagan strategy. Has it
4 Empirical studies indicate that males in their prime earning years do not adjust their work time significantly in response to a change in their after-tax wage rates.Do these findings indicate that marginal tax rates exert little influence on aggregate supply? Why or why not? Discuss.
3 If unemployed resources are present, an economy is not operating on the vertical portion of its aggregate supply curve. True, false, or uncertain? Discuss.
2 "An increase in aggregate expenditures will always lead to more income because one person's spending is another person's income. Maintenance of a high level of expenditures is the key to maintenance of a high level of income." Evaluate.
Indicate the impact of each of the following on aggregate supply in the United States:(a) An increase in the world price of wheat, a major export product of the United States(b) The discovery of a major oil field in Utah(c) A sharp reduction in the import price of Japanese automobiles stemming from
5 What's Wrong with This Way of Thinking?"Keynesians argue that a budget deficit will stimulate the economy. The historical evidence is highly inconsistent with this view. A $ 1 2 billion budget deficit in 1958 was associated with a serious recession, not expansion. We experienced recessions in
4 What are automatic stabilizers? Explain the major advantage of automatic stabilizers.
3 "In the real world, it is wrong to expect that fiscal policy will be symmetric.Politicians will be glad to run a deficit during bad times to stimulate the economy, but they will surely fail to plan a surplus when it is needed to halt inflationary pressures.Thus, fiscal policy has an inflationary
2 If an economy were experiencing 7 percent unemployment while prices were rising at a 2 percent annual rate, indicate your view on appropriate fiscal policy. Explain your reasons.
1.Suppose that you are a member of the Council of Economic Advisers. The president has asked you to prepare a statement on "What is the proper fiscal policy for the next 1 2 , .months?" Prepare such a statement, indicating (a) the current state of the economy(that is, unemployment rate, growth in
5 "How can the Keynesian model be correct? According to Keynes, falling income, unemployment, and bad times result because people have so much income that they fail to spend enough to buy all of the goods produced. Paradoxically, rising income and good times result because people are reducing their
4 What is the multiplier principle? What determines the size of the multiplier? Does the multiplier principle make it more or less difficult to stabilize the economy? Explain.
3 Explain the paradox of thrift . Was Ben Franklin wrong to sanctify savings? Is saving necessary for investment and economic growth? Should we try to save more or less next year? Why?
2 When is an economy in Keynesian aggregate equilibrium? Explain in your own words why an economy will return to aggregate equilibrium from a position of excess aggregate demand or from a position of insufficient aggregate demand.
1 You have j ust been appointed to the president's Council of Economic Advisers.Write a short essay explaining to the president the Keynesian view of why a market economy may be unable to generate the full-employment level of income. Be sure to explain why equilibrium may result at less than full
5 How will each of the following factors influence the consumption schedule?(a) The expectation that consumer prices will rise more rapidly in the future(b) Pessimism about future employment conditions(c) A reduction in income taxes(d) An increase in the interest rate(e) A decline in stock
4 Annual data on household expenditures illustrate that high-income recipients save more of their income than persons with lower incomes. However, as income grows over time, saving does not increase as a share of income. Provide an explanation for these seemingly contradictory findings.
3 What is the difference between APC and MPC? What are the major determinants of MPC and MPS?
2 Professor Keynes did not believe that the u nhampered market mechanism would necessarily provide for the full employment of resources. Outline the views of Keynes and indicate why you either agree or disagree.
1 The classical economists believed that market forces would always move the aggregate labor market toward full employment. Outline their views and explain why you either agree or disagree with them.
7 "As the inflation proceeds and the real value of the currency fluctuates widely from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting
6 What's Wrong with This Way of Thinking?"The value of today's dollar is only one-fourth of what it was in 1940. Five years from now it will be worth only 20 cents. We cannot maintain our standard of living when the value of our currency is declining so rapidly."
5 What are the most harmful effects of inflation? Explain why it matters whether inflation is accurately anticipated.
4 "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?" Evaluate. Do you agree with the view implicit i n this question?
3 How does the rate of employment differ from the rate of unemployment? Which is the better indicator of employment opportunity? Why?
2 What is full employment? How does public policy affect the percentage of the labor force that will be employed at full employment? What other factors influence the level of full employment? Give an example of a public policy that decreases (increases) the number of persons who will be employed at
1 Explain why even an efficiently functioning economic system will have some unemployed resources.
7 What's Wrong with This Way of Thinking?"An agricultural program that pays farmers to reduce their planted acreage and cut back on the production of farm products can increase everyone's income. The reduction in the supply of farm products will cause their prices to rise, which will result in an
6 "GNP counts the product of steel but not the disproduct of air pollution. It counts the product of automobiles but not the disproduct of 'blight' due to junkyards. It counts the product of cigarettes but not the disproduct of a shorter life expectancy due to cancer. Until we can come up with a
5 Why might the GNP be a misleading index of changes in output between 1 900 and 1 980 in the United States? of differences in output between the United States and Mexico?
4 Indicate which of the following activities are counted as part of this year's GNP:(a) The services of a homemaker(b) Frank Murry's purchase of a 1 9 8 1 Chevrolet(c) Frank Murry's rental payments on a 1 98 1 Chevrolet(d) The purchase of 1 00 shares of AT&T stock(e) Interest on a bond issued by
3 What is real GNP? How is it determined? Calculate the change in real GNP between 1970 and 1 980.
2 Explain why the rate of growth in GNP in current dollars can sometimes be a misleading statistic.
1 Why does a pound of beef add more to GNP than a pound of wheat? Does it reflect demand or costs? Comment.
7 Do you believe that the U.S. tax structure is equitable? Do you think it is efficient?How might it be improved? Discuss.
6 Do you know of anyone participating in the underground economy? Do you think that as many people would participate in the underground economy if marginal tax rates were lower? Why or why not?
5 Do you think that the indexing of the U.S. tax structure is a good idea? Why or why not? Can you think of any reason why Congress did not immediately index tax rates in 1 981 when the legislation was passed rather than delaying the institution of indexing until 1 985? Will indexing make it easier
4 "Transfer payments exert no influence on our economy because they merely transfer income from one group of individuals to another." Evaluate.
3 The progressive personal income tax is the major source of tax revenue in the United States. What do you think are the advantages of this tax? What are its disadvantages?What changes, if any, would you make in the nature of this tax? Why?
2 Do you think that the tax burden in the United States is too large or too small?Explain. What policies, if any, would you advocate to change the tax burden and its distribution? Be specific and defend your position.
I The major categories of government spending are (a) national defense, (b) education, and (c) income transfers and antipoverty expenditures. Why do you think that the public sector has become involved in these activities? Why not leave them to the market?
7 "Political organization cannot reform human beings. We should not expect it to.The public sector is an alternative to the market. Political organization will influence the direction of human action primarily by modifying the incentive structure. For some types of activity, public sector
6 Which of the following are public goods: (a) an antimissile system surrounding Washington, D.C., (b) a fire department, (c) tennis courts, (d) Yellowstone National Park, (e) elementary schools?
5 "Economics is a positive science. Government by its very nature is influenced by philosophical considerations. Therefore, the tools of economics cannot tell us much about how the public sector works." Do you agree or disagree? Why?
4 Do you think that special interest groups exert much influence on local government?Why or why not? As a test, check the composition of the local zoning board in your community. How many real estate agents, contractors, developers, and landlords are on the board? Are there any citizens without
3 Do you think that real-world politicians adopt political positions in order to help their election prospects? Can you name a current political figure who consistently puts"principles above politics"? If so, check with three of your classmates and see if they agree.
2 If producers are to be provided with an incentive to produce a good, why 1s 1t important for them to be able to prevent nonpaying customers from receiving the good?
Explain in your own words what is meant by external costs and external benefits.Why may market allocations be less than ideal when externalities are present?
7 A severe frost hit Brazil in July 1 975, damaging the coffee crop. The 1976 harvest was 9.5 million bags, down from the 1975 harvest of 23 million bags. Since Brazil is the world's leading coffee producer, there was a substantial reduction in the world supply of coffee in 1976. Use supply and
6 What's Wrong with This Way of Thinking?"Economists argue that lower prices will necessarily result in less supply. However, there are exceptions to this rule. For example, in 1970 ten-digit electronic calculators sold for$ 1 00. By 1980 the price of the same type of calculator had declined to
5 "We cannot allow the price of gasoline to go any higher because it is as essential to the poor as to the rich. We cannot allow the rich to bid gasoline away from the poor. I would prefer to ration ten gallons of gas to each driver- both rich and poor." (Overheard during the gasoline shortage of

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