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Macroeconomics Private And Public Choice 14th Edition James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson - Solutions

10. *How are the following related to each other?a. the long-run equilibrium rate of outputb. the potential real GDP of the economyc. the output rate at which the actual and natural rates of unemployment are equal
9. Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If the inflation rate in recent years has been steady at 3 percent annually, what is the estimated real rate of interest? If the inflation rate during the next five years is 6 percent, what will
8. *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?
7. 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?
6. *If the real interest rate in the loanable funds market increases, what will happen to the net inflow of foreign capital? Explain.
5. What is the current money interest rate on ten-year government bonds? Is this also the real interest rate? Why or why not?
4. *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 be affected? How will the actual rate of unemployment compare with the natural rate of
3. 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 be willing to expand output? Why or why not?
2. 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?
1. 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 demand curve differ from that of a demand curve for a specific good?
15. The following Table B presents the 2010 population, employment, and unemployment data among working age persons for several countries.a. Calculate the number of people in the labor force for each country.b. Calculate the labor force participation rate for each country, and put the figures in
14. Data for nominal GDP and the GDP deflator (2005 = 100) in 2009 and 2010 for six major industrial countries are presented in the accompanying Table A.a. Use the data provided to calculate the 2009 and 2010 real GDP of each country measured in 2005 prices. Place the figures in the blanks
13. *“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 way of thinking?
12. Suppose that the consumer price index at year-end 2011 was 150 and by year-end 2012 had risen to 160. What will be the inflation rate during 2012?
11. “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 job.” Do you think this proposal is a good one? Why or why not?If instituted, would the policy
10. *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 in the purchasing power of the dollar in 2000.b. In which year was the real presidential salary
9. What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying longterm contracts and related business decisions?
8. *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?Does it mean that there were no jobs available for which the unemployed workers were qualified?
7. *Use the following data to calculate (a) the labor force participation rate, (b) unemployment rate, and (c) the employment/population ratio:
6. *How are the following related to one another?a. the actual rate of unemploymentb. the natural rate of unemploymentc. cyclical unemploymentd. potential GDP
5. 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 natural rate of unemployment? Why?
4. What is full employment? When full employment is present, will the rate of unemployment be zero? Explain.
3. *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 application.b. Martinez is vacationing in Florida during a layoff at a General Motors plant due to a model
2. *Explain why even an efficiently functioning economic system will have some unemployed resources.
1. 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 phases relatively similar and therefore highly predictable?
16. *Fill in the blanks in the following table:
15. The accompanying chart presents 2010 data from the nationalincome accounts of the United States.a. Indicate the various components of GDP when it is derived by the expenditure approach. Calculate GDP using the expenditure approach.b. Indicate the various components of GDP when it is derived by
14. *Indicate how each of the following will affect this year’s GDP:a. You suffer $10,000 of damage when you wreck your automobile.b. You win $10,000 in a state lottery.c. You spend $5,100 in January for 100 shares of stock ($5,000 for the stock and $100 for the sales commission) and sell the
13. GDP does not count productive services, such as child care, food preparation, cleaning, and laundry, provided within the household. Why are these things excluded? Is GDP a sexist measure? Does it understate the productive contributions of women relative to men? Discuss.
12. *How do the receipts and expenditures of a state-operated lottery affect GDP?
11. *Indicate whether the following statements are true or false:a. “For the economy as a whole, inventory investment can never be negative.”b. “The net investment of an economy must always be positive.”c. “An increase in GDP indicates that the standard of living of people has risen.”
10. What is the difference between the consumer price index (CPI) and the GDP deflator? Which would be better to use if you want to measure whether your hourly earnings this year were higher than they were last year? Why?
9. *How much do each of the following contribute to GDP?a. Jones pays a repair shop $1,000 to rebuild the engine of her automobile.b. Jones spends $200 on parts and pays a mechanic $400 to rebuild the engine of her automobile.c. Jones spends $200 on parts and rebuilds the engine of her automobile
8. The receipts and year of release of the four movies with the largest nominal box office revenues, along with the CPI data of each year are presented below. Assuming that the receipts for each of the movies were derived during their year of release, convert the receipts for each to real dollars
7. *In 1982, the average hourly earnings of private nonagricultural production workers were $7.87 per hour. By 2010, the average hourly earnings had risen to $19.04. In 2010, the CPI was 218.1, compared with 96.5 in 1982. What were the real earnings of private nonagricultural production workers in
6. What are price indexes designed to measure? Outline how they are constructed. When GDP and other income figures are compared across time periods, explain why it is important to adjust for changes in the general level of prices.
5. *Why might even real GDP be a misleading index of changes in output between 1950 and 2010 in the United States?
4. Suppose a group of British investors finances the construction of a plant to manufacture skateboards in St. Louis, Missouri. How will the construction of the plant affect GDP? Suppose the plant generates $100,000 in corporate profits this year. Will these profits contribute to GDP? Why or why
3. *A large furniture retailer sells $100,000 of household furnishings from inventories built up last year. How does this sale influence GDP? How are the components of GDP affected?
2. If nominal GDP increased by 6 percent during a year, while the GDP deflator increased by 4 percent, by how much did real GDP change during the year?
1. *Indicate how each of the following activities will affect this year’s GDP:a. the sale of a used economics textbook to the college bookstoreb. Smith’s $500 doctor bill for setting her son’s broken armc. family lawn services provided by Smith’s 16-year-old childd. lawn services purchased
15. *The United States imposes highly restrictive sugar import quotas that result in a domestic price that is generally two or three times the world price. The quotas benefit sugar growers at the expense of consumers. Given that there are far more sugar consumers than growers, why aren’t the
14. If a senator trades his or her vote on an issue for a $10,000 payment, would you consider this corruption? If a senator votes a certain way in “exchange” for a $10,000 contribution to his political campaign, would you consider this corruption? Is there a major difference between the two?
13. “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.
12. *What’s wrong with this way of thinking? “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 trucking will charge excessive prices; products will
11. What is the shortsightedness effect? How does it influence the attractiveness of government borrowing? Explain.
10. *“When an economic function is turned over to the government, social cooperation replaces personal self-interest.” Is this statement true? Why or why not?
9. 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 not?Explain. Will efficient projects necessarily be favored by a majority of voters? Explain.
8. *“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 work far better when this happens.” Evaluate this view.
7. “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 of the majority when activities are undertaken through government.” In your own words,
6. *“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?
5. What is rent-seeking? When is it likely to be widespread? How does it influence economic efficiency? Explain.
4. *“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 allocate resources efficiently.” Evaluate this statement.
3. “If there are problems with markets, government will generally be able to intervene and correct the situation.” Is this statement true?Explain your response.
2. *“The government can afford to take a long view when it needs to, while a private firm has a short-term outlook. Corporate officers, for example, typically care about the next 3 to 6 months, not the next 50 to 100 years. Government, not private firms, should own things like forests, which take
1. Are voters likely to be well informed on issues and the positions of candidates? Why or why not?
14. *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 economically inefficient?
13. 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?
12. What are the necessary conditions for economic efficiency? In what four situations might a market fail to achieve ideal economic efficiency?
11. *“Elementary education is obviously a public good. After all, it is provided by the government.” Evaluate this statement.
10. 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 with ideal economic efficiency?
9. *If sellers of toasters were able to organize themselves, reduce their output, and raise their prices, how would economic efficiency be affected? Explain.
8. “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 offers a good night’s lodging at a fair price.” Is this true or false? Explain.
7. “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.
6. 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.Why is this protection important to the efficient operation of an economy?
5. 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?
4. 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 departmentc. tennis courtsd. Yellowstone National Parke. elementary schools
3. 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?
2. 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 make economic sense to devote enough resources to completely prevent any such future attacks?
1. *Why is it important for producers to be able to prevent nonpaying customers from receiving a good?
14. *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.
13. “We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $50,000 or more) in order to collect more tax revenue from the wealthy.” Will the burden of the proposed tax fall primarily on the wealthy? Why or why not?
12. *Suppose Congress were to pass legislation requiring that businesses employing workers with three or more children pay these employees at least $15 per hour. How would this legislation affect the employment level of low-skilled workers with three or more children? Do you think some workers with
11. *What is the nature of the deadweight loss accompanying taxes?Why is it often referred to as an “excess burden”?
10. 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.
9. What is meant by the incidence of a tax? Explain why the statutory and actual incidence of a tax often differ.
8. How do you think the markets for organ donation and child adoption would be affected if they were made fully legal with a wellfunctioning price mechanism? What would be the advantages and disadvantages relative to the current system?
7. What is a black market? What are some of the main differences in how black markets operate relative to legal markets?
6. *Analyze the impact of an increase in the minimum wage from the current level to $10 per hour. How would the following be affected?a. employment of people previously earning less than $10 per hourb. the unemployment rate of teenagersc. the availability of on-the-job training for low-skilled
5. The tax on cigarettes in New York City is 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 effects of this tax?
4. *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 exchanged? What impact will a meaningful price floor have on the quantity exchanged? Explain.
3. 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 good?Explain.
2. 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 housing? In your answer, address how this price ceiling will affect (a) the quality of rental
1. *How will a substantial increase in demand for housing affect the wages and employment of carpenters, plumbers, and electricians?
15. What is the difference between substitutes and complements?Indicate two goods that are substitutes for each other. Indicate two goods that are complements.16. *Do business firms operating in competitive markets have a strong incentive to serve the interest of consumers? Are they motivated by a
14. *What’s wrong with this way of thinking? “Economists argue that lower prices will result in fewer units being supplied. However, there are exceptions to this rule. For example, in 1972, a very simple 10-digit electronic calculator sold for $120. By 2000, the price of the same type of
13. What is the invisible hand principle? Does it indicate that selfinterested behavior within markets will result in actions that are beneficial to others? What conditions are necessary for the invisible hand to work well? Why are these conditions important?
12. *What’s wrong with this way of thinking? “Economists claim that when the price of something goes up, producers increase the quantity supplied to the market. But last year, the price of oranges was really high and the supply of them was really low.Economists are wrong!”
11. What must an entrepreneur do to earn a profit? How do the actions of firms earning profits influence the value of resources? What happens to the value of resources when losses are present? If a firm making losses goes out of business, is this bad? Why or why not?
10. *“Production should be for people and not for profit.” Answer the following questions concerning this statement:a. If production is profitable, are people helped or harmed? Explain.b. Are people helped more if production results in a loss than if it leads to profit? Is there a conflict
9. What factors determine the cost of producing a good or service?Will producers continue to supply a good or service if consumers are unwilling to pay a price sufficient to cover the cost?
8. *“The future of our industrial strength cannot be left to chance.Somebody has to develop notions about which industries are winners and which are losers.” Is this statement by a newspaper columnist true? Who is the “somebody”?
7. How is the market price of a good determined? When the market for a product is in equilibrium, how will consumers value an additional unit compared to the opportunity cost of producing that unit? Why is this important?
6. Define consumer surplus and producer surplus. What is meant by economic efficiency, and how does it relate to the gains of consumers and producers?
5. What is being held constant when the supply curve is constructed for a specific good like pizza or automobiles? Explain why the supply curve for a good slopes upward to the right.
4. *Are prices an accurate measure of a good’s total value? Are prices an accurate measure of a good’s marginal value? What’s the difference? Can you think of a good that has high total value but low marginal value? Use this concept to explain why professional wrestlers earn more than nurses,
3. What is the law of supply? How many of the following “goods” do you think conform to the general law of supply? Explain your answer in each case.a. gasolineb. cheating on examsc. political favors from legislatorsd. the services of heart specialistse. childrenf. legal divorces
2. What is being held constant when a demand curve for a specific product (shoes or apples, for example) is constructed? Explain why the demand curve for a product slopes downward to the right.
1. *Which of the following do you think would lead to an increase in the current demand for beef?a. higher pork pricesb. higher consumer incomec. higher prices of feed grains used to feed cattled. widespread outbreak of mad cow or hoof-and-mouth diseasee. an increase in the price of beef
18. This question pertains to the addendum to Chapter 2. The following tables show the production possibilities for two hypothetical countries, Italia and Nire. Which country has the comparative advantage in producing butter? Which country has the comparative advantage in producing guns? What would

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