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macroeconomics

Macroeconomics 22nd Edition Campbell McConnell, Stanley Brue, Sean Flynn - Solutions

In 2009, the inflation rate reached negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed’s target interest rate back then? Would
True or False. A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.
True or False. In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.
In 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target
Suppose that actual inflation is 3 percentage points, the Fed’s inflation target is 2 percentage points, and unemployment is 1 percent below the Fed’s unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?
What is compound interest? How does it relate to the formula Xt = (1 + i)tX0? What is present value? How does it relate to the formula Xt/(1 + i)t = X0?
What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?
Identify each of the following investments as either an economic investment or a financial investment.a. A company builds a new factory.b. A pension plan buys some Google stock.c. A mining company sets up a new gold mine.d. A woman buys a 100-year-old farmhouse in the countryside.e. A man buys a
It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of $140 received in three years if the annual interest rate is 12 percent?a. $1.40b. $12c. $100d. $112
Asset X is expected to deliver 3 future payments. They have present values of, respectively, $1,000, $2,000, and $7,000.Asset Y is expected to deliver 10 future payments, each having a present value of $1,000. Which of the following statements correctly describes the relationship between the
Tammy can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the asset’s anticipated percentage rate of return?a. 0 percentb. 5 percentc. 10 percentd. 15 percent
Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good;the other does well when the weather is bad. Sammy’s portfolio indicates that “weather risk” is a _______ risk.a. diversifiableb. nondiversifiablec. automatic
An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment’s average expected rate of return?a. 10 percentb. 11 percentc. 12 percentd. 13 percente. 14 percentf. 15 percent g. 16 percent
If an investment has 35 percent more nondiversifiable risk than the market portfolio, its beta will be:a. 35b. 1.35c. 0.35
The interest rate on short-term U.S. government bonds is 4 percent.The risk premium for any asset with a beta = 1.0 is 6 percent.What is the average expected rate of return on the market portfolio?a. 0 percentb. 4 percentc. 6 percentd. 10 percent
Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we expect to happen to its price?a. Rise.b.
If the Fed increases interest rates, the SML will shift _______ and asset prices will _______.a. down; riseb. down; fallc. up; rised. up; fall
Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be _______.a. higher than it is nowb. lower than it is nowc. the same as it is now
Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of:a. the AD curve shifting right.b. the AS curve shifting right.c.
Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation.a. Real GDP is below the full-employment level and prices have risen recently.b. Real GDP is above the full-employment level and prices have risen recently.
Aggregate supply shocks can cause _______ inflation rates that are accompanied by _______ unemployment rates.a. higher; higherb. higher; lowerc. lower; higherd. lower; lower
Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes?a. 3 percentb. 6 percentc. 9 percentd. 12 percent
Suppose that firms were expecting inflation to be 3 percent, but it actually turned out to be 7 percent. Other things equal, firm profits will be:a. smaller than expected.b. larger than expected.
Compare and contrast the market monetarist 5-percent target for nominal GDP growth with the older, simpler monetary rule advocated by Milton Friedman.
If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _________ curve will shift _________.a. AD; rightb. AD; leftc. AS; rightd. AS; left
Suppose that the money supply is $1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:a. $1 trillion.b. $4 trillion.c. $5 trillion.d. $8 trillion.
If the money supply fell by 10 percent, a monetarist would expect nominal GDP to __________.a. riseb. fallc. stay the same
An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusts back to producing at full employment, the price level will ________.a. increaseb. decreasec. stay the same
Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?
In 2018, manufacturing workers in the United States earned average compensation of $21.86 per hour. That same year, manufacturing workers in Mexico earned average compensation of$3.20 per hour. How can U.S. manufacturers possibly compete?Why isn’t all manufacturing done in Mexico and other
Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ______ should specialize in producing fish while should specialize in producing lumber.a. Canada; Icelandb. Iceland; Canada
Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡ 1W in Switzerland but 1C ≡ 4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other?Select one or more
True or False. If a country is open to international trade, the domestic price of a product can differ from the international price of that product.
“Exports pay for imports. Yet in 2018 the nations of the world exported about $891 billion more of goods and services to the United States than they imported from the United States.” Resolve the apparent inconsistency of these two statements.
Is it accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor? Explain.
If a country such as Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives might it undertake? Give at least two examples.
Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of −$200 billion. The balance on the capital and financial account is:a. $10 billion.b. $50 billion.c. $200 billion.d. −$200 billion.
Suppose that the Fed is fixing the dollar-pound exchange rate at$2.50 = £1. If the Fed’s reserve of pounds falls by £500 million, by how much would the supply of dollars increase, all other things equal?
If the economy booms in the United States while going into recession in other countries, the U.S. trade deficit will tend to.a. increaseb. decreasec. remain the same
Alpha’s balance-of-payments data for 2020 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on current account, and (d) balance on capital and financial account? Goods exports Goods imports Service exports
China had a $49.1 billion overall current account surplus in 2018. Assuming that China’s net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real
Return to problem 3 and assume that the exchange rate is fixed at 110. In year 1, what is the minimum initial size of the U.S. reserve of loonies such that the United States can maintain the peg throughout the year? What is the minimum initial size that is necessary at the start of year 2? Next,
Explain the differences among microcredit, conditional cash transfers, and unconditional cash transfers.Then explain how effective each policy has been.
A DVC’s population is growing 2 percent per year and its output is growing 3 percent per year. If the government wants to improve living standards over the coming decades, which of the following would probably be the best savings rate for the economy?a. 0 percentb. 2 percentc. 5 percentd. 10
Starbucks has $1 billion to invest. It can either purchase a rival coffee shop chain or build additional Starbucks shops. If Starbucks chooses to purchase the rival chain, what does that say about the relative profitability of purchasing and owning the rival’s existing shops versus building
Indicate whether each of the following statements applies to microeconomics or macroeconomics:a. The unemployment rate in the United States was 3.7 percent in December 2018.b. A U.S. software firm laid off 15 workers last month and transferred the work to India.c. An unexpected freeze in central
Pham can work as many or as few hours as she wants at the college bookstore for $12 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working at either the bookstore or other potential jobs. One potential job, at a café, will pay her $15 per hour for up to
Because investment and capital goods are paid for with savings, higher savings rates reflect a decision to consume fewer goods in the present so as to invest in more goods for the future.Households in China save 40 percent of their annual incomes each year, whereas U.S. households save less than 5
What is an inverse relationship? How does it graph? What is a direct relationship? How does it graph?
Why are price ceilings during a hyperinflation problematic? What generalizations do you draw from Venezuela’s economic collapse? Would a Venezuelan-style economic collapse be less likely in the United States? Explain.
Real (inflation-adjusted) tuition costs were nearly constant during the 1960s despite a huge increase in the number of college students as the very large Baby Boom generation came of age. What do these constant tuition costs suggest about the supply of higher education during that period? When the
Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the following table.a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?b. If the local government can enforce a
What information does a government need if it wants to attempt to reduce a widespread negative externality like air pollution? Who, typically, is actually in possession of that information? How do markets in tradeable emissions permits solve the asymmetric information problem affecting pollution
Does traditional one-person-one-vote (1p1v) majority voting allow voters to directly express differences in strengths of preference?Does quadratic voting do any better? Discuss the differences and then explain which system you prefer, and why.
What are the pluses and minuses of corporate location subsidies? Why do politicians like them so much?Would you be surprised to know that many of the 238 cities bidding for Amazon’s HQ2 offered much larger location subsidies than did New York City and Alexandria, Virginia? Explain.
In Figure 5.2b, we saw that traditional one-person-one-vote (1p1v) majority voting results in an inefficient majority Yes vote (two in favor, one opposed). Let’s see whether the outcome is better under quadratic voting.a. How much will Garcia be willing to spend on votes?b. How much each will
Suppose that total costs (TC) double for each project listed in Table 5.2. Which project(s) is (are) now economically viable?a. Plan A onlyb. Plans C and D onlyc. Plans B and Cd. Plans A and B onlyTable 5.2: (1) Plan No new construction A: Widen existing highways B: New 2-lane highways C: New
Let’s see whether quadratic voting can avoid the paradox of voting that arose in Table 5.3 when using 1p1v in a series of pairedchoice majority votes. To reexamine this situation using quadratic voting, the following table presents the maximum willingness to pay of Garcia, Johnson, and Lee for
Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility over months or years?
Why do many firms strive to maintain stable prices?
Do prices tend to become more flexible or less flexible as time passes? Explain.
Are labor costs a major fraction of the typical firm’s overall production costs? How does wage stickiness cause price stickiness? Discuss why firms are averse to cutting wages and salaries during a business downturn.
An increase in _________ GDP guarantees that more goods and services are being produced by an economy.a. nominalb. real
True or False. The term economic investment includes purchases of stocks, bonds, and real estate.
If an economy has sticky prices, and demand unexpectedly increases, you would expect the economy’s real GDP to:a. increase.b. decrease.c. remain the same.
If an economy has fully flexible prices and demand unexpectedly increases, you would expect the economy’s real GDP to:a. increase.b. decrease.c. remain the same.
If the demand for a firm’s output unexpectedly decreases, you would expect its inventory to:a. increase.b. decrease.c. remain the same.d. increase or remain the same, depending on whether or not prices are sticky.
True or False. Because price stickiness matters only in the short run, economists are comfortable using just one macroeconomic model for all situations.
Why are changes in inventories included as part of investment spending? Suppose inventories decline by $1 billion during 2022. How would this $1 billion decrease affect the size of gross private domestic investment and gross domestic product in 2022? Explain.
Use the concepts of gross investment and net investment to distinguish between an economy that has a rising capital stock and one that has a falling capital stock. Explain: “Though net investment can be positive, negative, or zero, it is impossible for gross investment to be less than zero.”
Define net exports. How are net exports determined? Explain why net exports might be a negative amount.
Why is gross output a better measure of overall economic activity than GDP is? How could you construct a new statistic that focuses only on nonfinal economic activity? Given what you know about the behavior of GO and GDP during the Great Recession, would you expect your new statistic to show more
How do “free” products make the calculation of GDP more difficult? What are hedonic adjustments and why are they necessary? Will inflation tend to be overstated or understated if quality improvements are not accounted for?Explain.
Tina walks into Ted’s sporting goods store and buys a punching bag for $100. That $100 payment counts as for Tina and for Ted.a. income; expenditureb. value added; multiple countingc. expenditure; incomed. rents; profits
Which of the following transactions are counted in GDP?Select one or more answers from the choices shown.a. Kerry buys a new sweater to wear this winter.b. Patricia receives a Social Security check.c. Roberto gives his daughter $50 for her birthday.d. Nayana sells $1,000 of General Electric
A small economy starts the year with $1 million in capital. During the course of the year, gross investment is $150,000 and depreciation is $50,000. What is the economy’s capital stock at the end of the year?a. $1,150,000b. $1,100,000c. $1,000,000d. $850,000e. $800,000
Suppose that this year a small country has a GDP of $100 billion.Also assume that Ig = $30 billion, C = $60 billion, and Xn = − $10 billion. What is the value of G?a. $0b. $10 billionc. $20 billiond. $30 billion
Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at $200. With the 10 percent sales tax, his total comes to $220. How much
Suppose GDP is $16 trillion, with $10 trillion coming from consumption,$2 trillion coming from gross investment, $3.5 trillion coming from government expenditures, and $500 billion coming from net exports. Also suppose that across the whole economy, depreciation (consumption of fixed capital)
Suppose GDP is $15 trillion, with $8 trillion coming from consumption, $2.5 trillion coming from gross investment,$3.5 trillion coming from government expenditures, and $1 trillion coming from net exports. Also suppose that across the whole economy, personal income is $12 trillion. If the
Suppose that this year’s nominal GDP is $16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago.Using that index, we find that this year’s real GDP is $15 trillion.Given those numbers, we can
Which of the following items are included in official U.S. GDP statistics?Select one or more answers from the choices shown.a. Revenue generated by illegal marijuana growers.b. Money spent to clean up a toxic waste site in Ohio.c. Revenue generated by legal medical marijuana sales in California.d.
Suppose GDP is $5.0 trillion, depreciation is $1 trillion, and gross output (GO) is $17.25 trillion.a. What is the value of all stages of production and distribution except for final sales of goods and services?b. What is the dollar value of the economic activity taking place at every stage of
Suppose that in 1994 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1994 each bucket of chicken was priced at $10. Finally, assume that in 2015 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the GDP price index
Relate each of the following to the 1995–2010 increase in the trend rate of productivity growth:a. information technologyb. increasing returnsc. network effectsd. global competition
Has female labor force participation increased or decreased in recent decades? What is the distribution of higher education degrees like across genders? Aside from discrimination, what are the reasons that women earn less than men on average, despite having higher levels of educational attainment?
If real GDP grows at 7 percent per year, then real GDP will double in approximately ________ years.a. 70b. 14c. 10d. 7
In 1820, living standards in various places around the globe were _______ they are today.a. more widely varying thanb. just as widely varying asc. less widely varying than
True or False. Countries that currently have a low real GDP per capita are destined to always have lower living standards than countries that currently have a high real GDP per capita.
Identify each of the following situations as something that either promotes growth or retards growth.a. Increasing corruption allows government officials to steal people’s homes.b. A nation introduces patent laws for the first time.c. A court order shuts down all banks permanently.d. A poor
Real GDP equals _________ times _________.a. average hours of work; quantity of capitalb. average hours of work; allocative efficiencyc. labor input; labor productivityd. natural resources; improvements in technology
Suppose that just by doubling the amount of output that it produces each year, a firm’s per-unit production costs fall by 30 percent. This result is an example of:a. economies of scale.b. improved resource allocation.c. technological advance.d. the demand factor.
True or False. Computers and increased global competition have retarded economic growth in recent decades.
Identify the following arguments about economic growth as either anti-growth or pro-growth.a. Growth means worker burnout and frantic schedules.b. Rising incomes allow people to buy more education, medical care, and recreation.c. Earth has only finite amounts of natural resources.d. Even the
What annual growth rate is needed for a country to double its output in 7 years? In 35 years? In 70 years? In 140 years?
Can frictional unemployment by itself explain the fact that the late 2010s saw more job openings than unemployed workers? Why are there plenty of skilled workers among older job seekers but very few in their twenties, thirties, and forties?What happens to the speed at which positions are filled if
Place the phases of the business cycle in order, starting with the highest level of GDP: recession, trough, peak, expansion.
Most economists agree that the immediate cause of most cyclical changes in real output and employment is an unexpected change in ___________________.a. the level of total spendingb. the value of the stock marketc. the value of the trade deficitd. the unemployment rate
Suppose that a country has 9 million people working full-time. It also has 1 million people who are actively seeking work but are currently unemployed, along with 2 million discouraged workers who have given up looking for work and are currently unemployed.What is this country’s unemployment
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.a. Tim just graduated from college and is looking for a job.b. A recession causes a local factory to lay off 30 workers.c. Thousands of bus and truck drivers permanently lose

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