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macroeconomics principles

Questions and Answers of Macroeconomics Principles

On January 1, 2014, the top federal income tax bracket in the United States went from 35 percent to 39.6 percent.Many republicans claimed that lowering the rewards for working (the net after-tax wage
The Bureau of Labor Statistics reported that in June 2010, the unemployment rate in the United States was 9.4 percent. In June 2015, the BLS reported an unemployment rate of 5.3 percent.a. According
Between December 2012 and December 2013, real GDP in the United States increased by 3.18 percent, whereas nonfarm payroll jobs increased by only 1.77 percent. How is it possible for output to
During 2015, the Federal Reserve Bank discussed the probability of raising interest rates by the end of the year, the first time in over 7 years they will have raised rates.a. What direct effects do
Explain the effect that each of the following situations will have on the size of the multiplier.a. Firms have excess inventories as the economy begins to recover from a recession.b. Expansionary
If the government implements a spending and tax policy in which it promises to neither increase nor decrease spending and taxes, is it still possible for the budget deficit to increase or decrease?
Suppose the government decides to decrease spending and increase taxes in an attempt to decrease its deficit. Is it possible for the Fed to ease the macroeconomic effects of the spending and tax
The Economics in Practice states that since recessions can be hard to forecast, the recognition lag can be long, as was the case with the recession of 2008–2009. Assuming that the recognition lag
You are given the following information about the economy in 2015 (all in billions of dollars):a. Find equilibrium income. Show that the government budget deficit (the difference between government
Explain why stabilization policy may be difficult to carry out. How is it possible that stabilization policies can actually be destabilizing?
During 1997, stock markets in Asia collapsed. Hong Kong’s was down nearly 30 percent, Thailand’s was down 62 percent, and Malaysia’s was down 60 percent. Japan and Korea experienced big drops
Explain why the government deficit rises as the economy contracts and why the government deficit falls when the economy expands.
Some states are required to balance their budgets. Is this measure stabilizing or destabilizing? Suppose all states were committed to a balanced-budget philosophy and the economy moved into a
In July 2009, the S&P 500 index was at 1,000.What is the S&P 500 index?
How might social, or implicit, contracts result in sticky wages? Use a labor market graph to show the effect of social contracts on wages and on unemployment if the economy enters a recession.
Suppose the inflation–unemployment relationship depicted by the Phillips Curve was stable. Do you think the U.S. trade-off and the Japanese trade-off would be identical? If not, what kinds of
In which if the following situations will you be best off, and in which will you be worst off, in terms of your real wage? Explain your answer.a. You are offered a 5 percent wage increase and the
How will the following affect labor force participation rates, labor supply, and unemployment? a. In an attempt to get a handle on increasing Social Security shortfalls, Congress and the
In June 2015, the U.S. unemployment rate dropped to 5.3 percent, its lowest level in more than 7 years. At the same time, inflation remained at a very low level by historical standards. Can you offer
In 2015, the country of Sorbet was suffering from a period of high unemployment. The new president, Gelato, appointed Sherrie Sherbert as his chief economist. Ms. Sherbert and her staff estimated
Using a supply and demand graph for the labor market, explain the classical view that the economy will remain at full employment, even with a decrease in the demand for labor. How will this labor
The following policies have at times been advocated for coping with unemployment. Briefly explain how each might work and explain which type or types of unemployment(frictional, structural, or
In country A, all wage contracts are indexed to inflation. That is, each month wages are adjusted to reflect increases in the cost of living as reflected in changes in the price level. In country B,
By using aggregate supply and aggregate demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run:a. An
In Japan during the first half of 2000, the Bank of Japan kept interest rates at a near zero level in an attempt to stimulate demand. In addition, the government passed a substantial increase in
Explain the effect, if any, that each of the following occurrences should have on the aggregate demand curve.a. The Fed raises the discount rate.b. The price level increases.c. The federal government
Contractionary policies are designed to slow the economy and reduce inflation by decreasing aggregate demand and aggregate output. Explain why contractionary fiscal policy and contractionary monetary
Describe what will happen to the interest rate and aggregate output with the implementation of the following policy mixes:a. Expansionary fiscal policy and expansionary monetary policyb. Expansionary
Use aggregate supply and aggregate demand curves to illustrate the effect the mild monsoon season had on the rice crop in India. Explain what affect this had on the levels of aggregate output and
By late summer 2010, the target federal funds rate was between zero and 0.25 percent. At the same time, “animal spirits” were dormant and there was excess capacity in most industries. That is,
Fill in the aggregate saving column in the following table. Use the data in the table to calculate the consumption function and the saving function, and plot these functions as well as the 45-degree
Evaluate the following statement: In the short run, if an economy experiences inflation of 10 percent, the cause of the inflation is unimportant. Whatever the cause, the only important issue the
By using aggregate supply and aggregate demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run:a. A tax
From the following graph, identify the initial equilibrium, the short-run equilibrium, and the long-run equilibrium based on the scenarios below. Explain your answers and identify what happened to
For each of the following scenarios, tell a story and predict the effects on the equilibrium level of aggregate output (Y) and the interest rate (r): a. During 2009, the Federal Reserve was
During the third quarter of 1997, Japanese GDP was falling at a rate of over 11 percent. Many blamed the big increase in Japan’s taxes in the spring of 1997, which was designed to balance the
From May 2014 to March 2015, the price of oil dropped sharply on world markets. What impact would you expect there to be on the aggregate price level and on real GDP? Illustrate your answer with
The Federal Reserve Bank of St. Louis publishes PCE price index data on its Website at: https://research .stlouisfed.org/fred2/categories/9. Go to this Web site and look at the 1-, 5-, and 10-year
In the first few chapters of this book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity
The Economics in Practice describes the simple Keynesian AS curve as one in which there is a maximum level of output given the constraints of a fixed capital stock and a fixed supply of labor. The
The AD curve slopes downward because when the price level is lower, people can afford to buy more and aggregate demand rises. When prices rise, people can afford to buy less and aggregate demand
Using AS and AD curves to illustrate, describe the effects of the following events on the price level and on equilibrium GDP in the long run assuming that input prices fully adjust to output prices
Illustrate each of the following situations with a graph showing the IS curve and the Fed rule, and explain what happens to the equilibrium values of the interest rate and output:a. A decrease in G
During 1999 and 2000, a debate raged over whether the United States was at or above potential GDP. Some economists feared the economy was operating at a level of output above potential GDP and
Describe the Fed’s tendency to “lean against the wind.” Do the Fed’s policies tend to stabilize or destabilize the economy?
Two separate capacity constraints are discussed in this chapter: (1) the actual physical capacity of existing plants and equipment, shown as the vertical portion of the short-run AS curve, and (2)
Some economists argue that the €œanimal spirits€ of investors are so important in determining the level of investment in the economy that interest rates do not matter at all.
The economy of Mayberry is currently in equilibrium at point A on the graph. Prince Barney of Mayberry has decided that he wants the economy to grow and has ordered the Royal Central Bank of Mayberry
In the tiny island nation of Bongo, the nation’s wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last
Illustrate each of the following situations with a graph showing AS and AD curves, and explain what happens to the equilibrium values of the price level and aggregate output:a. A decrease in G with
On November 9, 2011, the European Central Bank acted to decrease the short-term interest rate in Europe by one-fourth of a percentage point, to 1.25 percent, and additional cuts were made over the
Illustrate each of the following situations with a graph showing short-run aggregate supply:a. A decrease in the size of the labor forceb. An increase in available capitalc. An increase in
Suppose on your 21st birthday, your eccentric grandmother invites you to her house, takes you into her library, removes a black velvet painting of Elvis Presley from the wall, opens a hidden safe
Suppose Ginger deposits $12,000 in cash into her checking account at the Bank of Skidoo. The Bank of Skidoo has no excess reserves and is subject to a 4 percent required reserve ratio.a. Show this
You are given this account for a bank:Assets LiabilitiesReserves $1,200 $8,000 DepositsLoans 6,800The required reserve ratio is 10 percent.a. How much is the bank required to hold as reserves given
Although the official currency of the United States is the U.S. dollar, some towns and cities actually issue their own money. In these communities, consumers are able to buy local currency at a
What are the three traditional tools the Fed can use to control the interest rate via changing the money supply? Briefly describe how the Fed can use each of these tools to either increase or
When the Fed adds new reserves to the system, some of these new reserves find their way out of the country into foreign banks or foreign investment funds. In addition, some portion of the new
After suffering two years of staggering hyperinflation, the African nation of Zimbabwe officially abandoned its currency, the Zimbabwean dollar, in April 2009 and made the U.S. dollar its official
Suppose in the Republic of Sasquatch that the regulation of banking rested with the Sasquatchian Congress, including the determination of the reserve ratio. The Central Bank of Sasquatch is charged
Do you agree or disagree with each of the following statements?Explain your answers.a. When the Treasury of the United States issues bonds and sells them to the public to finance the deficit, the
Why is M2 sometimes a more stable measure of money than M1? Explain in your own words using the definitions of M1 and M2.
If the head of the Central Bank of Brazil wanted to decrease the supply of money in Brazil in 2015, which of the following would do it? Explain your answer. Increase the required reserve
Normally, people from the United States and from around the world think of highly rated corporate or government bonds as a safe place to put their savings relative to common stocks. Because the stock
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1165.7 billion in currency, $3.5 billion in traveler’s checks, and $1,514.1 billion in checking
As king of Medivalia, you are constantly strapped for funds to pay your army. Your chief economic wizard suggests the following plan: “When you collect your tax payments from your subjects, insist
In 2000, the federal debt was being paid down because the federal budget was in surplus. Recall that surplus means that tax collections (T) exceed government spending (G). The surplus (T - G) was
Explain why there is a negative relationship between the amount of money you should hold and the interest rate.
For each of the following, determine whether it is an asset or a liability on the accounting books of a bank. Explain why in each case.– Cash in the vault– Demand deposits– Savings deposits–
It is well known that cigarettes served as money for prisoners of war in World War II. Do an Internet search using the key word cigarettes and write a description of how this came to be and how it
The following table gives three key U.S. interest rates in 1980 and again in 1993:Provide an explanation for the extreme differences that you see. Specifically, comment on (1) the fact that rates in
In the Republic of Doppelganger, the currency is the ditto. During 2015, the Treasury of Doppelganger sold bonds to finance the Doppelganger budget deficit. In all, the Treasury sold 80,000 ten-year
The Economics in Practice states that the capital value of Professor Serebryakov’s estate is not the value for which he could sell the estate if the interest rate on “suitable” securities is
What if, at a low level of interest rates, the money demand curve became nearly horizontal, as in the following graph. That is, with interest rates so low, the public would not find it attractive to
The United States is divided into 12 Federal Reserve districts, each with a District Bank. These Districts and the locations for the District Bank in each region are shown in Figure 10.4. Do some
For each of the following sets of data, determine if output will need to increase, decrease, or remain the same to move the economy to equilibrium:a. Y = 1,000; C = 100 + 0.75(Y- T); I = 200; G =
For the data in the following table, the consumption function is C = 800 + 0.6 (Y €“ T). Fill in the columns in the table and identify the equilibrium output. Planned Aggregate Expenditure
What is the balanced-budget multiplier? Explain why the balanced-budget multiplier is equal to 1.
Evaluate the following statement: For an economy to be in equilibrium, planned investment spending plus government purchases must equal saving plus net taxes.
Answer the following:a. MPS = 0.1. What is the government spending multiplier?b. MPC = 0.6. What is the government spending multiplier?c. MPS = 0.25. What is the government spending multiplier?d. MPC
Some economists claim World War II ended the Great Depression of the 1930s. The war effort was financed by borrowing massive sums of money from the public. Explain how a war could end a recession.
A $1 increase in government spending will raise equilibrium income more than a $1 tax cut will, yet both have the same impact on the budget deficit. So if we care about the budget deficit, the best
Assume that in 2015, the following prevails in the Republic of Nurd:Y = $200 G = $0C = $160 T = $0S = $40I (planned) = $30Assume that households consume 80 percent of their income, they save 20
Federal government expenditures and receipts for the simple economy of the nation of Topanga are listed in the table in the next column. The government of Topanga would like to reduce the debt-to-GDP
Suppose that the government of Ansonia is experiencing a large budget deficit with fixed government expenditures of G = 250 and fixed taxes of T = 150. Assume that consumers of Ansonia behave as
Expert economists in the economy of Bongo estimate the following:
Suppose all tax collections are fixed (instead of dependent on income) and all spending and transfer programs are fixed (in the sense that they do not depend on the state of the economy, as, for
You are appointed secretary of the treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year, and the budget
MPS, government spending multiplier, and tax multiplier. Draw a graph showing the data for consumption spending, planned aggregate expenditures, and aggregate output. Be sure to identify the
Define saving and investment. Data for the simple economy of Newt show that in 2015, saving exceeded investment and the government is running a balanced budget. What is likely to happen? What would
You are given the following data concerning Freedonia, a legendary country:(1) Consumption function: C = 200 + 0.8Y(2) Investment function: I = 100(3) AE K C + I(4) AE = Ya. What is the marginal
This chapter argues that saving and spending behavior depend in part on wealth (accumulated savings and inheritance), but our simple model does not incorporate this effect. Consider the following
Assume in a simple economy that the level of saving is –800 when aggregate output equals zero and that the marginal propensity to save is 0.25. Derive the saving function and the consumption
According to the Bureau of Economic Analysis, during the recession of 2008–2009, household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the
The following questions refer to this table:a. At each level of output, calculate saving. At each level of output, calculate unplanned investment (inventory change). What is likely to happen to
The Economics in Practice describes some of the difficulties that households have with regard to decisions involving tradeoffs between the present and the future. Explain briefly how the problem of
Use the graph to answer the questions that follow.a. What is the value of the MPC?b. What is the value of the MPS?c. What is the value of the multiplier?d. What is the amount of unplanned investment
If households decide to save more, saving in the aggregate may fall. Explain this in words.
The following data are estimates for the small island nation of KaboomReal GNP (Y........................ 800 million Kaboomian dollarsPlanned investment spending) ........................ 200
Explain whether you agree or disagree with the following statement: “All else equal, businesses will generally plan more investment projects when interest rates rise, because higher interest rates

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