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macroeconomics principles

Questions and Answers of Macroeconomics Principles

Redraw Figure 2, showing how a decrease in the price level will lead to an increase in equilibrium real GDP. (a) (b) Interest Rate Aggregate Expenditure ($ trillions) MS AE, = 6% AE, = 9% B As the
Suppose that the Fed raises its interest rate target to prevent the economy from overheating. Illustrate graphically, using a diagram similar to Figure 7, but this time include the feedback effects
How would each of the following likely affect the spread (increase, decrease, or no effect) between 10-year treasury securities and moderately risky corporate bonds? Explain briefly.a. A financial
In Chapter 4, you learned about the difference between flow variables and stock variables. Which theory of the interest rate (long-run/classical or the short-run theory of this chapter) relies on
In a later chapter, you will learn that a drop in the interest rate has another channel of influence on real GDP: It causes a depreciation of the dollar (that is, it makes the dollar cheaper in terms
Suppose that there is just one interest rate in the economy. In an attempt to prevent the economy from overheating, the Fed raises its interest rate target. Illustrate graphically, using a diagram
Suppose that you own a bond that matures in one year, and promises to pay you $1,000 at that time. The current one-year interest rate in the economy is 6 percent.a. What is the price that someone
For each of the following events, state (1) the impact on the money demand curve, and (2) whether the Fed should increase or decrease the money supply if it wants to keep the interest rate
A fellow student in your economics class stops you in the hallway and says: “An increase in the demand for money causes the interest rate to rise. But a rise in the interest rate causes people to
A bond promises to pay its owner $20,000 one year from now.a. Complete the following chart.b. Draw a graph of the money market, assuming that it is currently in equilibrium at an interest rate of
A bond promises to pay its owner $500 one year from now. For the following prices, find the corresponding interest payments and interest rates that the bond offers.As the price of the bond rises,
Assume the money multiplier is 7. For each of the following, state the impact on the money supply curve (the direction it will shift, and the amount of the shift), and whether the nominal interest
Assume the money multiplier is 10. For each of the following, state the impact on the money supply curve (the direction it will shift, and the amount of the shift), and whether the nominal interest
Suppose that Mid-Size National Bank has the balance sheet in the following table, and one day, the value of every asset it holds (including its loans) decreases by 5 percent.a. What is
Suppose that Mid-Size National Bank has the balance sheet in the following table and is required by law to have 20 percent of its total assets as bank capital.a. What is the maximum simple leverage
Suppose that Mid-Size Bank has the balance sheet in Table 1, and is required by law to have 20 percent of its total assets as bank capital.a. What percentage of total assets is Mid-Size€™s
Suppose a bank has the following entries on its balance sheet: $20 million in property and buildings; $200 million in government bonds; $300 million in loans; $5 million cash in vault; $95 million
For each of the following situations, determine whether the money supply will increase, decrease, or stay the same.a. Depositors become concerned about the safety of depository institutions.b. The
Suppose that the money supply is $3.2 trillion. Decision makers at the Federal Reserve decide that they wish to use open market operation to increase the money supply by $500 billion. If the required
Suppose that the money supply is $1 trillion. Decision makers at the Federal Reserve decide that they wish to use open market operations to reduce the money supply by $100 billion, or by 10 percent.
Suppose that Mid-Size National Bank has the balance sheet in Table 1. One day, a hurricane destroys 20 percent of its property and buildings, and its insurance covers only half this amount.
Suppose accountants at Mid-Size National Bank (Table 1) discover that they’ve made an error: Cash in vault is only $8 million, not $10 million.a. Which other entries in the bank’s balance sheet
Suppose a country, Zeekland, uses a unit of account called the “zeek.” Its banks have no reserve requirements, but banks always want to hold 3 percent of their total checking deposits as cash,
Which of the following is considered part of the U.S. money supply? (Use the M1 measures.)a. A $10 bill you carry in your walletb. A $100 traveler’s check you bought but did not usec. A $100 bill
If the Fed buys $50 million of government securities, by how much will the money supply increase if the required reserve ratio is 0.15? How will your answer be different if the required reserve ratio
Suppose the required reserve ratio is 0.2. If an extra $20 billion in reserves is injected into the banking system through an open market purchase of bonds, by how much will the money supply
In the example in the chapter, the balanced budget multiplier was equal to 1.0. Prove that this must always be the case in our model, regardless of the value of the MPC or the amount by which G and T
Refer to Table 4 in the chapter, which assumes the country continues to pay an interest rate of 8% on its debt. Suppose, instead, that the interest rate were 10%, while each year€™s nominal
Refer to the following table in the chapter, which assumes the country continues to pay an interest rate of 8% on its debt. Suppose, instead, that the interest rate were 10%, while each
Complete the table below for the small country of Microland. Assume all dollar values are nominal, and Microland started Year 1 with no federal debt.a. Over which years does Microland€™s
Suppose a nation’s government purchases are equal to $2 trillion, regardless of the state of the economy. However, its taxes and transfers depend on economic conditions. When the economy is at
Are either of the following countries violating the basic debt guideline as presented in the chapter? Country A (Figures in Billions of $) GDP Debt 1999 100 2000 2 110 2001 3 150 Country B (Figures
Suppose there is a country with 30 households divided into three categories (A, B, and C), with 10 households of each type. If a household earns 20,000 zips (the country’s currency) or more in a
You are running for reelection as president of the nation of Utopia. Your opponents have criticized you for allowing the national debt to grow by almost 50 percent over the last 4 years. Use the
Some economists have argued that when the government cuts taxes in a way that increases the debt ratio, people recognize that tax rates will have to rise in order to pay higher interest on the debt.
Suppose a country has the following statistics, in billions of units of currency, for the years shown.Nominal national debt in 1990: 1.2Nominal national debt in
Calculate the change in real GDP that would result in each of the following cases (assuming an MPC of 0.8, and simple multipliers, with no automatic stabilizers or destabilizers):a. Government
Calculate the changes in real GDP that would result in each of the following cases (assuming simple multipliers, with no automatic stabilizers ordestabilizers):a. Government purchases rise by $7.5
The equilibrium condition Y = C + Ip + G + NX can be reinterpreted as follows. First, subtract C from both sides to get Y − C = Ip + G + NX. Then note that all income not spent on consumption goods
Draw an aggregate expenditure line and 45-degree line for an imaginary economy that produces only services. Label the axes “Real GDP per day” and “Aggregate expenditure per day.” Remember
Suppose that a = 1,000, b = 0.65, T = 700, Ip = 800, G = 600, and NX = −200. Calculate the equilibrium level of real GDP. Then check that the equilibrium value equals aggregate expenditure.
Suppose that a = 600, b = 0.75, T = 400, Ip = 600, G = 700, and NX = 200. Calculate the equilibrium level of real GDP. Then check that the equilibrium value equals the sum C + Ip + G + NX.
“Saving is good for the economy; it increases GDP.” Is this statement true, false, or sometimes true and sometimes false? Explain your reasoning.
Suppose that investment spending rises by $1,000 billion, and the MPC is 0.6, as in Table 5 in the chapter. But, unlike in the table, suppose that each time income rises by one dollar, taxes rise by
Calculate the changes in real GDP that would result in each of the following cases:a. Government purchases rise by $7,500, and the MPC is 0.95.b. Planned investment spending falls by $300,000 and the
Calculate the change in real GDP that would result in each of the following cases, assuming there are no automatic stabilizers or destabilizers.a. Planned investment spending rises by $100 billion,
Suppose that households become thriftier; that is, they now wish to save a larger proportion of their disposable income and spend a smaller proportion.a. In the table in problem 1, which column of
Assuming the MPC is 0.8, construct a table similar to the following table in this chapter.a. Show what would happen in the first five rounds following an increase in investment spending from $400
What would be the effect on real GDP and total employment of each of the following changes?a. As a result of restrictions on imports into the United States, net exports (NX) increase.b. The federal
Use an aggregate expenditure diagram to show the effect of each of the following changes:a. An increase in autonomous consumption spending due, say, to optimism on the part of consumersb. An increase
Draw a graph showing a 45° line and an aggregate expenditure line.a. Choose a point where real GDP is less than aggregate expenditure and label it GDPA. Explain what will happen to inventories if
a. What is the marginal propensity to consume implicit in these data?b. What is the numerical value of the expenditure multiplier for this economy?c. What is the equilibrium level of real GDP?d.
a. Complete the following table when autonomous consumption is $30 billion, the marginal propensity to consume is 0.85, and net taxes are $0.b. Use your answers in part (a) and assume planned
a. What is the marginal propensity to consume implicit in these data?b. Plot a 45° line, and then use the data to draw an aggregate expenditure line.c. What is the equilibrium level of real GDP?
In the chapter, you learned that forces outside of the loanable funds market can influence the interest rate. Suppose the supply and demand curves in the loanable funds market are as depicted in
In Figure 5(b), we assumed that when saving rises, none of the additional saving enters the loanable funds market. Suppose, instead, that 40 percent of any additional saving is supplied to financial
In Figure 5(b), we assumed that household saving rises by $100 billion per year, and none of this additional saving goes into the loanable funds market. Under this assumption, would total lending
€œImmediately after a recession ends, the employment rate begins rising.€ Evaluate this statement, based on the historical record in the following figure. Percent 98 employed 97
“Every U.S. recession over the last 5 decades has been caused by an increase in oil prices.” True or false? Explain briefly.
during which the U.S. economy was clearly:a. In the midst of an expansion but not yet experiencing a boom.b. In the midst of an expansion and also in the midst of a boom.c. In the midst of an
Economist Amartya Sen has argued that famines in underdeveloped countries are not simply the result of crop failures or natural disasters. Instead, he suggests that wars, especially civil wars, are
For each of the following scenarios, calculate the percentage change in real GDP per capita, assuming there is no change in technology:a. Average hours are constant; EPR, productivity, and population
On a diagram, draw an economy’s aggregate production function. On the same diagram, add curves to illustrate where the production function would be in five years under each of the following
Assume that average work hours, the employment– population ratio and technology all remain constant in a less developed country. The country initially has $100 billion in capital. For each of the
Redraw Figure 10 from the chapter, adding the new PPF the country would face in Year 2 if it produces at point H in Year 1. Explain your drawing.
State whether each of the following statements is true or false, and explain your reasoning briefly. Assume in each case that the population remains constant. a. “A permanent increase in
Show what would happen to the production function if the capital stock decreased. Suppose, too, that the decrease in the capital stock because t made workers less productive to firms—shifted
In addition to shifting the production function upward, an increase in the capital stock will ordinarily make workers more productive and shift the labor demand curve rightward. Graphically
Below are hypothetical data for the country of Barrovia:a. Fill in the entries for total output in each of the five years.b. Calculate the following for each year (except 2002):(1) Population growth
Below are past GDP and growth data for the United States and four other countries:a. For both years, calculate each country€™s per capita GDP as a percentage of U.S. per capita GDP. Which
[Requires appendix.] Suppose that Classica has international trade, but it is running a trade surplus (X > IM) rather than a trade deficit as in the appendix.Suppose, too, that Classica’s
Suppose that the government budget is balanced (G = T), and household saving is $1 trillion.a. If this is a closed economy, what is the value of planned investment (Ip)?b. If this is an open economy
The following figure shows the impact of a tax cut on the loanable funds market when the entire tax cut is spent. What if, instead, the entire tax cut had been saved?a. Draw a diagram of the loanable
When the government runs a budget surplus (T > G), it deposits any unspent tax revenue into the banking system, thus adding to the supply of loanable funds. In this case, the supply of loanable
For the economy in problem 7, suppose that the government had purchased $2 billion more in goods and services than you found in that problem, with no change in taxes.a. Explain how each of the
The following data give a complete picture of the household, business, and government sectors for 2011 in the small nation of Sylvania. (All dollar figures are in billions.)Consumption
As the baby boomers retire, spending on Social Security benefits is rising. Assume that (1) the government— which is already running a budget deficit—pays for the increased benefits with further
Return to problem 4. What will happen if consumption spending starts to rise? Assume no change in net taxes. Show the effect on the loanable funds market, and explain what will happen to C, Ip, and
The following data ($ millions) are for the island nation of Pacifica over a year.Total output ................................................................... $10Total
Consider the following statement: “In the classical model, just as an increase in government purchases causes complete crowding out, so a decrease in government purchases causes complete crowding
Draw a diagram (similar to the following figure in this chapter) illustrating the impact of a decrease in government purchases. Assume the government is running a budget deficit both before and after
Use a diagram similar to the following figure to illustrate the effect, on aggregate output and the real hourly wage, of(a) an increase in labor demand and(b) an increase in labor supply. Real Hourly
In Table 2, you can see that the CPI rose from 174.0 in December 2000 to 219.2 in December 2010. The average annual inflation rate from 2000 to 2010 was 2.34 percent. That is, 174.0 Ã—
Suppose we want to change the base period of the CPI from July 1983 to December 2000. Recalculate December’s CPI for each of the years in Table 1, so that the table gives the same information about
In December 2008, some economists forecast deflation for the coming year—a decrease in the price level, and therefore a negative inflation rate. Suppose a lender at that time expected deflation
As in the following table, consider someone who retired in 2006 with $25,000 in initial Social Security benefits per year, and that the actual inflation rate is 2 percent per year over the next 20
During the late 19th and early 20th centuries, many U.S. farmers favored inflationary government policies. Why might this have been the case?
a. Jodie earned $25,000 at the end of year 1, when the CPI was 460. If the CPI at the end of year 2 is 504, what would Jodie have to earn at the end of year 2 to maintain a constant real wage?b. What
Complete the following table. (CPI numbers are for the end of each year.) Inflation Nominal Real CPI Year Rate Wage Wage $ 5.60 37 2 48 $11.26 10% $25 4 19% $15 60 3.
An economy has only two goods, whose prices and typical consumption quantities are as follows:a. Using December 2010 as the base period for calculations and also as the year for measuring the typical
Given the following data, calculate the approximate real interest rate for years 2, 3, and 4. (Assume that each CPI number tells us the price level at the end of each year.)If you lent $200 to a
If there is 5 percent inflation each year for 8 years, what is the total amount of inflation (i.e., the total percentage rise in the price level) over the entire 8-year period?
Given the following year-end data, calculate both the inflation rate and the real hourly wage rate for years 2, 3, and 4. Inflation Nominal Real CPI Year Rate Wage Wage $10.00 100 2 $12.00 110 3 120
Calculate the total percentage change in real weekly earnings (excluding benefits) from 2000 to 2005 using the last column of Table 2. Compare your answer to the answer in problem 3. Which is the
Use your answers from problems 2(a) and 2(b) to obtain the total percentage change in real weekly earnings (excluding benefits) from 2000 to 2005.
Using the data in the following table, calculate the following for the period 2000 2005:a. The total percentage change in the nominal weekly earningsb. The total percentage change in the price level
Calculate each of the following from the data in the following table in this chapter.a. The inflation rate for the year 2008b. Total inflation (the total percentage change in the price level) from
After the attacks of September 11, 2001, U.S. businesses began to spend more on security, and they continue to do so today. For example, airlines and package delivery services run more background
After the attacks of September 11, 2001, U.S. businesses began to spend more on security, and they continue to do so today. For example, airlines and package delivery services run more background
Suppose, in a given year, someone buys a Ford automobile for $30,000. That same year, Ford produced the car in Michigan, using $10,000 in parts imported from Japan. However, the parts imported from

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