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macroeconomics principles
Principles Of Macroeconomics 8th Edition Robert Frank, Ben Bernanke, Kate Antonovics, Ori Heffetz - Solutions
7. Define the multiplier. In economic terms, why is the multiplier greater than one? (LO4)
6. Sketch the Keynesian-cross diagram. Explain in words the economic significance of the two lines graphed in the diagram. Given only this diagram, how could you determine autonomous expenditure, induced expenditure, the marginal propensity to consume, and short-run equilibrium output? (LO3)
5. Sketch a graph of the consumption function, labeling the axes of the graph. Discuss the economic meaning of (a) a movement from left to right along the graph of the consumption function and (b) a parallel upward shift of the consumption function. Give an example of a factor that could lead to a
4. Explain how planned spending and actual spending can differ. Illustrate with an example. (LO2)
3. Define planned aggregate expenditure and list its components. Why does planned spending change when output changes? (LO2)
2. Give an example of a good or service whose price changes very frequently and one whose price changes relatively infrequently. What accounts for the difference? (LO1)
1. What is the key assumption of the basic Keynesian model? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term economic fluctuations. (LO1)
LO6 Discuss the qualifications that arise in applying fiscal policy in real-world situations.
LO5 Explain why the basic Keynesian model suggests that fiscal policy is useful as a stabilization policy.
LO4 Show how a change in planned aggregate expenditure can cause a change in short-run equilibrium output and how this is related to the incomeexpenditure multiplier.
LO3 Analyze, using graphs and numbers, how an economy reaches shortrun equilibrium in the basic Keynesian model.
LO2 Discuss the determinants of planned investment and aggregate consumption spending and how these concepts are used to develop a model of planned aggregate expenditure.
LO1 Identify the key assumption of the basic Keynesian model and explain how it affects the production decisions made by firms and the consumption decisions made by households.
6. Of the following, identify the incorrect statement. (LO5) a. Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy. b. Low aggregate spending can make output fall below potential output. c. When spending is high, output may rise above
5. Using Okun’s law, fill in the four pieces of missing data in the table below. The data are hypothetical. (LO4)Year Real GDP ($ billions) Potential GDP ($ billions) Natural unemployment rate (%) Actual unemployment rate (%) 2015 13,536 14,400 5 (a) 2016 14,500 (b) 5 5 2017 (c) 14,800 5 4.5
4. From the home page of the Bureau of Labor Statistics (www.bls.gov), obtain the most recent available data on the unemployment rate for workers aged 16–19 and workers aged 20 or over. How do they differ? What aresome of the reasons for the difference? How does this difference relate to the
3. Given below are data on real GDP and potential GDP for the United States for the years 2005–2016, in billions of 2009 dollars. For each year, calculate the output gap as a percentage of potential GDP and state whether the gap is a recessionary gap or an expansionary gap. Also calculate the
2. From the home page of the Bureau of Economic Analysis (www.bea.gov), obtain quarterly data for U.S. real GDP from these recessions: 1981–1982, 1990–1991, 2001, and 2007–2009. (LO1)a. How many quarters of negative real GDP growth occurred in each recession?b. Which, if any, of the
1. Using Table 12.1, find the average duration, the minimum duration, and the maximum duration of expansions in the United States since 1929. Are expansions getting longer or shorter on average over time? Is there any tendency for long expansions to be followed by long recessions? (LO1)
6. If the natural rate of unemployment is 5 percent, what is the total rate of unemployment according to Okun’s law if output is 2 percent below potential output? What if output is 2 percent above potential output? (LO4)
5. True or false: When output equals potential output, the unemployment rate is zero. Explain. (LO4)
4. How is each of the following likely to be affected by a recession: the natural unemployment rate, the cyclical unemployment rate, the inflation rate, the poll ratings of the president? (LO1, LO3)
3. Define potential output. Is it possible for an economy to produce an amount greater than potential output? Explain. (LO2)
2. Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service? Which is likely to see its profits reduced the least? Explain. (LO1)
1. Define recession and expansion. What are the beginning and ending points of a recession called? In the postwar United States, which have been longer on average: recessions or expansions? (LO1)
LO5 Discuss the basic differences between how the economy operates in the short run versus the long run.
LO4 Apply Okun’s law to analyze the relationship between the output gap and cyclical unemployment.
LO3 Define the natural rate of unemployment and show how it is related to cyclical unemployment.
LO2 Use potential output and the output gap to analyze an economy’s position in the business cycle.
LO1 List the four phases of the business cycle and explain the primary characteristics of recessions and expansions.
7. A country’s domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: (LO3) S = 1,800 + 2,000r I = 2,000 − 4,000r KI = −100 + 6,000r a. Assuming that the market for saving and investment
6. Use a diagram like Figure 11.4 (solid lines only) to show the effects of each of the following on the real interest rate and capital investment of a country that is a net borrower from abroad. (LO3) a. Investment opportunities in the country improve owing to new technologies. b. The government
5. How do each of the following transactions affect (1) the trade surplus or deficit and (2) capital inflows or outflows for the United States? Show that in each case, the identity that the trade balance plus net capital inflows equals zero applies. (LO3) a. A U.S. exporter sells software to
4. You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats are elected, an event you believe to have a 40 percent probability; otherwise, the shares pay a zero
3. Your financial investments consist of U.S. government bonds maturing in 10 years and shares in a start-up company doing research in pharmaceuticals. How would you expect each of the following news items to affect the value of your assets? Explain. (LO1) a. Interest rates on newly issued
2. Shares in Brothers Grimm Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5.50 in one year and to sell for $99.00 per share at that time. How much should you be willing to pay today per share of Grimm: (LO1) a. If the safe rate of interest is 5.1 percent and you
1. Simon purchases a bond, newly issued by the Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end of the third year. (LO1) a. What are the principal amount, the term, the coupon rate, and the
6. How would increased political instability in a country likely affect capital inflows, the domestic real interest rate, and investment in new capital goods? Show graphically. (LO3)
5. Explain with examples why, in any period, a country’s net capital inflows equal its trade deficit. (LO3)
4. How are capital inflows or outflows related to domestic investment in new capital goods? (LO3)
3. Suppose you are much less concerned about risk than the typical person. Are stocks a good financial investment for you? Why or why not? (LO1, LO2)
2. Give two ways that the financial system helps improve the allocation of savings. Illustrate with examples. (LO2)
1. Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond? Explain. (LO1)
LO3 Analyze the factors that determine international capital flows to understand how domestic saving, the trade balance, and net capital flows are related.
LO2 Show how the financial market improves the allocation of saving to productive uses.
LO1 Describe the role of financial intermediaries, such as commercial banks in the financial system, and differentiate between bonds and stocks.
8. Consider the following hypothetical data for 2019 and 2020: (LO4) 2019 2020 Money supply 1,000 1,050 Velocity 8 8 Real GDP 12,000 12,000 a. Find the price level for 2019 and 2020. What is the rate of inflation between the two years? b. What is the rate of inflation between 2019 and 2020 if the
7. Consider a country in which real GDP is $9 trillion, nominal GDP is $12 trillion, M1 is $2.5 trillion, and M2 is $5.5 trillion. (LO4) a. Find velocity for M1 and for M2. b. Show that the quantity equation holds for both M1 and M2.
6. The Federal Reserve System was created by the Federal Reserve Act, passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the following statements about the Fed is false? (LO3) a. The Fed has the power to supervise and regulate
5. Refer to Table 10.7. Suppose that the Fed had decided to set the U.S. money supply in December 1932 and in December 1933 at the same value as in December 1930. Assuming that the values of currency held by the public and the reserve-deposit ratio had remained as given in the table, by how much
4. When a central bank increases bank reserves by $1, the money supply rises by more than $1. The amount of extra money created when the central bank increases bank reserves by $1 is called the money multiplier. (LO2) a. Explain why the money multiplier is generally greater than 1. In what special
3. Answer each of the following questions: (LO2) a. Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply. b. The money supply is 500, and currency held by the public equals bank reserves. The desired
2. Redo the example of Gorgonzola in the text (see Tables 10.2 to 10.6), assuming that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation, and (2) commercial banks desire to hold reserves of 20 percent of deposits. As in the text, assume that the public holds no
1. During World War II, an Allied soldier named Robert Radford spent several years in a large German prisonerof-war camp. At times, more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described
6. Use the quantity equation to explain why money growth and inflation tend to be closely linked. (LO4)
5. Define velocity. How has the introduction of new payment technologies affected velocity? Explain. (LO4)
4. What is a banking panic? Prior to the introduction of deposit insurance, why might even a bank that had made sound loans have reason to fear a panic? (LO3)
3. The Fed wants to reduce the U.S. money supply using open-market operations. Describe what it would do and explain how this action would accomplish the Fed’s objective. (LO3)
2. Suppose that the public switches from doing most of its shopping with currency to using checks instead. If the Fed takes no action, what will happen to the national money supply? Explain. (LO2, LO3)
1. What is money? Why do people hold money even though it pays a lower return than other financial assets? (LO1)
LO4 Explain why control of the money supply is important and how the money supply is related to inflation in the long run.
LO3 Describe the structure and responsibilities of the Federal Reserve System.
LO2 Analyze how the lending behavior of commercial banks affects the money supply.
LO1 Discuss the three functions of money and how the money supply is measured.
8. For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment. Show all your diagrams. (LO5) a. The legislature passes a 10 percent investment tax credit. Under this program, for every $100 that a
7. The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available. (LO4)Number of screens Total number of patrons 1 2 40,000 75,000 3 105,000
6. Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the home’s value. If properly maintained, the house’s real value is not expected to change. The real
5. In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. (LO3) a. Household saving = 200 Business saving = 400 Government purchases of goods and services = 260 Government transfers and interest payments = 135 Tax
4. Individual retirement accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds
3. Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms of the basic motivations for saving. (LO2) a. Ellie learns she is pregnant. b. Vince reads in the
2. State whether each of the following is a stock or a flow, and explain. (LO1) a. The gross domestic product. b. National saving. c. The value of the U.S. housing stock on January 1, 2020. d. The amount of U.S. currency in circulation as of this morning. e. The government budget deficit. f. The
1. Corey has a mountain bike worth $300, credit card debt of $150, $200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. (LO1) a. Construct Corey’s balance sheet and calculate his net worth. For each remaining part, explain how
6. Name one factor that could increase the supply of saving and one that could increase the demand for saving. Show the effects of each on saving, investment, and the real interest rate.
5. Why do increases in real interest rates reduce the quantity of saving demanded? (Hint: Who are the “demanders” of saving?) (LO4, LO5)
4. Household saving rates in the U.S. are very low. Is this fact a problem for the U.S. economy? Why or why not? (LO3)
3. Define national saving, relating your definition to the general concept of saving. Why does the standard U.S. definition of national saving potentially understate the true amount of saving being done in the economy? (LO3)
2. Give three basic motivations for saving. Illustrate each with an example. What other factors would psychologists cite as being possibly important for saving? (LO2)
1. Explain the relationship between saving and wealth, using the concepts of flows and stocks. Is saving the only means by which wealth can increase? Explain. (LO1)
LO5 Analyze financial markets using the tools of supply and demand.
LO4 Discuss the reasons firms choose to invest in capital.
LO3 Identify and apply the components of national saving.
LO2 Discuss the reasons people save and how psychological factors influence saving.
LO1 Explain the relationship between saving and wealth.
7. For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer. (LO4) a. Ted lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed over a year. b. Alice was laid
6. Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. (LO3) a. Suppose that electronic equipment is introduced that increases the marginal product of skilled workers (who can use the equipment to produce more
5. How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3) a. Demand for the type of car made by the plant increases. b. A sharp increase in the price of gas causes many commuters to switch to mass transit. c.
4. How would each of the following factors be likely to affect the economywide supply of labor? (LO2) a. The age at which people are eligible for Medicare is increasedb. Increased productivity causes real wages to rise. c. War preparations lead to the institution of a national draft, and many young
3. The following table lists the marginal product per hour of workers in a lightbulb factory. Lightbulbs sell for $2 each, and there are no costs to producing them other than labor costs. (LO2 )Number of workers 1 23 Marginal product: lightbulbs/hr 24 22 20 4 18 569 16 14 7 12 8 10 9 8 10 6a. The
2. Production data for Bob’s Bicycle Factory are as follows:Number of workers Bikes assembled/day 1 10 2 18 3 24 4 28 5 30 Other than wages, Bob has costs of $100 (for parts and so on) for each bike assembled. (LO2) a. Bikes sell for $130 each. Find the marginal product and the value of the
1. Data on the average earnings of people of different education levels are available from the Bureau of the Census (try online at www.census.gov/population/ socdemo/education/tableA-3.txt). Using these data, prepare a table showing the earnings of college graduates relative to high school
5. List three types of unemployment and their causes. Which of these types is economically and socially the least costly? Explain. (LO4)
4. What are two major factors contributing to increased inequality in wages? Briefly, why do these factors raise wage inequality? Contrast possible policy responses to increasing inequality in terms of their effects on economic efficiency. (LO3)
3. Why have real wages risen by so much in the United States in the past century? Why did real wage growth slow for 25 years beginning in the early 1970s? What has been happening to real wages recently? (LO3)
2. Acme Corporation is considering hiring Marisa Fabrizio. Based on her other opportunities in the job market, Marisa has told Acme that she will work for them for $40,000 per year. How should Acme determine whether to employ her? (LO2)
1. List and discuss the five important labor market trends given in the first section of the chapter. How do these trends either support or qualify the proposition that increasing labor productivity leads to higher standards of living? (LO1)
LO4 Differentiate among the three types of unemployment defined by economists and the costs associated with each.
LO3 Explain how changes in the supply of and demand for labor account for trends in real wages and employment in the past few decades.
LO2 Apply a supply and demand model to understand the labor market.
LO1 Discuss five important trends that have characterized labor markets in the industrialized world in the past few decades.
10. Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the United States is exceptionally strong, relative to other countries? Areas where the United States is less strong than
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