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macroeconomics principles
Principles Of Macroeconomics 2nd Edition Lee Coppock, Dirk Mateer - Solutions
3. Why are current account balances generally mirror images of capital account balances? L-9658
2. The United States currently has a current account deficit. How would each of the following events affect this deficit, assuming no other changes?a. U.S. economic growth slows relative to the rest of the world.b. U.S. personal savings rates increase.c. U.S. federal budget deficits decline.d.
1. The United States imports Molson beer from Canada. Assume that Canada and the United States share the same currency and that a bottle of Molson beer costs $2 in Toronto, Canada, but just $1 in Chicago.a. What market adjustments will ensue in this case, assuming no shipping costs or trade
Create a simple supply and demand graph showing how the Chinese purchase of U.S. dollars on currency markets reduces the value of the yuan. L-9658
✷ What is purchasing power parity? L-9658
✷ Why do exchange rates rise and fall? L-9658
4. Germany and Japan both produce cars and beer. The table below shows production possibilities per worker in each country. For example, one worker in Germany produces 8 cars or 10 cases of beer per week. (For a review of absolute versus comparative advantage, see Chapter 2.) L-9658
3. What are the two trade restriction policies we discussed in this chapter? Who benefits and who loses from each of these policies? What is the new outcome for society? L-9658
3 cans of sardines would be acceptable to both nations. L-9658
2. Suppose that the comparative-cost ratios of two products—mangoes and sardines—are as follows in the hypothetical nations of Mangolia and Sardinia:Mangolia: 1 mango = 2 cans of sardines Sardinia: 1 mango = 4 cans of sardines In what product should each nation specialize?Explain why the terms
1. Consider the following table for the neighboring nations of Quahog and Pawnee. Assume that the opportunity cost of producing each good is constant.Product Quahog Pawnee Meatballs (per hour) 4,000 2,000 Clams (per hour) 8,000 1,000a. What is the opportunity cost of producing meatballs in Quahog?
5. Tariffs reduce the volume of imports. Do tariffs also reduce the volume of exports? Explain your response. L-9658
4. Why might foreign producers voluntarily agree to a quota rather than face an imposed tariff? L-9658
3. How might a nation’s endowment of natural resources, labor, and climate shape the nature of its comparative advantage? L-9658
2. What would happen to the standard of living in the United States if all foreign trade were eliminated? L-9658
1. What are three problems with trade restrictions? What are three reasons often given in support of trade restrictions? L-9658
Based on the list of U.S. imports, how would you finish this sentence? “Americans sure love their ________!” L-9658
What U.S. industry generates the most universal demand from our trading partners? L-9658
✷ What are the effects of tariffs and quotas? L-9658
✷ How does international trade help the economy? L-9658
✷ Is globalization for real? L-9658
6. Explain the difference between active and passive monetary policy? L-9658
5. Who is harmed when inflation is less than anticipated? In what ways are they harmed?Who is harmed when inflation is greater than anticipated? In what ways are they harmed? L-9658
4. Explain why a stable 5% inflation rate can be preferable to one that averages 4% but varies between 1% and 7% regularly. L-9658
3. During the economic slowdown that began at the end of 2007, the Federal Reserve used monetary policy to reduce interest rates in the economy. Use what you have learned in this chapter to give a possible explanation as to why the monetary policy failed to restore the economy to long-run
2. Many people focus on the effect of monetary policy on interest rates in the economy.a. Use the loanable funds market to explain how unexpected contractionary monetary policy affects interest rates in the short run.b. Now explain how these changes affect aggregate demand and aggregate supply in
1. Why is it possible to change real economic factors in the short run simply by increasing the money supply?
Knowing that in the long run inflation is the only result of expansionary monetary policy, why would the government act to increase inflation? L-9658
10. Define quantitative easing. How is it different from standard open market operations? L-9658
9. What is the current required reserve ratio?What would happen to the money supply if the Fed decreased the ratio? L-9658
8. How is the discount rate different from the federal funds rate? L-9658
7. How does the Fed increase and decrease the money supply through open market operations? L-9658
6. Why can’t a bank lend out all of its reserves? L-9658
5. Why is the actual money multiplier usually less than the simple money multiplier?
4. Suppose you withdraw $100 from your checking account. What impact would this action alone have on the following?a.the money supply b.your bank’s required reserves c.your bank’s excess reserves L-9658
3. What are the components of M1 and M2? List them. L-9658
2. What are the three functions of money?Which function is the defining characteristic? L-9658
1. What is the difference between commodity money and fiat money? L-9658
What percentage of M1 does currency make up? Of M2? L-9658
✷ How does the Federal Reserve control the money supply? L-9658
✷ How do banks create money? L-9658
✷ What is money? L-9658
7. Assuming that complete crowding-out always holds, what happens to consumption, investment, and interest rates if the government decreases borrowing, all else being equal? l-58
6. Many people emphasize just one portion of the Laffer curve and forget that there are actually two sides. First, explain the math behind the positively sloped region of the Laffer curve. That is, explain why an increase in the tax rate sometimes leads to an increase in tax revenue. Second,
5. In what circumstances would contractionary fiscal policy be recommended? How might you implement this type of policy? Why would you implement this policy—that is, what are the reasons why it might make sense to use fiscal policy to slow the economy?
4. Explain the three types of fiscal policy lags.What are automatic stabilizers? Which lags do automatic stabilizers affect? l-58
3. Explain why the government budget deficit increases during a recession even without countercyclical fiscal policy. l-58
2. Using the aggregate demand–aggregate supply model, one might argue that the economy will adjust on its own when aggregate demand drops. How does this adjustment work? Why might this adjustment take some time? (If necessary, review Chapter 14.) l-58
1. How are government budget balances affected by countercyclical fiscal policy? Be sure to describe the effects of both expansionary and contractionary fiscal policy.
What other factors beyond GDP growth might account for the high unemployment numbers since late 2008? l-58
The GDP growth numbers from 2010 onward are similar to the GDP numbers from 2002 to 2008. What is dierent? l-58
✷ What is supply-side fiscal policy? l-58
✷ What are the shortcomings of fiscal policy? l-58
✷ What is fiscal policy? l-58
2. Greece, Ireland, Portugal, and Spain all went through national budget difficulties in recent years. Use the following data to answer questions regarding the sovereign debts of these nations. (All data come from the OECD and are in billions of current U.S. dollars.)2000 2010 Debt GDP Debt GDP
1. Use the marginal income tax rates in Figure 15.6 to compute the following:a. tax due on taxable income of $100,000,$200,000, and $500,000b. average tax rate on taxable income of$100,000, $200,000, and $500,000 l-58
6. Explain the difference between average tax rates and marginal tax rates. Is it possible for a person’s average tax rate to equal his or her marginal tax rate? If so, how? l-58
5. Explain why mandatory outlays are predicted to grow (as a portion of the total budget) over the next two decades. l-58
4. This question refers to Figure 15.10, which shows the U.S. outlays and revenue as portions of GDP.a. List three periods when the U.S. budget deficit was relatively large.b. What historical events were taking place in the United States during these three periods that may have led to these large
3. Going back to 1965, there have been a few years in which the U.S. government budget was in surplus. What years were these? Why do you think those surpluses disappeared when they did? Figure 15.10 might be helpful in answering this question. l-58
2. Explain the difference between a budget deficit and the national debt. l-58
1. Since the 1960s, Social Security and Medicare have grown as portions of U.S. government spending.a. What major categories of government spending have shrunk during the same period?b. Has the U.S. budget become more or less flexible as a result of the growth in the mandatory programs? Explain
✷ What are budget deficits? l-58
✷ How does the government tax? l-58
✷ How does the government spend?
2. For this problem, we want to practice working with the aggregate demand–aggregate supply model.a. Set up an aggregate demand–aggregate supply model in long-run equilibrium, with both short-run and long-run aggregate supply curves and an aggregate demand curve.Label the equilibrium price
1. Explain whether each of the following statements is more likely to come from a classical economist or a Keynesian economist:a. “The recent decline in consumer confidence will likely spell disaster for the economy.”b. “Business managers making investment decisions play a crucial role in the
6. Consider the following statements about the macroeconomy. For each, indicate whether the statement best distinguishes the strict Keynesian view, strict classical view, or neither of these views.a. All prices are completely flexible.b. The primary focus is on aggregate supply.c. Spending is the
5. In Chapter 13, we covered a list of factors that shift aggregate demand. Which of those factors changed during the Great Depression, and how did they change? l-58
4. In Chapter 13, we covered three factors that shift long-run aggregate supply. What are those factors? Which of those factors changed during the period of the Great Recession, and how did they change? l-58
3. What is the key side (supply or demand) of the economy for Keynesian economists? What assumption about prices leads them to this emphasis? What is the key side of the economy (supply or demand) for classical economists? What assumption about prices leads them to this emphasis? l-58
2. What specific numerical evidence would you give to explain why the Great Depression was so much worse than the Great Recession? l-58
1. What were the cause(s) of the long-run aggregate supply shift during the Great Recession?What were the cause(s) of the aggregate demand shift during the Great Recession? l-58
✷ What are the big disagreements in macroeconomics? l-58
✷ Exactly what happened during the Great Recession and the Great Depression? l-58
2. Describe whether the following changes cause the long-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. The stock of capital in the economy increases.c. Natural resources increase.d. The price level decreases.e. Firms and workers expect the price level to
1. Describe whether the following changes cause the short-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. Input prices decrease.c. Firms and workers expect the price level to fall.d. The price level decreases.e. New policies increase the cost of meeting
8. The interest rate effect can be viewed as a chain of reactions in the economy.a. Below is the chain of reactions with some of the steps filled in. Fill in the missing steps in the chain and be sure to indicate the direction of change (using an up or down arrow).b. What component (or piece) of
7. Consider two economies, both in recession.In the first economy, all workers have longterm contracts that guarantee high nominal wages for the next five years. In the second economy, all workers have annual contracts that are indexed to changes in the price level.Which economy will return to the
6. Suppose the economy is in a recession caused by lower aggregate demand. If no policy action is taken, what will happen to the price level, output, and employment in the long run? l-58
5. How does strong economic growth in China affect aggregate demand in the United States? l-58
4. Why is the long-run aggregate supply curve vertical? l-58
3. How are the factors that shift the long-run aggregate supply curve different from those that shift the short-run aggregate supply curve? l-58
2. What are three reasons the short-run aggregate supply curve slopes upward? Name at least three factors that shift the short-run aggregate supply curve. l-58
1. What are three reasons the aggregate demand curve slopes downward? Name at least three factors that shift the aggregate demand curve. l-58
Looking at the year immediately following each recession, can you determine which economic recovery was most dicult? On what do you base your answer? l-58
✷ How does the aggregate demand–aggregate supply model help us understand the economy? l-58
✷ What is aggregate supply? l-58
✷ What is aggregate demand? l-58
✷ What is the aggregate demand–aggregate supply model? l-58
3. Suppose the people in the United States increase their savings rate. How will this change affect the rate of economic growth in the United States? l-58
2. Define human capital. Draw a graph that illustrates an increase in effective labor on a production function. l-58
1. The Solow model focuses on how resources affect output. In this chapter, we focused on capital.a. Name the other two major categories of resources.b. Draw an aggregate production function with a typical shape; label this function F.c. Draw a second production function that indicates a
9. Modern growth theory still uses the basic Solow production function as a starting point, but the emphasis is much different.a. What is the key theoretical distinction between modern growth theory and the Solow growth models?b. How does this one difference affect policy recommendations? l-58
8. Robert Solow formulated a model that still serves as the basis for growth theory.a. What is the steady state of an economy, and what key piece of the Solow model implies that the steady state is an inevitable outcome?b. Explain the concept of convergence in growth theory. What has been the
7. How can an increase in educational opportunities increase growth? Use a graph to illustrate how educational opportunities affect a nation’s production function. l-58
6. The basic Solow growth model implies convergence. What is convergence? What key assumption about the marginal product of capital implies convergence? l-58
5. China is a land of vast resources. In addition, technology is easily transportable across international borders. If we rule out these two sources of growth, to what can we attribute the economic growth in China since 1979?
4. The Solow model assumes that technological changes are exogenous. What does the term“exogenous” mean? Why does the assumption of exogenous technological change matter for growth policy? What does this assumption imply about growth rates across nations over time? l-58
3. Explain why a nation cannot continue to grow forever by just adding more capital. l-58
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