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Principles Of Macroeconomics 2nd Edition Lee Coppock, Dirk Mateer - Solutions

2. About 50 years ago, Robert Solow formulated a simple model of economic growth. What are the two key properties of the aggregate production function at the center of Solow’s first contribution? l-58
1. Modern economic theory points to three sources of economic growth. What are these three sources? Give an example of each. l-58
How does technological progress aid resources to promote growth? l-58
How does private property ownership(versus government ownership) aect the incentives for productive use of resources? l-58
✷ Why are institutions the key to economic growth? l-58
✷ How does technology affect growth? l-58
✷ What is the Solow growth model? l-58
✷ How do macroeconomic theories evolve? l-58
7. Economic growth is a very particular concept in economics. The term “economic growth” is not always used correctly in media reports.a. Define economic growth.b. Consider the following economy:Nominal GDP (trillions Year of dollars) Price level 2014 $18 240 2015 $20 250 Is it possible to
6. Assume that you plan to retire in 40 years and are evaluating the three different accounts listed in question 5. How much would your$1,000 be worth in 40 years under each of the three alternatives? l-58
5. The rule of 70 applies in any growth rate application. Let’s say you have $1,000 in savings and you have three alternatives:• a savings account earning 1% interest per year• a U.S. Treasury bond earning 3% interest per year• a stock market mutual fund earning 8%interest per year
4. Use the data in the table below to compute economic growth rates for the United States for 2008, 2009, and 2010. Note that all data are from the end of the year specified.Nominal GDP(billions of GDP Population Date current $) deflator growth rate 2007 $14,061.8 106.30 1.01%2008 $14,369.1 108.62
3. Let’s revisit the data from Table 11.3, showing the following world economic growth rates for specific historical eras:Years Growth rate AD 1–1800 0.02%1800–1900 0.64%1900–1950 1.04%1950–2000 2.12%Approximately how many years will it take for average real per capita GDP to double at
2. The table below presents long-run macroeconomic data for two hypothetical nations, A and B:A B Nominal GDP growth 12% 5%Inflation 10% 2%Nominal interest 4% 4%Unemployment rate 12% 5%Population growth 1.5% 1%Assume that both nations start with real GDP of $1,000 per citizen. Fill in the blanks in
1. Real per capita GDP in China in 1959 was about $350, but it doubled to about $700 by 1978, when Deng Xiaoping started market reforms.✷a. What was the average annual economic growth rate in China over the 20 years from 1959 to 1978?b. Chinese real per capita GDP doubled again in only seven
10. What do economists mean by the term “institutions”? Name five different laws that are institutions that affect production incentives.Name three social practices that affect production in a society. l-58
9. The difference between 1% growth and 2%growth seems insignificant. Explain why it really matters. l-58
8. In 2011, when the U.S. unemployment rate was over 9%, President Barack Obama said,“There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t
7. The flow of funds across borders is a source of growth for economies. Use what you learned about loanable funds in Chapter 9 to describe how foreign funds might expand output in a nation. l-58
6. Many historical accounts credit the economic success of the United States to its abundance of natural resources.a. What is missing from this argument?b. Name five poor nations that have significant natural resources. l-58
5. List five human welfare conditions that are positively affected by economic growth. l-58
4. Describe the pattern of world economic growth over the past 2,000 years. Approximately when did economic growth really take off? l-58
If a growth rate of 1.17% persists in South Africa, how long it will take for income to double? Use the Rule of 70. l-58
✷ How do resources and technology contribute to economic growth? l-58
✷ Why does economic growth matter? l-58
7. The following table presents partial information for several different bonds that each mature in one year. Use the information given along with Equation 10.1 to fill in the blank cells in the table.Face Value Initial Price Interest Bond pm p0 Rate R A $10,000 $9,000.00 ______ B $10,000 ______
6. In this chapter, we discussed Target Corporation bonds to illustrate the effect of default risk on the price of a bond. In particular, when the default risk rises, the demand for a bond falls and then the equilibrium price falls. In our example, the price of a $100,000 Target bond fell from
5. Use supply and demand curves to illustrate how default risk affects both the price and the interest rate of a bond.
4. This question involves the hypothetical iPong firm from question 3.a. How will demand be affected if a ratings agency upgrades your bond rating to AA?b. How will the ratings upgrade affect the price of your bond?c. How will the ratings upgrade affect your cost of borrowing?
3. Let’s say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB.a. Draw supply and demand curves for your iPong
2. In 2008, when the U.S. automobile industry was struggling, the price of Ford Motor Company bonds rose. In this question, you need to calculate how the price increase also affected the interest rate.a. What was the interest rate on a one-year Ford bond with a face value of $5,000 and a price of
1. Toyota bonds are currently rated AA, and Ford bonds are rated BB. Suppose the price of a$1,000 one-year Toyota bond is $970.a. What is the rate of return on the one-year Toyota bond?b. The price of a $1,000 one-year Ford bond must be:i. less than $970 ii. greater than $970 iii. $970 iv. There is
7. What is a U.S. Treasury bond? Why are Treasury bonds such a popular asset in world markets?
6. What is a mortgage-backed security (MBS)?Why is it difficult for ratings agencies to determine the risk of an MBS? Describe how the existence of MBSs helps homebuyers in the United States. Describe how MBS markets spread financial troubles around the world when U.S. home prices dropped in 2008.
5. Why might a firm prefer to finance its investments with bonds rather than stocks? Alternatively, why might a firm prefer stocks to bonds? L-89
4. What is the primary use of U.S. Treasury securities? Why are the interest rates on Treasury securities so low? If people worried about the United States defaulting on the national debt, what would you expect to happen to interest rates on U.S. Treasury securities? Why?
3. One principle we learned in this chapter is that the dollar price and the interest rate on a bond move in opposite directions. Why is this always the case? L-89
2. What is securitization? Discuss how securitization benefits borrowers. L-89
1. What is the difference between direct and indirect finance? Discuss the reasons why a firm (a borrower) might choose each method.Discuss the reasons why a saver might choose each method. L-89
Why do movements in overall stock prices indicate something about the entire macroeconomy? L-89
Approximately how long did it take the Dow to rise from 1,000 to 10,000? From 10,000 to 15,000? L-89
✷ What are the key financial tools for the macroeconomy? L-89
✷ How do financial markets help the economy? L-89
2. Many interest rates in the United States have fallen over the past couple of decades. Which of the following factors could have been the cause?a. increase in the demand for loanable fundsb. decrease in the demand for loanable fundsc. increase in the supply of loanable fundsd. decrease in the
1. Assume that the residents of a nation become more patient (experience a reduction in their time preferences).a. What will happen to the interest rate in that nation? What will happen to the equilibrium level of investment in that nation? Explain your answers.b. In the long run, how will the
7. Many people believe that a high interest rate is bad for the economy. Of course, all else equal, a higher interest rate means greater borrowing costs for firms. But a high interest rate is also helpful to some people in the economy.a. What group of people benefits from a higher interest rate?
6. Why does inflation have a positive effect on the nominal interest rate? L-89
5. List the factors that affect the demand side of the loanable funds market. Which factors shift the curve? L-89
4. List the factors that affect the supply side of the loanable funds market. Which factors shift the curve? L-89
3. Consider two alternatives to prepare for retirement: (1) saving in a bank where your funds earn interest and (2) buying fine art that rises in value over time. Each grows your retirement account over time.a. If the rates of return on fine art purchases fall, how would you expect the allocation
2. All else equal, what does a lower interest rate mean for firms? What does a lower interest rate mean for savers? L-89
1. Explain the importance of the loanable funds market to basic GDP in a macroeconomy. L-89
Explain why financial markets play a critical role in the macroeconomy L-89
Suppose your bank uses your savings to make a loan to a computer company.Is this an example of direct finance or indirect finance? L-89
✷ How do we apply the loanable funds market model? L-89
✷ What factors shift the demand for loanable funds? L-89
✷ What factors shift the supply of loanable funds? L-89
✷ What is the loanable funds market? L-89
7. Let’s say you graduate from college and accept a job in 2018. You decide to compare your starting salary with your grandfather’s and mother’s starting salaries. The salaries you compare are: L-89
6. The equation of exchange is helpful for determining the effect of money supply changes on the price level. Use the equation of exchange to answer each of the following questions.a. Real GDP grows at 3% and inflation is equal to 2%, but there is no change in velocity.What can you conclude about
5. If healthcare costs make up 10% of total expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise? L-89
4. Suppose that the residents of Greenland play golf incessantly. In fact, golf is the only thing that they spend their money on. They buy golf balls, clubs, and tees. In 2016, they bought 1,000 golf balls for $2.00 each, 100 clubs for$50.00 each, and 500 tees for $0.10 each. In 2017, they bought
3. While rooting through the attic, you discover a box of old tax forms. You find that your grandmother made $75 working part-time during December 1964, when the CPI was 31.3. How much would you need to have earned in January of this year to have at least as much real income as your grandmother did
2. Visit the Bureau of Labor Statistics web site for the CPI (www.bls.gov/cpi), and find the latest news release. Table 1 in that release presents CPI data for all items and also for many individual categories.a. How much has the entire index changed (in percentage terms) in the past year?b. Now
1. In 1991, the Barenaked Ladies released their hit song “If I Had a Million Dollars.” How much money would the group need in 2015 to have the same amount of real purchasing power they had in 1991? Note that the consumer price index in 1991 was 136.2 and in 2015 it was 238. L-89
9. Inflation causes a lot of problems for the macroeconomy.a. What is the key misconception people have about inflation, and why does this problem generally not accompany inflation? L-89
8. Following is a list of potential problems that inflation might cause. Use the space on the left to name each of these with the terms used in this chapter.a. ________ Lenders and workers are reluctant to help firms produce output because the real value of future dollar payoffs is unclear.b.
7. What are the seven problems caused by inflation? Briefly explain each one. L-89
6. Wage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% over that in the second year to account
5. In a sentence or two, evaluate the accuracy of the following statement, including a clear and precise statement of historical comparison:Inflation in the United States last year was 0%.This is close to the historical level. L-89
4. If a country is experiencing a relatively high rate of inflation, what impact will this have on the country’s long-term rate of economic growth? L-89
3. If the prices of homes go up by 5% and the prices of concert tickets rise by 10%, which will have the larger impact on the CPI? Why? L-89
2. What three issues are at the center of the debate regarding the accuracy of the CPI? Give an example of each issue. L-89
1. The price of a typical laptop computer has fallen from $2,000 in 1985 to $800 today. At the same time, the consumer price index has risen from 100 to 238. Adjusting for inflation, how much did the price of laptops change?Does this answer seem right to you, or is it missing something? Explain
Explain why television and computer prices continue to fall but we still observe increases in the CPI. L-89
When was the last time the inflation rate exceeded 5% in the United States? L-89
✷ What is the cause of inflation? L-89
✷ What problems does inflation bring? L-89
✷ How is inflation measured? L-89
5. Consider a country with 300 million residents, a labor force of 150 million, and 10 million unemployed. Answer the following questions.a. What is the labor force participation rate?b. What is the unemployment rate?c. If 5 million of the unemployed become discouraged and stop looking for work,
4. Visit www.bls.gov and search through the tables on unemployment to answer the following questions.a. What is the current national unemployment rate for the United States?b. What is the current unemployment rate among people of your age, sex, and race?
3. A country with a civilian (work-eligible) population of 90,000 (all over age 16) has 70,000 employed and 10,000 unemployed persons.Of the unemployed, 5,000 are frictionally unemployed and another 3,000 are structurally unemployed. On the basis of these data, answer the following questions.a.
2. In January 2015, the U.S. economy added 257,000 new jobs. Yet the unemployment rate rose from 5.6% to 5.7%. How is this possible? L-89
1. In his song “Allentown,” Billy Joel sings about the demise of the steel and coal industries in Pennsylvania. Why do you think the loss of manufacturing jobs was so difficult on the workers in areas like Allentown and parts of the Midwest where manufacturing was once the largest employer?
8. What can cause an increase in frictional unemployment? Give at least one example. What can cause an increase in structural unemployment? Give at least one example? L-89
7. What does an increase in the natural rate of unemployment imply about each of the three types of unemployment? L-89
6. Does the duration of unemployment matter?Explain your answer. L-89
5. What groups does the Bureau of Labor Statistics count in the labor force? Explain why the official unemployment rate tends to underestimate the level of labor market problems. L-89
4. What type of unemployment is affected when online job search engines reduce the time necessary for job searches? Does this outcome affect the natural rate of unemployment? If so, how? L-89
3. The news media almost always bemoans the current state of the U.S. economy. How does the most recent unemployment rate relate to the long-run average? L-89
2. Is there any unemployment when an economy has “full employment”? If so, what type(s)? L-89
1. Until the late 1960s, most economists assumed that less unemployment was always preferable to more unemployment. Define and explain the two types of unemployment that are consistent with a dynamic, growing economy. L-89
How do you explain the labor force participation rate changes between men and women? L-89
In the Great Recession of the late 2000s, roughly how many percentage points did the unemployment rate of black (African American) men rise? L-89
✷ What can we learn from the employment data? L-89
✷ What are the major reasons for unemployment? L-89
2. In the following situations, explain what is counted (or is not counted) in this year’s GDP.a. You bought a new Wii at GameStop last year and resold it on eBay this year.b. You purchase a new copy of Investing for Dummies at Barnes & Noble.c. You purchase a historic home using the services of
1. A friend who knows of your interest in economics comes up to you after reading the latest GDP data and excitedly exclaims, “Did you see that nominal GDP rose from $19 trillion to $19.5 trillion?” What should you tell your friend about this news? L-P82
8. Real GDP for 2015 is less than nominal GDP for that year. But real GDP for 2000 is more than nominal GDP for that year. Why? L-P82
7. Phil owns an old set of golf clubs that he purchased for $1,000 seven years ago. He decides to post them on Craigslist and quickly sells the clubs for $250. How does this sale affect GDP? L-P82

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