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Principles Of Macroeconomics 8th Edition Sayre, J.E.; Morris, A.J. - Solutions
(LO 1, 2, 3) The economy of Copland is in equilibrium but is suffering from a recessionary gap of $10 billion.Its aggregate demand and supply curves are shown in Figure 13.11.a) Draw the potential GDP (LAS) curve, and label it LAS.Both demand-side and supply-side economists in Copland have been
6. (LO 1, 2) Figure 13.10 shows the aggregate demand for the economy of Bachland. Its potential GDP (LAS) is $350.According to neoclassical theory:a) If the price level is 110, is the economy of Bachland currently in equilibrium? If not, what might happen?b) If, instead, the economy of Bachland
5. (LO 1) Table 13.2 shows the savings and investment functions for the economy of Brittenia.a) What is the equilibrium rate of interest and the amount of loanable funds?Rate of interest:Loanable funds:b) Suppose that there is an increase of $150 billion in investment. Complete column 3 in Table
4. (LO 3) Figure 13.9 shows the economy of Straussland is in equilibrium and suffering from stagflation.a) What are the present values of GDP and the price index?GDP: $ (billions) Price index:b) By how much must aggregate supply change to get the economy to full-employment
Suppose that, because of uncertainty in the economy, employers cut back on hirings with the result that the demand for labour falls by 0.75 (million) workers.a) Draw the new labour demand curve on Figure 13.8, labelled D2.b) If the wage rate does not change, how much unemployment would there be in
3. (LO 1) Figure 13.8 shows the labour market for Lumberland.
2. (LO 3) Figure 13.7 illustrates the economy of Ukatria, which is in equilibrium.a) What are the present levels of real GDP and price?GDP: Price level:b) By how much must aggregate demand increase to return the economy to full employment?c) If aggregate demand is increased by the amount in (b),
1. (LO 1) Figure 13.6 shows the savings and investment of loanable funds for the highly classical economy of Glucklanda) What is the equilibrium rate of interest in Gluckland?b) According to the graph, what rate of interest would induce the people of Gluckland to save $100 billion?c) According to
10. What three arguments did neoclassicists present as to why austerity programs are better than stimulative programs?
9. Why were most of the stimulus efforts by governments in the 2008–2010 recession focused on fiscal policy rather than on monetary policy?
8. What were the major causes of the 2008–2010 financial crisis?
7. If fiscal and monetary policy are used in tandem to address a recessionary gap, which of the two is made more effective? Why is this?
6. Describe what will happen to real GDP, the unemployment rate and the price level as a result of a massive increase in military spending.
5. According to Keynesian theory, will an increase in aggregate demand cause an increase in real GDP, nominal GDP, or both?
4. Explain why Keynes felt that the level of savings is not affected greatly by changes in interest rates.
3. The accompanying table shows the labour demand and supply in a hypothetical economy.a) What is the equilibrium wage rate, and how many workers would be employed?b) Suppose that the wage rate increases to $8.50. How many workers are employed? How many are unemployed?c) How many of the unemployed
2. According to neoclassical economists, what two things could cause a decrease in interest rates?
1. Why did neoclassical economists feel that the aggregate supply curve is vertical at the full-employment level of GDP?
LO5 Explain the cause of the 2008–2010 financial crisis, its economic consequences, and suggested remedies.
LO4 Recount the significant economic changes that occurred in Canada and around the world at the end of the twentieth century.
LO3 Describe the evolution of the welfare state and the rise of supply-side economics.
LO2 Describe how Keynesian economics challenged accepted beliefs about curing economic depression and maintaining prosperity.
LO1 Explain why neoclassicists believe the economy will automatically achieve full-employment equilibrium.
10. (LO 5) Are the prices of products in different countries that use a common currency (like Europe) the same or different? Explain your answer.
9. (LO 4) According to supply-siders, a reduction in tax rates will increase work, saving, and investment. Explain why.
8. (LO 4) What are the causes of stagflation? How can stagflation be cured?
7. (LO 6) Why will deflation lead to a drop in consumer spending and investment?
6. (LO 3) What is the Phillips curve?
5. (LO 1, 2) Using AD/AS curves, in Figure 12.19 illustrate a small (in A), a larger (in B), and a very large (in C) increase in the price level, resulting from expansionary fiscal (or monetary) policy
4. (LO 5) Assume that Figure 12.18 refers to the Japanese economy in the 1990s. Describe in words what actually occurred during those years.
3. (LO 2) Name two important benefits of fixed exchange rates.Intermediate (Problems 4–7)
2. (LO 2) If the money supply increases, what effect will it have on the following variables?Interest rate: Investment:Exchange rate: Net exports:
1. (LO 1, 2, 3, 4, 6) Match each item in the left-hand column with a related idea or event in the right-hand column by writing a letter in each blank.A. Bubble bursts 1. Keynesians B. Demand 2. OPEC-induced management oil price increases C. Tax cuts as a 3. Phillips curve stimulus to aggregate
Table 12.5C shows the relationship between the exchange rate and net exports in Grassland.b) If the money supply is 160, what are the values of the interest rate, the exchange rate, investment spending, and net exports in Grassland?Interest rate:Exchange rate:Investment spending: $Net exports:c) If
(LO 1,2,3) Suppose that the economy of Basel, as shown below, was in equilibrium in 2013. (Calculate answers, where necessary, to one decimal place.)In 2014, Basel’s government uses expansionary policy and is able to increase AD by $400.a) Draw AD2 on Figure 12.16.b) Suppose that the natural rate
Table 12.5C shows the relationship between the exchange rate and net exports in Grassland.b) If the money supply is 160, what are the values of the interest rate, the exchange rate, investment spending, and net exports in Grassland?Interest rate:Exchange rate:Investment spending: $Net exports:c) If
10. (LO 5) Tables 12.5A, B, and C relate to the economy of Grassland. Table 12.5A shows the money market.a) Fill in the total demand for money.
9. (LO 3) The data in Table 12.4 are for the economy of Hyaku.a) Given that the labour force remained a constant 120 million, calculate the unemployment and inflation rates for each of the years 2011–2015 in Table 12.14.b) From the data collected, draw a Phillips curve in Figure 12.15.
8. (LO, 1, 4) Figure 12.14 shows the economy of Parryland.a) Assume that a supply-side economist in Parryland advocates a big reduction in taxes to return the economy to full employment equilibrium GDP. What GDP and price levels does she expect if this policy is carried out?GDP : Price index:b)
7. (LO 1, 2) Given Figure 12.13, suppose that aggregate demand increases by 60.a) How much will GDP increase?Assume that the transactions demand for money in Etrusca. increases by 10 percent of the increase in GDP.b) Draw in the new MD2 on Figure 12.13B.c) What is the new equilibrium interest
6. (LO 1, 2) Figure 12.12 shows the aggregate demand and supply for the economy of Etrusca.a) Draw AD2 on Figure 12.12 assuming an increase in aggregate demand of 120.b) What is the new level of equilibrium GDP?c) What is the new equilibrium price level?d) How much is the reduction in GDP due to
5. (LO 2)a) Suppose that GDP in Rutland is $400 billion and the government increases spending by $16 billion. If the multiplier equals 3, what is the new level of GDP?b) Suppose that, as a result of the increase in GDP, the price level in Newland also rises, causing the demand for money to increase
Suppose the economy of Haydn is in equilibrium and experiencing a recessionary gap of $60 and inflation of 1 percent.a) What are the price index, equilibrium GDP, potential GDP, and unemployment rate?Price index:Equilibrium GDP:Potential GDP:Unemployment rate:b) In the following year, AD increases
4. (LO 1, 3) The data in Table 12.3 show Haydn’s aggregate demand and aggregate supply. In this economy, the natural rate of unemployment is 6 percent, and for each $10 of recessionary gap, cyclical unemployment is 1 percent.
3. (LO 1, 2) Suppose that GDP in Newland is $600 billion and government increases spending by $20 billion.a) If the multiplier equals 4, what is the new level of GDP?b) Suppose that as a result of the increase in GDP the price level in Newland also rises, causing the demand for money to increase by
2. (LO 2) The nominal GDP of Etruria is $1500 billion. Next year, the growth of nominal GDP is expected to be 2.4 percent. If the transactions demand in Etruria is 10 percent of nominal GDP, by how much must the money supply be increased in order to avoid crowding out?
1. (LO 1) In the queendom of Frankland, GDP is currently$500 million. Production in Frankland is unaffected by changes in tax rates until the rate hits 35 percent.Thereafter, for each 5 percent increase in the tax rate, GDP drops by $40 million.a) Complete Table 12.2 for the government of
7. What is the difference between stagflation and deflation? What is similar under both of these circumstances?
6. Name two major benefits of fixed exchange rates.
5. Supply-side economists say that a cut in tax rates will lead to an increase in real GDP. Keynesians agree with this, but for different reasons. In what ways do they differ?
4. Shown here are several different average tax rates (ATR)associated with various levels of GDP. Calculate the total tax revenue at each level of GDP, and indicate the tax rate that would maximize government’s tax revenue.
3. The following data are for the very volatile economy of Mobile. Given that the labour force remained a constant 320 million, calculate the unemployment and inflation rates for each of the years 2011–2015. From the data collected, draw a Phillips curve.Year Price Index Unemployment(in
2. Given the graphs in question 1 for Newland, should its central bank increase or decrease the money supply to avoid crowding out? How much?
1.a) Suppose that GDP in Newland is $800 billion and government increases spending by $25 billion. If the multiplier equals 4, what is the new level of GDP?b) Suppose that as a result of the increase in GDP the price level in Newland also rises, causing the demand for money to increase by $40
LO6 Explain why economists are concerned about the possibility of deflation.
LO5 Show that Canada has been successful in maintaining the internal but not the external value of the Canadian dollar and why some people call for a fixed exchange rate.
LO4 Describe what is meant by the term supply-side economics.
LO3 Explain the trade-off between unemployment and inflation levels implied by the Phillips curve.
LO2 Explain how the effectiveness of monetary policy is enhanced under a flexible exchange rate.
LO1 Describe the impact of a change in interest rates and exchange rates on the effectiveness of fiscal policy.
12. (LO 1) Explain purchasing power parity theory.
11. (LO 4) Explain why a country with a fixed exchange rate loses control over its money supply as an effective policy tool.
10. (LO 3) An increase in the demand for Canadian products will cause the Canadian dollar to appreciate. Yet an appreciation of the dollar causes the demand for Canadian products to fall. How can you reconcile these two statements?
9. (LO 4) Contrast flexible exchange rate and fixed exchange rate.Advanced (Problems 10–12)
8. (LO 2) What happens to the effective price of Canadian products if the Canadian dollar appreciates? What happens to the volume of Canadian exports?
7. (LO 3) Assume that the demand for the Canadian dollar increases because of a rising GDP level in the United States.What will happen to the value of the Canadian exchange rate, Canada’s GDP, and the unemployment rate in Canada?Exchange rate:GDP:Unemployment rate:
6. (LO 5) A country that experiences a capital account surplus for many years will, eventually, experience many years of current account deficits. Explain.
5. (LO 2) What is arbitrage?4
4. (LO 2) Where does the supply of Canadian dollars on foreign exchange markets come from?
3. (LO 3) What effect will the following events have on the value of the Canadian dollar versus the Mexican peso?a) Canadian interest rates rise significantly above Mexican rates.b) An especially bad winter causes tens of thousands of Canadians to escape to the Mexican Riviera for vacations.c) A
2. (LO 2) Refer to the following list, and identify who would be hurt or who would benefit from an appreciation of the Canadian dollar.a) an Italian father spending the summer with his daughter in Calgaryb) a Canadian research scientist living in Washington, D.C., who is paid a monthly salary in
v1. (LO 2) Refer to the following list, and explain who will be buying Canadian dollars and who will be selling.a) a Canadian businesswoman visiting Japanb) a Russian tourist visiting Cape Bretonc) an American corporation building a new plant in Saskatoond) a Canadian bank expanding its operations
(LO 2, 3, 4, 5) Suppose that the international demand and supply of Canadian dollars (in billions) is as shown in Table 11.10. This represents the total market for Canadian dollars (that is, no transfers, speculation, or arbitrage).a) Calculate and fill in the total demand and total supply columns
10. Fill in the blanks in the hypothetical balance of payments statement in Table 11.9.
9. (LO 1) Table 11.8 shows some actual data concerning exchange rates and the prices of Big Macs in the summer of 2012.a) Assuming purchasing power parity, what should the price of Big Macs be in the three countries?Switzerland = SF Singapore = $ Singapore Hong Kong = $ Hong Kongb) Compared with
8. (LO 3) Suppose that a certain type of SUV costs$32 000 in Canada, but sells for 18 000 British pounds in the United Kingdom. Suppose that the nominal exchange rate is one Canadian dollar = 0.45 British pounds.a) What is the value of the real exchange rate?b) In which country is the SUV cheaper?
7. (LO 1) Assume that you buy a 1-year, 200 000-peso Philippine bond that pays 9 percent when the exchange rate is 1 Canadian dollar for 40 pesos. If, after one year, the peso falls to 1 Canadian dollar equals 45 pesos, how much money in Canadian dollars will you have?
6. (LO 3) The hypothetical graph in Figure 11.10 is for the Canadian dollar with a fixed exchange rate of 1.2.a) What is the equilibrium quantity of Canadian dollars traded?b) If the supply of Canadian dollars increases by 200, draw in the new supply curve and label it S2.c) What is the new
5. (LO 3) The graph in Figure 11.9 illustrates hypothetical supply and demand curves for the Canadian dollar. Use the graph to answer the questions below.a) What is the quantity of dollars exchanged, given D1 and S1?b) What is this quantity worth in U.S. dollars?c) If the demand for the dollar
4. (LO 1) Karen operates a small foreign currency exchange business. She begins each day with three boxes of cash.Each box contains 10 000 units of Canadian currency and 10 000 units of another currency. Table 11.7 shows Karen’s holdings of each currency at the end of a day’s business.TABLE
3. (LO 5) Given the data in Table 11.6 (all figures are in billions of dollars),a) What is the value of the balance of trade?b) What is the balance on the current account?c) What is the balance on the capital account?d) Is there a balance of payments surplus or deficit?How much?
2. (LO 1) Fill in the blanks.a) If one Canadian dollar equals $0.75 American, then one U.S. dollar equals Canadian dollars.b) If one Canadian dollar equals 80 yen, then one yen equals Canadian dollars.c) If one euro equals 1.6 Canadian dollars, then one Canadian dollar equals euros.
1. (LO 1) If a Canadian hockey stick has a price of $42, how much does it cost ina) Europe, assuming an exchange rate of 1 euro = $1.40 Canadian?b) the United Kingdom, assuming an exchange rate of 1 pound = $2.10 Canadian?
6. Assume that the demand for the Canadian dollar increases. Describe the adjustment mechanism of this change, given (a) flexible exchange rates and (b) fixed exchange rates.
5. Assume that the demand for Canadian exports decreases.What would be the effect ona) the value of the Canadian dollarb) the level of aggregate demandc) the level of GDPd) the price level
4. Which of the following factors would cause the Canadian dollar to appreciate?a) a big increase in the popularity of wood-frame homes in Chinab) a drop in Canadian interest ratesc) a big increase in Canadian incomesd) significantly higher inflation rates in the United States than in Canadae) a
3. Imagine that the Canadian dollar appreciates.a) What would happen to Canadian imports?b) What would happen to Canadian exports?
2. Given the events described below, indicate whether the demand for the Canadian dollar would appreciate, depreciate, or not change.a) Canadian exports rise.b) Vancouver hosts the Winter Olympics in 2010.c) IBM, ITT, and the provincial government announce the construction of a $2 billion data
1.a) Assume that a Swedish krona is worth $0.20 Canadian.How much is a Canadian dollar worth in kronor?b) Assume that one Canadian dollar equals 70 Japanese yen.How much is a yen worth in Canadian dollars?
LO5 Explain the meaning of a balance of payments surplus and deficit.
LO4 Compare flexible and fixed exchange rate systems.
LO3 Explain why the value of the Canadian dollar fluctuates.
LO2 Identify who wants to buy and sell Canadian dollars in foreign exchange markets.
LO1 Calculate the value of the Canadian dollar in terms of other currencies and explain the purchasing power parity theory.
10. (LO 1, 2) Explain the theory of comparative advantage. How does it differ from the theory of absolute advantage?
9. (LO 2, 5) If comparative cost is the basis for trade, why are the developing countries (which have very low wage rates)not the world’s greatest trading nations?
8. (LO 2) If Japan can produce kumquats cheaper than can the Philippines, why would it import them from the Philippines?
7. (LO 1) Which country, the U.S. or Canada, exports more as a percentage of its GDP? Why?
6. (LO 3) List three arguments against free trade.
5. (LO 1) How are trade and specialization related?
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