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macroeconomics principles
Macroeconomics Private And Public Choice 13th Edition James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson - Solutions
Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run?Are the long-run implications different? Explain.*7. What are some of the practical problems
What is the index of leading indicators? Why is it useful to macro policy makers?*5. How would you expect the actual unemployment rate to compare with the natural unemployment rate in the following cases?a. Prices are stable and have been stable for the last four years.b. The current inflation rate
State in your own words the adaptive-expectations hypothesis. How does the theory of rational expectations differ from that of adaptive expectations?
The chair of the Council of Economic Advisers has requested that you write a short paper explaining how economic policy can be used to stabilize the economy and achieve a high level of economic growth during the next five years. Be sure to make specific proposals. Indicate why your recommendations
Did monetary policy contribute to the economic crisis of 2008? Why or why not? How did monetary policy makers respond to this crisis? Has their response created an environment for future stability and growth? Explain.
a. What is the quantity theory of money?b. Is the quantity theory of money valid?c. Does it explain the impact of shifts in monetary policy on the economy? Why or why not?
What is the Taylor Rule? Why is the Taylor Rule important? What did the Taylor Rule indicate about monetary policy during 2002–2006?
Political officials often call on the monetary authorities to expand the money supply more rapidly so that interest rates can be reduced. Will expansion-ary monetary policy reduce interest rates in the short run? Will it do so in the long run?*10. Many economists believe that there is a “long and
Did monetary policy help promote economic stability during 1985 through 1999? Has monetary policy exerted a stabilizing impact on the U.S. economy during the past decade? Explain your response to these questions.
If the Fed shifts to a more restrictive monetary policy, it will generally sell some of its current holdings of bonds in the open market. How will this action influence each of the following? Briefly explain each of your answers.a. the reserves available to banksb. real interest ratesc. household
How rapidly has the money supply (M1) grown during the past twelve months? How rapidly has M2 grown? Do you think the monetary authorities should increase or decrease the growth rate of the money supply during the next year? Why? (The data necessary to answer this question are available at the Web
What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.
Historically, shifts toward a more expansionary monetary policy have often been associated with increases in real output. Is this surprising? Why or why not? Would a more expansionary policy increase the long-term growth rate of real GDP?Why or why not?
What is the opportunity cost of the following?a. obtaining a $100,000 houseb. holding the house for one yearc. obtaining $1,000d. holding the $1,000 in your checking account for one year
How would each of the following influence the quantity of money you would want to hold?a. an increase in the interest rate on checking depositsb. an increase in the expected rate of inflationc. an increase in incomed. an increase in the differential interest rate between money market mutual funds
Why do people hold money? How will an increase in the interest rate influence the amount of money that people will want to hold?*
Suppose that the reserve requirement is 10 percent and the balance sheet of the People’s National Bank looks like the accompanying example.a. What are the required reserves of People’s National Bank? Does the bank have any excess reserves?b. What is the maximum loan that the bank could
How would the following influence the growth rates of the M1 and M2 money supply figures over time?a. an increase in the quantity of U.S. currency held overseasb. a shift of funds from interest-earning checking deposits to money market mutual fundsc. a reduction in the holdings of currency by the
Why is the actual money deposit multiplier generally less than the potential multiplier?
What is the federal funds interest rate? If the Fed wants to use open market operations to lower the federal funds rate, what action should it take?Explain.*12. If the Fed wants to expand the money supply, why is it more likely to do so by purchasing bonds and other financial assets rather than by
What’s wrong with this way of thinking? “When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy, it waters down the value of paper money already in circulation. Thus, it takes more money to buy
The excess reserves of the banking system were quite large during mid-year 2009. If the banks use these excess reserves to extend additional loans, what will happen to the money supply? Explain. Is this a potential problem? Why or why not?*8. How will the following actions affect the money
Why can banks continue to hold reserves that are only a fraction of the demand and saving deposits of their customers? Is your money safe in a bank?Why or why not?*6. Suppose you withdraw $100 from your checking account. How does this transaction affect (a) the supply of money, (b) the reserves of
“People are poor because they don’t have very much money. Yet, central bankers keep money scarce. If people had more money, poverty could be eliminated.” Evaluate this view. Do you think it reflects sound economics?
What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills are not?*3. What makes money valuable? Does money perform an economic service? Explain. Could money
The American Wind Energy Association argues for additional government support because windgenerated electricity creates more employment per kilowatt-hour than the alternatives: 27 percent more jobs than coal and 66 percent more than natural gas. Is this a sound economic argument for increased use
If there is a shift to a more expansionary fiscal policy in order to stimulate recovery from a recession, does it make any difference whether tax rates are cut or government expenditures increased? Explain your answer.*
If the impact on tax revenues is the same, does it make any difference whether the government cuts taxes by (a) reducing marginal tax rates or(b) increasing the personal exemption allowance?Explain.
Marginal tax rates were cut substantially during the 1980s, and although rates were increased in the early 1990s, the marginal rates applicable in the highest income brackets were still well below the top rates of the 1960s and 1970s. How did the lower rates of the 1980s and 1990s affect the share
During the 1990s, the federal budget moved from a deficit to a surplus. What factors accounted for this change? Were the budget surpluses of the late 1990s good for the economy? Would it have been better to have reduced taxes and balanced the budget during 1999–2000? Why or why not?
How do persistently large budget deficits affect capital formation and the long-run rate of economic growth? Do the proponents of the Keynesian, crowding-out, and new classical theories agree on the answer to this question? Discuss.
Does fiscal policy have a strong impact on aggregate demand? Did the large budget deficits of the last decade lead to excessive aggregate demand?Did the budget surpluses of the late 1990s restrain aggregate demand? Discuss.*
If the government becomes more heavily involved in subsidizing some businesses and sectors of the economy while levying taxes on others, how will this influence the quantity of rent seeking? How will this affect long-term growth? Explain your response.
If uncertainty about the future causes households to increase their saving and reduce their consumption spending during a recession, how will this affect the economy? Explain. If households save little and spend most of their income on current consumption, how will this affect the economy? Explain.
Are changes in discretionary fiscal policy likely to be instituted in a manner that will reduce the ups and downs of the business cycle? Why or why not?
Outline the supply-side view of fiscal policy. How does this view differ from the various demand-side theories? Would a supply-side economist be more likely to favor a $500 tax credit or an equivalent reduction in marginal tax rates? Why?
Will increases in government spending financed by borrowing help promote a strong recovery from a severe recession? Why or why not?
Suppose that the government provides each taxpayer with a $1,000 tax rebate financed by issuing additional Treasury bonds. Outline alternative views that predict how this fiscal action will influence interest rates, aggregate demand, output, and employment.
What is the crowding-out effect? How does it modify the implications of the basic Keynesian model with regard to fiscal policy? How does the new classical theory of fiscal policy differ from the crowding-out model?
Suppose that you are a member of the Council of Economic Advisers. The president has asked you to prepare a statement on the question, “What is the proper fiscal policy for the next twelve months?”Prepare such a statement, indicating (a) the current state of the economy (that is, the
When output and employment slowed in early 2008, the Bush Administration and the Democratic Congress passed legislation sending households a check for $600 for each adult (and $300 per child).These checks were financed by borrowing. Would a Keynesian favor this action? Why or why not?
“An increase in aggregate demand will tend to increase real output by a larger amount when unemployment is widespread than when the economy is operating at or near full employment.” Is this statement true? Explain.*10. “If we set aside our reluctance to use fiscal policy as a stabilization
What are automatic stabilizers? Explain their major advantage.
Are discretionary changes in fiscal policy likely to be instituted in a manner that will help smooth the ups and downs of the business cycle? Why or why not?*
According to the Keynesian view, what fiscal policy actions should be taken if the unemployment rate is high and current GDP is well below potential output?
From a stabilization standpoint, why is proper timing of a change in fiscal policy important? Is it easy to time fiscal policy changes properly? Why or why not?*
What is a budget deficit? How are budget deficits financed? Why do Keynesians believe that budget deficits will increase aggregate demand?
What is the multiplier principle? What determines the size of the multiplier? Does the multiplier make it more or less difficult to stabilize the economy?Explain.
What do Keynesians think cause fluctuations in output? What must be done to maintain fullemployment capacity?*
What determines the equilibrium rate of output in the Keynesian model? Why did Keynes think the Great Depression lasted so long and the unemployment rate remained so high throughout the 1930s?
Consider an economy with the following aggregate demand (AD) and aggregate supply (AS) schedules.These schedules reflect the fact that, prior to the period we’re examining, decision makers entered into contracts and made choices anticipating that the price level would be P105.a. Indicate the
Construct the AD, SRAS, and LRAS curves for an economy experiencing (a) full employment, (b) an economic boom, and (c) a recession.
How will (a) an unexpected 3 percent fall in the price level in the goods and services market differ from (b) 1 percent inflation when 4 percent inflation had been expected? What impact would (a) and(b) have on the real price of resources, profit margins, output, and employment? Explain.*10.
During 2007, there was a substantial reduction in housing prices, and the world price of crude oil rose sharply. How did these two changes influence aggregate demand and aggregate supply in the United States? Use the AD–AS model to indicate the expected impact of these changes on output and the
What is the difference between an anticipated and an unanticipated increase in aggregate demand?Provide an example of each. Which is more likely to result in a temporary spurt in the growth of real output?*6. Assume that both union and management representatives agree to wage increases because they
When an economy dips into a recession, consumers will often be relatively pessimistic about the future for an extended period of time. How will this pessimism affect the speed and strength of the recovery? Feel free to use the data of Exhibit 2 in your response to this question.
What is the difference between the production possibilities constraint and the long-run aggregate supply curve? How would changes in conditions that move the production possibilities curve affect the LRAS curve? How have improvements in computer technology affected production possibilities and the
Consider an economy with the following aggregate demand (AD) and short-run aggregate supply(SRAS) schedules. Decision makers have previously made decisions anticipating that the price level during the current period will be P105.a. Indicate the quantity of GDP that will be produced during the
How is a nation’s trade balance related to its net inflow of foreign capital? If an economy provides more attractive investment opportunities than are available in other countries, how will this tend to influence its trade balance?*16. The following chart indicates the aggregate demand(AD) and
When the price of a specific product increases, individual firms can generally expand their output by a larger amount in the long run than in the short run. For the economy as a whole, however, an unexpected increase in the price level leads to a larger expansion in output in the short run than in
How will an increase in the inflation rate affect(a) the money rate of interest and (b) the real rate of interest? Explain. Does inflation transfer wealth from lenders to borrowers? Why or why not?*12. If a bond pays $1,000 per year in perpetuity (each year in the future), what will the market
Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If the inflation rate in recent years has been steady at 3 percent annually, what is the estimated real rate of interest? If the inflation rate during the next five years remains steady at 3 percent,
Explain why it’s possible to temporarily achieve output levels beyond the economy’s long-run potential. Why can’t the high rates of output be sustained?*8. If the price level in the current period is higher than buyers and sellers anticipated, what will tend to happen to real wages and the
What is the current money interest rate on ten-year government bonds? Is this also the real interest rate? Why or why not?*6. If the real interest rate in the loanable funds market increases, what will happen to the net inflow of foreign capital? Explain.
Why does the short-run aggregate supply curve slope upward to the right? If the prices of both(a) resources and (b) goods and services increased proportionally (by the same percentage), would business firms be willing to expand output? Why or why not?*4. Suppose prices had been rising at 3 percent
What major factors influence our ability to produce goods and services in the long run? Why is the long-run aggregate supply curve vertical?
In your own words, explain why aggregate demand is inversely related to the price level. Why does the explanation for the inverse relationship between price and quantity demanded for the aggregate demand curve differ from that of a demand curve for a specific good?
The following Table B presents the 2008 population, employment, and unemployment data among persons aged fifteen to sixty-four for several countries.a. Calculate the number of people in the labor force for each country, and put the figures in the blanks provided.b. Calculate the labor force
Data for nominal GDP and the GDP deflator(2000 100) in 2007 and 2008 for six major industrial countries are presented in the accompanying Table A.a. Use the data provided to calculate the 2007 and 2008 real GDP of each country measured in 2000 prices. Place the figures in the blanks provided.b. Use
What will be the inflation rate during 2010?*13. “My money wage rose by 6 percent last year, but inflation completely erased these gains. How can I get ahead when inflation continues to wipe out my increases in earnings?” What’s wrong with this way of thinking?
Suppose that the consumer price index at year-end 2009 was 150 and by year-end 2010 had risen to
“When employees are dismissed from employment for reasons other than poor performance,unemployment benefits should replace 100 percent of their prior earnings while they are searching for a new job.” Evaluate this statement. Do you think the idea expressed is a good one? Would it influence how
What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?*10. The nominal salary paid to the president of the United States along with data for the consumer price index (CPI) are given
Is the natural rate of unemployment fixed? Why or why not? How are full employment and the natural rate of unemployment related? Is the actual rate of unemployment currently greater or less than the natural rate of unemployment? Why?*6. How are the following related to one another?a. the actual
What is full employment? When full employment is present, will the rate of unemployment be zero?Explain.
List the major phases of the business cycle and indicate how real GDP, employment, and unemployment change during these phases. Are the time periods of business cycles and the duration of the various phases relatively similar and therefore highly predictable?*2. Explain why even an efficiently
The accompanying chart presents 2008 data from the national-income accounts of the United Statesa. Indicate the various components of GDP when it is derived by the expenditure approach.Calculate GDP using the expenditure approach.b. Indicate the various components of GDP when it is derived by the
GDP does not count productive services, such as child care, food preparation, cleaning, and laundry, provided within the household. Why are these things excluded? Is GDP a sexist measure? Does it understate the productive contributions of women relative to men? Discuss.*14. Indicate how each of the
What is the difference between the consumer price index (CPI) and the GDP deflator? Which would be better to use if you want to measure whether your hourly earnings this year were higher than they were last year? Why?*11. Indicate whether the following statements are true or false:a. “For the
The receipts and year of release of the four movies with the largest nominal box office revenues, along with the CPI data of each year are presented below. Assuming that the receipts for each of the movies were derived during their year of release, convert the receipts for each to real dollars for
What are price indexes designed to measure?Outline how they are constructed. When GDP and other income figures are compared across time periods, explain why it is important to adjust for changes in the general level of prices.*7. In 1982, the average hourly earnings of private nonagricultural
Suppose a group of British investors finances the construction of a plant to manufacture skateboards in St. Louis, Missouri. How will the construction of the plant affect GDP? Suppose the plant generates$100,000 in corporate profits this year. Will these profits contribute to GDP? Why or why
If nominal GDP increased by 6 percent during a year, while the GDP deflator increased by 4 percent, by how much did real GDP change during the year?*3. A large furniture retailer sells $100,000 of household furnishings from inventories built up last year.How does this sale influence GDP? How are
If a senator trades his or her vote on an issue for a$10,000 payment, would you consider this corruption? If a senator votes a certain way in “exchange”for a $10,000 contribution to his political campaign, would you consider this corruption? Is there a major difference between the two?
Suppose that in the election campaign of 2010, incumbent Representative Earmark is shown to have proposed and helped to pass twenty programs in her previous term, all of which were funded by the federal government, but delivered benefits only in her district—benefits that were estimated to be
If the power of special interests were reduced, for example, through the adoption of a supra-majority voting rule, would economic efficiency improve?How would contributions to political campaigns be affected? Do you think politicians are very interested in curtailing the power of special interests?
“The United States is rich because it is a political democracy where the people decide what policies will be followed.” Is this statement true or false?Discuss.
The United States imposes highly restrictive sugar import quotas that result in a domestic price that is generally two or three times the world price.The quotas benefit sugar growers at the expense of consumers. Given that there are far more sugar consumers than growers, why aren’t the quotas
Why does representative democracy often tax some people in order to provide benefits to others?When governments become heavily involved in taxtransfer activities, how will this involvement affect economic efficiency?*
What percentage of government income transfer payments go to the poor? Do you think that the political process in general works to the advantage of the poor? Why or why not?
“Since government-operated firms do not have to make a profit, they can usually produce at a lower cost and charge a lower price than privately owned enterprises.” Evaluate this view.
What’s wrong with this way of thinking? “Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries such as airlines, railroads, and trucking will charge excessive prices; products will be
What is the shortsightedness effect? How does the shortsightedness effect influence the efficiency of public-sector action?*
“When an economic function is turned over to the government, social cooperation replaces personal self-interest.” Is this statement true? Why or why not?
If a project is efficient (if its total benefits exceed its total costs), would it be possible to allocate the cost of the project in a manner that would provide net benefits to each voter? Why or why not? Explain. Will efficient projects necessarily be favored by a majority of voters? Explain.*
“The average person is more likely to make an informed choice when he or she purchases a personal computer than when he or she votes for a congressional candidate.” Evaluate this statement.
“If there are problems with markets, government will generally be able to intervene and correct the situation.” Is this statement true or false? Explain your response.*
“The government can afford to take a long view when it needs to, while a private firm has a shortterm outlook. Corporate officers, for example, typically care about the next 3 to 6 months, not the next 50 to 100 years. Government, not private firms, should own things like forests, which take
Are voters likely to be well informed on issues and the positions of candidates? Why or why not?*
Apply the economic efficiency criterion to the role of government. When would a government intervention be considered economically efficient?When would a government intervention be considered economically inefficient?
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