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macroeconomics principles

Principles of Macroeconomics 12th edition Karl E. Case, Ray C. Fair, Sharon E. Oster - Solutions

The economy of Mayberry is currently in equilibrium at point A on the graph. Prince Barney of Mayberry has decided that he wants the economy to grow and has ordered the Royal Central Bank of Mayberry to print more currency so banks can expand their loans to stimulate growth. Explain what will most
In the tiny island nation of Bongo, the nation’s wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last year, Bongo experienced an inflation rate of 25 percent, and housing prices and stock prices each
Illustrate each of the following situations with a graph showing AS and AD curves, and explain what happens to the equilibrium values of the price level and aggregate output:a. A decrease in G with the money supply held constant by the Fedb. A decrease in the price of oil with no change in
On November 9, 2011, the European Central Bank acted to decrease the short-term interest rate in Europe by one-fourth of a percentage point, to 1.25 percent, and additional cuts were made over the next three years, to a low rate of 0.05 percent by September 2014. The rate cuts were made because
Illustrate each of the following situations with a graph showing short-run aggregate supply:a. A decrease in the size of the labor forceb. An increase in available capitalc. An increase in productivity as a result of a technological changed. A decrease in the price of oil
Suppose on your 21st birthday, your eccentric grandmother invites you to her house, takes you into her library, removes a black velvet painting of Elvis Presley from the wall, opens a hidden safe where she removes 50 crisp $100 bills, and hands them to you as a present, claiming you are her
Suppose Ginger deposits $12,000 in cash into her checking account at the Bank of Skidoo. The Bank of Skidoo has no excess reserves and is subject to a 4 percent required reserve ratio.a. Show this transaction in a T-account for the Bank of Skidoo.b. Assume the Bank of Skidoo makes the maximum loan
You are given this account for a bank:Assets LiabilitiesReserves $1,200 $8,000 DepositsLoans 6,800The required reserve ratio is 10 percent.a. How much is the bank required to hold as reserves given its deposits of $8,000?b. How much are its excess reserves?c. By how much can the bank increase its
Although the official currency of the United States is the U.S. dollar, some towns and cities actually issue their own money. In these communities, consumers are able to buy local currency at a discounted rate using U.S. dollars (for example, a consumer may spend 95 U.S. cents to buy one local
What are the three traditional tools the Fed can use to control the interest rate via changing the money supply? Briefly describe how the Fed can use each of these tools to either increase or decrease the money supply.
When the Fed adds new reserves to the system, some of these new reserves find their way out of the country into foreign banks or foreign investment funds. In addition, some portion of the new reserves ends up in people’s pockets and under their mattresses instead of in bank vaults. These
After suffering two years of staggering hyperinflation, the African nation of Zimbabwe officially abandoned its currency, the Zimbabwean dollar, in April 2009 and made the U.S. dollar its official currency. Why would anyone in Zimbabwe be willing to accept U.S. dollars in exchange for goods and
Suppose in the Republic of Sasquatch that the regulation of banking rested with the Sasquatchian Congress, including the determination of the reserve ratio. The Central Bank of Sasquatch is charged with regulating the money supply by using open market operations. In September 2015, the money supply
Do you agree or disagree with each of the following statements?Explain your answers.a. When the Treasury of the United States issues bonds and sells them to the public to finance the deficit, the money supply remains unchanged because every dollar of money taken in by the Treasury goes right back
Why is M2 sometimes a more stable measure of money than M1? Explain in your own words using the definitions of M1 and M2.
If the head of the Central Bank of Brazil wanted to decrease the supply of money in Brazil in 2015, which of the following would do it? Explain your answer. Increase the required reserve ratio Decrease the required reserve ratio Increase the discount rate Decrease the discount
Normally, people from the United States and from around the world think of highly rated corporate or government bonds as a safe place to put their savings relative to common stocks. Because the stock market had performed so poorly during the recession and because many foreigners turned to the
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1165.7 billion in currency, $3.5 billion in traveler’s checks, and $1,514.1 billion in checking deposits. Suppose the Fed decided to decrease the money supply by increasing the reserve requirement
As king of Medivalia, you are constantly strapped for funds to pay your army. Your chief economic wizard suggests the following plan: “When you collect your tax payments from your subjects, insist on being paid in gold coins. Take those gold coins, melt them down, and remint them with an extra 10
In 2000, the federal debt was being paid down because the federal budget was in surplus. Recall that surplus means that tax collections (T) exceed government spending (G). The surplus (T - G) was used to buy back government bonds from the public, reducing the federal debt. As we discussed in this
Explain why there is a negative relationship between the amount of money you should hold and the interest rate.
For each of the following, determine whether it is an asset or a liability on the accounting books of a bank. Explain why in each case.– Cash in the vault– Demand deposits– Savings deposits– Reserves– Loans– Deposits at the Federal Reserve
It is well known that cigarettes served as money for prisoners of war in World War II. Do an Internet search using the key word cigarettes and write a description of how this came to be and how it worked.
The following table gives three key U.S. interest rates in 1980 and again in 1993:Provide an explanation for the extreme differences that you see. Specifically, comment on (1) the fact that rates in 1980 were much higher than in 1993 and (2) the fact that the long-term rate was higher than the
In the Republic of Doppelganger, the currency is the ditto. During 2015, the Treasury of Doppelganger sold bonds to finance the Doppelganger budget deficit. In all, the Treasury sold 80,000 ten-year bonds with a face value of 1,000 dittos each. The total deficit was 80 million dittos. The
The Economics in Practice states that the capital value of Professor Serebryakov’s estate is not the value for which he could sell the estate if the interest rate on “suitable” securities is higher than the average yield from the estate. What would happen to:a. the value of the estate
What if, at a low level of interest rates, the money demand curve became nearly horizontal, as in the following graph. That is, with interest rates so low, the public would not find it attractive to hold bonds; thus, money demand would be very high. Many argue that this was the position of the U.S.
The United States is divided into 12 Federal Reserve districts, each with a District Bank. These Districts and the locations for the District Bank in each region are shown in Figure 10.4. Do some research to find out why the districts are divided as they are, why the District Banks are located in
For each of the following sets of data, determine if output will need to increase, decrease, or remain the same to move the economy to equilibrium:a. Y = 1,000; C = 100 + 0.75(Y- T); I = 200; G = 150; T = 100b. Y = 5,000; C = 200 + 0.9(Y - T); I = 500; G = 400; T = 300c. Y = 2,000; C = 150 + 0.5(Y
For the data in the following table, the consumption function is C = 800 + 0.6 (Y €“ T). Fill in the columns in the table and identify the equilibrium output. Planned Aggregate Expenditure Planned Investment Unplanned Inventory Disposable Consumption Net Тахes Government Purchases
What is the balanced-budget multiplier? Explain why the balanced-budget multiplier is equal to 1.
Evaluate the following statement: For an economy to be in equilibrium, planned investment spending plus government purchases must equal saving plus net taxes.
Answer the following:a. MPS = 0.1. What is the government spending multiplier?b. MPC = 0.6. What is the government spending multiplier?c. MPS = 0.25. What is the government spending multiplier?d. MPC = 0.5. What is the tax multiplier?e. MPS = 0.2. What is the tax multiplier?f. If the government
Some economists claim World War II ended the Great Depression of the 1930s. The war effort was financed by borrowing massive sums of money from the public. Explain how a war could end a recession. Look at recent and back issues of the Economic Report of the President or the Statistical Abstract of
A $1 increase in government spending will raise equilibrium income more than a $1 tax cut will, yet both have the same impact on the budget deficit. So if we care about the budget deficit, the best way to stimulate the economy is through increases in spending, not cuts in taxes.
Assume that in 2015, the following prevails in the Republic of Nurd:Y = $200 G = $0C = $160 T = $0S = $40I (planned) = $30Assume that households consume 80 percent of their income, they save 20 percent of their income, MPC = 0.8, and MPS = 0.2. That is, C = 0.8Yd and S = 0.2Yd.a. Is the economy of
Federal government expenditures and receipts for the simple economy of the nation of Topanga are listed in the table in the next column. The government of Topanga would like to reduce the debt-to-GDP ratio, and the Finance Minister of Topanga has proposed the following: “The best way to reduce
Suppose that the government of Ansonia is experiencing a large budget deficit with fixed government expenditures of G = 250 and fixed taxes of T = 150. Assume that consumers of Ansonia behave as described in the following consumption function:C = 300 + 0.8(Y - T)Suppose further that investment
Expert economists in the economy of Bongo estimate the following: Billion BongosReal output/income .................... 1,200Government purchases
Suppose all tax collections are fixed (instead of dependent on income) and all spending and transfer programs are fixed (in the sense that they do not depend on the state of the economy, as, for example, unemployment benefits now do). In this case, would there be any automatic stabilizers in the
You are appointed secretary of the treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year, and the budget situation is that the government will spend 10 million lavs and taxes will be 9 million lavs. The
MPS, government spending multiplier, and tax multiplier. Draw a graph showing the data for consumption spending, planned aggregate expenditures, and aggregate output. Be sure to identify the equilibrium point on your graph.
Define saving and investment. Data for the simple economy of Newt show that in 2015, saving exceeded investment and the government is running a balanced budget. What is likely to happen? What would happen if the government were running a deficit and saving were equal to investment?
You are given the following data concerning Freedonia, a legendary country:(1) Consumption function: C = 200 + 0.8Y(2) Investment function: I = 100(3) AE K C + I(4) AE = Ya. What is the marginal propensity to consume in Freedonia, and what is the marginal propensity to save?b. Graph equations (3)
This chapter argues that saving and spending behavior depend in part on wealth (accumulated savings and inheritance), but our simple model does not incorporate this effect. Consider the following model of a simple economy: C = 50 + 0.8Y + 0.1W If you assume that wealth (W) and investment (I) remain
Assume in a simple economy that the level of saving is –800 when aggregate output equals zero and that the marginal propensity to save is 0.25. Derive the saving function and the consumption function, and draw a graph showing these functions. At what level of aggregate output does the consumption
According to the Bureau of Economic Analysis, during the recession of 2008–2009, household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. All else equal, what impact would this
The following questions refer to this table:a. At each level of output, calculate saving. At each level of output, calculate unplanned investment (inventory change). What is likely to happen to aggregate output if the economy produces at each of the levels indicated? What is the equilibrium level
The Economics in Practice describes some of the difficulties that households have with regard to decisions involving tradeoffs between the present and the future. Explain briefly how the problem of global warming and the problem of adequate household saving are similar. Describe ways in which the
Use the graph to answer the questions that follow.a. What is the value of the MPC?b. What is the value of the MPS?c. What is the value of the multiplier?d. What is the amount of unplanned investment at aggregate output of 300, 900, and 1,300? 45 AE -C+1 1200 450 300 900 1,300 Aggregale output,Y
If households decide to save more, saving in the aggregate may fall. Explain this in words.
The following data are estimates for the small island nation of KaboomReal GNP (Y........................ 800 million Kaboomian dollarsPlanned investment spending) ........................ 200 millionKaboomian dollarsKaboom is a simple economy with no government, no taxes, and no imports or
Explain whether you agree or disagree with the following statement: “All else equal, businesses will generally plan more investment projects when interest rates rise, because higher interest rates mean businesses will earn more on those investments.”
Explain the difference between actual investment and planned investment. When are actual investment and planned investment equal? When is actual investment greater than planned investment? When is actual investment less than planned investment?
Briefly define the following terms and explain the relationship between MPC and MPS and the relationship between aggregate output and aggregate income.a. MPCb. MPSc. Aggregate outputd. Aggregate income
Explain the multiplier intuitively. Why is it that an increase in planned investment of $100 raises equilibrium output by more than $100? Why is the effect on equilibrium output finite? How do we know that the multiplier is 1/MPS?
In each of the following cases, classify the person as cyclically unemployed, structurally unemployed, frictionally unemployed, or not in the labor force. Explain your answers.a. Samuel quit his job as a bank teller to work full-time on his master’s degree.b. Charmaine lost her job as a customer
On average, nations in Europe pay higher unemployment benefits for longer periods of time than does the United States. How do you suppose this would impact the unemployment rates in these nations? Explain which type of unemployment you think is most directly affected by the size and duration of
Suppose the number of employed people in an economy is 312,545,372. The unemployment rate in this economy is 7.4 percent, or .074, and the labor force participation rate is 80 percent, or .80.a. What is the size of the labor force?b. How many people are unemployed?c. What is the size of the
Consider the following statements:a. Fewer people are employed in Freedonia now than at any time in the past 75 years.b. The unemployment rate in Freedonia is lower now than it has been in 75 years.Can both of those statements be true at the same time? Explain.
The CPI is 120 in year 1 and 150 in year 2. All inflation is anticipated. If the Gringotts Bank charges an interest rate of 30 percent in year 2, what is the bank’s real interest rate?
Consider the following five situations. In which situation would a borrower be best off and in which situation would a lender be best off?a. The nominal interest rate is 6 percent and the inflation rate is 3 percent.b. The nominal interest rate is 13 percent and the inflation rate is 11 percent.c.
According to the National Bureau of Economic Research (NBER), the United States experienced five recessions from 1980 to 2010. Following is the NBER’s list of the start and end dates for each of these recessions:January 1980 – July 1980July 1981 – November 1982July 1990 – March 1991March
In his 2015 State of the Union speech, President Barack Obama urged Congress to raise the federal minimum wage from $7.25 to $10.10 per hour, and stated that future minimum wage increases should be tied to the cost of living. Explain how tying the minimum wage to an index like the CPI could impact
For each of the following events, explain what is likely to happen to the labor force participation rate:a. The federal minimum wage is abolished.b. The minimum legal working age is lowered from 16 to 14.c. The economy is in the midst of a prolonged period of economic growth.d. The federal
An article in the Gotham Times states that the stock of capital and the workforce in Gotham are both increasing at an annual rate of 7 percent. The same article states that real output is growing by 11 percent. Explain if this is possible in the short run and in the long run.
The CPI is a fixed-weight index. It compares the price of a fixed bundle of goods in one year with the price of the same bundle of goods in some base year. Calculate the price of a bundle containing 50 units of good X, 125 units of good Y, and 100 units of good Z in 2013, 2014, and 2015. Convert
When an inefficient firm or a firm producing a product that people no longer want goes out of business, people are unemployed, but that is part of the normal process of economic growth and development. The unemployment is part of the natural rate and need not concern policy makers. Discuss that
What do the CPI and PPIs measure? Why do we need both of these types of price indexes? What purpose you would use each one for?
In late 2010 economists were debating whether the U.S. economy was in a recession. GDP seemed to be rising, yet the unemployment rate was stuck at close to 10 percent. In thinking about the economic distress experienced during a recession, which is the most important: high unemployment or falling
Policy makers talk about the “capacity” of the economy to grow. What specifically is meant by the “capacity” of the economy? How might capacity be measured? In what ways is capacity limited by labor constraints and by capital constraints? What are the consequences if demand in the economy
Suppose all wages, salaries, welfare benefits, and other sources of income were indexed to inflation. Would inflation still be considered a problem? Why or why not?
Evaluate the following statement: Even if the prices of a large number of goods and services in the economy increase dramatically, the real GDP for the economy can still fall, but if the prices of a large number of goods and services in the economy decrease dramatically, the real GDP for the
The following table contains nominal and real GDP data, in billions of dollars, from the U.S. Bureau of Economic Analysis for 2013 and 2014. The data is listed per quarter, and the real GDP data was calculated using 2009 as the base year. Fill in the columns for the GDP deflator and for the percent
Gorgonzola is a small island nation with a simple economy that produces only six goods: sugar cane, yo-yos, rum, peanuts, harmonicas, and peanut butter. Assume that onequarter of all the sugar cane is used to produce rum and onehalf of all the peanuts are used to produce peanut butter.a. Use the
Beginning in 2005, the housing market, which had been booming for years, turned. Housing construction dropped sharply in 2006. Go to www.bea.gov. Look at the GDP release and at past releases from 2005 to 015. In real dollars, how much private residential fixed investment (houses, apartments,
By mid-2009, many economists believed that the recession had ended and the U.S. economy had entered an economic expansion. Define recession and expansion. Go to www.bea.gov and look at the growth of GDP during 2009. In addition, go to www.bls.gov and look at payroll employment and the unemployment
Explain why imports are subtracted in the expenditure approach to calculating GDP.
If you buy a new car, the entire purchase is counted as consumption in the year in which you make the transaction. Explain briefly why this is in one sense an “error” in national income accounting. (How is the purchase of a car different from the purchase of a pizza?) How might you correct this
Anissa makes custom bird houses in her garage and she buys all her supplies from a local lumber yard. Last year she purchased $3,500 worth of supplies and produced 250 bird houses. She sold all 250 bird houses to a local craft store for $25 each. The craft store sold all the bird houses to
The following table gives some figures from forecasts of real GDP (in 2005 dollars) and population done in mid-2014. According to the forecasts, approximately how much real growth will there be between 2018 and 2019?Real GDP ........................ 2018 .. (billions) ......................
During 2002, real GDP in Japan rose about 1.3 percent. During the same period, retail sales in Japan fell 1.8 percent in real terms. What are some possible explanations for retail sales to consumers falling when GDP rises? (Think of the composition of GDP using the expenditure approach.)
Tobias, a classic car enthusiast in Phoenix, occasionally offers for sale one of his classic automobiles at the Barrett-Jackson collector car auction in neighboring Scottsdale. In January 2016, Tobias put a 1929 Cadillac 341B in the auction, and it sold to a buyer in Riyadh, Saudi Arabia for
What are some of the problems in using fixed weights to compute real GDP and the GDP deflator? How does the BEA’s approach attempt to solve these problems?
How do we know that calculating GDP by the expenditure approach yields the same answer as calculating GDP by the income approach?
Which of the following transactions would not be counted in GDP? Explain your answers.a. You buy a new pair of Lucchese Cowboy boots at the Lucchese factory in El Paso, Texas.b. You buy a vintage pair of Lucchese cowboy boots from a used clothing store in Jackson Hole, Wyoming. c. You take a
GDP calculations do not directly include the economic costs of environmental damage—for example, global warming and acid rain. Do you think these costs should be included in GDP? Why or why not? How could GDP be amended to include environmental damage costs?
As the following table indicates, GNP and real GNP were almost the same in 1972, but there was a $300 billion difference by mid-1975. Explain why. Describe what the numbers here suggest about conditions in the economy at the time. How do the conditions compare with conditions today? Date (Year and
In a simple economy, suppose that all income is either compensation of employees or profits. Suppose also that there are no indirect taxes. Calculate gross domestic product from the following set of numbers. Show that the expenditure approach and the income approach add up to the same
Explain what double counting is and discuss why GDP is not equal to total sales.
According to the National Bureau of Economic Research (NBER), what has been dubbed the Great Recession officially began in December, 2007 and ended in June, 2009. During this recession, national output of goods and services fell from the second quarter of 2008 until the end of the recession in the
For each of the following statements, draw a diagram that illustrates the likely effect on the market for eggs. Indicate in each case the impact on equilibrium price and equilibrium quantity.a. The surgeon general warns that high-cholesterol foods cause heart attacks.b. The price of bacon, a
In 1974, the price of a first-class postage stamp was 10 cents, a loaf of bread averaged 28 cents, gasoline was 53 cents per gallon, and the average price of a new car was $3,500. In 2014, the postage stamp cost 49 cents, a loaf of bread was $2.46, gasoline averaged $3.36 per gallon, and the
Explain briefly how macroeconomics is different from microeconomics. How can macroeconomists use microeconomic theory to guide them in their work, and why might they want to do so?
Explain why the length and severity of the Great Depression necessitated a fundamental rethinking of the operations of the macroeconomy.
Assume that the demand for flight attendants increases significantly as a result of an increase in demand for air travel. Explain what will happen to unemployment using both classical and Keynesian reasoning.
John Maynard Keynes was the first to show that government policy could be used to change aggregate output and prevent recession by stabilizing the economy. Describe the economy of the world at the time Keynes was writing. Describe the economy of the United States today. What measures are being
In which of the three market arenas is each of the following goods traded?a. The athletic skills of the Green Bay Packers’ quarterback Aaron Rodgersb. Shares of Nike stockc. The hair-braiding abilities of a hair stylist in Akron, Ohiod. A Gibson Les Paul Custom guitare. Corporate bonds issued by
Define unemployment. Should everyone who does not hold a job be considered “unemployed”? To help with your answer, draw a supply and demand diagram depicting the labor market. What is measured along the demand curve? What factors determine the quantity of labor demanded during a given period?
Many of the expansionary periods during the twentieth century occurred during wars. Why do you think this is true?

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