Modern Principles Macroeconomics 2nd Edition Tyler Cowen ,Alex Tabarrok - Solutions

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1.2. Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases below, who has the absolute advantage at each task, and who has the comparative
1.1. Fit each of the following examples into one of these reasons for trade:I.Division of knowledge II.Comparative advantagea. Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of
1.6. Conan O'Brien has been a talk show host since 1993, but he began his career in comedy as a writer: first at the Harvard Lampoon while in college, then eventually at Saturday Night Live and The Simpsons. Given that he is such an accomplished comedy writer, it might be surprising to learn that
1.5. According to the Wall Street]ournal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is
1.4.a. American workers are typically paid much more than Chinese workers. True or false:This is largely because American workers are typically more productive than Chinese workers.b. Julia Child, an American chef (and World War II spy) who reintroduced French cook ing to Americans in the 1960s,
1.3. "Opportunity cost" is one of the tougher ideas in economics. Let's make it easier by starting with some simple examples. In the examples below, find the opportunity cost: Your answer should be a rate, as in "1.5 widgets per year" or"6 lectures per month." Ignoring Adam Smith's insight from the
1.2. In the Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because "a man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or
1.1. Use the idea of the "division ofknowledge" to answer the following questions:a. Which country has more knowledge:Utopia, where in the words ofKarl Marx, each person knows just enough about hunt ing, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle
1.4. Economics is sometimes called "the dismal science." Of the big ideas in this chapter, which sound "dismal"-like bad news?
1.3. As Nobel Prize winner and New York Times columnist Paul Krugman has noted, the field of economics is a lot like the field of medicine: They are fields where knowledge is limited (both are new as real scientific disciplines), and where many cures are quite painful ("opportunity cost"), but
1.2. Some problems that economists try to solve are easy as economic problems but hard as political problems. Medical doctors face similar kinds of situations: Preventing most death from obesity or lung cancer is easy as a medical problem (eat less, exercise more, don't smoke)but hard as a
1.1. We claim that part of the reason the Great Depression was so destructive is because economists didn't understand how to use government policy very well in the 1930s. In your opinion, do you think that economists during the Great Depression would have agreed? In other words, if you had asked
1.5. According to the United Nations, there were roughly 300 million human on the planet a thousand years ago. E entially all of them were poor by modem standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today,
1.4. Nobel Prize winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet, water won't show up in the showerhead for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how
1.3. Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money"and handing those out to its citizens?
1.2. Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produces enough food to
1.1. In recent years, Zimbabwe has had hyperinflation, with price tripling (or more!)every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation?
1.6. In the discussion ofBig Idea Five, the chapter says that "self-sufficiency is death" because most of us would not be able to produce for ourselves the food and shelter that we need to survive. In addition to death, however, one could also say that self-sufficiency is boredom or ignorance. How
1.5. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine?
1.4. The chapter lists four things that entrepreneur save and invest in. Which of the four are actual objects, and which are more intangible, like concepts or ideas or plans? Feel free to use Wikipedia or some other reference source to get definitions of unfamiliar terms.
1.3. How much did national output fall during the Great Depression? According to the chapter, which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?
1.2. When bad weather in India destroys the crop harvest, does this sound like a fall in the total"supply" of crops or a fall in people's "demand"for crops? Keep your an wer in mind as you learn about economic booms and busts later on.
1.1. A headline5 in the New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." How would you rewrite this headline now that you understand the idea of opportunity cost?
1.10. Using the raw data from this chapter, use Excel to replicate simple versions of any two of our graphs. Figures A.6, A. 7, A. 9, and A.l 0 all provide the data you'll need. If you're adventurous, feel free to search out the newest GDP data and S&P 500 data on the Bureau ofEconomic Analysis
1.9. We mentioned that a demand curve is a hypothetical relationship:It answers a "what if' question: "What if today's price of oil rose (or fell), but the average con umer's income, beliefs about future oil prices, and the prices of everything else in the economy stayed the same?"When some of
1.8. If you haven't practiced in a while, let's calculate some slopes. In each case, we give two points, and you can use the "rise over run" formula to get the right answer.a. Point 1: x = 0, y = 0. Point 2: x = 3, y = 6b. Point 1: x = 6, y = -9. Point 2: x = 3, y = 6c. Point 1: x = 4, y = 8. Point
1.7. Educated people are supposed to point out (correctly) that "correlation isn't proof of causation." This is an important fact-which explains why economists, medical doctors, and other researchers spend a lot of time trying to look for proof of causation. But sometimes, correlation is good
1.6. As a scientist, you have to plot the following data: The number ofbacteria you have in a large petri dish, measured every hour over the course of a week. (Note: E. coli bacteria populations can double every 20 minutes)Should this data be plotted on a ratio scale and h ?
1.5. Let's take another look at the ratio scale, and compare it to a normal scale.a. In Figure A. 7, which one is presented in ratio cale and which in normal scale?b. In the top graph, every time the S&P 500 crosses a horizontal line, how many points did the S&P ri e?c. In the bottom graph, every
1.4. Let's read the child labor graph [A.10] horizontally and then vertically:a. According to the trendline, in a typical country with 10 percent of the children in the labor force, what's the real GDP per person?b. According to the trendline, when a country's GDP per person is$2,000, roughly what
1.3. Let's convert Klick and Tabarrok's research on crime into a simple alge bra equation. We reported the result as the effect of a 10 percent increase in police on the crime rate in Washington, D.C. In the equation below, fill in the effect of a 1 percent increase in the police on the crime
1.2. When social scientists talk about social and economic fact they usually talk about a "positive relationship" or a "negative relation hip" instead of"positive slope" or "negative slope." Based on your knov ledge, which of the following pairs of variables tend to have a "po iti e relationship"(a
1.1. We start with a simple idea from algebra: Which of the graphs at the top of the next page have a positive slope and which ha e a negative slope?
1.6. In the 1998 Minnesota gubernatorial election, there were three main candidates: Norm Coleman (the Republican), Jesse "The Body"Ventura (an Independent), and Hubert Humphrey (the Democrat). Although we can't know for certain, the voters probably ranked the candidates in a way similar to that
1.5. In the previous question, you showed that sometimes there may be no policy that beats every other policy in a majority rule election and, as a result, the agenda can determine the outcome. In the previous question, all of the policy choices on the agenda were as good as any other, but this is
1.4. We mentioned that the median voter theorem doe n't always work, and sometime a winning policy doesn't exist. This fact ha driven economists and political scientists to write thousands of papers and books, both proving that fact and trying to find good workarounds.The most famous theoretical
1.3. Political scientist J effiey Friedman and law professor Ilya Sonun say that since voters are largely ignorant, that is an argument for keeping government simple. Government, they say, should stick to a few basic tasks. That way, rationally ignorant voters can keep track of their government by
1.2.a. When a drought hits a country and a famine is possible, what probably fall more: the demand for food or the demand for haircuts? Why?b. Who probably uffer more from a deep drought: people who own farms or people who own barbershop ? ( ote: The answer ion page 164 of Sen's summary of his
1.1.Is rational ignorance the whole explanation for why voters allow programs like the sugar quota to persist? Perhaps not. In the early 1900 , the government of New York City was controlled by a Democratic Party organization known as Tarnman Hall. In a delightful essay entitled "Hone t Graft and
1.8. Let's rewrite a sentence from the chapter concerning the Roman Empire: "As the American Empire grew, courting politicians Political Economy and Public Choice • CHAPTER 21 • 479 in Washington became a more secure path to riches than starting a new business." Does this seem true today? If it
1.7. The following figure shows the political leanings of 101 voters. Voters will vote for the candidate who is closest to them on the spectrum, as in the typical median voter story. Again as usual, politicians compete against each other, entering the "political market" just as freely as firms
1.6. Driving along America's interstates, you'll notice that few rest areas have commercial businesses.Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association ofTruck Stop Operators (NATSO),
1.5. In the television show Scrubs, the main character]. D. is a competent and knowledgeable doctor.He also has very little information outside of the field of medicine, admitting he doesn't know the difference between a senator and a representative and believes New Zealand is near "Old Zealand."a.
1.4. In his book The Myth of the Rational Voter, our GMU colleague Bryan Caplan argues that not only can voters be rationally ignorant, they can even be rationally irrational. People in general eem to enjoy believing in some types of false ideas.If this is true, then they won't challenge their own
1.3. We mentioned that voters are myopic, mostly paying attention to how the economy is doing in the few month before a presidential election.If they want to be rational, what should they do instead? In particular, should they pay attention to all four years of the economy, just the first year,
1.2. An initiative on Arizona's 2006 ballot would have handed out a $1 million lottery prize every election: The only way to enter the lottery would be to vote in a primary or general election. How do you think a lottery like this would influence voter ignorance?
1.1. David Mayhew' cla ic book Congress:The Electoral Connection argued that members of Congre face strong incentives to put most of their efforts into highly visible activities like foreign travel and ribbon-cutting ceremonies, in tead of actually running the government.How does the rational
1.8. Perhaps it was in elementary school that you first realized that if everyone in the world gave you a penny, you d become fantastically rich. This insight is at the core of modern politics. Sort the following government policies into "concentrated benefits" and"diffuse benefits. 'a. Social
1.7. Let's walk through the median voter theorem in a little more detail. Consider a town with three voters, Enrique, Nandini, and Torsten. The big issue in the upcoming election is how high the sales tax rate should be. As you'll learn in macroeconomics (and in real life), on average, a government
1.6. The "median voter theorem" is sometimes called the "pivotal voter theorem." This is actually a fairly good way to think of the theorem. Why?
1.5. True or false?a. During Bangladesh's worst famine, average food per person was much lower than usual.b. Democracies are less likely to kill their own citizens than other kinds of governments.c. Surprisingly, newspapers aren't that important for informing voters about hungry citizens.d.
1.4. If a particular government policy-like a decision to go to war or to raise taxes-only works when citizens are informed, is that an argument for that policy or against that policy?
1.3. Around 130 million voters participated in the 2008 U.S. presidential election. Imagine that you are deciding whether to vote in the next presidential election. What do you think is the probability that your vote will determine the outcome of the election? Is it greater than 1%, between 1% and
1.2.a. How many famines have occurred in functioning democracies?b. What percentage of famines occurred in countries without functioning democracies?
1.1. Which of the following is the smallest fraction of the U.S. federal budget? Which are the two largest categories of federal spending?Welfare Interest on the federal debt Defense Foreign aid Social Security Health care
1.3. A supply-and-demand model can illustrate the difficulty of keeping a fixed exchange rate:It's much the same as any other price floor.Consider the fixed exchange rate below. Sparta uses a currency called the spartonian, Athenians use the aton, and the Spartans have chosen a fixed exchange rate
1.2. In Panama, a dollarized country, a Big Mac is about 30% cheaper than in the United States.Why?Atons per spartonian
1.1. In our basic model, a rise in money growth causes currency depreciation: We al o know from Chapter 13 and Chapter 16 on monetary policy that a rise in money growth normally rai es aggregate demand and boosts short-run real growth. But in the 2001 Argentine crisis and the 1997 Asian financial
1.6. Now that we've built up some intuition about exchange rates, let's apply the principle more thoroughly. In this question, we di cus the U.S.-China exchange rate. Officiall , the Chinese government fixed this exchange rate for years at a time, but in this question, we treat it as a market rate
1.5. The market for foreign currencies is a lot like the market for apples or cars or fish, so we can use the same intuition-as long as we keep reminding ourselves which way is "up" and which is "down." Consider the market for something called "euros" (maybe it's a new breakfast cereal) and measure
1.8. Which international financial institution focu es on the long-run health of developing countries: the IMF or the W odd Bank? Which one focu es on short-run financial crises in developing countries?
1.5.a. According to Table 20.1, how many Japanese yen could you get for 1 dollar on September 2010? Use the currency converter on Yahoo! Finance to find out how many yen you could buy for a dollar today.b. Given your answer to the previous question did the dollar gain or lose buying power, in terms
1.3.a. Consider two headlines: "Money is pouring into the U.S. faster than ever" versus International Finance • CHAPTER 20 • 455"Record U.S. trade deficit." How can both be true simultaneously?b. Consider two headlines: "Money is fleeing the U.S. faster than ever" ver us "Record U.S. trade
1.3. Let's think a little more about Thinking and Problem Solving question 4. If quality weren't held constant, what would you expect to happen to the additional Chinese sedans produced after the import ban? Would they be as good as the ones that used to be imported? (Hint: Which types of sedans do
1.1. In the chapter, we focused on a sugar tariff that eliminated all imports. Let's now take a look at the case where the sugar tariff eliminates some but not all imports. We will also examine the closely related case of a quota on sugar imports.The figure below shows a tariff on ugar that raise
1.8. For each of the four parts of Question #7 above, calculate the values of these areas in dollars. How much of the deadweight loss is due to the overproduction of steel by higher cost U.S. steel producers, and how much is due to the underconsumption of steel by U.S. steel consumers?
1.1. 7 million metric tons, but the price of the imported steel rose to about $448 per metric ton. The supply and demand diagram below shows this situation (along with an estimated no-trade domestic equilibrium at a price of$625 per metric ton and a quantity of 8.9 million metric
1.7. In March 2002, then President George W.Bush put a tariff on imported steel as a means of protecting the domestic steel industry. In February, before the tariff went into effect, the U.S. produced 7.4 million metric tons of crude steel and imported about 2.8 million metric tons of steel
1.4. According to Chinese government statistics, China imported 140,000 sedans in 2007.Let's see what would happen to consumer and producer surplus if China were to ban sedan imports. To keep things simple, let's assume that if sedan imports were banned, the equilibrium price of sedans (holding
1.2. Figure 19.1 looks at a case where the world price is below the domestic no-trade price. Let's look at the case where the world price is above the domestic no-trade price. We'll work with the market for airplanes shown in the figure below.Price per plane(in millions of dollars)World supply
1.1.a. Just to review: Back in Chapter 5, we illustrated price ceilings with a horizontal line below the equilibrium price. Did price ceilings create surpluses or shortages?b. The horizontal line in Figure 19.1 doesn't represent a surplus or a shortage. What does it represent?c. Figure 19.1
1.5. Spend some time driving in Detroit, MI-the Motor City-and you're sure to see bumper stickers with messages like "Buy American" or"Out of a job yet? Keep buying foreign!" or"Hungry? Eat your foreign car!" Explain these International Trade • CHAPTER 19 • 429 bumper stickers in light of what
1.3. In Figure 19.3, consider triangles Band C.One of these could be labeled "Workers and machines who could be better used in another sector of the economy," while the other could be labeled "Consumers who have to pay more than necessary for their product." Which is which?
1.The 85 percent of the $825 billion stimulus package spent by the end of the second quarter in 2011, amounting to $701.3 billion, was funded through deficit financing and added to the national debt. For comparison to the real GDP figures, $701.3 billion when adjusted for inflation becomes $677.6
1.6. In February of2009, Congress passed the American Recovery and Reinvestment Act(ARRA). When this stimulus package was signed into law, White House officials projected that it would create, or at least save, 3.5 million jobs, prevent the unemployment rate from rising above 8 percent, and have a
1.4. We usually think about crowding out as a decrease in private consumption or investment in response to an increase in government purchases. But the idea works in reverse as well, an idea we might call "crowding in." Consider the economy below.Inflation rate(1T)Solow growth rate Real GOP growth
1.1. When we discussed unemployment in Chapter 11, we noted that people will search a long time to find a good job. So it might only take you two weeks to find a minimum wage job, but it might take you six months to find a job paying five times the minimum wage.Let's investigate how this simple
1.10. Fiscal policy cannot cure all ills. Sometimes:X. The economy needs a long-run boost.Y. The problem isn't low AD, but low Solow growth.Z. Almost all machines and workers are employed; they're just not very productive.Sort the following cases into either "fiscal solution possible" or
1.9. We discussed three situations where fiscal policy is most likely to matter (though fiscal policy is best when all three are true):1. When the economy needs a short-run boost 2. When the problem is low AD, not low Solow growth 3. When many machines and workers are unemployed Let's fit each of
1.8. Again, think about the extreme case of crowding out known as Ricardian equivalence. In real life, few citizens buy or ell government bonds directly; instead, normal people put their money in a bank(or invest it in a mutual fund), and then their bank (or mutual fund) uses that money to buy
1.7. Ricardian equivalence is the idea that people might just use the extra money from their tax cut to buy the very government bonds that pay for the tax cut. Let's think about the opposite ituation: If Ricardian equivalence is true, and the government raises taxes (holding spending con tant), how
1.6.a. Which policy is likely to shift aggregate demand more? In which direction will it shift?A tax increase that occurs in the same year as a spending increase A tax increase that occurs without a spending Increaseb. Why is this so?
1.3. Consider the figure below. Suppose that there's a rise in v due to business optimism- what Keynes called the "animal spirits" of investors.This pushes us to AD (2). If the government's goal is to keep output close to the Solow growth rate, and if fiscal policy is the tool that the government
1.2. Using the figure below, suppose that a change in fiscal policy shifts AD from AD ( 1) to AD (2).Which response below would be most likely to cause that shift? Choose one ofa, b,c, or d.a. A rise in taxes OR a rise in government spendingb. A rise in taxes OR a fall in government spending Fiscal
1.10. Which kind of aggregate demand shift has fewer lags: changes in monetary policy or changes in fiscal policy?
1.9. Ifthe U.S.-debt-to-GDP ratio were 100% and if the interest rate on the debt were 5% (not far from the truth at present), then what fraction of U.S. GDP would go toward paying interest on the debt? (Note: Mter World War II, U.S. debt was greater than 100% of GDP.)
1.6. You're flipping through the newspaper, reading about shocks that have hit the U.S. economy and reading what Congress is planning to do about the shocks. (Remember that "shocks"can be either good or bad.) Is Congress even getting the direction of its response right? And if it is getting the
1.5. It' often very difficult to get the timing of fi cal policy right. In this chapter, we listed five relevant lags.a. If each of the lags lasts three months, is the total lag longer or shorter than the typical recession since World War II? For data on the length of recessions, go to: http:/
1.4. Imagine you live in the land of Ricardia, where every citizen is a Ricardian and thus "Ricardian equivalence" is 100% true. Government spending never changes in Ricardia: It's a fixed amount every year. Thus, when the Ricardian government cuts taxes, it has to pay for the government spending
1.3. When people "buy governn1ent bonds," are they borrowing money or saving money?
1.2. Let's see what the "three difficulties with using fiscal policy" look like in real life. Categorize each of the three stories below as either(1) crowding out, (2) a drop in the bucket, or(3) a matter of timing.a. During a recession, the State of New York hires 1,000 new trash collectors. The
1.1. What shifts AD to the left: a rise in taxes or a cut in taxes? Does this push v up or push it down?
1.5. When discussing the statements sent to you by the federal government that predict your future Social Security payments, we said,"Don't be surprised if those predictions turn out to be a little bit optimistic." Consider why this might be wrong: Why might these predictions be too pessimistic,
1.4. Currently, the U.S. government offers "food stamps" to poor Americans. These "stamps" are pieces of paper that look like Monopoly money and can be spent just like money at many grocery stores. The government has a complex formula that determines how much each poor person gets each month in
1.3.a. If the debt-to-GDP ratio rose to 100%and the interest rate on the debt were 5%per year, what fraction of GDP would go toward paying interest on the debt?b. If this happened, would interest on the debt be a bigger share of GDP than Social Security is today?c. In your opinion, do you think
1.2. Today, many government transfer programs are run through the tax code. The Earned Income Tax Credit (EITC), which we discussed in this chapter, is one important example. The federal government also has a variety of other "refundable tax credits," that is, spending programs run through the tax
1.1. In 1989, Senator Bob Packwood asked Congress's Joint Committee on Taxation how much extra revenue the government would raise if it just tarted taxing 100% of all income over $200,000 per year. The Joint Committee crunched some numbers and reported an answer: $204 billion per year.a. What is
1.9. Which of the following actual government programs show up as costs in the federal budget?The Department of Labor mandates the minimum wage for workers.The Environmental Protection Agency mandate that cars have equipment to keep pollution level low.The National Oceanic and Atmospheric
1.8. Some people argue that a large national debt will make future generations poorer. One way to test this is to see what happened after the last time the United States had a large national debt:after W odd War II. As Figure 17.4 shows, the debt-to-GDP ratio was over 100%, a bit higher than even
1.7.a. If 1% of federal spending goes toward foreign aid, then what percent ofU.S. GDP goes toward foreign aid? Figures 17.3 and 17.5 will help.b. If 20% of federal spending goe to ard defense spending, then what percent ofU.S.GDP goes toward defense spending?c. If $30 billion of federal spending

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Modern Principles Macroeconomics 2nd Edition Tyler Cowen ,Alex Tabarrok - Solutions

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