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microeconomics principles
Modern Principles Macroeconomics 2nd Edition Tyler Cowen ,Alex Tabarrok - Solutions
1.9. If financial intermediation breaks down, what category of GDP will probably fall the most: consumption, investment, government purchases, or net exports?
1.8. When governments outlaw high interest rates and the ceiling is binding, what probably happens to the total amount of money borrowed?a. It rises because borrowers are protected from high interest rates.b. It falls because savers aren't willing to lend as much money at this low interest rate.c.
1.7. If savers don't feel safe putting their money in banks or buying bonds, what's the best way to sum up what's happening in the market for loanable funds?a. Supply of savings falls and the interest rate falls.b. Supply of savings falls and the interest rate nses.c. Demand for savings falls and
1.6. In each of the following, answer either "bank account," "bonds," or "stocks."a. Which investment is typically the riskiest?b. Which is a corporate IOU?c. Which one gives you an ownership "share"in a company?d. Which one usually lets you "withdraw" part of your investment at any time, for any
1.5. Sometimes, in supply and demand models, it's not clear who "supplies" and who "demands."For instance, in the labor market, it's individual workers (not firms) who supply labor. In the loanable funds market, who is usually the supplier and who i usually the demander?Choose the correct answer.a.
1.4. Consider three countries: Jovenia (average age: 25), Mittelaltistan (average age: 45), and Decrepetia (average age: 75). Based on the lifecycle theory, which of these countries will probably have:a. High savings rates?b. High rates ofborrowing?c. High rates of dissaving? (That's spending your
1.3. The typical savings supply curve has a positive slope. If a nation's saving supply curve had a perfectly vertical slope, what would that mean?a. People in this country save the same amount no matter what the interest rate is.b. People in this country are extremely sensitive to interest rates
1.2. A large number of economic and psychological studies demonstrate that people who are impatient in one area of their life tend to be impatient in other areas as well. This isn't true in every single case, but of course, that doesn't matter if we're trying to understand the "typical person."
1.1. If people want to smooth their consumption over time, what will they tend to do when they win the lottery: spend most of it within a year or save most of it for later?
1.1. Use the instructions in the appendix to set up the Solow model in Excel with the Investment Share 'Y equal to 0.3 and with the Depreciation Rate 8 equal to 0.02. Both numbers are just what we used in the chapter. Now increase the Investment Share to 0.36.a. What is the new level of
1.9. Change the production function used in the chapter to reflect the contribution of labor in the production process. As with capital, labor also has diminishing returns, so let Y = ....;-KL Now suppose that immigration reform leads to an increase in this country's labor force.a. Begin with a
1.8. A small less-developed country finds itself the recipient of a large amount of foreign direct investment that adds 50% to its current steady state level of capital stock. This country seeks your advice about the long-term implications of that kind of help.a. Assume this country begins in a
1.7. Use the Solow diagram to show the impact of a natural disaster that destroys half of a nation's capital stock.a. Begin with a country in a steady state at y ss = .yy::;s , and show the short-run effects of the natural disaster destroying half of the steady-state level of capital stock, K 55 on
1.6. According to economist Michael Kremer, as human populations have grown over the last million years, so has the human population growth rate. This was true until the 1800s. How does Thinking and Problem Solving question 10 help explain why human populations grew more quickly despite the fact
1.5. Which of the following goods are non rivalrous?Sunshine An apple A national park A Mozart symphony The idea of penicillin A dose of penicillin
1.4. Let's think about two countries, Frugal and Smart.In Frugal, people devote 50% of GDP to making new investment goods, so 'Y = 0.5, and their production function is Y =VIC In Smart, people devote 25% of GDP to making new investment goods, so "{ = 0.25 and their production function is Y = 2 VK.
1.3. The Solow model makes it quite easy to figure out how rich a country will be in its steady tate. We already know that you're in a steady state when investment equals depreciation. In math, that's -y Y = oK Since Y = VK in our simplest model, this means that K = Y2 :There are a lot of ways to
1.2. If the government of a poor catch-up country itrying to decide whether to encourage investment or encourage research and development, which of the two should it favor?(Note: In a world of trade-offs, you can't just say, "Both are important!")
1.1. Which country would you expect to have a higher rate of investment: a catch-up country or a cutting-edge country?
1.12. Are we running out of ideas? Economist Paul Romer thinks not. To make things concrete, he notes that if we keep trying out different molecules to search for interesting compound like new drugs, new plastics, etc., the universe may end from heat death before we finish our search. For example,
1.According to economists Robert Barro and Xavier Sala-i-Martin, convergence isn't just for entire nations: It's also true for states and regions, as well. They looked at state-level GDP per capita in the United States in 1880, and then calculated how fast each state grew over the next 120 years.
1.11.ideas will come along each year in 1800 and today?c. If half of the population of India and China become rich enough to create new ideas(to simplify, assume populations of 1 billion each), and start coming up with big ideas at the same rate as the top 20%, how many big ideas will India and
1.10.In Facts and Tools question 2, we saw that big markets create a big demand for inventions. This is an example of what Adam Smith meant when he said that "the division oflabor is limited by the extent of the market." Now let's look at how big markets impact the supply side of inventions. The
1.9. Since ideas can sometimes be copied quite easily, many people think that we should put more effort into creating new ideas. Let's see if there are trade-offs to having more people creating new ideas. To keep things simple, let' assume that the growth rate of the economy depends on how many
1.8. Many inventors decide that patents are a bad way to protect their intellectual property.Instead, they keep their ideas a secret. Trade secrets are actually quite common: The formula for Coca-Cola is a trade secret, as is Colonel Sander's secret recipe. What is one major strength of keeping a
1.7. The Solow model isn't useful for only thinking about entire countrie : As long as the production function run into diminishing returns and your total stock of inputs constantly wears out, then the Solow model applies. Consider a professor's knowledge of economics. The more she learns about
1.6. In the Solow model, you've seen that as the total stock of capital equipment gets larger, the number of machine wearing out grows as well. Often, most investment ends up just replacing worn-out machines. This is actually true in the United States and other rich countries. According to the
1.5. Mter World War II, a lot of France's capital stock was destroyed, but it had educated workers and a market-oriented economy. Do you think the war's destruction increased or decreased the marginal product of capital?
1.4. A drug company has $1 billion to spend on research and development. It has to decide on one of two projects:a. Spend the money on a project to fight deadly forms of influenza including bird flu.b. Spend the money on a project to fight a condition of red, itchy skin known as eczema.The company
1.3. Of course, no country makes only investment goods like machines, equipment, and computers. They also make consumer goods.Let's consider a case where the countries in question 1 devote 25 % of GDP to making investment goods (so -y, gamma, = 0.25).What is the amount of savings in these three
1.2. Consider the data in the previous question: If 10% of all machines become worthless every year (they depreciate, in other words), then how many machines will become worthless in these three countries this year? Are there any countries where the amount of depreciation is actually greater than
1.1. Consider the following three countries that produce GDP this way:Y = 5 VK Ilia: K = 100 machines Caplania: K = 10,000 machines Hansonia: K = 1,000,000 machines What will GDP (Y) be in these three countries?Hansonia has 10,000 times more machines than Ilia, so why isn't it 10,000 times more
1.11. Let's keep track of a nation's capital stock for five years. Mordor starts off with 1,000 machines, and every year, 5% of the machines depreciate or wear out. Fortunately, the people in this land produce 75 machines per year, every year.The key equation for keeping track of capital is quite
1.10. Which three countries on the list are good examples of" conditional convergence?"China Ireland Argentina North Korea Greece
1.9. When will people work harder to invent new ideas: when they can patent those ideas for 1 year or when they can patent them for 10 years?
1.8. What is a patent?
1.7. According to Thomas Jefferson, how are ideas like flames?
1.6. What is more important for explaining the standard of living in the rich countries: capital or ideas?
1.5. Compared with its fast growth today, is China's economy likely to grow more quickly or more slowly in the future?
1.4. Many people say that "the rich grow richer and the poor grow poorer." Is this what Figure 8.11 says about the countries in that graph? Did the rich countries grow more quickly or more slowly than the poor countries?
1.3. Many say that if people save too much, the economy will be hurt. They often refer to the fact that consumer spending is two-thirds of GDP to make this point. This is sometimes called the "paradox of thrift."a. In the Solow model, is there a paradox of thrift? In other words, is a high savings
1.2. When will people work harder to invent new ideas: when they can sell them to a market of 10,000 people or when they can sell them to a market of 1 billion? Does your answer tell us anything about whether it's good or bad from the U.S. point of view for China and India to become rich countries?
1.1. Which countries are likely to grow faster:countries doing "cutting-edge" growth or those doing "catch-up" growth?
1.3. If you wanted to double $1,000 in 10 years' time, what average rate of return would you require on your investment?
1.2. If a country with a GDP per capita of$4,000 at its start grows at 8% per year how many years will it take before GDP per capita is $46,000?
1.1. If a country starts off as rich as the United State , with a GDP per capita of$46,000, and if GDP per capita grows 3% per year then how many years will it take before GDP per capita is $1,000,000 per year?
1.7. Figure 7.5 and its discussion in the text identify one of the immediate causes of the wealth of nations as human capital. Visit Gaprninder World again at Gaprninder http:/ /www.gaprninder.org and select "Education" and "Literacy Rate, Adult Total" for the vertical axis while leaving GDP per
1.6. Figure 7.5 and its discussion in the text identify some of the ultimate causes of the Wealth of Nations as Institutions cif Economic Growth.One of these is honest government. Go to Gapminder at http:/ /www.gapminder.org to explore this relationship. Once there, click on the tab for "Gapminder
1.5. The chapter lists five key institutions of economic growth. But isn't there really just one: good government? Support your argument with facts from this chapter.
1.4. Communists believed that their system would be much more efficient than capitalism: They thought that competition between companies was wasteful. Why build three separate headquarters for car makers (General Motors, Chrysler, and Ford), when you can just build one? Why have three advertising
1.3. Why do you think expensive red tape is difficult to get rid of in many poor countries? Yes, this is a miniature version of the previous question.
1.2. What do you think creates the good institutions that exist in rich countries? Why don't these institutions- property rights, markets, a society where you can usually trust strangers-exist everywhere on the planet?
1.Let's look at one well-known set of tests, to see if what you learned in thi chapter matches the statistical evidence. Here are 17 variable that turned out to be very strong predictor of a nation's long-run economic performance in literally millions of statistical test (Source: Sala i-Martin, X.,
1.1. One way to learn about what makes some countries richer is to run statistical tests to see which factors are good at predicting a nation's level of productivity. Sometimes it turns out that a relationship is just a coincidence (like the fact that people in rich countries eat more ice cream),
1.11. If"everyone used to be poor," then how could some ancient civilizations afford to create massive buildings like the pyramids of Egypt and the Buddhist statues of Mghanistan (sadly, many of the latter were destroyed by the Taliban in the 1990s)?
1.10. Free rider problems are everywhere. For example, some restaurants let each food server keep his or her own tips. Other restaurants require all of the food servers to put their tips into a tip pool, which then gets divided up equally among all of the servers. It's easy to adjust the tip pool
1.9. In the Soviet Union, especially in the early decades under Lenin and Stalin, the official doctrine was Communism, and the use of incentives was considered a form of treason.One important exception was the military equipment sector, where bonuses were common for engineers who designed and
1.8. Let's figure out how long it will take for the average Indian to be as wealthy as the average Western European is today. Note that all numbers are adjusted for inflation, so we're measuring output in "piles of stuff," not "piles of money." India's GDP per capita is $3,000, and (somewhat
1.7. Economists often refer to the "natural resource curse," by which they mean that large amounts of natural resources tend to create bad politics because as long as the oil keeps flowing or the diamonds remain plentiful, political leaders don't need to care much about what goes on in the rest of
1.6. Many people say that natural resources like oil and minerals are the way to prosperity.Indeed, in an old cartoon by Matt Groening, creator of The Simpsons, a professor taught his students, "The nation that controls magnesium controls the universe!" But natural resources have been left out of
1.5. Economists use the term "human capital"to refer to education and job skills. How is education like a piece of capital?
1.4. Laws that encourage businesses to stay small are often very popular. The laws governing Indian shirt tailors discussed in this chapter are just one example. What are some noneconomic (e.g., social, moral, ethical) reasons why voters might want businesses to stay small? What are some economic
1.3. During the Great Leap Forward, millions of Chinese starved to death because not enough food was produced by farmers. Why didn't fanners grow food? In particular, was it because there wasn't enough human capital or physical capital?The text on the Great Leap Forward era flag reads, in part,
1.2. Before the rise of affordable automobiles and subways, many people used trolleys-small trains on rails that ran along ordinary streets-to The Wealth of Nations and Economic Growth • CHAPTER 7 • 133 get around in urban areas. On trolleys, there is a literal "free rider problem": Since the
1.1. The average person in Argentina today is about as rich (in inflation-adjusted terms) as his or her parents. How can this be called a "growth disaster"?
1.12. In the CIA World Factbook, GDP per capita in the United States in 2010 was approximately$47,400. In Table 7.1, the formula for growth used in that spreadsheet for any given year, y1 , is y1= Yo (1 +g), where y0 is the value of GDP in the beginning year, y1 is the value of GDP for the specific
1.11. Let's convert Figure 7.5 into words.Institutions create _ _ , which in turn affect the amount of __ , __ , and _ _ in a country, which, combined with the right kind of __ ,generates a level of __ per person.
1.10. India and China come up a lot in this chapter.You might wonder why so much time is spent talking about just two countries out of more than 180 on the planet. But what fraction of humans live in India and China together?
1.9. More practice with the rule of70: Suppose that instead, you put your money into a savings account that grows at an inflation-adjusted return of 2% per year. How many years will it take to be worth $20,000? $40,000? $160,000? (Note:Bank deposits have grown at roughly this rate over the last 50
1.8. Practice with the rule of 70: If you inherit$10,000 this year and you invest your money so that it grows 7% per year, how many years will it take for your investment to be worth $20,000? $40,000? $160,000? (Note:Investments in stocks have grown at an average inflation-adjusted rate of 7% per
1.7. Using data from the Penn W odd Tables, calculate the annual growth rate of real GDP per person for China for the years in the table.The Penn W odd Tables, available free online, are a reliable source of international economic data, and they are very popular among economists.Year 2000 2001 2002
1.6. What are the factors of production? Name them and briefly describe them in plain English.
1.5. According to Fact Two, what would your answer to question 4c have been if you calculated it 2,000 years ago?
1.4. Now let's look at the productivity of the world's least productive 80%.a. How much GDP do they produce? (Hint:You've already calculated this number in the previous question.)b. What is the average GDP per capita of the least productive 80% of the world's population?c. Now, the payoff How
1.3. The world's average (mean) GDP per capita is 9,133. There are roughly 6 billion people in the world.a. What is the world's total GDP?b. About 20% of the world's popula tion produces 50% of the world's total GDP. (Notice the use of"produces," not"consumes." In popular discussion, you are more
1.2. Look at Figure 7 .2. About what fraction of the world's population lives in countries richer than
1.1. Look at Figure 7 .1. About how many babie die before the age of 5 in Nigeria versus Argentina?What is the difference in GDP per person in tho e two countries?
1.4. According to legend, some government employees do very little work. If this legend is true enough to be important, then we may be measuring GDP incorrectly. Officially, we say that these are "employed workers," but to a great extent these "employees" are really unemployed in any useful task;
1.3. IfU.S. government statistics counted people who are receiving unemployment benefits as people who are "government employees" hired to "search for work," which of the following would rise, which would fall, and which would remain unchanged? (Note: You might use rise, fall, and unchanged more
1.2. IfU.S. government statistics counted education spending as part of investment, which would rise, which would fall, and which would remain unchanged? (Note: You might use rise, fall, and unchanged more than once each or you might not.)Consumption Investment Gross Domestic Product
1.1. During World War II, the government did a good job measuring nominal GDP. But if the price level was calculated incorrectly, we might get a completely wrong idea about what happened with real GDP. During World 114 • PART 2 • EconomicGrowth War II, price ceilings were in place. That means
1.11. What is the difference between a nation's wealth and it GDP? How are the two related?
1.10. Let' urn up some basic facts ofU.S. economic hi tory with numbers:a. Fir t, let's measure the size of the Great Depression:Real GDP in 1929(peak): $323 billion Price level in 1929: 33 Real GDP in 1933(trough): $206 billion Price level in 1933: 24 Calculate the percent change in real GDP and
1.9.a. U.S. GDP is approximately $14 trillion. If GDP were divided up equally among all 300 million Americans, what would each person get? If you and your nine best friend took almost all of the GDP for yourselves, but gave $1,000 per person for everyone else, how much would you get each year, just
1.8. The underground economy and other non priced production make it difficult to accurately measure the precise level of GDP. But GDP could still be very accurate for measuring changes in the economy. If Ben Bernanke, the Federal Reserve chairman, is trying to find out whether the U.S. economy has
1.7. Consider the following two claim . The first would be a typical statement at the magazine The Nation, while the second would be a typical statement at the magazine ational Review:Europeans have strong labor unions, so their workers get a bigger share of the pie than American workers.Since
1.6. Let's think about an economically sound way to measure the value ofleisure. To keep this simple, we'll just think about the value of leisure to people who could work but who decide to stay home. Also, we won't think about how much actual workers value their free time, or how much children and
1.5. Let's figure out GDP for Robinson Crusoe.a. Initially, he is stuck on an island without the wisdom and local knowledge of Friday.Because Crusoe is a proper Englishman, he wants to keep his accounts. This year, he catches and eats 2,000 fish valued at one British pound (£) each, grows and eats
1.4. Let's see what fraction of the economic pie goes to workers in the form of wages, and let's see if it has changed over the years. The "wage share" seems like it should be easy to calculate, but there's a problem. That problem brings us back to the big idea of opportunity cost. The problem
1.3. We noted that "government purchases" don't include all government spending. A big part of what the U.S. government does is transfer money from one person to another. Social Security (payments to retirees), and Medicare and Medicaid (paying for medical care for the elderly and the poor) make up
1.2. Since W odd War II, who were the only three recession-free U.S. presidents? (We'll revisit the question of how presidents matter for the economy in later chapters.)
1.1. Calculate GDP in this simple economy:Consumer purchases: $100 per year Investment purchases: $50 per year Government purchases: $20 per year Total exports: $50 per year Total imports: $70 per year
1.12. What is the national spending identity? This identity is very important in macroeconomics.It is as important as basic anatomy in medical school: You won't be able to cure a person until you know what's inside a person.
1.11. Attach the appropriate fractions to the "long-term averages" in Figure 6.6. (Some fractions will be left over.) These fractions may turn out to be more memorable than the exact percentages in the figure.Long-Run Averages Consumption Investment Government purchases Net exports Fraction of GOP
1.10. Looking back over the last 10,000 years of human history, which is more "normal": for GDP per capita to grow or for GDP per capita to stay about the same?
1.9. According to the National Bureau of Economic Research, which of the following are "normally"part of the definition of a recession?A fall in nominal income A fall in employment A fall in real income A fall in the price level
1.8. In the last 20 years, have recessions been getting more frequent or less frequent than they used to be?
1.7. By definition, is nominal GDP higher than real GDP?
1.6. Are the following included in U.S. GDP?Briefly explain why or why not:a. Used textbooks sold at your college bookstoreb. Used books sold at a garage salec. Cars made in the United States at a Toyota factoryd. Cars made in Germany at a General Motors factorye. The price paid by a German tourist
1.5. Calculate the annual growth rate of nominal GDP in the following examples:Nominal GDP in 1930: $97 billion. Nominal GDP in 1931: $84 billion.Nominal GDP in 1931: $84 billion. Nominal GDP in 1932: $68 billion.Nominal GDP in 2000: $9,744 billion.Nominal GDP in 2001: $10,151 billion.(Source:
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