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microeconomics principles

Macroeconomics 2nd Edition In Modules Paul Krugman, Robin Wells (main Authors), Margaret Ray, David Anderson (auxiliary Authors) - Solutions

Suppose that Northlandia and Southlandia are the only two trading countries in the world, that each nation runs a balance of payments on both current and financial accounts equal to zero, and that each nation sees the other’s assets as identical to its own. Using the accompanying diagrams,
In the economy of Popania in 2008, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled $400 billion, and Popania’s exported goods and services equaled $350 billion. What was Popania’s balance of
In the economy of Scottopia in 2008, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for
The accompanying diagram shows the assets of the rest of the world that are in the United States and U.S. assets abroad, both as a percentage of rest-of-the-world GDP. As you can see from the diagram, both have increased nearly fivefold since 1980.a. As U.S. assets abroad have increased as a
How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale to or purchase of assets from a foreigner)? How will the balance of payments on the
Assume the United States is operating below potential output.a. Draw a correctly labeled aggregate demand and supply graph showing equilibrium in the economy.b. Suppose the government decreases taxes. On your graph, show how the decrease in taxes will affect AD, SRAS, LRAS, equilibrium aggregate
If the Mexican government pursues expansionary fiscal policy in response to the recession, what will happen to aggregate demand and aggregate supply in the short-run? Aggregate demand Short-run aggregate supplya. increase increaseb. increase decreasec. decrease increased. decrease decreasee.
Suppose the aggregate price level in Mexico decreases relative to that in the United States. What is the effect of this price level change on the demand and on the exchange rate, for Mexican pesos? Demand for pesos Exchange ratea. increases appreciatesb. increases depreciatesc. decreases
If the aggregate price level in Mexico decreases, what will happen to the real interest rate?a. It will increase.b. It will decrease.c. It will be unchanged.d. It will stabilize.e. It cannot be determined.
What is the effect of Mexico’s falling income on the demand for money and the nominal interest rate in Mexico? Demand for money Nominal interest ratea. increases decreasesb. decreases decreasesc. increases increasesd. decreases increasese. increases unchanged
Which of the following occurs as a result of the recession in Mexico? I. Output in Mexico decreases. II. Aggregate demand in the United States decreases. III. Output in the United States decreases.a. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
The economy is operating in long-run macroeconomic equilibrium.a. Illustrate this situation using a correctly labeled aggregate demand-aggregate supply graph.b. Use your graph to show the short-run effect on real GDP and the aggregate price level if there is a decrease in government spending.c.
Explain how a floating exchange rate system can help insulate a country from recessions abroad
Which of the following will happen in a country if a trading partner’s economy experiences a recession?a. It will experience an expansion.b. Exports will decrease.c. The demand for the country’s currency will increase.d. The country’s currency will appreciate.e. All of the above will occur.
Monetary policy that reduces the interest rate will do which of the following?a. appreciate the domestic currencyb. decrease exportsc. increase importsd. depreciate the domestic currencye. prevent inflation
Devaluation of a currency is used to achieve which of the following?a. an elimination of a surplus in the foreign exchange marketb. an elimination of a shortage in the foreign exchange marketc. a reduction in aggregate demandd. a lower inflation ratee. a floating exchange rate
Devaluation of a currency will lead to which of the following?a. appreciation of the currencyb. an increase in exportsc. an increase in importsd. a decrease in exportse. floating exchange rates
Devaluation of a currency occurs when which of the following happens? I. The supply of a currency with a floating exchange rate increases. II. The demand for a currency with a floating exchange rate decreases. III. The government decreases the fixed exchange rate.a. I onlyb. II onlyc. III onlyd. I
In the late 1980s, Canadian economists argued that the high interest rate policies of the Bank of Canada weren’t just causing high unemployment—they were also making it hard for Canadian manufacturers to compete with U.S. manufacturers. Explain this complaint, using our analysis of how monetary
Where do you see devaluations and revaluations of the franc against the mark?
Look at the graph on page
Which of the following is a benefit of a fixed exchange rate regime?a. certainty about the value of domestic currencyb. commitment to inflationary policiesc. no need for foreign exchange reservesd. allows unrestricted use of monetary policye. all of the above List three tools used to fix exchange
Which of the following interventions would be required to keep a country’s exchange rate fixed if the equilibrium exchange rate in the foreign exchange market were below the fixed exchange rate (measured as units of foreign currency per unit of domestic currency)? The government/ central banka.
The United States has which of the following exchange rate regimes?a. fixedb. floatingc. fixed, but adjusted frequentlyd. fixed, but managede. floating within a target zone
Changes in exchange rates affect which of the following?a. the price of importsb. the price of exportsc. aggregate demandd. aggregate outpute. all of the above
Which of the following methods can be used to fix a country’s exchange rate at a predetermined level? I. using foreign exchange reserves to buy its own currency II. using monetary policy to change interest rates III. implementing foreign exchange controlsa. I onlyb. II onlyc. III onlyd. I and II
Draw a diagram, similar to Figure 43.1, representing the foreign exchange situation of China when it kept the exchange rate fixed at a target rate of $0.121 per yuan and the market equilibrium rate was higher than the target rate. Then show with a diagram how each of the following policy changes
Which of the following will decrease the supply of U.S. dollars in the foreign exchange market?a. U.S. residents increase their travel abroad.b. U.S. consumers demand fewer imports.c. Foreigners increase their demand for U.S. goods.d. Foreigners increase their travel to the United States.e. Foreign
Which of the following would cause the real exchange rate between pesos and U.S. dollars (in terms of pesos per dollar) to decrease?a. an increase in net capital flows from Mexico to the United Statesb. an increase in the real interest rate in Mexico relative to the United Statesc. a doubling of
What happens to the real exchange rate between the euro and the U.S. dollar (expressed as euros per dollar) if the aggregate price levels in Europe and the United States both fall? Ita. is unaffected.b. increases.c. decreases.d. may increase, decrease, or stay the same.e. cannot be calculated.
The nominal exchange rate at which a given basket of goods and services would cost the same in each country describesa. the international consumer price index (ICPI).b. appreciation.c. depreciation.d. purchasing power parity.e. the balance of payments on the current account.
When the U.S. dollar buys more Japanese yen, the U.S. dollar has I. become more valuable in terms of the yen. II. appreciated. III. depreciateda. I onlyb. II onlyc. III onlyd. I and II onlye. I and III only
Suppose a basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico and the current nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the cost of that market basket rises to $120 in the United States and to 1,200 pesos in Mexico, although
Suppose Mexico discovers huge reserves of oil and starts exporting oil to the United States. Describe how this would affect the following:a. the nominal peso–U.S. dollar exchange rateb. Mexican exports of other goods and servicesc. Mexican imports of goods and services
Use two correctly labeled side-by-side graphs of the loanable funds market in the United States and China to show how a higher interest rate in the United States will lead to capital flows between the two countries. On your graphs, be sure to label the starting and ending interest rates and the
Which of the following will increase the demand for loanable funds in a country?a. economic growthb. decreased investment opportunitiesc. a recessiond. decreased private savings ratese. government budget surpluses
The trade balance includes which of the following? I. imports and exports of goods II. imports and exports of services III. net capital flowsa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
The financial account was previously known as thea. gross national product.b. capital account.c. trade deficit.d. investment account.e. trade balance.
The balance of payments on the current account plus the balance of payments on the financial account is equal toa. zero.b. one.c. the trade balance.d. net capital flows.e. the size of the trade deficit.
The current account includes which of the following? I. payments for goods and services II. transfer payments III. factor incomea. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Which of the balance of payments accounts do the following events affect?a. Boeing, a U.S.-based company, sells a newly built airplane to China.b. Chinese investors buy stock in Boeing from Americans.c. A Chinese company buys a used airplane from American Airlines and ships it to China.d. A Chinese
The accompanying table shows the percent change in verified emissions of carbon dioxide (CO2) and the percent change in real GDP per capita for selected EU countries.Percent change in Percent change in real GDP per capita CO2 emissions Country 2005–2007 2005–2007 Austria 6.30% −4.90% Belgium
According to the Oil & Gas Journal, the proven oil reserves of the top 12 oil producers was 1,137 billion barrels of oil in 2007. In that year, the U.S. Energy Information Administration reported that the daily oil production from these nations was 48.2 million barrels a day.a. At this rate, how
Why would you expect real GDP per capita in California and Pennsylvania to exhibit convergence but not in California and Baja California, a state of Mexico that borders the United States? What changes would allow California and Baja California to converge?
The accompanying table shows data on real GDP per capita in 2000 U.S. dollars for several countries in 1960 and 2003. (Source: The Penn World Table, Version 6.2.) Complete the table. Have these countries converged economically?1960 2003 Real GDP Percentage Real GDP Percentage per capita of U.S. per
The accompanying table shows data on real GDP per capita in 2000 U.S. dollars for several countries in 1950 and 2004. (Source: The Penn World Table, Version 6.2) Complete the table. Have these countries converged economically?1950 2004 Real GDP Percentage Real GDP Percentage per capita of U.S. per
Over the next 100 years, real GDP per capita in Groland is expected to grow at an average annual rate of 2.0%. In Sloland, however, growth is expected to be somewhat slower, at an average annual growth rate of 1.5%. If both countries have a real GDP per capita today of $20,000, how will their
How have U.S. policies and institutions influenced the country’s long -run economic growth?
The Bureau of Labor Statistics regularly releases the “Productivity and Costs” report for the previous month. Go to www.bls.gov and find the latest report. (On the Bureau of Labor Statistics home page, under Latest Numbers, find “Productivity” and click on “News Release.”) What were
In your diagram, label the resulting point of production C. Using the Rule of 70, calculate by how many percent per year output per worker has grown now. d.As the economy of Androde moves from point A to point C, which percentage of the annual productivity growth is due to higher total factor
Assuming Androde still uses Method 1, in your diagram, label the resulting point of production B. Using the Rule of 70, calculate by how many percent per year output per worker has grown.c. Now assume that, starting from point A, over the same 70 years, the amount of physical capital per worker in
In your figure, label that point A.b. Starting from point A, over a period of 70 years, the amount of physical capital per worker in Androde rises to
The accompanying table shows combinations of physical capital per worker and output per worker for both methods, assuming that human capital per worker is fixed.Method 1 Method 2 Physical capital Real GDP Physical capital Real GDP per worker per worker per worker per worker 0 0.00 0 0.00 50 35.36
The country of Androde is currently using Method 1 for its production function. By chance, scientists stumble on a technological breakthrough that will enhance Androde’s productivity. This technological breakthrough is reflected in another production function, Method
You are hired as an economic consultant to the countries of Albernia and Brittania. Each country’s current relationship between physical capital per worker and output per worker is given by the curve labeled Productivity1 in the accompanying diagram. Albernia is at point A and Brittania is at
The accompanying table provides approximate statistics on per capita income levels and growth rates for regions defined by income levels. According to the Rule of 70, the high-income countries are projected to double their per capita GDP in approximately 37 years, in 2042. Throughout this question,
The accompanying table shows the average annual growth rate in real GDP per capita for several countries between 1960 and 2000. (Source: The Penn World Table, Version 6.2)Average annual growth rate of real GDP per capita Years Argentina Ghana South Korea 1960 –1970 2.53% 15.54% 7.50% 1970–1980
The accompanying table shows data on real GDP per capita for several countries between 1960 and 2000. (Source: The Penn World Table, Version 6.2.)Argentina Ghana South Korea United States Real GDP Per centage of Real GDP Per centage of Real GDP Per centage of Real GDP Per centage of per capita 1960
Which of the following is listed among the key sources of growth in potential output?a. expansionary fiscal policyb. expansionary monetary policyc. a rightward shift of the short-run aggregate supply curved. investment in human capitale. both a and b Draw a separate, correctly labeled aggregate
In the aggregate demand-aggregate supply model, long-run economic growth is shown by aa. leftward shift of the aggregate demand curve.b. rightward shift of the aggregate demand curve.c. rightward shift of the long-run aggregate supply curve.d. rightward shift of the short-run aggregate supply
The reduction in the value of an asset due to wear and tear is known asa. depreciation.b. negative investment.c. economic decline.d. disinvestment.e. net investment.
In the production possibility frontier (PPF) model, long-run economic growth is shown by a(n)a. outward shift of the PPF.b. inward shift of the PPF.c. movement from a point below the PPF to a point on the PPF.d. movement from a point on the PPF to a point below the PPF.e. movement from a point on
Which of the following will shift the production possibility frontier outward? I. an increase in the production of investment goods II. an increase in the production of consumer goods III. technological progressa. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
How are long-run economic growth and short-run fluctuations during a business cycle represented using the aggregate demand-aggregate supply model?
How are long-run economic growth and short-run fluctuations during a business cycle represented using the production possibility frontier model? Solutions appear at the back of the book.
What roles do physical capital, human capital, technology, and natural resources play in influencing long -run economic growth of aggregate output per capita?
According to the MIT study discussed in the module, a cap and trade system to reduce greenhouse gas emissions in the United States would lead toa. no significant costs.b. significant but not overwhelming costs.c. a loss of roughly three year’s real GDP over the next 40 years.d. a reduction in
Which of the following statements is true of environmental quality?a. It is typically not affected by government policy.b. Other things equal, it tends to improve with economic growth.c. There is broad scientific consensus that rising levels of carbon dioxide and other gases are raising the
Which of the following is true of sustainable long-run economic growth?a. Long-run growth can continue in the face of the limited supply of natural resources.b. It was predicted by Thomas Malthus.c. Modern economies handle resource scarcity problems poorly.d. It is less likely when we find
Which of the following can lead to increases in physical capital in an economy?a. increased investment spendingb. increased savings by domestic householdsc. increased savings from foreign householdsd. an inflow of foreign capitale. all of the above
Economies experience more rapid economic growth when they do which of the following? I. add physical capital II. promote technological progress III. limit human capitala. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
What is the link between greenhouse gas emissions and growth? What is the expected effect on growth from emissions reduction? Why is international burden sharing of greenhouse gas emissions reduction a contentious problem?
Some economists think the best way to help African countries is for wealthier countries to provide more funds for basic infrastructure. Others think this policy will have no long -run effect unless African countries have the financial and political means to maintain this infrastructure. What
Which of the following is the better predictor of a future high long -run growth rate: a high standard of living today or high levels of savings and investment spending? Explain your answer.
Explain the link between a country’s growth rate, its investment spending as a percent of GDP, and its domestic savings.
Assume that between 1940 and 2010: The amount of physical capital per worker grows at 2% per year. Each 1% rise in physical capital per worker (holding human capital and technology constant) raises output per worker by 1 ⁄2 of a percent, or 0.5%. There is no growth in human capital. Real GDP per
The “convergence hypothesis”a. states that differences in real GDP per capita among countries widen over time.b. states that low levels of real GDP per capita are associated with higher growth rates.c. states that low levels of real GDP per capita are associated with lower growth rates.d.
Which of the following is cited as an important factor preventing long-run economic growth in Africa?a. political instabilityb. lack of property rightsc. unfavorable geographic conditionsd. poor healthe. all of the above
The following statement describes which area of the world? “This area has experienced growth rates unprecedented in history and now looks like an economically advanced country.”a. North Americab. Latin Americac. Europed. East Asiae. Africa
Which of the following is an example of physical capital?a. machineryb. healthcarec. educationd. moneye. all of the above
Which of the following is a source of increased productivity growth? I. increased physical capital II. increased human capital III. technological progressa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Multinomics, Inc., is a large company with many offices around the country. It has just adopted a new computer system that will affect virtually every function performed within the company. Why might a period of time pass before employees’ productivity is improved by the new computer system? Why
The economy of Erehwon has grown 3% per year over the past 30 years. The labor force has grown at 1% per year, and the quantity of physical capital has grown at 4% per year. The average education level hasn’t changed. Estimates by economists say that each 1% increase in physical capital per
Explain the effect of each of the following on the growth rate of productivity.a. The amounts of physical and human capital per worker are unchanged, but there is significant technological progress.b. The amount of physical capital per worker grows, but the level of human capital per worker and
Increases in real GDP per capita result mostly from changes in what variable? Define that variable. What other factor could also lead to increased real GDP per capita? Why is this other factor not as significant?
Long-run economic growth depends almost entirely ona. technological change.b. rising productivity.c. increased labor force participation.d. rising real GDP per capita.e. population growth.
If a country’s real GDP per capita doubles in 10 years, what was its average annual rate of growth of real GDP per capita?a. 3.5%b. 7%c. 10%d. 70%e. 700%
According to the “Rule of 70,” if a country’s real GDP per capita grows at a rate of 2% per year, it will take how many years for real GDP per capita to double?a. 3.5b. 20c. 35d. 70e. It will never double at that rate.
Which of the following is the key statistic used to track economic growth?a. GDPb. real GDPc. real GDP per capitad. median real GDPe. median real GDP per capita
Which of the following is true regarding growth rates for countries around the world compared to the United States? I. Fifty percent of the world’s people live in countries with a lower standard of living than the U.S. in 1908. II. The U.S. growth rate is six times the growth rate in the rest of
Although China and India currently have growth rates much higher than the U.S. growth rate, the typical Chinese or Indian household is far poorer than the typical American household. Explain why.
Apply the Rule of 70 to the data in Figure 37.3 to determine how long it will take each of the countries listed there to double its real GDP per capita. Would India’s real GDP per capita exceed that of the United States in the future if growth rates remained the same? Why or why not?
Why do economists focus on real GDP per capita as a measure of economic progress rather than on some other measure, such as nominal GDP per capita or real GDP?
Using a set of graphs as in Figure 35.2, show how a monetarist can argue that a contractionary fiscal policy may not lead to the desired fall in real GDP given a fixed money supply. Explain.
Which of the following policy recommendations, if any, are consistent with the classical, Keynesian, monetarist, and/or modern consensus views of the macroeconomy?a. Since the long -run growth of GDP is 2%, the money supply should grow at 2%. b.Decrease government spending in order to decrease
The economy of Albernia is facing a recessionary gap, and the leader of that nation calls together five of its best economists representing the classical, Keynesian, monetarist, real business cycle, and modern consensus views of the macroeconomy. Explain what policies each economist would
Module 35 explains that Kenneth Rogoff proclaimed Richard Nixon "the all-time hero of political business cycles." Using the table of data below from the Economic Report of the Presi- dent, explain why Nixon may have earned that title.Government Government receipts Government spending budget balance
Monetarists believed for a period of time that the velocity of money was stable within a country. However, with financial in- novation, the velocity began shifting around erratically after 1980. As would be expected, the velocity of money is different across countries depending upon the
In the modern world, central banks are free to increase or re- duce the money supply as they see fit. However, some people harken back to the "good old days" of the gold standard. Under the gold standard, the money supply could expand only when the amount of available gold increased.a. Under the
The accompanying table provides data from the United States on the average annual rates of unemployment and in- flation. Use the numbers to construct a scatter plot similar to Figure 34.1. Discuss why, in the short run, the unemploy- ment rate rises when inflation falls.Year Unemployment rate

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