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microeconomics principles
Macroeconomics 2nd Edition In Modules Paul Krugman, Robin Wells (main Authors), Margaret Ray, David Anderson (auxiliary Authors) - Solutions
Concerned about the crowding-out effects of government bor- rowing on private investment spending, a candidate for presi- dent argues that the United States should just print money to cover the government's budget deficit. What are the advan- tages and disadvantages of such a plan?
a. Maria Moneybags keeps $1,000 in her sock drawer for a year. Over the year, the inflation rate is 10%. What is the real inflation tax paid by Maria for this year?b. Maria continues to keep the $1,000 in her drawer for a sec- ond year. What is the real value of this $1,000 at the begin- ning of
Answer the following questions about the (real) inflation tax, assuming that the price level starts at
In the following examples, would the classical model of the price level be relevant?a. There is a great deal of unemployment in the economy and no history of inflation. b.The economy has just experienced five years of hyperinflation.c. Although the economy experienced inflation in the 10% to 20%
An economy is in long - run macroeconomic equilibrium with an unemployment rate of 5% when the government passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there. How could the central bank achieve this goal in the short run? What would
Continuing from equilibrium E1 in the previous problem, now suppose that in the economy of Eastlandia the central bank decides to decrease the money supply.a. Using the diagram in problem 5, explain what will happen to the interest rate in the short run. b.What will happen to the interest rate in
In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant at M 1. b.If the central
Unlike households, governments are often able to sustain large debts. For example, in September 2007, the U.S. government’s total debt reached $9 trillion, approximately 64% of GDP. At the time, according to the U.S. Treasury, the average interest rate paid by the government on its debt was 5.0%.
In which of the following cases does the size of the government’s debt and the size of the budget deficit indicate potential problems for the economy?a. The government’s debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to
You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced -budget rule for the federal government and for your recommendation on whether she should support such a rule. How do you respond?
The government’s budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. One argues that a rising budget surplus indicates a growing economy; the other argues that it shows that the government is using
The “clean little secret of macroeconomics” is thata. microeconomics is even more contentious than macroeconomics.b. debate among macroeconomists has ended.c. economists have reached a significant consensus.d. macroeconomics has progressed much more than microeconomics in the past 70 years.e.
The Fed’s main concerns area. inflation and unemployment.b. inflation and asset prices.c. inflation, asset prices, and unemployment.d. asset prices and unemployment.e. inflation and the value of the dollar.
Which of the following is true regarding central bank targets?a. The Fed has an explicit inflation target.b. All central banks have explicit inflation targets.c. No central banks have explicit inflation targets.d. The Fed clearly does not have an implicit inflation target.e. Economists are split
In the first In Real Life box in this module, you learned about supply-side economics. Which of the following is stressed by supply siders?a. Taxes should be increased.b. Lower taxes will lead to lower tax revenues.c. It is important to increase incentives to work, save, and invest.d. The economy
Which of the following is an example of an opinion on which economists have reached a broad consensus? I. The natural rate hypothesis holds true. II. Discretionary fiscal policy is usually counterproductive. III. Monetary policy is effective, especially in a liquidity trap.a. I onlyb. II onlyc. III
What debates has the modern consensus resolved? What debates has it not resolved?
For each of the following economic theories, identify its fundamental conclusion.a. the classical model of the price levelb. Keynesian economicsc. monetarismd. the natural rate hypothesise. rational expectationsf. real business cycle theory
That fluctuations in total factor productivity growth cause the business cycle is the main tenet of which theory?a. Keynesianb. classicalc. rational expectationsd. real business cyclee. natural rate
The main difference between the classical model of the price level and Keynesian economics is thata. the classical model assumes a vertical short-run aggregate supply curve.b. Keynesian economics assumes a vertical short-run aggregate supply curve.c. the classical model assumes an upward sloping
The natural rate hypothesis says that the unemployment rate should bea. below the NAIRU.b. high enough that the actual rate of inflation equals the expected rate.c. as close to zero as possible.d. 5%.e. left wherever the economy sets it.
Which of the following is a central point of monetarism?a. Business cycles are associated with fluctuations in money demand.b. Activist monetary policy is the best way to address business cycles.c. Discretionary monetary policy is effective while discretionary fiscal policy is not.d. The Fed should
Which of the following was an important point emphasized in Keynes’s influential work? I. In the short run, shifts in aggregate demand affect aggregate output. II. Animal spirits are an important determinant of business cycles. III. In the long run we’re all dead.a. I onlyb. II onlyc. III
Debt deflation isa. the effect of deflation in decreasing aggregate demand.b. an idea proposed by Irving Fisher.c. a contributing factor in causing the Great Depression.d. due to differences in how borrowers/lenders respond to inflation losses/gains.e. all of the above.Consider the accompanying
Bringing down inflation that has become embedded in expectations is calleda. deflation.b. negative inflation.c. anti-inflation.d. unexpected inflation.e. disinflation.
An increase in expected inflation will shifta. the short-run Phillips curve downward.b. the short-run Phillips curve upward.c. the long-run Phillips curve upward.d. the long-run Phillips curve downward.e. neither the short-run nor the long-run Phillips curve.
The short-run Phillips curve shows a relationship between .a. negative the aggregate price level and aggregate outputb. positive the aggregate price level and aggregate outputc. negative unemployment and inflationd. positive unemployment and aggregate outpute. positive unemployment and the
The long-run Phillips curve is I. the same as the short-run Phillips curve. II. vertical. III. the short-run Phillips curve plus expected inflation.a. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Why won’t anyone lend money at a negative nominal rate of interest? How can this pose problems for monetary policy?
Why is disinflation so costly for an economy? Are there ways to reduce these costs?
Why is there no long - run trade - off between unemployment and inflation?
Explain how the short - run Phillips curve illustrates the negative relationship between cyclical unemployment and the actual inflation rate for a given level of the expected inflation rate.
Draw a correctly labeled aggregate demand and supply graph showing an economy in long-run macroeconomic equilibrium. On your graph, show the effect of an increase in the money supply, according to the classical model of the price level.
Revenue generated by the government’s right to print money is known asa. seignorage.b. an inflation tax.c. hyperinflation.d. fiat money.e. monetary funds.
An inflation tax isa. imposed by governments to offset price increases.b. paid directly as a percentage of the sale price on purchases.c. the result of a decrease in the value of money held by the public.d. generally levied by states rather than the federal government.e. higher during periods of
The classical model of the price level is most applicable ina. the United States.b. periods of high inflation.c. periods of low inflation.d. recessions.e. depressions.
In the classical model of the price levela. only the short-run aggregate supply curve is vertical.b. both the short-run and long-run aggregate supply curves are vertical.c. only the long-run aggregate supply curve is vertical.d. both the short-run aggregate demand and supply curves are vertical.e.
The real quantity of money is I. equal to M/P. II. the money supply adjusted for inflation. III. higher in the long run when the Fed buys government securities.a. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?
Suppose there is a large increase in the money supply in an economy that previously had low inflation. As a consequence, aggregate output expands in the short run. What does this say about situations in which the classical model of the price level applies?
A graph of percentage increases in the money supply and average annual increases in the price level for various countries provides evidence thata. changes in the two variables are exactly equal.b. the money supply and aggregate price level are unrelated.c. money neutrality holds only in wealthy
Monetary neutrality means that, in the long run, changes in the money supplya. can not happen.b. have no effect on the economy.c. have no real effect on the economy.d. increase real GDP.e. change real interest rates.
A 10% decrease in the money supply will change the aggregate price level in the long run bya. zero.b. less than 10%.c. 10%.d. 20%.e. more than 20%.
An increase in the money supply will lead to which of the following in the short run?a. higher interest ratesb. decreased investment spendingc. decreased consumer spendingd. increased aggregate demande. lower real GDP
In the long run, changes in the quantity of money affect which of the following? I. real aggregate output II. interest rates III. the aggregate price levela. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Again supposing the economy begins in long-run macroeconomic equilibrium, what is the long-run effect on the interest rate of a 5% increase in the money supply? Explain.
Suppose the economy begins in long-run macroeconomic equilibrium. What is the long-run effect on the aggregate price level of a 5% increase in the money supply? Explain.
When implementing monetary policy, the Federal Reserve attempts to achievea. an explicit target inflation rate.b. zero inflation.c. a low rate of deflation.d. a low, but positive inflation rate.e. 4–5% inflation.a. What can the Fed do with each of its tools to implement expansionary monetary
Which of the following is a goal of monetary policy?a. zero inflationb. deflationc. price stabilityd. increased potential outpute. decreased actual real GDP
Contractionary monetary policy attempts to aggregate demand by interest rates.a. decrease increasingb. increase decreasingc. decrease decreasingd. increase increasinge. increase maintaining
Which of the following actions can the Fed take to decrease the equilibrium interest rate?a. increase the money supplyb. increase money demandc. decrease the money supplyd. decrease money demande. both (a) and (d)
At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following? I. the federal funds rate II. the prime interest rate III. the market interest ratea. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
Suppose the economy is currently suffering from a recessionary gap and the Federal Reserve uses an expansionary monetary policy to close that gap. Describe the short -run effect of this policy on the following.a. the money supply curveb. the equilibrium interest ratec. investment spendingd.
Now assume that the Fed is following a policy of targeting the federal funds rate. What will the Fed do in the situation described in question 1 to keep the federal funds rate unchanged? Illustrate with a diagram.
Assume that there is an increase in the demand for money at every interest rate. Using a diagram, show what effect this will have on the equilibrium interest rate for a given money supply.
In Module 29 you learned about the market for loanable funds, which is intimately related to our current topic of budget deficits. Use a correctly labeled graph of the market for loanable funds to illustrate the effect of a persistent budget deficit. Identify and explain the effect persistent
Which of the following is a reason to be concerned about persistent budget deficits?a. crowding outb. government defaultc. the opportunity cost of future interest paymentsd. higher interest rates leading to decreased long-run growthe. all of the above
During a recession in the United States, what happens automatically to tax revenues and government spending? Tax revenues Government spendinga. increase increasesb. decrease decreasesc. increase decreasesd. decrease increasese. decrease does not change
The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP werea. greater than potential output.b. equal to nominal GDP.c. equal to potential output.d. falling.e. calculated during a recession.
Which of the following fiscal policies is expansionary? Taxes Government spendinga. increase by $100 million increases by $100 millionb. decrease by $100 million decreases by $100 millionc. increase by $100 million decreases by $100 milliond. decrease by $100 million increases by $100 millione.
If government spending exceeds tax revenues, which of the following is necessarily true? There is a I. positive budget balance. II. budget deficit. III. recession.a. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Suppose the economy is in a slump and the current public debt is quite large. Explain the trade - off of short - run versus long - run objectives that policy makers face when deciding whether or not to engage in deficit spending.
Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater or smaller?a. The growth rate of real GDP increases.b. Retirees live longer.c. Tax revenue decreases.d.
Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states not held to that requirement.
Why is the cyclically adjusted budget balance a better measure of the long-run sustainability of government policies than the actual budget balance?
Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of
Using a figure similar to Figure 29.7, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.
Using the accompanying diagram, explain what will happen to the market for loanable funds when there is a fall of 2 percentage points in the expected future inflation rate. How will the change in the expected future inflation rate affect the equilibrium quantity of loanable funds?
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next
How would you respond to a friend who claims that the government should eliminate all purchases that are financed by borrowing because such borrowing crowds out private investment spending?
In 2006, Congress estimated that the cost of the Iraq War was approximately $100 billion a year. Since the U.S. government was running a budget deficit at the time, assume that the war was financed by government borrowing, which increases the demand for loanable funds without affecting supply. This
The government is running a budget balance of zero when it decides to increase education spending by $200 billion and finance the spending by selling bonds. The accompanying diagram shows the market for loanable funds before the government sells the bonds. Assume that there are no capital inflows
Use the market for loanable funds shown in the accompanying diagram to explain what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume that there are no capital inflows or outflows.a. The government reduces the size of its
The accompanying figure shows new U.S. housing starts, in thousands of units per month, between January 1980 and September 2008. The graph shows a large drop in new housing starts in 1984–1991 and 2006–2008. New housing starts are related to the availability of mortgages.a. What caused the
The Congressional Research Service estimates that at least $45 million of counterfeit U.S. $100 notes produced by the North Korean government are in circulation.a. Why do U.S. taxpayers lose because of North Korea’s counterfeiting? b.As of September 2008, the interest rate earned on oneyear U.S.
Using Figure 26.1 find the Federal Reserve district in which you live. Go to http://www.federalreserve.gov/bios/pres. htm, and click on your district to identify the president of the Federal Reserve Bank in your district. Go to http://www.federalreserve.gov/fomc/ and determine if the president of
Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in reserves and $1,000 million in checkable deposits; the initial required reserve ratio is 10%. The
What will happen to the money supply under the following circumstances in a checkable-deposits-only system?a. The required reserve ratio is 25%, and a depositor withdraws $700 from his checkable bank deposit. b.The required reserve ratio is 5%, and a depositor withdraws $700 from his checkable
In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table. (Hint: The first row shows that the bank must hold $100 in
Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet.a. How will the withdrawal change the T-account of the local bank and the money supply? b.If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the
Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank.a. How does the deposit initially change the T-account of the local bank? How does it change the money supply? b.If the bank maintains a reserve ratio of 10%, how will it respond to the new
The drug company Pfizer is considering whether to invest in the development of a new cancer drug. Development will require an initial investment of $10 million now; beginning one year from now, the drug will generate annual profits of $4 million for three years.a. If the interest rate is 12%,
You have won the state lottery. There are two ways in which you can receive your prize. You can either have $1 million in cash now, or you can have $1.2 million that is paid out as follows: $300,000 now, $300,000 in one year’s time, $300,000 in two years’ time, and $300,000 in three years’
Indicate whether each of the following is part of M1, M2, or neither:a. $95 on your campus meal cardb. $0.55 in the change cup of your carc. $1,663 in your savings accountd. $459 in your checking accounte. 100 shares of stock worth $4,000f. a $1,000 line of credit on your Sears credit card
There are three types of money: commodity money, commodity- backed money, and fiat money. Which type of money is used in each of the following situations?a. Bottles of rum were used to pay for goods in colonial Australia.b. Salt was used in many European countries as a medium of exchange.c. For a
For each of the following transactions, what is the initial effect (increase or decrease) on M1? or M2?a. You sell a few shares of stock and put the proceeds into your savings account.b. You sell a few shares of stock and put the proceeds into your checking account.c. You transfer money from your
What are the important types of financial intermediaries in the U.S. economy? What are the primary assets of these intermediaries, and how do they facilitate investment spending and saving?
Explain how a well-functioning financial system increases savings and investment spending, holding the budget balance and any capital flows fixed.
Which of the following are examples of investment spending, investing in financial assets, or investing in physical assets?a. Rupert Moneybucks buys 100 shares of existing Coca -Cola stock. b.Rhonda Moviestar spends $10 million to buy a mansion built in the 1970s.c. Ronald Basketballstar spends $10
Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is the budget balance? What is the relationship among investment spending, private savings, and the budget balance? Is national savings equal to investment
Does each of the following affect either the supply or the demand for loanable funds, and if so, does the affected curve increase (shift to the right) or decrease (shift to the left)?a. There is an increase in capital inflows into the economy.b. Businesses are pessimistic about future business
Both lenders and borrowers base their decisions ona. expected real interest rates.b. expected nominal interest rates.c. real interest rates.d. nominal interest rates.e. Nominal interest rates minus real interest rates.
Which of the following will increase the supply of loanable funds?a. an increase in perceived business opportunitiesb. decreased government borrowingc. an increased private saving rated. an increase in the expected inflation ratee. a decrease in capital inflows
Which of the following will increase the demand for loanable funds?a. a federal government budget surplusb. an increase in perceived business opportunitiesc. a decrease in the interest rated. positive capital inflowse. decreased private saving rates
The real interest rate equals thea. nominal interest rate plus the inflation rate.b. nominal interest rate minus the inflation rate.c. nominal interest rate divided by the inflation rate.d. nominal interest rate times the inflation rate.e. federal funds rate.
A business will decide whether or not to borrow money to finance a project based on a comparison of the interest rate with the from its project.a. expected revenueb. profitc. rate of returnd. cost generatede. demand generated
Suppose that expected inflation rises from 3% to 6%.a. How will the real interest rate be affected by this change?b. How will the nominal interest rate be affected by this change?c. What will happen to the equilibrium quantity of loanable funds?
Explain what is wrong with the following statement: “Savings and investment spending may not be equal in the economy as a whole in equilibrium because when the interest rate rises, households will want to save more money than businesses will want to invest.”
Use a diagram of the loanable funds market to illustrate the effect of the following events on the equilibrium interest rate and quantity of loanable funds.a. An economy is opened to international movements of capital, and a capital inflow occurs.b. Retired people generally save less than working
Draw a correctly labeled graph showing equilibrium in the money market. Select an interest rate below the equilibrium interest rate and explain what occurs in the market at that interest rate and how the market will eventually return to equilibrium.
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