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

The quantity of money demanded rises (that is, there is a movement along the money demand curve) whena. the aggregate price level increases.b. the aggregate price level falls.c. real GDP increases.d. new technology makes banking easier.e. short-term interest rates fall.
Which of the following is true regarding short-term and long-term interest rates?a. Short-term interest rates are always above long-term interest rates.b. Short-term interest rates are always below long-term interest rates.c. Short-term interest rates are always equal to long-term interest rates.d.
What will happen to the money supply and the equilibrium interest rate if the Federal Reserve sells Treasury securities? Money supply Equilibrium interest ratea. increase increaseb. decrease increasec. increase decreased. decrease decreasee. decrease no change
Which of the following will decrease the demand for money?a. an increase in the interest rateb. inflationc. an increase in real GDPd. an increase in the availability of ATMse. the adoption of Regulation Q
A change in which of the following will shift the money demand curve? I. the aggregate price level II. real GDP III. the interest ratea. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
How will each of the following affect the opportunity cost or benefit of holding cash? Explain.a. Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50.b. To attract more deposits, banks raise the interest paid on six-month CDs.c. Real estate prices fall
Explain how each of the following would affect the quantity of money demanded, and indicate whether each change would cause a movement along the money demand curve or a shift of the money demand curve.a. Short -term interest rates rise from 5% to 30%.b. All prices fall by 10%.c. New wireless
When banks make loans to each other, they charge thea. prime rate.b. discount rate.c. federal funds rate.d. CD rate.e. mortgage rate.What are the four basic functions of the Federal Reserve System and what part of the system is responsible for each?
If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the money supply? Bank reserves Money supplya. increase decreaseb. increase increasec. decrease decreased. decrease increasee. increase no change
When the Fed makes a loan to a commercial bank, it chargesa. no interest.b. the prime rate.c. the federal funds rate.d. the discount rate.e. the market interest rate.
Which of the following financial services does the Federal Reserve provide for commercial banks? I. clearing checks II. holding reserves III. making loansa. I onlyb. II onlyc. III onlyd. I and IIe. I, II, and III
Which of the following is a function of the Federal Reserve System? I. examine commercial banks II. print Federal Reserve notes III. conduct monetary policya. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
Assume that any money lent by a bank is deposited back in the banking system as a checkable deposit and that the reserve ratio is 10%. Trace out the effects of a $100 million open -market purchase of U.S. Treasury bills by the Fed on the value of checkable bank deposits. What is the size of the
Which of the following contributed to the financial crisis of 2008?a. subprime lendingb. securitizationc. deleveragingd. low interest rates leading to a housing boome. all of the abovea. What does the Board of Governors of the Federal Reserve System do?b. How many members serve on the group?c. Who
Who oversees the Federal Reserve System?a. the presidents of the Regional Federal Reserve Banksb. the president of the United Statesc. the Federal Open Market Committeed. the Board of Governors of the Federal Reserve Systeme. the Reconstruction Finance Corporation
Which of the following is NOT a role of the Federal Reserve System?a. controlling bank reservesb. printing currency (Federal Reserve notes)c. carrying out monetary policyd. supervising and regulating bankse. holding reserves for commercial banks
Which of the following is a part of both the Federal Reserve System and the federal government?a. the Federal Reserve Board of Governorsb. the 12 regional Federal Reserve Banksc. the Reconstruction Finance Corporationd. commercial bankse. the Treasury Department
Which of the following contributed to the creation of the Federal Reserve System? I. the bank panic of 1907 II. the Great Depression III. the savings and loan crisis of the 1980sa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Describe the balance sheet effect. Describe the vicious cycle of de leveraging. Why is it necessary for the government to step in to halt a vicious cycle of de leveraging?
Why did the creation of the Federal Reserve fail to prevent the bank runs of the Great Depression? What measures did stop the bank runs?
What are the similarities between the Panic of 1907, the S&L crisis, and the crisis of 2008?
The monetary base equalsa. currency in circulation.b. reserves held by banks.c. currency in circulation − reserves held by banks.d. currency in circulation + reserves held by banks.e. currency in circulation/reserves held by banks.The required reserve ratio is 5%.a. If a bank has deposits of
Which of the following changes would be the most likely to reduce the size of the money multiplier?a. a decrease in the required reserve ratiob. a decrease in excess reservesc. an increase in cash holding by consumersd. a decrease in bank runse. an increase in deposit insurance
Bank regulation includes which of the following? I. deposit insurance II. capital requirements III. reserve requirementsa. I onlyb. II onlyc. III onlyd. I and IIe. I, II, and III
The fraction of bank deposits actually held as reserves is thea. reserve ratio.b. required reserve ratio.c. excess reserve ratio.d. reserve requirement.e. monetary base.
Bank reserves include which of the following? I. currency in bank vaults II. bank deposits held in accounts at the Federal Reserve III. customer deposits in bank checking accountsa. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
Take the example of Silas depositing his $1,000 in cash into First Street Bank and assume that the required reserve ratio is 10%. But now assume that each recipient of a bank loan keeps half the loan in cash and deposits the rest. Trace out the resulting expansion in the money supply through at
Assume that total reserves are equal to $200 and total checkable bank deposits are equal to $1,000. Also assume that the public does not hold any currency and banks hold no excess reserves. Now suppose that the required reserve ratio falls from 20% to 10%. Trace out how this leads to an expansion
A con artist has a great idea: he’ll open a bank without investing any capital and lend all the deposits at high interest rates to real estate developers. If the real estate market booms, the loans will be repaid and he’ll make high profits. If the real estate market goes bust, the loans
Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans. Every depositor knows that the rumor isn’t true, but each thinks that most other depositors believe the rumor. Why, in the absence of deposit insurance, could this lead to a
a. What is the amount you will receive in three years if you loan $1,000 at 5% interest?b. What is the present value of $1,000 received in three years if the interest rate is 5%?
What is the present value of $100 realized two years from now if the interest rate is 10%?a. $80b. $83c. $90d. $100e. $110
If the interest rate is 5%, the amount received one year from now as a result of lending $100 today isa. $90.b. $95.c. $100.d. $105.e. $110.
If the interest rate is 10%, the present value of $1 paid to you one year from now isa. $0.b. $0.89.c. $0.91.d. $1.e. more than $1.
If the interest rate is zero, then the present value of a dollar received at the end of the year isa. more than $1.b. equal to $1.c. less than $1.d. zero.e. infinite.
Suppose, for simplicity, that a bank uses a single interest rate for loans and deposits, there is no inflation, and all unspent money is deposited in the bank. The interest rate measures which of the following? I. the cost of using a dollar today rather than a year from now II. the benefit of
Consider the three hypothetical projects shown in Table 24.1. This time, however, suppose that the interest rate is only 2%.a. Calculate the net present values of the three projects. Which one is now preferred?b. Explain why the preferred choice is different with a 2% interest rate from with a 10%
Which of the following is the best example of using money as a store of value?a. A customer pays in advance for $10 worth of gasoline at a gas station.b. A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle.c. Travelers buy meals on board an airline flight.d. Foreign
Which of the following is the most liquid monetary aggregate?a. M1b. M2c. M3d. near-moneyse. dollar bills
In the United States, the dollar isa. backed by silver.b. backed by gold and silver.c. commodity-backed money.d. commodity money.e. fiat money.
When you decide you want “$10 worth” of a product, money is serving which role(s)? I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
When you use money to purchase your lunch, money is serving which role(s)? I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
Explain why a system of commodity -backed money uses resources more efficiently than a system of commodity money.
Although most bank accounts pay some interest, depositors can get a higher interest rate by buying a certificate of deposit, or CD. The difference between a CD and a checking account is that the depositor pays a penalty for withdrawing the money before the CD comes due—a period of months or even
Suppose you hold a gift certificate, good for certain products at participating stores. Is this gift certificate money? Why or why not?
A financial intermediary that provides liquid financial assets in the form of deposits to lenders and uses their funds to finance the illiquid investment spending needs of borrowers is called aa. mutual fund.b. bank.c. corporation.d. pension fund.e. life insurance company.
A nonprofit institution collects the savings of its members and invests those funds in a wide variety of assets in order to provide its members with income after retirement. This describes aa. mutual fund.b. bank.c. savings and loan.d. pension fund.e. life insurance company.
The federal government is said to be “dissaving” whena. there is a budget deficit.b. there is a budget surplus.c. there is no budget surplus or deficit.d. savings does not equal investment spending.e. national savings equals private savings.
Which of the following is NOT a type of financial asset?a. bondsb. stocksc. bank depositsd. loanse. houses
Decreasing which of the following is a task of the financial system? I. transaction costs II. risk III. liquiditya. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
An economy is in long -run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? How would
The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant to help the economy move to potential output, YPa. Is Brittania facing a recessionary or inflationary
The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, YPa. Is Albernia facing a recessionary or inflationary gap? b.Which type of fiscal policy—expansionary or
Explain how each of the following actions will affect the level of investment spending and unplanned inventory investment.a. The Federal Reserve raises the interest rate. b.There is a rise in the expected growth rate of real GDP.c. A sizable inflow of foreign funds into the country lowers the
How will investment spending change as the following events occur?a. The interest rate falls as a result of Federal Reserve policy. b.The U.S. Environmental Protection Agency decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide.c.
From the end of 1995 to March 2000, the Standard and Poor’s 500 (S&P 500) stock index, a broad measure of stock market prices, rose almost 150%, from 615.93 to a high of 1,527.46. From that time to September 10, 2001, the index fell 28.5% to 1,092.54. How do you think the movements in the stock
From 2003 to 2008, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income
The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of income.ncome range Marginal propensity to consume $0 − $20,000 0.9 $20,001 − $40,000 0.8 $40,001 − $60,000 0.7 $60,001 − $80,000 0.6 Above $80,000 0.5a.
Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier. However, a smaller multiplier means that the change in government purchases of goods and services, government transfers, or taxes necessary to close an inflationary or
In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in
The late 1990s in the United States were characterized by substantial economic growth with low inflation; that is, real GDP increased with little, if any, increase in the aggregate price level. Explain this experience using aggregate demand and aggregate supply curves. Illustrate with a diagram.
In the accompanying diagram, the economy is in long -run macroeconomic equilibrium at point E1 when an oil shock shifts the short -run aggregate supply curve to SRAS2. Based on the diagram, answer the following questions.a. How do the aggregate price level and aggregate output change in the short
The economy is in short -run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.a. Is the economy facing an inflationary or a recessionary gap? b.What policies can the government implement that might bring the economy back to long
Using aggregate demand, short -run aggregate supply, and long -run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one long -run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the
Using aggregate demand, short -run aggregate supply, and long -run aggregate supply curves, explain the process by which each of the following economic events will move the economy from one long -run macroeconomic equilibrium to another. Illustrate with diagrams. In each case, what are the short
There were two major shocks to the U.S. economy in 2007, leading to a severe economic slowdown. One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the AD–AS framework.a. Draw typical aggregate
The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on April 29, 2008 stated: “The Conference Board Consumer
In late January, a new computer operating system is introduced that increases labor productivity dramatically. Explain how Wageland will move from one short -run macroeconomic equilibrium to another. Illustrate with a diagram.
In Wageland, all workers sign an annual wage contract each year on January
Explain whether the following government policies affect the aggregate demand curve or the short -run aggregate supply curve and how.a. The government reduces the minimum nominal wage. b.The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to
Suppose that the economy is currently at potential output. Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most preferred to least preferred type of shock: positive demand shock, negative demand shock, positive supply
Suppose that all households hold all their wealth in assets that automatically rise in value when the aggregate price level rises (an example of this is what is called an “inflation -indexed bond”—a bond for which the interest rate, among other things, changes one -for- one with the inflation
Determine whether, in the short run, each of the following events causes a shift of a curve or a movement along a curve. Also determine which curve is involved and the direction of the change.a. As a result of new discoveries of iron ore used to make steel, producers now pay less for steel, a major
No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following questions using a diagram and assume that
Suppose that in Wageland all workers sign annual wage contracts each year on January
Your study partner is confused by the upward -sloping shortrun aggregate supply curve and the vertical long -run aggregate supply curve. How would you explain the shapes of these two curves?
A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement
A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assume the absence of taxes, international trade, and changes in the aggregate price level.a. Suppose that the MPC is equal to 0.75. What was the size of the change in government purchases
Which of the following is NOT an automatic stabilizer?a. income taxesb. unemployment insurancec. Medicaidd. food stampse. monetary policy
A lump-sum tax isa. higher as income increases.b. lower as income increases.c. independent of income.d. the most common form of tax.e. a type of business tax.
The presence of taxes has what effect on the multiplier? Theya. increase it.b. decrease it.c. destabilize it.d. negate it.e. have no effect on it.
Assume that taxes and interest rates remain unchanged when government spending increases, and that both savings and consumer spending increase when income increases. The ultimate effect on real GDP of a $100 million increase in government purchases of goods and services will bea. an increase of
III. represents the proportion of consumers’ disposable income that is spent.a. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and III
The marginal propensity to consume I. has a negative relationship to the multiplier. II. is equal to
The country of Boldovia has no unemployment insurance benefits and a tax system using only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system in which residents must pay a percentage of their income. Which country will experience greater
Explain why a $500 million reduction in government purchases of goods and services will generate a larger fall in real GDP than a $500 million tax increase.
Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.
a. Draw a correctly labeled graph showing an economy experiencing a recessionary gap.b. What type of fiscal policy is appropriate in this situation?c. Give an example of what the government could do to implement the type of policy you listed in part b.
An income tax rebate is an example ofa. an expansionary fiscal policy.b. a contractionary fiscal policy.c. an expansionary monetary policy.d. a contractionary monetary policy.e. none of the above.
Which of the following is a fiscal policy that is appropriate to combat inflation?a. decreasing taxesb. decreasing government spendingc. increasing government transfersd. increasing interest ratese. expansionary fiscal policy
Which of the following is an example of expansionary fiscal policy?a. increasing taxesb. increasing government spendingc. decreasing government transfersd. decreasing interest ratese. increasing the money supply
Which of the following is a government transfer program?a. Social Securityb. Medicare/Medicaidc. unemployment insuranced. food stampse. all of the above
Which of the following contributes to the lag in implementing fiscal policy? I. It takes time for Congress and the President to pass spending and tax changes. II. Current economic data take time to collect and analyze. III. It takes time to realize an output gap exists.a. I onlyb. II onlyc. III
Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive—you get a brief high, but then you have the pain of inflation.”a. Explain what this means in terms of the AD–AS model.b. Is this a valid argument against stabilization policy? Why or why not?
Explain why federal disaster relief, which quickly disburses funds to victims of natural disasters such as hurricanes, floods, and large -scale crop failures, will stabilize the economy more effectively after a disaster than relief that must be legislated.
In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy.a. Several military bases around the country, which together employ tens of thousands of people, are closed.b. The number of weeks an unemployed person is eligible for unemployment
Draw a correctly labeled aggregate demand and aggregate supply graph illustrating an economy in long-run macroeconomic equilibrium.
The economy depicted in the graph is experiencing a(n)a. contractionary gap.b. recessionary gap.c. inflationary gap.d. demand gap.e. supply gap.
4. Which of the following statements is true if this economy is operating at P1 and Y1? I. The level of aggregate output equals potential output. II. It is in short-run macroeconomic equilibrium. III. It is in long-run macroeconomic equilibrium.a. I onlyb. II onlyc. III onlyd. II and IIIe. I and III
During stagflation, what happens to the aggregate price level and real GDP? Aggregate price level Real GDPa. decreases increasesb. decreases decreasesc. increases increasesd. increases decreasese. stays the same stays the same Refer to the graph for questions 4 and

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