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modern principles of economics

Questions and Answers of Modern Principles Of Economics

a. Consider two headlines: “Money is pouring into the U.S. faster than ever” versus “Record U.S. trade deficit.” How can both be true simultaneously?b. Consider two headlines: “Money is
In the chapter, two stories about the deficit are told: “the great place to invest” story and the “foolishly saving too little” story. In the examples below, which is more like the “great
a. According to Table 36.1, how many Japanese yen could you get for 1 dollar on September 2010? Use the currency converter on Yahoo! Finance to find out how many yen you could buy for a dollar
According to the purchasing power parity theorem, what must be approximately equal across countries: the nominal exchange rate or the real exchange rate? lop8
Which international financial institution focuses on the long-run health of developing countries: the IMF or the World Bank? Which one focuses on short-run financial crises in developing countries?
Let’s translate “Americans are foolishly saving too little” into a simple GDP story. Recall that GDP = C + I + G + Net exports. GDP is fixed and equal to 100 throughout the story:After all,
Now that we’ve built up some intuition about exchange rates, let’s apply the principles more thoroughly. In this question, we discuss the U.S.-China exchange rate. Officially, the Chinese
Nobel Laureate Robert Solow once jokingly noted, “I have a chronic [trade] deficit with my barber, who doesn’t buy a darned thing from me.” Is this a problem? Why or why not?How does this
In Panama, a dollarized country, a Big Mac is about 30% cheaper than in the United States.Why? lop8
A supply-and-demand model can illustrate the difficulty of keeping a fixed exchange rate:It’s much the same as any other price floor.Consider the fixed exchange rate below. Sparta uses a currency
What shifts AD to the left: a rise in taxes or a cut in taxes? Does this push v→ up or push it down? ki5
Let’s see what the “three difficulties with using fiscal policy” look like in real life. Categorize each of the three stories below as either(1) crowding out, (2) a drop in the bucket, or(3) a
When people “buy government bonds,” are they borrowing money or saving money? mk6
You’re flipping through the newspaper, reading about shocks that have hit the U.S. economy and reading what Congress is planning to do about the shocks. (Remember that “shocks”can be either
Why was the Great Depression an especially appropriate time to use fiscal policy rather than just monetary policy alone? mk6
If the U.S.-debt-to-GDP ratio were 100% and if the interest rate on the debt were 5% (not far from the truth at present), then what fraction of U.S. GDP would go toward paying interest on the debt?
Which kind of aggregate demand shift has fewer lags: changes in monetary policy or changes in fiscal policy? mk6
a. In the chapter, we wrote that Tyler does not save and plan according to the theory of Ricardian equivalence but Alex is more of a“Ricardian.” In light of this, who probably cuts back their
Using the figure below, suppose that a change in fiscal policy shifts AD from AD(1) to AD(2).Which response below would be most likely to cause that shift? Choose one ofa, b,c, or d.a. A rise in
Consider the figure below. Suppose that there’s a rise in v→ due to business optimism—what Keynes called the “animal spirits” of investors.This pushes us to AD(2). If the government’s
We discussed three situations where fiscal policy is most likely to matter (though fiscal policy is best when all three are true): 1. When the economy needs a short-run boost 2. When the problem is
Fiscal policy cannot cure all ills. Sometimes:X. The economy needs a long-run boost.Y. The problem isn’t low AD, but low Solow growth.Z. Almost all machines and workers are employed; they’re just
Nobel Laureate Amartya Sen has pointed out that one way to prevent starvation during droughts in the poorest countries is to just pay peasants to build roads, sewer lines, and other public goods
We usually think about crowding out as a decrease in private consumption or investment in response to an increase in government purchases. But the idea works in reverse as well, an idea we might call
According to recent estimates by Susan Woodward and Robert Hall, an extra dollar of government purchases raises GDP by one dollar—so there is little evidence for a“multiplier effect” in the
In February of 2009, Congress passed the American Recovery and Reinvestment Act(ARRA). When this stimulus package was signed into law, White House officials projected that it would create, or at
What is a “price level”? If the “price level” is higher in one country than another, what does that tell us, if anything, about the standard of living in that country? L02
What are some forces that could cause shocks to v, the velocity of money? L02
When is the inflation rate more likely to have a big change either up or down: when inflation is high or when it is low? L02
Who gets helped by a surprise inflation: people who owe money or people who lend money? L02
Who is more likely to lobby the government for fast money growth: people who have mortgages or people who own banks that lent money for those mortgages? L02
Which tells me more about how many more goods and services I can buy next year if I save my money today: the nominal interest rate or the real interest rate? Which interest rate gets talked about
If everyone expects inflation to rise by 10%over the next few years, where, according to the Fisher effect, will the biggest effect be:on nominal or real interest rates? L02
Calculate inflation in the following cases: L02 Price Level Last Year Price Level This Year Inflation Rate 100 110 250 300 4,000 4,040
In countries with hyperinflation, the government prints money and uses it to pay government workers. How is this similar to counterfeiting? How is it different? L02
The Fisher effect says that nominal interest rates will equal expected inflation plus the real equilibrium rate of return: L02Economists and Wall Street experts often use the Fisher effect to learn
If I get more money, does that typically make me richer? If society gets more money, does it make society richer? What’s the contradiction? L02
Why is it so painful to get rid of inflation? Why can’t the government just stop printing so much money? L02
Who gets hurt most in the following cases:banks, mortgage holders (i.e., homeowners), or neither? L02 ETT Who gets hurt? 4% 10% 10% 4% -3% 0% 3% 6% 10% 10%
Sort the following shocks into real shocks or aggregate demand shocks. Remember that“shocks” include both good and bad events.A fall in the price of oil A rise in consumer optimism A hurricane
Look at Figure 30.2. Let’s sum up some basic facts about the link between unemployment rates and recessions. Notice that the shaded bars indicate periods of recession, and wider bars mean longer
Look at Figure 30.5. When inflation rises, does the Solow growth rate rise, fall, or remain unchanged?: lop1
Are “real shocks” negative shocks, by definition? : lop1
When negative real shocks hit, what typically happens to the Solow growth curve: Does it shift left, shift right, or stay in the same place?: lop1
When negative real shocks hit, what typically happens to the aggregate demand curve? Does it shift left, shift right, or stay in the same place? : lop1
As Figure 30.1 implies, for the United States, the Solow growth curve has, on average, been approximately 3% real growth per year. If a negative real shock hits, shifting it by 2 percentage points,
In the following cases, will real growth rise, fall, or remain unchanged? : lop1 Expected inflation = 5%, Actual inflation 7% Expected inflation = 3%, Actual inflation=1% Expected inflation = 6%,
Consider the figure below. In this relatively unsuccessful economy, the Solow growth rate is 1% per year: : lop1a. Calculate the inflation rate at X in this economy. (Hint: Use the quantity
a. The short-run aggregate supply (SRAS)curve is very predictable. When inflation is greater than people expect, SRAS eventually shifts (choose one: up, down) over the next year or so, and when
From the equation of exchange, MV = PY, we know that spending growth (M→ + v→) equals nominal GDP growth (P→ + Y→R) or that M→ +v→ = p + Y→R. Recall from the chapter that in the long
Complete the following sentences:With a real shock, when real growth is worse than usual, inflation is than usual.With an aggregate demand shock, when real growth is worse than usual, inflation is
a. In the 1970s, the United States had slow growth and high inflation. Which kind of shock better fits these facts?Negative real shock Positive real shock Negative aggregate demand shock Positive
a. If newspapers and magazines report a lot of good news about the economy, what is likely to happen to velocity?b. If the Federal Reserve wants to keep aggregate demand (i.e., spending
After a monetary shock hits aggregate demand, which curve will shift to bring output growth back to the Solow growth rate: the short-run aggregate supply curve or the aggregate demand curve? (Hint:
What happens when bad aggregate demand shocks hit the economy? Consider the following graph. : lop1It’s the businesses who demand labor and workers who supply labor. Currently, let’s assume the
a. If newspapers and magazines report a lot of good news about the economy, what is likely to happen to velocity?b. If the Federal Reserve wants to keep aggregate demand (i.e., spending
After a monetary shock hits aggregate demand, which curve will shift to bring output growth back to the Solow growth rate: the short-run aggregate supply curve or the aggregate demand curve? (Hint:
Let’s have some practice with the dynamic aggregate demand curve. If you want to draw it in your familiar y = b + mx format, you can think of it this way:Inflation = (Growth in money + Growth in
In the aggregate demand and supply model, what is “sticky”? More than one may be true: wages, real growth, prices, velocity, money growth, unemployment. : lop1
During the Great Depression, which of the following were mostly aggregate demand shocks and which were mostly negative real shocks?The fall in the growth rate of money The fall in farm productivity
Reconsider your answer to Facts and Tools question 3. If you wanted to draw the Solow growth curve accurately, taking into account the idea that very high rates of inflation are likely to reduce real
Often, more than one kind of shock hits the economy at once. When this happens, the different shocks could push inflation (or real growth) in different directions in the short run, leaving the final
Use Figure 30.11 as a starting point for this problem and consider the initial impact of the following circumstances on the aggregate demand, Solow growth, and short-run aggregate supply curves.a. A
Take a look at Figure 30.9. In the last few decades, what has usually happened to the price of oil just before or during a recession? Lo1
When oil price shocks force people to switch jobs, how much GDP are they producing when they are out of work? Lo1
Do you know anyone who “intertemporally substitutes” their labor? In other words, what are some careers where someone might choose to work more during times when the wage is higher but less when
When an investment is irreversible, are you likely to make that decision in a hurry or wait until more information comes in? Lo1
When do you want to study for a test: when your friends are studying for the same test or when they are not? How can this help explain seasonal business fluctuations? Lo1
If the Solow growth curve increased because of a sudden fall in the price of oil, what would happen to inflation? Assume that spending growth (aggregate demand) does not change—only the growth
Office buildings have a boom-bust cycle every day. At what hours of the weekday do grocery stores have an economic boom? What days of the week do shopping malls have an economic boom? Lo1
When would a restaurant owner prefer to open a new restaurant: one year after an oil shock hits or two years after the oil shock hits? Lo1
How is marriage like a decision to build a new factory? Which decision is easier to reverse? Lo1
In the chapter, we discussed how intertemporal substitution can amplify a boom by causing people to work more and by causing more people to work (while the reverse is true in a recession). Capital is
For the sake of the economy, should the government ban Christmas, and instead encourage people to give gifts throughout the year? Why or why not? Lo1
How is the previous question similar to this question: Should the government encourage people to move from the East and West coasts to the Midwest and Rocky Mountain states, where the population is
Do workers choose to work more because wages are temporarily high and do workers choose to work less because wages are temporarily low? This is key to the“intertemporal substitution” story of
a. If Solow growth rate shocks do largely explain business fluctuation, while the aggregate demand curve mostly stays fixed, then should prices be higher than usual or lower than usual during a
Define the following:a. The monetary base, MBb. M1c. M2 Lo1
If the Federal Reserve wants to lower interest rates via open market operations, should it buy bonds or should it sell bonds? Lo1
Practice with money multipliers. Think of the“money supply” (MS) as equal to either M1 or M2.a. RR = 5%, Change in reserves =$10 billion. MM = ?; Change in MS = ?b. RR = ?, Change in reserves =
The main interest rate that the Federal Reserve tries to control is the Federal Funds rate, the interest rate that banks charge on short-term(usually overnight) loans to other banks. Let’s see how
We mentioned that the central bank can influence a short-run real interest rate—this is because in the short run the inflation rate is relatively constant but the central bank can adjust the
Whether an asset is “liquid” often depends on what situation you are in. For each of the pairs of assets below, which is more liquid in the particular setting?You want to buy a sofa:A savings
Let’s watch a bank create money. Last Wednesday, the Bank of Numenor opened for business. The first customer, Edith, walked in the door with 100 silver coins called Thalers to deposit in a new
You are a bank regulator working for the Federal Reserve. It is your job to see whether banks are solvent or insolvent, liquid or illiquid.Fit each bank below into one of the following four
Does the House of Representatives get to vote on who becomes the chairperson of the Federal Reserve Board? If not, who does get to vote? Lo1
Economist Bennett McCallum says that in order to push interest rates down in the long run, the central bank needs to raise interest rates in the short run. How can this be true? Lo1
This chapter is concerned mostly with how monetary policy might be able to return an economy quickly to the Solow growth rate after a shock. But as we saw in Chapter 29’s discussion of the quantity
We’ve just reviewed the quantity theory of money, which is a theory that shows how the economy fixes itself in the long run. But as economist John Maynard Keynes famously said,“In the long run we
Let’s look at the Federal Reserve’s dilemma when there’s a positive shock to the Solow growth rate. We’ll consider the reverse of Figures 33.3 and 33.4.a. In the following figure, illustrate
All of the following are called “rules.” Which of the following so-called rules are actually like“rules” and which are more like “discretion”?How can you tell the difference? pg65a.
Let’s consider a case that has some similarities to Figure 33.2. We mentioned that it’s difficult for the Fed to know what’s really happening to the economy in real time. This is similar to the
Which of the following would be methods that the Fed could use to “maintain market confidence” when a negative AD shock hits? pg65a. Slow the growth rate of the monetary base.b. Raise the
a. When a financial bubble collapses, is that more like a fall in aggregate demand or a fall in the Solow growth rate?b. When a financial bubble collapses, what is more likely to happen as a result:
Central banks and voters alike usually want higher real growth and lower inflation. What kind of shock makes that happen? (Note: This is similar to the type of shock that causes higher quantity and
Let’s reenact a simplified version of the 1981–1982 Volcker disinflation. Expected inflation and actual inflation are both 10%, real growth is 3%, and to keep it simple, assume that velocity
Now, let’s reenact the Volcker disinflation in an alternate universe where wages are more flexible and workers are much more willing to accept slower-growing wages when the inflation rate falls.
The Fed plays an important role in maintaining market confidence. As former Chairman Alan Greenspan put it in a 1997 address: “In[financial crises] the Federal Reserve stands ready to provide
In the United States, the government’s data on real growth improve over time. For instance, we now know that in the early 1970s, the economy was actually growing 4% faster than people believed. At
We discussed how hard it is to keep AD stable or put it back “where it belongs” after a shock.Alan Blinder, a former vice chairman of the Federal Reserve, noticed that this was a major problem.

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