Questions and Answers of Modern Principles Of Economics

Why does a recession cause a trade deficit to increase?
Both the United States and global economies are booming. Will U.S. imports and/or exports increase?
For each of the following, indicate which type of government spending would justify a budget deficit and which would not.a. Increased federal spending on Medicareb. Increased spending on educationc.
How did large trade deficits hurt the East Asian countries in the mid 1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)
Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factor or factors are making the difference
The United States exports 14% of GDP while Germany exports about 50% of its GDP. Explain what that means.
Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.a. Living in an especially large
If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?
What is included in the current account balance?
In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?
Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit?
What are the main components of the national savings and investment identity?
When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?
Does a trade surplus help to guarantee strong economic growth?
What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?
What is the difference between trade deficits and balance of trade?
Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically
A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is
If a country is a big exporter, is it more exposed to global financial crises?
If countries reduced trade barriers, would the international flows of money increase?
Is it better for your country to be an international lender or borrower?
Many think that the size of a trade deficit is due to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.
If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid
Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Is this possible?
What is more important, a country’s current account balance or GDP growth? Why?
Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?
Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your
In 2001, the United Kingdom's economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of
Table 23.7 provides some hypothetical data on macroeconomic accounts for three countries represented by A, B, and C and measured in billions of currency units. In Table 23.7, private household saving
Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $100 billion, total domestic savings of $1,500 billion, and total domestic physical capital
Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is
Describe the mechanism by which supply creates its own demand.
Describe the mechanism by which demand creates its own supply.
The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like
In the AD/AS model, what prevents the economy from achieving equilibrium at potential output?
Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect
Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth,
How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?
Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. Use the AD/AS model to determine the likely impact on our equilibrium GDP
A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?
Many financial analysts and economists eagerly await the press releases for the reports on the home price index and consumer confidence index. What would be the effects of a negative report on both
What impact would a decrease in the size of the labor force have on GDP and the price level according to the AD/AS model?
Suppose, after five years of sluggish growth, the European Union's economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?
Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?
If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?
What is Keynes’ law?
Do neoclassical economists believe in Keynes’ law or Say’s law?
Does Say’s law apply more accurately in the long run or the short run? What about Keynes’ law?
What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?
What is the economic reason why the SRAS curve slopes up?
What are the components of the aggregate demand (AD) curve?
What are the economic reasons why the AD curve slopes down?
Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.
Briefly explain the reason for the near-vertical shape of the SRAS curve on its far right.
Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.
Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?
Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left.
Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?
How is long-term growth illustrated in an AD/AS model?
How is recession illustrated in an AD/AS model?
How is cyclical unemployment illustrated in an AD/AS model?
How is the natural rate of unemployment illustrated in an AD/AS model?
How is pressure for inflationary price increases shown in an AD/AS model?
What are some of the ways in which exports and imports can affect the AD/AS model?
What is the Keynesian zone of the SRAS curve? How much is the price level likely to change in the Keynesian zone?
What is the neoclassical zone of the SRAS curve? How much is the output level likely to change in the neoclassical zone?
What is the intermediate zone of the SRAS curve? Will a rise in output be accompanied by a rise or a fall in the price level in this zone?
Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?
On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why
Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was
If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment
During spring 2016 the Midwestern United States, which has a large agricultural base, experiences above average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and
Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use
Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and
If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?
If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output,
If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?
Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model?
If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.
The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate
Explain why the short-run aggregate supply curve might be fairly flat in the Keynesian zone of the SRAS curve. How might we tell if we are in the Keynesian zone of the AS?
Explain why the short-run aggregate supply curve might be vertical in the neoclassical zone of the SRAS curve. How might we tell if we are in the neoclassical zone of the AS?
Why might it be important for policymakers to know which in zone of the SRAS curve the economy is?
In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve?
Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 24.2 shows information on aggregate supply, aggregate demand, and the
Are Say’s law and Keynes’ law necessarily mutually exclusive?
The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 24.3 shows.Table 24.3a. Plot the AD/AS diagram. Identify the equilibrium.b. Would you expect
Table 24.4 describes Santher's economy.Table 24.4a. Plot the AD/AS curves and identify the equilibrium.b. Would you expect unemployment in this economy to be relatively high or low?c. Would you
In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.a. A large increase in the price of
Use the AD/AS model to explain how an inflationary gap occurs, beginning from the initial equilibrium in Figure 25.6.Figure 25.6 Price Level AD₁ E Real GDP SRAS AD E₁ Yp
In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation?a. A tax
Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/AS model to analyze the likely impact on output and employment. Hint: revisit Figure
How would a decrease in energy prices affect the Phillips curve?
Does Keynesian economics require government to set controls on prices, wages, or interest rates?
List three practical problems with the Keynesian perspective.
Name some economic events not related to government policy that could cause aggregate demand to shift.
Name some government policies that could cause aggregate demand to shift.
From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?
Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?
Explain what economists mean by “menu costs.”

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