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modern principles of economics
Questions and Answers of
Modern Principles Of Economics
Why do presidents typically reappoint Chairs of the Federal Reserve Board even when they were originally appointed by a president of a different political party?
In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?
The term “moral hazard” describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank
Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9% to10% of deposits. What would their options be to come up with the
A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short run tradeoff typically observed between inflation and unemployment. Based on
How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?
Is it preferable for central banks to primarily target inflation or unemployment? Why?
Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds
Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. Sketch out the balance sheet changes that will occur as Acme restores its required reserves (10% of
All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?
Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?
If GDP is 1,500 and the money supply is 400, what is velocity?
If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?
If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?
How will a stronger euro affect the following economic agents?a. A British exporter to Germany.b. A Dutch tourist visiting Chile.c. A Greek bank investing in a Canadian government bond.d. A French
Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds, supply of pounds, and exchange rate for
Suppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say,
Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and
This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system,” if banks borrow from abroad to lend
A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose
How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?
A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?
Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?
Describe some buyers and some sellers in the market for U.S. dollars.
What is the difference between foreign direct investment and portfolio investment?
What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?
Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?
Does a higher rate of return in a nation’s economy, all other things being equal, affect the exchange rate of its currency? If so, how?
Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?
What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?
How can an unexpected fall in exchange rates injure the financial health of a nation’s banks?
Why would a nation “dollarize”—that is, adopt another country’s currency instead of having its own?
Can you think of any major disadvantages to dollarization? How would a central bank work in a country that has dollarized?
If a country’s currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the interest rate paid on government bonds) in that
Do you think that a country experiencing hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?
Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its
We learned that changes in exchange rates and the corresponding changes in the balance of trade amplify monetary policy. From the perspective of a nation’s central bank, is this a good thing or a
If a developing country needs foreign capital inflows, management expertise, and technology, how can it encourage foreign investors while at the same time protect itself against capital flight and
Many developing countries, like Mexico, have moderate to high rates of inflation. At the same time, international trade plays an important role in their economies. What type of exchange rate regime
What would make a country decide to change from a common currency, like the euro, back to its own currency?
A British pound cost $2.00 in U.S. dollars in 2008, but $1.27 in U.S. dollars in 2017. Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?
When governments run budget deficits, how do they make up the differences between tax revenue and spending?
When governments run budget surpluses, what is done with the extra funds?
Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio
Suppose that gifts were taxed at a rate of 10% for amounts up to $100,000 and 20% for anything over that amount. Would this tax be regressive or progressive?
If an individual owns a corporation for which he is the only employee, which different types of federal tax will he have to pay?
What taxes would an individual pay if he were self-employed and the business is not incorporated?
The social security tax is 6.2% on employees’ income earned below $113,000. Is this tax progressive, regressive or proportional?
Debt has a certain self-reinforcing quality to it. There is one category of government spending that automatically increases along with the federal debt. What is it?
True or False:a. Federal spending has grown substantially in recent decades.b. By world standards, the U.S. government controls a relatively large share of the U.S. economy.c. A majority of the
What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?
What is the standardized employment budget?
What are some practical weaknesses of discretionary fiscal policy?
What are some of the arguments for and against a requirement that the federal government budget be balanced every year?
Why is government spending typically measured as a percentage of GDP rather than in nominal dollars?
Why are expenditures such as crime prevention and education typically done at the state and local level rather than at the federal level?
Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy
Excise taxes on tobacco and alcohol and state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of income, why might this be so?
What is the benefit of having state and local taxes on income instead of collecting all such taxes at the federal level?
In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play?
Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case?
Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio
How will cuts in state budget spending affect federal expansionary policy?
Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.
Is Medicaid (federal government aid to lowincome families and individuals) an automatic stabilizer?
What is a potential problem with a temporary tax increase designed to increase aggregate demand if people know that it is temporary?
If the government gives a $300 tax cut to everyone in the country, explain the mechanism by which this will cause interest rates to rise.
Do you agree or disagree with this statement: “It is in the best interest of our economy for Congress and the President to run a balanced budget each year.” Explain your answer.
During the Great Recession of 2008–2009, what actions would have been required of Congress and the President had a balanced budget amendment to the Constitution been ratified? What impact would
A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the
If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the
Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate
In a country, private savings equals 600, the government budget surplus equals 200, and the trade surplus equals 100. What is the level of private investment in this economy?
Assume an economy has a budget surplus of 1,000, private savings of 4,000, and investment of 5,000.a. Write out a national saving and investment identity for this economy.b. What will be the balance
In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity,
Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of 50, a trade deficit of 20, private savings of 130, and investment of 100. If the budget deficit rises to
Why have many education experts recently placed an emphasis on altering the incentives that U.S. schools face rather than on increasing their budgets? Without endorsing any of these proposals as
What are some steps the government can take to encourage research and development?
Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
How would you expect larger budget deficits to affect private sector investment in physical capital? Why?
Under what conditions will a larger budget deficit cause a trade deficit?
What does the concept of rationality have to do with Ricardian equivalence?
What are some of the ways fiscal policy might encourage economic growth?
What are some fiscal policies for improving a society’s human capital?
What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?
Explain how cuts in funding for programs such as Head Start might affect the development of human capital in the United States.
Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.
Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.
The U.S. government has shut down a number of times in recent history. Explain how a government shutdown will affect the variables in the national investment and savings identity. Could the shutdown
Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.
Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.
Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe
Explain why the government might prefer to provide incentives to private firms to do investment or research and development, rather than simply doing the spending itself?
Under what condition would crowding out not inhibit long-run economic growth? Under what condition would crowding out impede long-run economic growth?
What must take place for the government to run deficits without any crowding out?
Sketch a diagram of how a budget deficit causes a trade deficit.
Sketch a diagram of how sustained budget deficits cause low economic growth.
Assume that the newly independent government of Tanzania employed you in 1964. Now free from British rule, the Tanzanian parliament has decided that it will spend 10 million shillings on schools,
Using the data in Table 32.3, rank the seven regions of the world according to GDP and then according to GDP per capita.Table 32.3 East Asia and Pacific South Asia Sub-Saharan Africa Latin America
Illustrate the concept of Ricardian equivalence using the demand and supply of financial capital graph.
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