Questions and Answers of Principles Of Economics

Explain how you would use the five tips to track the economy to form an outlook of the economy and job market you are hoping to enter after finishing your education. Go online to find data that will
For each of the following, should you use seasonally adjusted data? Why or why not?a. You are trying to look at economic growth over the past few quarters and you want to figure out the trend so that
What indicators should you use to track each of the following, and why?a. The overall size of the economyb. Labor market performancec. The future trajectory of economic activityd. Wages and benefits
The S&P 500 has been increasing steadily over the past few months. What does this signal about how investors view future profits? Explain your reasoning.
What do you expect to happen to the S&P 500 if it is announced that GDP grew at an annual rate of 2% last quarter but economists were expecting it to grow at an annual rate of 3%?
Javier is a department manager at a big box store. Over the last month sales have slumped and he has lots of inventory going unsold. Now it’s time to put in his orders to restock for next month.
How is macroeconomic equilibrium related to equilibrium output? How does equilibrium output differ from potential output?
How will businesses adjust their production in response to each of the following changes to aggregate expenditure?a. Consumers become more confident in the economic outlook and increase their
In 2017, potential output was $18.17 trillion and output was $18.05 trillion. In 2018, potential output was $18.51 trillion and output was $18.56 trillion. Calculate the output gap for each year. How
Provide an example of how your own consumption would change as the real interest rate changes. Specifically, describe how your opportunity costs change. If other consumers made similar changes, how
Pick a product that you typically buy and draw the demand curve for it. Then draw the IS curve for the economy. Compare and contrast the two. What are the prices and quantities for each?
The following graph depicts an IS curve for the economy.a. How does the output gap change if the real interest rate rises from 1% to 3%?b. Explain the process by which the output gap changed. How did
For each of the following, illustrate how the IS curve will change with a graph.a. Poor numbers from several leading economic indicators cause businesses to become pessimistic about the future of the
What determines the risk premium, and how does it affect the real interest rate and MP curve?
The federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%.a. Draw an MP curve.b. Determine the risk premium. Label it and the
The economy is experiencing an output gap of − 3% . Discuss how monetary policy or fiscal policy could be used to raise actual output toward potential output. Could monetary policy and fiscal
Explain how prolonged recessions can occur and how an economy can become stuck in a slump with actual output falling short of potential output even if both buyers and sellers are making the best
Draw an IS-MP graph where the macroeconomic equilibrium is at a real interest rate of 6% and actual output is 10% below potential GDP. Use this graph to answer the following questions.a. You’re a
To combat a recession, the Indian government enacts expansionary fiscal policy, which increases government spending by 2 trillion rupees. In response, GDP rises by 6 trillion rupees.a. What is the
Recent releases of leading economic indicators have been a mixed bag: Some of them indicate stable economic growth, while others indicate a looming recession. Explain how businesses will adjust their
How can the Federal Reserve influence long-term interest rates, and shift the MP curve, without changing the current risk-free interest rate?
In 2018 and 2019, the United States enacted tariffs on imports from China. In retaliation, China enacted tariffs on goods exported from the United States. How will the output gap change in response
Classify each of the following as an example of either a spending shock or a financial shock. Determine how the macroeconomic equilibrium will change by illustrating this shift in an IS-MP graph.a.
Housing prices in the United States decline dramatically and remain depressed for several months. Using an IS-MP graph, explain what happens to the macroeconomic equilibrium in the United States.
Rare earth metals are used in the production of many of the personal electronic devices you use every day. Use the interdependence principle to discuss the impact of an unexpected increase in the
You’ve been invited to help a foreign affiliate of your company set next year’s prices. Inflation last year was 5%, the unemployment rate dropped to record lows, and GDP skyrocketed. In addition,
For each of the following, determine whether inflation expectations, demandpull inflation, or cost-push inflation—and hence inflation overall—will change.a. A rapid influx of foreign investment
Explain how inflation expectations are like a self-fulfilling prophecy.
In June 2019, the average price for a cup of coffee in Venezuela was 6,500 bolivars; in June 2018 the average price was just 8 bolivars. This represents an 81,150% increase in a cup of coffee for
In January 2019, inflation expectations in the United Kingdom fell from 2.9% to 2.6%. What effect will this have on inflation in the United Kingdom if nothing else changes in the economy? Explain
Seana owns a small pet shop and expects inflation to be 3% next year. By how much does Seana expect her marginal costs to change? By how much does she expect her competitor’s prices to change?
You’re a pricing analyst for a manufacturing firm. You are tasked with predicting how average prices will change over the next quarter to help your manager decide how to change her prices. How
Explain the difference between expected inflation and unexpected inflation.
Draw an example of a Phillips curve and a labor market Phillips curve. Explain how they summarize the exact same idea while using different measures of excess demand.
You’re a junior consultant at a management consulting company and your team has been hired to help guide a struggling regional retailer. You do some research and find that the output gap is
Take the Phillips curve from the previous question and illustrate the corresponding labor market Phillips curve where the initial unemployment rate was 7 1/2% and the final unemployment rate is 2
If Congress levies a new $1,000 per car tax on car manufacturers to pay for expanded Social Security benefits, how do you think this will impact unexpected inflation?
The adoption of vehicle automation has exploded over the last few years: Automated tractors are already in use harvesting produce on farms, while selfdriving vehicles are used to move cargo around
Recently, policymakers have debated whether an increase in the federal minimum wage (currently $7.25 an hour) would be good for the economy. Use a Phillips curve to explain how inflation would change
Since 2010, the U.S. dollar has appreciated relative to the Mexican peso. What are the direct and indirect effects on inflation? Explain.
Identify whether the following will represent a shift in the Phillips curve or a movement along the Phillips curve. Illustrate with a graph.a. Consumer confidence increases unexpectedly and causes
The interdependence principle says that what happens in one part of the economy will affect other parts. Use the Fed model to explain the interdependence between the real interest rate, the output
Compare and contrast the three different economic shocks using the Fed model, and explain which curve shifts for each type of shock.
Determine if the following changes to the economy are examples of financial, spending, or supply shocks. For each case, explain whether the IS, MP, or Phillips curve will shift, and in what
The economy is experiencing a recession. The output gap is hovering at −7%, causing higher-than-normal unemployment. Using the Fed model, compare and contrast how monetary policy and fiscal policy
You open the newspaper and read that Europe is headed for a recession. Use the Fed model to forecast what you expect to happen to the U.S. economy. Use the three-step recipe for analyzing
The following graph summarizes the state of the economy. Your boss asks you how you think the Federal Reserve should respond to these economic conditions.a. Would you recommend that the Fed try to
For each of the following scenarios, use the Fed model to forecast how output, the real interest rate, and inflation will change. In each case, start with an economy with an output gap of zero and
Now go back to Study Problem 3 and predict how each change that it lists will impact output, inflation, and the real interest rate. Illustrate your answers.Problem 3Determine if the following changes
Consider the three types of economic shocks: financial shocks, spending shocks, and supply shocks. Discuss how each one affects the real interest rate, output gap, and the inflation rate.
Use your answer to the previous question to help you diagnose what kinds of shocks have hit the economy. If the real interest rate changes, what type of shock can you conclude must have occurred?
For each of the following, diagnose which type of economic shock has hit the economy:a. You hear a radio report noting that the recession appears to have ended. It says that while output remains less
Compare and contrast the microeconomic forces of demand and supply with the macroeconomic forces of aggregate demand and aggregate supply. How do the opportunity costs of buyers in the micro context
Draw aggregate demand and aggregate supply curves where macroeconomic equilibrium occurs at an output of $20 trillion. On your graph, indicate the equilibrium price level, but don’t worry about
Explain how the Federal Reserve plays a central role in determining the slope of the aggregate demand curve. For example, if a lower price level leads inflation to be below the Fed’s target rate,
What changes to the economy will lead the aggregate demand curve to shift? What changes will lead to a movement along the aggregate demand curve? Provide a few examples to illustrate your answer.
For each of the following, use a graph to show the shift in aggregate demand.a. Poor numbers from several leading economic indicators cause businesses to become pessimistic about the future of the
How do businesses change their prices at different levels of output, and how does this lead to an upward-sloping aggregate supply curve?
What changes to the economy will lead the aggregate supply curve to shift? What changes will lead to a movement along the aggregate supply curve? Provide a few examples to illustrate your answer.
Illustrate how each of the following will affect aggregate supply and explain your reasoning.a. The implementation of artificial intelligence in manufacturing has led to faster-than-expected
Explain how—depending on the circumstances—the Fed changing the real interest rate can lead either to a movement along the aggregate demand curve or to a shift of the aggregate demand curve. Be
Illustrate in separate AD-AS graphs how the macroeconomic equilibrium will change when the Federal Reserve pursues an expansionary monetary policy (with the goal of raising output) and when it
Explain how an initial increase in government purchases can increase GDP by a greater amount than the increase in government spending.
Think of at least one example of a change to the economy that will lead to the following outcomes and illustrate your answers with an AD-AS graph.a. Output increases and the price level increases.b.
To combat a recession, the Indian government enacts expansionary fiscal policy, which increases government spending by 2 trillion rupees. In response, GDP increases by 6 trillion rupees.a. What is
For each of the following, forecast how prices and output will change by drawing an AD-AS graph, and explain your answers using the three-step recipe to forecast macroeconomic outcomes.a. The Fed
Explain why, in the long run, a change in average prices has no impact on output. What impact does aggregate demand have in determining output in the long run?
One common argument against expansionary fiscal or monetary policy goes like this, “Since the economy returns to potential output in the long run, we should not react to the short-term fluctuations
Why does aggregate supply analysis require looking at specific time horizons to predict macroeconomic outcomes?
In an effort to boost output, the government passes a large fiscal stimulus that raises government purchases by $1 trillion. Use the AD-AS framework to predict how prices and output change in the
For each of the following scenarios, predict how the price level and output will change over time from the very short run to the long run. In each case, consider an economy that was initially
Use the opportunity cost principle to explain why the Fed uses interest rates to influence the economy. How do interest rates impact the opportunity cost of spending money today?
Why does the Fed pay such close attention to GDP if its mandate is to promote maximum employment while keeping prices stable?
Explain why countries with central banks independent from the government have lower inflation on average.
For each of the following misconceptions about the Fed, identify what is wrong with the statement and why.a. The Federal Reserve lacks accountability because no one audits the Fed.There’s no way to
In recent decades, the Federal Reserve has transitioned from an intentionally vague and bureaucratic communication style to a more direct and transparent approach. What is the impact on inflation
Explain why the Fed targets inflation rather than employment even though both are part of its dual mandate. Use the interdependence principle to help answer the question.
What are the pros and cons of targeting a 0% inflation rate? Do you believe the Fed should target 0% inflation, its current 2% inflation target, or some other value? Explain your reasoning.
With the advent of big data and increased computing power, some people have advocated for monetary policy by algorithm. Basically, real-time data is fed into a computer program, which then determines
You are working at the campus bookstore earning $15 per hour. Your manager tells you that in the upcoming year you will get a 2% raise. How does your real wage change if inflation next year is 1%,
Predict how the Fed would likely respond if the output gap became more positive, so that output moved from being 0.1% above potential output to being 3% above potential output, and inflation rose
Use the Fed rule-of-thumb to predict how the Fed would want to change the federal funds rate and the real interest rate targets for each of the following scenarios if its estimate of the neutral real
Explain how the Fed creates a lower and upper bound for the federal funds rate and the incentives that drive financial institutions to move the federal funds market to that target.
Explain how the average American is affected by monetary policy. How does a change in the federal funds rate percolate from Wall Street to Main Street?
You are the managing director of a small local bank. The Fed announces that it is moving its federal funds rate target from 2.25% up to 3.0%. How does this impact the interest rates on the business
The FOMC is presented with data and analysis that indicates the output gap has changed from being close to 0 to now being large and negative. Additionally, inflation is 1.2% instead of the target of
The FOMC increases real interest rates. Explain how each component of GDP—consumption, investment, government spending, and net exports—changes in response, and why. What happens to output,
Compare and contrast how changes in the federal funds rate and quantitative easing affect interest rates and the broader economy.
Do you think that the Fed’s role as a lender of last resort leads financial institutions to make riskier investments? What problem might the economy face if these institutions were left to fail?
The Fed has decreased the federal funds rate—a nominal short-term interest rate—to 0%, and yet the economy is still struggling. Explain what tools it still has at its disposal to help spur the
Explain how the saying, “The federal government is an insurance company with a military,” while exaggerating a bit, does generally describe U.S. federal government spending.
What is mandatory spending, and how does it differ from discretionary spending?
How do federal, state, and local government spending differ in focus?
How is a tax expenditure similar to government spending? How is it different?
You’re working as a staffer for a representative of Congress from your state. The representative is looking to co-sponsor a bill to provide assistance to lowwage workers who want to pursue higher
A friend of yours argues that federal government spending is out of control and significant cuts in spending are needed to reduce the size of the government. Your friend tells you that if we cut
Spending on Medicare and Social Security is expected to grow over the next few decades as the share of the population who are elderly grows. Explain why an aging population increases government
Marissa just got hired at a new job for an annual salary of $112,950. After the standard deduction, her taxable income will be $100,000. Use the marginal tax rates shown in Figure 9 to calculate how
In an effort to encourage people to purchase electric cars, the federal government passes a tax credit of $2,500 for each new electric car that is bought in the United States. Who do you think will
A politician says, “We could help low-wage workers by offering them tax credits like the earned income tax credit. However, it would be cheaper to help them by raising the minimum wage because that

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