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Questions and Answers of
Microeconomics
Why has nominal GDP increased faster than real GDP in the United States over time? What would it mean if an economy had real GDP increasing faster than nominal GDP?
We usually discuss GDP in terms of what is included in the definition. What is not included in GDP?Why are these things excluded?
If a surfboard is produced this year but not sold until next year, how is it counted in this year’s GDP and not next year’s?
What is the price of 1 U.S. dollar in terms of each of the following currencies, given the following exchange rates?a. 1 euro = \($1.41\)b. 1 Chinese yuan = \($.15\)c. 1 Israeli shekel = \($.28\)d.
A bicycle manufactured in the United States costs \($200.\) Using the exchange rates listed in Table 1, what would the bicycle cost in each of the following countries?a. Argentinab. Britainc. Canada
The U.S. dollar price of a Swedish krona changes from \($.1572\) to \($.1730\).a. Has the dollar depreciated or appreciated against the krona?b. Has the krona appreciated or depreciated against the
What is the balance of trade? Use the information in the following table on Mexico's 2007 international transactions to answer exercises 4-6 (the amounts are the U.S. dollar values in millions):
What is the current account? Use the information in the following table on Mexico's 2007 international transactions to answer exercises 4-6 (the amounts are the U.S. dollar values in millions):
Did Mexico become a larger international net debtor during 2007? Use the information in the following table on Mexico's 2007 international transactions to answer exercises 4-6 (the amounts are the
How reasonable is it for every country to follow policies aimed at increasing net exports?
How did the United States become the world’s largest debtor nation in the 1980s?
If the U.S. dollar appreciated against the Japanese yen, what would you expect to happen to U.S. net exports to Japan?
Suppose the U.S. dollar price of a British pound is \($1.50;\) the dollar price of a euro is \($1;\) a hotel room in London, England, costs 120 British pounds; and a comparable hotel room in Hanover,
Many residents of the United States send money to relatives living in other countries. For instance, a Salvadoran farmworker who is temporarily working in San Diego, California, sends money back to
Why is it true that if the dollar depreciates against the yen, the yen must appreciate against the dollar?
Why does the balance of payments contain an account called ‘‘statistical discrepancy’’?
Use the national income identity GDP = C + I + G + X to explain what a current account deficit (negative net exports) means in terms of domestic spending, production, and borrowing.
What is the labor force? Do you believe that the U.S. government’s definition of the labor force is a good one—that it includes all the people it should include? Explain your answer.
List the reasons why the official unemployment rate may not reflect the true social burden of unemployment.Explain whether the official numbers overstate or understate true unemployment in light of
Suppose you are able-bodied and intelligent, but lazy. You’d rather sit home and watch television than work, even though you know you could find an acceptable job if you looked.a. Are you
Can government do anything to reduce the number of people in the following categories? If so, what?a. Frictionally unemployedb. Structurally unemployedc. Cyclically unemployed
Does the GDP gap measure all of the costs of unemployment? Why or why not?
Why do teenagers have the highest unemployment rate in the economy?
Suppose you are currently earning $15 an hour. If the inflation rate over the current year is 10 percent and your firm provides a cost-of-living raise based on the rate of inflation, what would you
Write an equation that defines the real interest rate.Use the equation to explain why unexpectedly high inflation redistributes income from creditors to debtors.
Many home mortgages in recent years have been made with variable interest rates. Typically, the interest rate is adjusted once a year on the basis of current interest rates on government bonds. How
The word cycle suggests a regular, recurring pattern of activity. Is there a regular pattern to the business cycle? Support your answer by examining the duration (number of months) of each expansion
Using the list of leading indicators in Table 1, write a brief paragraph explaining why each variable changes before real output changes. In other words, provide an economic reason why each indicator
Suppose 500 people were surveyed, and of those 500, 450 were working full time. Of the 50 not working, 10 were full-time college students, 18 were retired, 5 were under 16 years of age, 7 had stopped
Consider the following price information:a. Based on the information given, what was the inflation rate between year 1 and year 2?b. What happened to the price of coffee relative to that of milk
Use a supply and demand diagram to illustrate:a. Cost-push inflation caused by a labor union successfully negotiating for a higher wage.b. Demand-pull inflation caused by an increase in demand for
During the Bolivian hyperinflation in the 1980s, Bolivians used U.S. dollars as a substitute for the domestic currency (the peso) for many transactions.Explain how the value of money is affected by
Suppose the government raises the benefits available to unemployed workers and then discovers that the number of unemployed workers has increased substantially, although there has been no other
Toward the end of the recent recession, the economy was characterized by a ‘‘jobless recovery’’— output and hours worked were rising, but employment was not. Explain what may have been
How is the aggregate demand curve different from the demand curve for a single good, like hamburgers?
Why does the aggregate demand curve slope downward?Give real-world examples of the three effects that explain the slope of the curve.
How does an increase in foreign income affect domestic aggregate expenditures and demand?Draw a diagram to illustrate your answer.
How does a decrease in foreign price levels affect domestic aggregate expenditures and demand?Draw a diagram to illustrate your answer.
How is the aggregate supply curve different from the supply curve for a single good, like pizza?
There are several determinants of aggregate supply that can cause the aggregate supply curve to shift.a. Describe those determinants and give an example of a change in each.b. Draw and label an
Draw a short-run aggregate supply curve that gets steeper as real GDP rises.a. Explain why the curve has this shape.b. Now draw a long-run aggregate supply curve that intersects a short-run AS curve.
Draw and carefully label an aggregate demand and supply diagram with initial equilibrium at P0 and Y0.a. Using the diagram, explain what happens when aggregate demand falls.b. How is the short run
Draw an aggregate demand and supply diagram for Japan. In the diagram, show how each of the following affects aggregate demand and supply.a. The U.S. gross domestic product falls.b. The level of
If the long-run aggregate supply curve gives the level of potential real GDP, how can the short-run aggregate supply curve ever lie to the right of the long-run aggregate supply curve?
What will happen to the equilibrium price level and real GDP if:a. Aggregate demand and aggregate supply both increase?b. Aggregate demand increases and aggregate supply decreases?c. Aggregate demand
During the Great Depression, the U.S. economy experienced a falling price level and declining real GDP. Using an aggregate demand and aggregate supply diagram, illustrate and explain how this could
Suppose aggregate demand increases, causing an increase in real GDP but no change in the price level. Using an aggregate demand and aggregate supply diagram, illustrate and explain how this could
Suppose aggregate demand increases, causing an increase in the price level but no change in real GDP. Using an aggregate demand and aggregate supply diagram, illustrate and explain how this could
Use an aggregate demand and aggregate supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and real GDP:a. Consumers expect a recession.b.
In the boom years of the late 1990s, it was often said that rapidly increasing stock prices were responsible for much of the rapid growth of real GDP.Explain how this could be true, using aggregate
Suppose you read in the newspaper that rising oil prices would contribute to a global recession. Use aggregate demand and supply analysis to explain how high oil prices could reduce real GDP.
Find an article in today’s news that could indicate a shift in aggregate supply and/or demand, and draw corresponding aggregate supply and demand curves.
Why do we study the consumption and saving functions together?
Explain the difference between a flow variable and a stock variable. Classify each of the following as a stock or a flow: income, wealth, saving, savings, consumption, investment, government
Why is consumption so much more stable over the business cycle than investment? In formulating your answer, discuss household behavior as well as business behavior.
Assuming investment is autonomous, draw an investment function with income on the horizontal axis. Show how the function shifts if:a. The interest rate falls.b. An investment tax credit is repealed
Use the following table to answer these questions:a. What is the MPC?b. What is the MPS?c. What is the MPI?d. What is the level of aggregate expenditures at each level of income?e. Graph the
Based on the table in exercise 6, what is the linear equation for each of the following functions?data from in exercise 6Use the following table to answer these questions:a. Consumptionb.
Is the AE function the same thing as a demand curve? Why or why not?
What is the level of saving if:a. Disposable income is \($500\) and consumption is \($450\)?b. Disposable income is \($1,200\) and the APS is .9?c. The MPC equals .9, disposable income rises from
What is the marginal propensity to consume if:a. Consumption increases by \($75\) when disposable income rises by \($100\)?b. Consumption falls by \($50\) when disposable income falls by
How can the APC fall as income rises if the MPC is constant?
Why would economies with older populations tend to have consumption functions with greater slopes?
Draw a diagram and illustrate the effects of the following on the net exports function for the United States:a. The French government imposes restrictions on French imports of U.S. goods.b. The U.S.
Why is the slope of the C + I + G function different from the slope of the C + I + G + X function?
Suppose the consumption function is C = $200 + 0.8Y.a. What is the amount of autonomous consumption?b. What is the marginal propensity to consume?c. What would consumption equal when real GDP equals
Explain why the consumption function is flatter in the short run than in the long run. Draw a diagram to illustrate your answer.
Explain the role of inventories in keeping actual expenditures equal to real GDP.
Rework Figure 1 assuming a closed economy (net exports equal zero at all levels of income). What is the equilibrium level of real GDP? What is the spending multiplier? FIGURE 1 The Equilibrium Level
Draw a graph representing a hypothetical economy.Carefully label the two axes, the S + T + IM curve, the I + G + EX curve, and the equilibrium level of real GDP. Illustrate the effect of an increase
Given the following information, what is the spending multiplier in each case?a. MPC = .90, MPI = .10b. MPC = .90, MPI = .20c. MPC = .80, MPI = .30d. MPC = .90, MPI = 0
Draw a graph representing a hypothetical economy in a recession. Carefully label the two axes, the 45-degree line, the AE curve, and the equilibrium level of real GDP. Indicate and label the GDP gap
Explain the effect of foreign repercussions on the value of the spending multiplier.
Suppose the MPC is .80, the MPI is .10, and the income tax rate is 15 percent. What is the multiplier in this economy?
What is the MPC?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
What is the MPI?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
What is the MPS?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
What is the multiplier?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
What is the equilibrium level of real GDP?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
What is the value of autonomous consumption?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20 $30 -$30 $700 $660 $20 $30 -$50
If government spending increases by $15, what is the new equilibrium level of real GDP?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500 $480 $20
What are the equations for the consumption, net exports, and aggregate expenditures functions?Use the information in the following table Y C G X $100 $120 $20 $30 $10 $300 $300 $20 $30 -$10 $500
Derive the aggregate demand curve from an aggregate expenditures diagram. Explain how aggregate demand relates to aggregate expenditures.
In the chapter titled ‘‘Macroeconomic Equilibrium:Aggregate Demand and Supply,’’ the aggregate supply (AS) curve was upward sloping. Now, in this chapter, we have a flat AS curve. What are
Why should the business cycles of Canada and Mexico be much like the U.S. business cycle, while those of South Africa and Turkey may differ from the U.S. pattern of economic expansion and contraction?
What is the role of aggregate demand in eliminating the GDP gap? How does the slope of the AS curve affect the fiscal policy actions necessary to eliminate the GDP gap?
What is the ‘‘government budget constraint’’? In other words, what are the sources of financing government spending?
In what ways are government deficits harmful to the economy?
Define and give three examples of automatic stabilizers.
Briefly describe the major differences between fiscal policy in industrial countries and that in developing countries.
Why will real GDP tend to rise when government spending and taxes rise by the same amount?
How can a larger government fiscal deficit cause a larger international trade deficit?
Why do government budget deficits grow during recessions?
Taxes can be progressive, regressive, or proportional.Define each, and briefly offer an argument for why income taxes are usually progressive.
What is a value-added tax (VAT), and what is an advantage of such a tax relative to an income tax?
What is the size of the GDP gap?Assume that equilibrium real GDP is \($800\) billion, potential real GDP is \($900\) billion, the MPC is .80, and the MPI is .40.
How much must government spending increase to eliminate the GDP gap?Assume that equilibrium real GDP is \($800\) billion, potential real GDP is \($900\) billion, the MPC is .80, and the MPI is .40.
How much must taxes fall to eliminate the GDP gap?Assume that equilibrium real GDP is \($800\) billion, potential real GDP is \($900\) billion, the MPC is .80, and the MPI is .40.
If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap?Assume that equilibrium real GDP is $800 billion, potential real GDP is
Suppose the MPC is .90 and the MPI is .10. If government expenditures go up \($100\) billion while taxes fall \($10\) billion, what happens to the equilibrium level of real GDP?
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