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Questions and Answers of Economics

Below you will find the yearly average values of the Dow Jones Industrial Average, the most popular index of stock market prices, for four different years. The Consumer Price Index for each year (on
Below you will find nominal GDP and the GDP deflator (based on 2000 = 100) for the years 1987, 1997, and 2007.a. Compute real GDP for each year.b. Compute the percentage change in nominal and real
Fill in the blanks in the following table of GDPstatistics:
Use the following data to compute the College Price Index for 2007 using the base 1982 =100.
Average hourly earnings in the U.S. economy during several past years were as follows:Use the CPI numbers provided on the inside back cover of this book to calculate the real wage (in
The example in the appendix showed that the Student Price Index (SPI) rose by 42 percent from 1983 to 2007. You can understand the meaning of this better if you do the following:a. Use Table to
Explain the different objectives of (long-run) growth policy versus (short-run) stabilization policy.
Explain why economic growth might be higher in a country with well-established property rights and a stable political system compared with a country where property rights are uncertain and the
Chapter 6 pointed out that, because faster capital formation comes at a cost (reduced current consumption), it is possible for a country to invest too much. Suppose the government of some country
Explain why the best educational policies to promote faster growth might be different in the following countries. a. Mozambiqueb. Brazilc. France
Comment on the following: “Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995.”
Discuss some of the pros and cons of increasing development assistance, both from the point of view of the donor country and the point of view of the recipient country.
The following table shows real GDP per hour of work in four imaginary countries in the years 1997 and 2007. By what percentage did labor productivity grow in each country? Is it true that
Imagine that new inventions in the computer industry affect the growth rate of productivity as follows:Would such a pattern help explain U.S. productivity performance since the mid-1970s?Why?
Which of the following prices would you expect to rise rapidly? Why?a. Cable television ratesb. Football ticketsc. Internet accessd. Household cleaning servicese. Driving lessons
Two countries have the production possibilities frontier (PPF) shown in Figure. But Consumia chooses point C, whereas Investia chooses point I. Which country will have the higher PPF the following
Show on a graph how capital formation shifts the production function. Use this graph to show that capital formation increases labor productivity. Explain in words why labor is more productive when
Explain the difference between investment as the term is used by most people and investment as defined by an economist.
What would the circular flow diagram look like in an economy with no government? Draw one for yourself.
Look at the scatter diagram in Figure. What does it tell you about what was going on in this country in the years 1942 to1945?
What is a consumption function, and why is it a useful device for government economists planning a tax cut?
Explain why permanent tax cuts are likely to lead to bigger increases in consumer spending than temporary tax cuts do.
In 2001 and again in 2003, Congress enacted changes in the tax law designed to promote saving. If such saving incentives had been successful, how would the consumption function have shifted?
Between 1990 and 1991, real disposable income (in 2000 dollars) barely increased at all, owing to a recession. (It rose from $5,324 billion to $5,352 billion.) Use the data on real consumption
Explain the difference between final goods and intermediate goods. Why is it sometimes difficult to apply this distinction in practice? In this regard, why is the concept of value added useful?
Explain the difference between government spending and government purchases of goods and services (G). Which is larger?
Which of the following transactions are included in the gross domestic product, and by how much does each raise GDP?a. You buy a new Toyota, made in the United States, paying $25,000.b. You buy a new
The following outline provides a complete description of all economic activity in Trivialand for 2007. Draw up versions of Tables 3 and 4 for Trivialand showing GDP computed in two different ways.i.
Now complicate Trivialand in the following ways and answer the same questions. In addition,Calculate national income and disposable income.12a. The government bought 50 cars, leaving only 150 cars
Which of the following acts constitute investment according to the economist’s definition of that term?a. Pfizer builds a new factory in the United States to manufacture pharmaceuticals.b. You buy
On a piece of graph paper, construct a consumption function from the data given here and determine theMPC.
In which direction will the consumption function shift if the price level rises? Show this on your graph from the previous question
For over 25 years now, imports have consistently exceeded exports in the U.S. economy. Many people consider this imbalance to be a major problem. Does this chapter give you any hints about why?
Explain the basic logic behind the multiplier in words. Why does it require b, the marginal propensity to consume, to be between 0 and 1?
What would happen to the multiplier analysis if b = 0? If b= 1?
Explain the logic behind the finding that variable imports reduce the numerical value of the multiplier
From the following data, construct an expenditure schedule on a piece of graph paper. Then use the income-expenditure (45° line) diagram to determine the equilibrium level of GDP.Now suppose
From the following data, construct an expenditure schedule on a piece of graph paper. Then use the income-expenditure (45° line) diagram to determine the equilibrium level of GDP. Compare your
Suppose that investment spending is always $250, government purchases are $100, net exports are always $50, and consumer spending depends on the price level in the following way:Price ConsumerLevel
Consider an economy in which the consumption function takes the following simple algebraic form:C = 300 + 0.75DIand in which investment (I) is always $900 and net exports are always -$100. Government
Keep everything the same as in Test Yourself Question 4 except change investment to I = $1,100. Use the equilibrium condition Y = C + 1 + G + (X - IM) to find the equilibrium level of GDP on the
An economy has the following consumption function:C = 200 + 0.8DIThe government budget is balanced, with government purchases and taxes both fixed at $1,000. Net exports are $100. Investment is $600.
Use both numerical and graphical methods to find the multiplier effect of the following shift in the consumption function in an economy in which investment is always $220, government purchases are
Find the equilibrium level of GDP demanded in an economy in which investment is always $300, net exports are always 2$50, the government budget is balanced with purchases and taxes both equal to
Referring to Test Yourself Question 1, do the same for an economy in which investment is $250, net exports are 0, government purchases and taxes are both $400, and the consumption function is as
In each of these cases, how much saving is there in equilibrium?
Imagine an economy in which consumer expenditure is represented by the following equation:C = 50 + 0.75DIImagine also those investors want to spend $500 at every level of income (I = $500), net
Fredonia has the following consumption function:C = 100 + 0.8DIFirms in Fredonia always invest $700 and net exports are 0, initially. The government budget is balanced with spending and taxes both
Suppose exports and imports of a country are given by the following:Calculate net exports at each level ofGDP
If domestic expenditure (the sum of C + 1 + G in the economy described in Test Yourself Question 1) is as shown in the following table, construct a 45° line diagram and locate the equilibrium level
Now raise exports to $650 and find the equilibrium again. How large is the multiplier?
Explain why a decrease in the price of foreign oil shifts the aggregate supply curve outward to the right. What are the consequences of such a shift?
Comment on the following statement: “Inflationary and recessionary gaps are nothing to worry about because the economy has a built-in mechanism that cures either type of gap automatically.”
Give two different explanations of how the economy can suffer from stagflation.
Why do you think wages tend to be rigid in the downward direction?
Explain in words why rising prices reduce the multiplier effect of an autonomous increase in aggregate demand.
In an economy with the following aggregate demand and aggregate supply schedules, find the equilibrium levels of real output and the price level. Graph your solution. If full employment comes at
Suppose a worker receives a wage of $20 per hour. Compute the real wage (money wage deflated by the price index) corresponding to each of the following possible price levels: 85, 95, 100, 110, 120.
Add the following aggregate supply and demand schedules to the example in Test Yourself Question 2 of Chapter 9 to see how inflation affects the multiplier:Draw these schedules on a piece of graph
Use an aggregate supply-and-demand diagram to show that multiplier effects are smaller when the aggregate supply curve is steeper. Which case gives rise to more inflation—the steep aggregate supply
The federal budget for national defense has increased substantially to pay for the Iraq war. How would GDP in the United States have been affected if this higher defense spending led to? a. larger
Explain why G has the same multiplier as I, but taxes have a different multiplier.
If the government decides that aggregate demand is excessive and is causing inflation, what options are open to it? What if the government decides that aggregate demand is too weak instead?
Advocates of lower taxes on capital gains argue that this type of tax cut will raise aggregate supply by spurring business investment. Compare the effects on investment, aggregate supply, and tax
When the income-tax rate declines, as it did in the United States early in this decade, does the multiplier go up or down? Explain why
Discuss the pros and cons of having a higher or lower multiplier.
Consider an economy in which tax collections are always $400 and in which the four components of aggregate demand are as follows:.Find the equilibrium of this economy graphically. What is the
Consider an economy similar to that in the preceding question in which investment is also $200, government purchases are also $500, net exports are also $30, and the price level is also fixed. But
Return to the hypothetical economy in Test Yourself Question 1, and now suppose that both taxes and government purchases are increased by $120. Find the new equilibrium under the assumption that
Suppose you are put in charge of fiscal policy for the economy described in Test Yourself Question 1. There is an inflationary gap, and you want to reduce income by $120. What specific actions can
Now put yourself in charge of the economy in Test Yourself Question 2, and suppose that full employment comes at a GDP of $1,840. How can you push income up to that level?
Which of the following is considered a fixed tax and which a variable tax?a. The gasoline taxb. The corporate income taxc. The estate taxd. The payroll tax
In a certain economy, the multiplier for government purchases is 2 and the multiplier for changes in fixed taxes is 1.5. The government then proposes to rise both spending and taxes by $100 billion.
Suppose real GDP is $10,000 billion and the basic expenditure multiplier is 2. If two tax changes are made at the same time: a. fixed taxes are raised by $100 billion, b. the income-tax rate is
Consider an economy described by the following set of equations:C = 120 + 0.80DII = 320G = 480(X - IM) = -80T = 200 + 0.25YFind the equilibrium level of GDP. Next, find the multipliers for government
This question is a variant of the previous problem that approaches things in the way that a fiscal policy planner might. In an economy whose consumption function and tax function are as given in Test
You are given the following information about an economy:C = 0.90DII = 100G= 540(X- IM) = -40T = -1⁄3 Ya. Find equilibrium GDP and the budget deficit.b. Suppose the government, unhappy with the
In the economy considered in Test Yourself Question 3, suppose the government, seeing that it has not wiped out the deficit, keeps cutting G until it succeeds in balancing the budget. What level of
If ours were a barter economy, how would you pay your tuition bill? What if your college did not want the goods or services you offered in payment?
How is “money” defined, both conceptually and in practice? Does the U.S. money supply consist of commodity money, full-bodied paper money, or fiat money?
What is fractional reserve banking, and why is it the key to bank profits? (Hint: What opportunities to make profits would banks lose if reserve requirements were 100 percent?) Why does fractional
During the 1980s and early 1990s, a rash of bank failures occurred in the United States. Explain why these failures did not lead to runs on banks.
Each year during Christmas shopping season, consumers and stores increase their holdings of cash. Explain how this development could lead to a multiple contraction of the money supply.
Excess reserves make a bank less vulnerable to runs. Why, then, don’t bankers like to hold excess reserves? What circumstances might persuade them that it would be advisable to hold excess reserves?
If the government takes over a failed bank with liabilities (mostly deposits) of $2 billion, pays off the depositors, and sells the assets for $1.5 billion, where does the missing $500 million come
Use tables to illustrate what happens to bank balance sheets when each of the following transactions occurs:a. You withdraw $100 from your checking account to buy concert tickets.b. Sam finds a $100
For each of the transactions listed in Test Yourself Question 3, what will be the ultimate effect on the money supply if the required reserve ratio is one-eighth (12.5 percent)? Assume that the
Why does a modern industrial economy need a central bank?
Explain why the quantity of bank reserves supplied normally is higher and the quantity of bank reserves demanded normally is lower at higher interest rates.
From September 2007 through April 2008, the Fed believed that interest rates needed to fall and took steps to reduce them, eventually cutting the federal funds rate from 5.25 percent to 2.0 percent.
Explain why both business investments and purchases of new homes rise when interest rates decline.
Suppose there is $120 billion of cash and that half of this cash is held in bank vaults as required reserves (that is, banks hold no excess reserves). How large will the money supply be if the
Show the balance sheet changes that would take place if the Federal Reserve Bank of New York purchased an office Building from Citigroup for a price of $100 million. Compare this effect to he effect
Suppose the Fed purchases $5 billion worth of government bonds from Bill Gates, who banks at the Bank of America in San Francisco. Show the effects on the balance sheets of the Fed, the Bank of
Treasury bills have a fixed face value (say, $1,000) and pay interest by selling at a discount. For example, if a one-year bill with a $1,000 face value sells today for $950, it will pay $1,000 –
Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions: a. Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage
Explain how your answers to Test Yourself Question 5 would differ if each of the assumptions changed. Specifically, what sorts of changes in the assumptions would weaken the effects of monetary
Consider an economy in which government purchases, taxes, and net exports are all zero, theConsumption function isC = 300 + 0.75Y And investment spending (I) depend on the rate of interest (r) in the
Use the concept of opportunity cost to explain why velocity is higher at higher interest rates.
How does monetarism differ from the quantity theory of money?

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