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business
micro economics

Questions and Answers of Micro Economics

Firms care about their after-tax rate of return on investment projects. In the market for loan able funds, draw a graph and explain the effect of an increase in taxes on business profits. (For
A writer for the Wall Street Journal wrote a whimsical "Letter to Stingy American Consumers": Dear American Consumer: This is The Wall Street Journal. ...The sun shined in April and you didn't spend
The Making the Connection claims that Ebenezer Scrooge promoted economic growth more when he was a miser and saved most of his income than when he reformed and began spending freely. Suppose, though,
The federal government in the United States has been running large budget deficits. Suppose that Congress and the president take actions that turn the budget deficits into budget surpluses.a. Use a
Savers are taxed on the nominal interest payments they receive rather than the real interest payments. Suppose the federal government shifts from taxing nominal interest payments to taxing only real
How does the financial system-both financial markets and financial intermediaries-provide risk sharing, liquidity, and information to savers and borrowers?
Briefly explain why the total value of saving in the economy must equal the total value of investment.
What are loan able funds? Why do businesses demand loan able funds? Why do households supply loan able funds?
Suppose you can receive an interest rate of 3 percent on a certificate of deposit at a bank that is charging borrowers 7 percent on new car loans. Why might you be unwilling to loan money directly to
An International Monetary Fund Factsheet makes the following observation regarding sound financial systems: "A country's financial system ... provides a framework ...for supporting economic growth."
Consider the following data for a closed economy: Y = $11 trillion C = $8 trillion I = $2 trillion TR = $1 trillion T = $3 trillion Use these data to calculate the following: a. Private saving b.
Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion G = $2 trillion SPublic = $-0.5 trillion T = $2 trillion Use these data to calculate the following: a. Private
In problem 2.8, suppose that government purchases increase from $2 trillion to $2.5 trillion. If the values for Y and C are unchanged, what must happen to the values of S and I? Briefly explain. In
Robert Samuelson, a columnist for the Washington Post, argues that the Great Moderation actually caused the Great Recession. During the Great Moderation, "consumers could assume more debt-and lenders
Briefly describe the effect of the business cycle on the inflation rate and the unemployment rate. Why might the unemployment rate continue to rise during the early stages of an expansion?
Why does a country's economic growth rate matter?
Explain the difference between the total percentage increase in real GDP between 2005 and 2015 and the average annual growth rate in real GDP between the same years.
Economists Carol Shiue and Wolfgang Keller of the University of Colorado published a study of "market efficiency" in the eighteenth century in England, other European countries, and China. If the
Use the data on real GDP in the following table to answer the following questions. The values are measured in each country's domestic currency. The base year for Brazil is 1995; the base year for
Andover Bank and Lowell Bank each sell one-year certificates of deposit (CDs). The interest rates on these CDs are given in the following table for a three-year period.Suppose you deposit $1,000 in a
Use the data for the United States in this table to answer the following questions.Year _____________Real GDP per Capita (2009 prices)2010 .................................. $47,7192011
In his book The White Man's Burden, William Easterly reports: A vaccination campaign in southern Africa virtually eliminated measles as a killer of children. Routine childhood immunization combined
Economist Charles Kenny of the Center for Global Development has argued: The process technologies-institutions like laws and inventory management systems-that appear central to raising incomes per
Using the per-worker production function graph from Figures 22.3 and 22.4 on pages 738 and 740, show the effect on real GDP per hour worked of an increase in capital per hour worked, holding
Shortly before the fall of the Soviet Union, the economist Gur Ofer of Hebrew University of Jerusalem wrote, "The most outstanding characteristic of Soviet growth strategy is its consistent policy of
People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in the New
Why is the role of entrepreneurs much more important in the new growth theory than in the traditional economic growth model?
What are the consequences for growth of diminishing returns to capital? How are some economies able to maintain high growth rates despite diminishing returns to capital?
What is the new growth theory? How does the new growth theory differ from the growth theory developed by Robert Solow?
Why are firms likely to under invest in research and development? Briefly discuss three ways in which government policy can increase the accumulation of knowledge capital.
Why does knowledge capital experience increasing returns at the economy level while physical capital experiences decreasing returns?
Which of the following will result in a movement along China's per-worker production function, and which will result in a shift of China's per-worker production function? Briefly explain. a. Capital
The Making the Connection emphasizes that a key difference between market economies and centrally planned economies, like that of the former Soviet Union, is as follows: In market economies,
Use the following graph to answer the questions. In each case, briefly explain your answer.a. True or false: The movement from point A to point B shows the effects of technological change. b. True or
If the per-worker production function were shaped as shown in the following graph, what would be the implications for economic growth of a country that was accumulating increasing quantities of
Describe the record of productivity growth in the United States from 1800 to the present.
Briefly describe the debate among economists over how high U.S. productivity growth rates are likely to be in the future.
Figure 22.5 on page 744 shows growth rates in real GDP per hour worked in the United States for various periods from 1800 onward. How might the growth rates in the figure be different if they were
A column in the Wall Street Journal considers two observations about the U.S. economy: "We live in an era of accelerating technological progress. ..." and "In the years since the recession ... the
Economist Robert Gordon of Northwestern University has argued: My interpretation of the [information] revolution is that it is increasingly burdened by diminishing returns. The push to ever smaller
Some economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many
Why does the economic growth model predict that poor countries should catch up to rich countries in real GDP per capita? Have poor countries been catching up to rich countries?
In 2015, President Barack Obama was quoted in an article in the Wall Street Journal as warning against "rising anti-globalization sentiment," which the president called "a big mistake." a. What did
A columnist in the New York Times observes that "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty
The Roman Empire lasted from 27 b.c. to a.d. 476. The empire was wealthy enough to build such monuments as the Roman Coliseum. Roman engineering skill was at a level high enough that aqueducts built
What are the main reasons many poor countries have experienced slow growth?
What does globalization mean? How have developing countries benefited from globalization?
Briefly explain whether the statistics in the following table are consistent with the economic growth model's predictions of catch-up.
In the following graph, each dot represents a particular country's initial level of real GDP per capita and its growth rate of real GDP per capita.a. For the range of initial GDP per capita from 0 to
Refer to Figures 22.7-22.9 on pages 749 and 751. The lines in the following three graphs show the average relationship between the initial level of real GDP per capita and the growth rate of real
An article in the New York Times notes that since 2001 Italy has had the lowest rate of growth in labor productivity among European countries that use the euro common currency. The article quoted
A study by the McKinsey Global Institute reported that labor productivity increased at an average annual rate of 5.8 percent between 1999 and 2013 in Mexico's large companies, but it fell at an
In 2014, real GDP per capita in Mexico increased by 0.9 percent. A Mexican economist was quoted in an article in the Wall Street Journal as saying, "It's clearly insufficient if we want to
Briefly describe three government policies that can increase economic growth.
Can economic analysis arrive at the conclusion that economic growth will always improve economic well-being? Briefly explain.
An article on the Mexican economy in the Economist notes, "A huge, unproductive informal sector and general lawlessness also drag the economy down." If these factors were the main barriers to more
In China, why may a lower birth rate lead to slower growth in real GDP per capita? Why might high levels of spending on investment in China lead to high rates of growth in the short run but not in
Pranab Bardhan, an economist at the University of California, Berkeley, argues: "China may be close to exhausting the possibilities of technological catch-up with the West, particularly in
Briefly explain which of the following policies are likely to increase the rate of economic growth in the United States. a. Congress passes an investment tax credit, which reduces a firm's taxes if
In an interview on PBS about economic development in Africa, economist George Ayettey stated that of the 54 African countries, only 8 had a free press. For Africa's economic development, Ayittey
More people in high-income countries than in low-income countries tend to believe that rapid rates of economic growth are not desirable. Recall the concept of a "normal good". Does this concept
Using data from the St. Louis Federal Reserve (FRED) (research.stlouisfed.org/ fred2/), analyze the relationship between labor productivity in the manufacturing sector and in the non-farm business
Using data from the St. Louis Federal Reserve (FRED) (research.stlouisfed.org/fred2/), analyze differences in labor productivity among China, India, and the United States. a. From 1952 to the
The U.S. Central Intelligence Agency's World Face book (https://www.cia.gov/library/publications/the-world-factbook/) offers many comparative tables of world data. Go to this site and find the
What is the key idea in the aggregate expenditure macroeconomic model?
What are inventories? What usually happens to inventories at the beginning of a recession? At the beginning of an expansion?
Which of the following does the aggregate expenditure model seek to explain: long-run economic growth, the business cycle, inflation, or cyclical unemployment?
Into which category of aggregate expenditure would each of the following transactions fall? a. The Jones family buys a new car. b. The San Diego Unified School District buys 12 new school buses. c.
Assume that Intel sells $1 billion of computer chips to Dell, Inc., for use in Dell's personal computers. How does this transaction affect aggregate expenditure?
In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate "would have been stronger if it hadn't been for
An article in the Wall Street Journal stated that in China, "carmakers continue to grapple with ... rising inventories." Why might carmakers in China find that their inventories are unexpectedly
According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a
In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports?
Fill in the blank cells in the following table. Assume for simplicity that taxes are zero. Also assume that the values represent billions of 2009 dollars.
In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful
An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many PC makers that buy those chips sell their products in local
Briefly explain which of the following statement is correct. a. The iPhone is made in China, using Chinese-made parts. b. The iPhone is made in the United States, using U.S. made parts. c. The iPhone
In a speech to a conference of government trade officials, Angel Gurría, secretary general of the Organization for Economic Co-operation and Development, made the following observation: "As goods
What are the five main determinants of consumption spending? Which of these is the most important? How would a rise in stock prices or housing prices affect consumption spending?
Compare what happened to real investment between 1979 and the second quarter of 2015 with what happened to real consumption during that period.
What are the four main determinants of investment? How would a change in interest rates affect investment?
What are the three main determinants of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports?
Suppose a major U.S. appliance manufacturer is forecasting demand for its products during the next year. How will the forecast be affected by each of the following? a. A survey shows a sharp rise in
Draw the consumption function and label each axis. Show the effect of an increase in income on consumption spending. Does the change in income cause a movement along the consumption function or a
An economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I
Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or less over the
What is the meaning of the 45° line in the 45° -line diagram?
Consider the table in the next column, which shows the change in inventories for each quarter from the first quarter of 2007 (2007:I) through the fourth quarter of 2010 (2010:IV) measured in billions
Briefly explain whether you agree with the following argument: "The equilibrium level of GDP is determined by the level of aggregate expenditure. Therefore, GDP will decline only if households decide
Fill in the blank cells in the table below. Assume that the value of the MPC does not change as real GDP changes. Also assume that the values represent billions of 2009 dollars.a. What is the value
What does the slope of the aggregate expenditure line equal? How is the slope of the aggregate expenditure line related to the slope of the consumption function?
What is the difference between aggregate expenditure and consumption spending?
At point A in the following graph, is planned aggregate expenditure greater than, equal to, or less than GDP? What about at point B? At point C? For points A and C, indicate the vertical distance
Suppose we drop the assumption that net exports do not depend on real GDP. Draw a graph with the value of net exports on the vertical axis and the value of real GDP on the horizontal axis. Now, add a
A Federal Reserve publication notes that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." What does
An article on bloomberg.com about the Japanese economy noted, "Whether the 2.4 percent annualized gain in gross domestic product reported Wednesday can be maintained depends on consumers stepping in
The following graph contains two aggregate expenditure functions. Consider a movement from point A to point B and a movement from point B to point C. Which movement shows a change in autonomous
Suppose the rate of growth of the economies in the BRIC nations (Brazil, Russia, India, and China) slows down, causing U.S. net exports to fall by $75 billion. If the MPC is 0.8, what will be the
Would a larger multiplier lead to longer and more severe recessions or shorter and less severe recessions? Briefly explain.
A study by the management consulting company McKinsey & Company recommended that the U.S. increase spending on infrastructure, such as bridges and highways, by between $150 and $180 billion per year.

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