Questions and Answers of Economics Principles and Policy

Describe how the World Bank distinguishes between industrially advanced countries (high-income nations)and developing countries (middle-income and lowincome nations).
Return to problem 3 and assume the exchange rate is fixed against the dollar at the equilibrium exchange rate that occurs in year 1. Also suppose that Japan and the United States are the only two
Suppose that the current Canadian dollar (CAD) to U.S.dollar exchange rate is $.85 CAD 5 $1 US and that the U.S.dollar price of an Apple iPhone is $300. What is the Canadian dollar price of an
Refer to the following table, in which Q d is the quantity of yen demanded, P is the dollar price of yen, Q s is the quantity of yen supplied in year 1, and Q s 9 is the quantity of yen supplied in
China had a $372 billion overall current account surplus in 2007. Assuming that China’s net debt forgiveness was zero in 2007 (its capital account balance was zero), by how much did Chinese
LAST WORD Suppose Super D’Hiver—a hypothetical French snowboard retailer—wants to order 5000 snowboards made in the United States. The price per board is $200, the present exchange rate is 1
What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: “A trade deficit means that a nation
Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Does it also
Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is$5 5 Z1). Then show on your diagram a decline in the demand for zee. LO4a.
“Exports pay for imports. Yet in 2009 the nations of the world exported about $379 billion more of goods and services to the United States than they imported from the United States.” Resolve the
Explain why you agree or disagree with the following statements.Assume other things equal. LO3a. A country that grows faster than its major trading partners can expect the international value of its
Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping. Assuming a system of flexible exchange rates between Mexico and the United States,
Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the
Generally speaking, how is the dollar price of euros determined?Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros.
What are official reserves? How do net sales of official reserves to foreigners and net purchases of official reserves from foreigners relate to U.S. balance-of-payment deficits and surpluses?
What do the plus signs and negative signs signify in the U.S.balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial
Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in
Do all international financial transactions necessarily involve exchanging one nation’s distinct currency for another?Explain. Could a nation that neither imports goods and services nor exports
Other things equal, a rightward shift of the supply curve in this figure would:a. depreciate the dollar and might be caused by a significant rise of real interest rates in Britain.b. depreciate the
Other things equal, a leftward shift of the demand curve in this figure:a. would depreciate the dollar.b. would create a shortage of pounds at the previous price of$2 for £1.c. might be caused by a
At the price of $2 for £1 in this figure:a. the dollar-pound exchange rate is unstable.b. the quantity of pounds supplied equals the quantity demanded.c. the dollar price of £1 equals the pound
Which of the following statements is true?a. The quantity of pounds demanded falls when the dollar appreciates.b. The quantity of pounds supplied declines as the dollar price of the pound rises.c. At
Describe the difference between flexible exchange rates and fixed exchange rates.
Discuss how exchange rates are determined in currency markets.
Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Refer to Figure 3.6, page 57. Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price of $1, $2,
The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for
The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two
Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata:Canswicki: 1 can baby formula ; 2 cans tuna fish Tunata: 1
LAST WORD What was the central point that Bastiat was trying to make in his imaginary petition of the candlemakers?
What is offshoring of white-collar service jobs and how does that practice relate to international trade? Why has offshoring increased over the past few decades? Give an example (other than that in
What form does trade adjustment assistance take in the United States? How does such assistance promote political support for free-trade agreements? Do you think workers who lose their jobs because of
Identify and state the significance of each of the following trade-related entities: ( a ) the WTO; ( b ) the EU; ( c ) the Euro Zone; and ( d ) NAFTA. LO5
How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what way do foreign firms that “dump” their products onto the U.S. market in effect
In 2007, manufacturing workers in the United States earned average compensation of $30.56 per hour. That same year, manufacturing workers in Mexico earned average compensation of $3.91 per hour. How
Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies
“The potentially valid arguments for tariff protection—military self-sufficiency, infant industry protection, and diversification for stability—are also the most easily abused.”Why are these
Draw a domestic supply-and-demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your
Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota?What is the net outcome of either tariffs or quotas for the world economy? LO4
What is an export demand curve? What is an import supply curve? How do such curves relate to the determination of the equilibrium world price of a tradable good? LO3
Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60
Explain: “The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China.” Relate your answer to the ideas of Adam Smith and David
Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive
Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner,
After specialization and international trade:a. the United States can obtain units of vegetables at less cost than it could before trade.b. Mexico can obtain more than 20 tons of vegetables, if it so
After specialization and international trade, the world output of beef and vegetables is:a. 20 tons of beef and 20 tons of vegetables.b. 45 tons of beef and 15 tons of vegetables.c. 30 tons of beef
Before specialization, the domestic opportunity cost of producing 1 unit of beef is:a. 1 unit of vegetables in both the United States and Mexico.b. 1 unit of vegetables in the United States and 2
The production possibilities curves in graphs (a) and (b) imply:a. increasing domestic opportunity costs.b. decreasing domestic opportunity costs.c. constant domestic opportunity costs.d. first
Assume the following information for a hypothetical economy in year 1: money supply 5 $400 billion; long-term annual growth of potential GDP 5 3 percent; velocity 5 4.Assume that the banking system
Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively.What is the velocity of money? How will households and businesses react if
You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a
Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively: LO4a. Anticipated changes in aggregate
Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain:“The
Use an AD-AS graph to demonstrate and explain the pricelevel and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is
Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists? LO2
Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig.They bumped into
Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle. LO1
How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility? LO1
What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at
According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability?How might adverse aggregate supply
First, imagine that both input and output prices are fixed in the economy. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output
Identify and describe the variations of the debate over “rules” versus “discretion” in conducting stabilization policy.
Explain what the equation of exchange is and how it relates to “monetarism.”
Suppose that for years East Confetti’s short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 2 percentage point decline in its
Suppose that over a 30-year period Buskerville’s price level increased from 72 to 138, while its real GDP rose from $1.2 trillion to $2.1 trillion. Did economic growth occur in Buskerville?If so,
ADVANCED ANALYSIS Suppose that the equation for a particular short-run AS curve is P 5 20 1 .5 Q , where P is the price level and Q is real output in dollar terms. What is Q if the price level is
Use the figure on the next page to answer the follow questions.Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s
LAST WORD On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax
Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same
What is the Laffer Curve, and how does it relate to supplyside economics? Why is determining the economy’s location on the curve so important in assessing tax policy? LO5
What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve?
Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate.
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over
Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent.Use the aggregate demand–aggregate supply model to illustrate these outcomes
Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its
Suppose the full-employment level of real output ( Q ) for a hypothetical economy is $250 and the price level ( P ) initially is 100. Use the short-run aggregate supply schedules below to answer the
Which of the following statements are true? Which are false? Explain why the false statements are untrue. LO1a. Short-run aggregate supply curves reflect an inverse relationship between the price
Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important? LO1
Explain the relationship between tax rates, tax revenues, and aggregate supply.
Discuss why there is no long-run trade-off between inflation and unemployment.
Explain the short-run trade-off between inflation and unemployment (the Phillips Curve).
Discuss how to apply the “extended” (short-run/long-run) AD-AS model to inflation, recessions, and economic growth.
Explain the relationship between short-run aggregate supply and long-run aggregate supply.
ADVANCED ANALYSIS Suppose that the equation for the SML is Y 5 0.05 1 0.04 X , where Y is the average expected rate of return, 0.05 is the vertical intercept, 0.04 is the slope, and X is the risk
Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. LO3a. What
Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that
Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8
Suppose that you desire to get a lump sum payment of$100,000 two years from now. Rounded to full dollars, how many current dollars will you have to invest today at a 10 percent interest to accomplish
Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound.Rounded to full dollars, what will be the value of your investment 4 years from now?
LAST WORD Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively
Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’dislike of risk grows more intense. Given this change, will average
Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates? LO5
What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML? LO5
In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S.
If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return? LO5
Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore
Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion
What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors? LO2
How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment(stocks or bonds) is considered to be more risky? Given what you know, which

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