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essentials of economics

Questions and Answers of Essentials of Economics

c. Redo the table again to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 20% per year over the next 10 years.
b. Redo the table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit grows by 3% per year over the next 10 years.
a. Complete the accompanying table to show the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy if the government’s budget deficit remains constant at$30 billion over the
14. In 2008, the policy makers of the economy of Eastlandia projected the debt– GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios
13. How did or would the following affect the current public debt and implicit liabilities of the U.S. government?a. In 2003, Congress passed and President Bush signed the Medicare Modernization Act,
12. In which of the following cases does the size of the government’s debt and the size of the budget deficit indicate potential problems for the economy?a. The government’s debt is relatively
11. Your study partner argues that the distinction between the government’s budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you
10. You are an economic adviser to a candidate for national office. She asks you for a summary of the economic consequences of a balanced -budget rule for the federal government and for your
9. Figure 15-9 shows the actual budget deficit and the cyclically adjusted budget deficit as a percentage of GDP in the United States since 1970. Assuming that potential output was unchanged, use
8. The government’s budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. One argues that a rising budget
6. Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier.However, a smaller multiplier means that the change in government
5. In each of the following cases, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the
c. Using the formula for the multiplier for changes in government purchases and for changes in transfers, calculate the total change in real GDP due to the $10 billion decrease in government
b. When the government reduces transfers by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?
a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10 rounds?
4. Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a$10 billion reduction in government transfers by completing the
3. An economy is in long -run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the
c. Illustrate the macroeconomic situation in Brittania with a diagram after the successful fiscal policy has been implemented.
b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Brittania to potential output, YP? What are some examples of such policies?
a. Is Brittania facing a recessionary or inflationary gap?
2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic consultant
c. Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented.
b. Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, YP? What are some examples of such policies?
a. Is Albernia facing a recessionary or inflationary gap?
1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, YP.
7. A widely used measure of fiscal health is the debt–GDP ratio. This number can remain stable or fall even in the face of moderate budget deficits if GDP rises over time.However, a stable
6. U.S. government budget accounting is calculated on the basis of fiscal years. Persistent budget deficits have long -run consequences because they lead to an increase in public debt. This can be a
5. Some of the fluctuations in the budget balance are due to the effects of the business cycle. In order to separate the effects of the business cycle from the effects of discretionary fiscal policy,
4. Rules governing taxes—with the exception of lump-sum taxes—and some transfers act as automatic stabilizers, reducing the size of the multiplier and automatically reducing the size of
3. Fiscal policy has a multiplier effect on the economy, the size of which depends upon the fiscal policy and the marginal propensity to consume. Except in the case of lump-sum taxes, taxes reduce
2. Government purchases of goods and services directly affect aggregate demand, and changes in taxes and government transfers affect aggregate demand indirectly by changing households’ disposable
1. The government plays a large role in the economy, collecting a large share of GDP in taxes and spending a large share both to purchase goods and services and to make transfer payments, largely for
2. Suppose the economy is in a slump and the current public debt is quite large. Explain the trade -off of short -run versus long -run objectives that policy makers face when deciding whether or not
1. Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater
2. Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states not held to that requirement.
3. The country of Boldovia has no unemployment insurance benefits and a tax system using only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system
2. Explain why a $500 million reduction in government purchases of goods and services will generate a larger fall in real GDP than a $500 million reduction in government transfers.
1. Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.
1. In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy.a. Several military bases around the country, which together employ tens of
16. The late 1990s in the United States were characterized by substantial economic growth with low inflation; that is, real GDP increased with little, if any, increase in the aggregate price level.
c. Why do supply shocks present a dilemma for government policy makers?
b. What fiscal or monetary policies can the government use to address the effects of the supply shock? Use a diagram that shows the effect of policies chosen to address the change in real GDP. Use
a. How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon known as?
15. In the accompanying diagram, the economy is in long -run macroeconomic equilibrium at point E1 when an oil shock shifts the short -run aggregate supply curve to SRAS2. Based on the diagram,
d. What are the advantages and disadvantages of the government implementing policies to close the gap?
c. If the government did not intervene to close this gap, would the economy return to long -run macroeconomic equilibrium? Explain and illustrate with a diagram.
b. What policies can the government implement that might bring the economy back to l ong - run macroeconomic equilibrium? Illustrate with a diagram.
a. Is the economy facing an inflationary or a recessionary gap?
14. The economy is in short -run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.
13. Using aggregate demand, short -run aggregate supply, and long - run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one
12. Using aggregate demand, short -run aggregate supply, and long - run aggregate supply curves, explain the process by which each of the following economic events will move the economy from one long
11. There were two major shocks to the U.S. economy in 2007, leading to a severe economic slowdown. One shock was related to oil prices; the other was the slump in the housing market. This question
10. The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the
9. In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. Explain
8. Explain whether the following government policies affect the aggregate demand curve or the short -run aggregate supply curve and how.a. The government reduces the minimum nominal wage.b. The
7. Suppose that the economy is currently at potential output.Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most preferred
6. Suppose that all households hold all their wealth in assets that automatically rise in value when the aggregate price level rises(an example of this is what is called an “inflation -indexed
5. The economy is at point A in the accompanying diagram. Suppose that the aggregate price level rises from P1 to P2. How will aggregate supply adjust in the short run and in the long run to the
d. A fall in the aggregate price level increases the purchasing power of households’ and firms’ money holdings. As a result, they borrow less and lend more.
c. Greater union activity leads to higher nominal wages.
b. An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates.
a. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production.
4. In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the
b. What will happen when firms and workers renegotiate their wages?
a. In the short run, how will the quantity of aggregate output supplied respond to the fall in prices?
3. Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage
2. Your study partner is confused by the upward -sloping shortrun aggregate supply curve and the vertical long -run aggregate supply curve. How would you explain this?
1. A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result,
12. Negative supply shocks pose a policy dilemma: a policy that counteracts the fall in aggregate output by increasing aggregate demand will lead to higher inflation, but a policy that counteracts
11. The high cost—in terms of unemployment—of a recessionary gap and the future adverse consequences of an inflationary gap lead many economists to advocate active stabilization policy: using
10. Demand shocks have only short -run effects on aggregate output because the economy is self-correcting in the long run. In a recessionary gap, an eventual fall in nominal wages moves the economy
9. Economic fluctuations occur because of a shift of the aggregate demand curve (a demand shock) or the short -run aggregate supply curve (a supply shock). A demand shock causes the aggregate price
8. In the AD–AS model, the intersection of the short -run aggregate supply curve and the aggregate demand curve is the point of short -run macroeconomic equilibrium.It determines the short -run
7. In the long run, all prices, including nominal wages, are flexible and the economy produces at its potential output. If actual aggregate output exceeds potential output, nominal wages will
6. Changes in commodity prices, nominal wages, and productivity lead to changes in producers’ profits and shift the short -run aggregate supply curve.
5. The short -run aggregate supply curve is upward sloping because nominal wages are sticky in the short run: a higher aggregate price level leads to higher profit per unit of output and increased
4. The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied.
3. The aggregate demand curve shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level, and the effect of the size of the existing stock of
2. The aggregate demand curve is downward sloping for two reasons. The first is the wealth effect of a change in the aggregate price level—a higher aggregate price level reduces the purchasing
1. The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded.
2. In 2008, in the aftermath of the collapse of the housing bubble and a sharp rise in the price of commodities, particularly oil, there was much internal disagreement within the Fed about how to
1. Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive—you get a brief high, but then you have the pain of inflation.”a. Explain what this means
2. Suppose the economy is initially at potential output and the quantity of aggregate output supplied increases. What information would you need to determine whether this was due to a movement along
1. Determine the effect on short -run aggregate supply of each of the following events. Explain whether it represents a movement along the SRAS curve or a shift of the SRAS curve.a. A rise in the
1. Determine the effect on aggregate demand of each of the following events. Explain whether it represents a movement along the aggregate demand curve (up or down) or a shift of the curve(leftward or
???? Use indifference curves and the budget line to find a consumer’s optimal consumption bundle
???? Discuss the importance of the marginal rate of substitution, the rate at which a consumer is just willing to substitute one good for another
???? Explain why economists use indifference curves to illustrate a person’s preferences
???? Explain how information asymmetries can lead to the problem of moral hazard
???? Discuss ways that firms can deal with imperfect information using screening and signaling
???? Explain how information asymmetries can lead to the problem of adverse selection
???? Identify the special problems posed by information that some people have and other people do not, which is known as private information or asymmetric information
???? Explain why assumptions of rationality are useful despite limits on the rationality of humans
???? Discuss the role of psychology in consumer behavior
???? Identify barriers to rational decision making
???? Explain the factors leading to the financial crisis of 2008
???? Identify the macroeconomic consequences of financial crises
???? List the causes of financial crises in the economy
???? Describe the importance of a well-functioning financial system
???? Discuss how Social Security and similar programs affect poverty and income inequality

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