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foundations of economics

Questions and Answers of Foundations Of Economics

10. The United States in 2011 has a recessionary gap. Use the AS-AD model to show the effect on U.S. real GDP as the new infrastructure is completed.
9. Explain the effect of the government’s increased expenditure on infrastructure on U.S. aggregate demand and aggregate supply.
8. Explain the effects of a global recession on the U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment.Use the following
7. Suppose that the world price of oil rises. On an AS-AD graph, show the effect of the world oil price rise on U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that
6. Table 1 sets out the aggregate demand and aggregate supply schedules in Japan. Potential GDP is 600 trillion yen. What is the short-run macroeconomic equilibrium? Does Japan have an inflationary
5. How would such an action influence aggregate supply?
4. How would such an action influence aggregate demand?
Use the following information to work Problems 4 and 5.Because fluctuations in the world oil price make the U.S. short-run macroeconomic equilibrium fluctuate, someone suggests that the government
3. Suppose that the United States is at full employment. Then the federal government cuts taxes, and all other influences on aggregate demand remain the same. Explain the effect of the tax cut on
Potential GDP increases.
The price level increases.
Union wage settlements push the money wage rate up by 10 percent.
2. Suppose that the United States is at full employment. Explain the effect of each of the following events on aggregate supply:
1. What, according to the mainstream theory of the business cycle, is the most common source of recession: a decrease in aggregate demand, a decrease in aggregate supply, or both? Which is the most
what is the
10. Japan economic recovery under way as deflation eases Consumer prices excluding fresh food declined 0.4 percent from a year earlier—the smallest drop since 2009. The unemployment rate
9. Some events change aggregate demand from AD0 to AD1 and aggregate supply from AS0 to AS1. What is the new macroeconomic equilibrium?
8. Some events change aggregate supply from AS0 to AS1. Describe two possible events. What is the new equilibrium point? If potential GDP is $1 trillion, does the economy have an inflationary gap, a
7. Some events change aggregate demand from AD0 to AD1. Describe two possible events.What is the new equilibrium point? If potential GDP is $1 trillion, describe the type of macroeconomic equilibrium.
6. Explain the effect of the Fed’s action that increases the quantity of money on the macroeconomic equilibrium in the short run. Explain the adjustment process that returns the economy to full
5. Suppose that the U.S. economy has a recessionary gap and the world economy goes into an expansion. Explain the effect of the expansion on U.S. real GDP and unemployment in the short run.
4. Table 1 sets out an economy’s aggregate demand and aggregate supply schedules. What is the macroeconomic equilibrium? If potential GDP is $600 billion, what is the type of macroeconomic
3. The United States is at full employment when the Fed cuts the quantity of money, other things remaining the same. Explain the effect of the cut in the quantity of money on aggregate demand in the
Congress raises income taxes.
The U.S. price level rises.
The world economy goes into a strong expansion.
2. Explain the effect of each of the following events on the quantity of U.S. real GDP demanded and the demand for U.S. real GDP:
1. As more people in India have access to higher education, explain how potential GDP and aggregate supply will change in the long run.
Demand-pull and cost-push forces bring inflation and real GDP cycles.
Business cycles occur because aggregate demand and aggregate supply fluctuate.
Economic growth is a persistent increase in potential GDP, and inflation occurs when aggregate demand grows at a faster rate than potential GDP.
Away from full employment, gradual changes in the money wage rate move real GDP toward potential GDP.
Aggregate demand and aggregate supply determine real GDP and the price level in macroeconomic equilibrium, which can occur at full employment or above or below full employment.
Aggregate demand is the relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same.
A change in potential GDP, a change in the money wage rate, or a change in the money price of other resources changes aggregate supply.
The AS curve slopes upward because with a given money wage rate, a rise in the price level lowers the real wage rate, increases the quantity of labor demanded, and increases the quantity of real GDP
Aggregate supply is the relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same.
3. Which event, if any, brings stagflation?
2. Explain the combined effect of these events on real GDP and the price level.
1. Explain the effect of each event separately on aggregate demand and aggregate supply. How will real GDP and the price level change in the short run?
U.S. businesses expect future profits to fall.
The world oil price rises by a large amount.
A deep recession hits the world economy.
Mexico sets new environmental standards that require factories to upgrade their production facilities
The United States experiences strong economic growth.
The government of Mexico cuts income taxes.
The state of the world economy
Fiscal policy and monetary policy
Expectations about the future
The real prices of exports and imports
The buying power of money
Firms go out of business or start up in business.Change in Output Rate To change its output rate, a firm must change the quantity
Firms shut down temporarily or restart production.
Firms change their output rate.
3 Explain how trends and fluctuations in aggregate demand and aggregate supply bring economic growth, inflation, and the business cycle.
2 Define and explain the influences on aggregate demand.
1 Define and explain the influences on aggregate supply.
To control inflation by limiting bank loans, the People’s Bank announced that it would raise the required reserve ratio for commercial banks from 21 percent to 21.5 percent.
Use the following information to work Problems 9 and 10.Inflation triggers more bank tightening
8. If there is no currency drain, what is the quantity of loans and the quantity of total deposits when the bank has no excess reserves?
7. Calculate the bank’s excess reserves. If the bank uses all of these excess reserves to make a loan, what is the quantity of the loan and the quantity of total deposits after the bank has made
Conduct an open market operation.Use Table 1, which shows a bank’s balance sheet, to work Problems 7 and 8. The desired reserve ratio on all deposits is 5 percent and there is no currency drain.
Change the required reserve ratio.
Change the currency drain ratio.
5. A bank has $500 million in checkable deposits, $600 million in savings deposits, $400 million in small time deposits, $950 million in loans to businesses,$500 million in government securities, $20
4. Naomi buys $1,000 worth of American Express travelers’ checks and charges the purchase to her American Express card. What is the immediate change in M1 and M2?
3. What are the three functions that money performs? Which of the items in List 1 perform some but not all of these functions and which of the items are money?
What would the money multiplier have been if the banks’desired reserve ratio had not changed?
2. What happened to the money multiplier between 2008 and 2011? What would the money multiplier have been if the currency drain ratio had increased?
1. When the Fed increased the monetary base between 2008 and 2011, which component of the monetary base increased most: banks’ reserves or currency?What happened to the reserves that banks borrowed
Use the following information to work Problems 11 and 12.South Korea: Bank reserves raised To rein in spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 percent—the
10. The quantity of money, and how much of the new money is currency and how much is bank deposits.
9. The monetary base and the change in its components.
Use the following information to work Problems 9 and 10.If the desired reserve ratio is 5 percent, the currency drain ratio is 20 percent of deposits, and the central bank makes an open market
8. The Fed buys $2 million of securities from AIG. If AIG’s bank has a desired reserve ratio of 0.1 and there is no currency drain, calculate the bank’s excess reserves as soon as the open market
7. Table 1 shows a bank’s balance sheet. The bank has no excess reserves and there is no currency drain. Calculate the bank’s desired reserve ratio.
6. Explain the Fed’s policy tools and briefly describe how each works.
Calculate the banks’ reserves at the central bank.
5. Suppose that banks had deposits of $500 billion, a desired reserve ratio of 4 percent and no excess reserves. The banks had $15 billion in notes and coins.
4. Terry takes $100 from his checking account and deposits the $100 in his savings account. What is the immediate change in M1 and M2?
3. Monica transfers $10,000 from her savings account at the Bank of Alaska to her money market fund. What is the immediate change in M1 and M2?
A debit card
A dime
A checking account at the Bank of America
2. What are the three functions that money performs? Which of the following items perform some but not all of these functions, and which perform all of these functions? Which of the items are money?
1. What is money? Would you classify any of the items in List 1 as money?
M2 consists of M1 plus savings deposits, small time deposits, and money market funds.
M1 consists of currency held by individuals and businesses, travelers’checks, and checkable deposits owned by individuals and businesses.
Money functions as a medium of exchange, unit of account, and store of value.
Money is anything that serves as a generally accepted means of payment.
An open market operation has a multiplier effect on the quantity of money.
When the Fed buys securities in an open market operation, it creates bank reserves. When the Fed sells securities in an open market operation, it destroys bank reserves.
The maximum quantity of deposits the banks can create is limited by the monetary base, the banks’ desired reserves, and desired currency holding.
Banks create money by making loans.
3. If the Fed makes an open market sale of $1 million of securities, what is the process by which the quantity of money changes? What factors determine the change in the quantity of money?
2. If the Fed makes an open market sale of $1 million of securities, who can buy the securities? What initial changes occur if the Fed sells to a bank?
1. How do banks create new deposits by making loans, and what factors limit the amount of deposits and loans that they can create?
Excess reserves decrease but remain positive.
Banks’ desired reserves increase.
Some of the new money remains in deposits in banks.

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