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foundations of economics

Questions and Answers of Foundations Of Economics

5. What are some of the components of marginal cost and marginal benefit that the producer of a movie faces?
4. Who decides whether a movie is going to be a blockbuster? How do you think the creation of a blockbuster movie influences what, how, and for whom goods and services are produced?
3. What contribution does a movie like The Social Network make to coping with scarcity? When you buy a movie ticket, are you buying a good or a service?
generates work for thousands, and makes a few people rich.
Use the following information to work Problems 3 to 6.The Social Network had world-wide box office receipts of $225 million. The movie had a production budget of about $70 million and additional
2. Label each entry in List 1 as dealing with a microeconomic topic or a macroeconomic topic. Explain your answer.
1. Provide three examples of scarcity that illustrate why even the 1,210 billionaires in the world face scarcity.
Economics is a tool for personal, business, and government decisions.
Economists use the scientific method to try to understand how the economic world works. They create economic models and test them using natural experiments, statistical investigations, and laboratory
6. Choices respond to incentives.
5. A “how much” choice is made on the margin by comparing marginal benefit and marginal cost.
4. People make rational choices by comparing benefits and costs.
3. Benefit is what you gain when you get something (measured by what you are willing to give up to get it).
2. Cost is what you must give up to get something.
1. A choice is a tradeoff.
Six ideas define the economic way of thinking:
2. Explain the ideas that define the economic way of thinking.
The second big question is: When do choices made in the pursuit of selfinterest also promote the social interest?
The first big question of economics is: How do the choices that people make end up determining what, how, and for whom goods and services are produced?
Microeconomics is the study of individual choices and interactions, and macroeconomics is the study of the national economy and global economy.
Economics is the social science that studies the choices that we make as we cope with scarcity and the incentives that influence and reconcile our choices.
1. Define economics and explain the kinds of questions that economists try to answer.
4. Why would you expect a lower price to increase the number of people who decide to take a cruise?
3. What would be the marginal benefit from a cruise? What would be the marginal cost of a cruise?
2. How would you make a rational choice about taking a cruise?
1. In deciding whether to take a cruise, would you face a tradeoff?
Times reports that cruise lines have been slashing prices and cruise sales are up. It says this surge of interest tells us that despite the uncertain economic climate, people clearly need more fun in
4. Did Kate make her decision on the margin?In the News The New York
3. Was Kate’s decision to play the third hour of tennis rational?
2. Given that Kate played the third hour, what can you conclude about her marginal benefit and marginal cost of the second hour of tennis?
1. What was Kate’s opportunity cost of the third hour of tennis?
2. In May 2011, businesses cut hiring because the higher price of gas pushed up costs and higher food prices forced consumers to cut spending.
1. According to the Bureau of Labor Statistics (BLS), high-paying jobs in health care and jobs in leisure, hospitality, and education will expand quickly over the next five years. How does the BLS
5. How does Facebook influence self-interest and the social interest?In the News
4. How does a new Starbucks in Beijing, China, influence self-interest and the social interest?
3. In the following three news items, find examples of the what, how, and for whom questions: “With more research, we will cure cancer”; “A good education is the right of every child”;
2. Provide three examples of wants in the United States today that are especially pressing but not satisfied.
1. Economics studies choices that arise from one fact. What is that fact?
2 Explain the ideas that define the economic way of thinking.
1 Define economics and explain the kinds of questions that economists try to answer.
Encourage and aid learning by doing
Steer a path between an overload of detail and too much left unsaid
Focus on core ideas
Motivate with compelling issues and questions
To fight unemployment and close a recessionary gap, the Fed ________.A. stimulates aggregate demand by lowering the federal funds rate, which increases the quantity of money B. stimulates aggregate
The Fed fights inflation by ________.A. lowering the federal funds rate, which lowers interest rates and decreases aggregate demand B. raising the federal funds rate, which raises interest rates and
When the Fed lowers the federal funds rate ________.A. aggregate demand increases the same day B. investment increases, but only after the economy’s growth rate rises C. the quantity of money and
The Fed’s “dual mandate” is to achieve ________.A. a government budget surplus and low interest rates B. low inflation and maximum employment C. a stable quantity of money and stable prices D.
Automatic fiscal policy ________.A. requires an action of the government B. is weak unless the government cuts its outlays to reduce the deficit C. operates as the economy moves along its business
Discretionary fiscal policy to stimulate the economy includes ________.A. lowering the tax rate paid by households with middle incomes B. raising the tax on gasoline C. the fall in tax revenue as the
U.S. national debt ________ when the federal government’s ________.A. increases; outlays exceed tax revenue B. decreases; outlays exceed tax revenue C. increases; tax revenue rises faster than
The federal government’s major outlay in its budget is ________ and its major source of revenue is ________.A. debt interest; sales of government bonds B. expenditure on goods and services; taxes
What the U.S. jobs report means for the Fed Despite U.S. job creation exceeding forecasts in July, experts believe that with weak output growth, the Fed will not raise the interest rate until after
Suppose that inflation is rising toward 5 percent a year, and the Fed, Congress, and the White House are discussing ways of containing inflation without damaging employment and output. The President
If the plan to reduce the deficit includes a cut in transfer payments and a rise in taxes of the same amount, how will this policy influence the budget deficit and real GDP?
Explain why the national debt does not measure the federal government’s true indebtedness. How does the nation’s fiscal imbalance provide a more accurate account of government’s debt?
Use an aggregate supply–aggregate demand graph to illustrate the effects on real GDP and the price level of a fiscal stimulus when the economy is in recession.Use the following information to work
Describe the supplyside effects of a fiscal stimulus and explain how a tax cut will influence potential GDP.
Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on needstested spending and the
Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on aggregate demand and real GDP.
In which episode, the Great Depression or the 2008–2009 recession, did the banks’ desired reserve ratio and the currency drain ratio increase by the larger amount and the money multiplier fall by
From the peak in 1929 to the Great Depression trough in 1933, government tax revenues fell by 1.9 percent of GDP and government expenditure increased by 0.3 percent. Real GDP fell by 25 percent.
What are the key differences in monetary policy between the Great Depression and the slow recovery from the 2008–2009 recession?
Read Eye on the Fed in a Crisis on p.
How big was the fiscal stimulus package of 2008–2009, how many jobs was it expected to create, and how large was the multiplier implied by that expectation? Did the stimulus work?
Read Eye on Fiscal Stimulus on p.
Premature to rule out an interest rate increase this year In the current state of the economy, it would be worse to raise rates too soon than moving slightly too late and adjusting by raising rates
Suppose that a drought decreases potential GDP in Artica to $250 billion.Explain what happens if the central bank lowers the federal funds rate. Do you recommend that the central bank lower the
What do you predict will happen if the central bank takes no monetary policy actions? What monetary policy action would you advise the central bank to take and what do you predict will be the effect
What are the price level and real GDP? Does Artica have an unemployment problem or an inflation problem? Why?
IMF reduces forecast for U.S. growth The IMF expects U.S. economic growth to slow to 2% in 2012 and 2.25% in 2013. That’s down from its earlier estimates of 2.15% in 2012 and 2.4% in 2013.
The U.S. economy is in recession and has a large recessionary gap. Describe what automatic fiscal policy might occur. Describe a fiscal stimulus that could be used that would not increase the budget
Classify the following items as automatic fiscal policy actions, discretionary fiscal policy actions, or neither.• An increase in expenditure on homeland security• An increase in unemployment
Suppose that in an economy, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are$200 billion. Calculate government expenditure
Over the past decade, the demand for goods produced in China has brought a sustained increase in the demand for China’s exports that has outstripped the growth of supply. As a result, China has
If the economy is at full employment and the Fed increases the quantity of money, ________.A. aggregate demand increases, a recessionary gap appears, and the money wage rate starts to rise B.
Macroeconomic equilibrium occurs when the quantity of real GDP ________ equals the quantity of ________.A. demanded; real GDP supplied B. demanded; potential GDP C. supplied; potential GDP D.
An increase in expected future income increases ________.A. consumption expenditure, which increases current aggregate demand B. investment, which increases current aggregate supply C. the demand for
The quantity of real GDP demanded increases if ________.A. the buying power of money increases B. the money wage rate rises C. the price level falls D. the nominal interest rate falls
When potential GDP increases, ________.A. aggregate demand increases B. aggregate supply increases C. both aggregate demand and aggregate supply increase D. the price level rises
Aggregate supply increases when ________.A. the price level rises B. the money wage rate falls C. consumption increases D. the money price of oil increases
The U.K. economy in 2016 was close to full employment. Use the AS-AD model to show the effect on U.K. real GDP of the effects of Brexit described in the news clip
Explain the effects of a fall in the value of the U.K. pound and lower spending by businesses and households on U.K. aggregate demand and aggregate supply.
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
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
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 gap
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
Suppose that the United States is at full employment. Explain the effect of each of the following events on aggregate supply:• Union wage settlements push the money wage rate up by 10 percent.•
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 caused the 2008–2009 recession and how do we know that a decrease in aggregate supply played a role?
Read Eye on the Business Cycle on p.
“Brexit” expected to rattle U.S. economy The United Kingdom vote to leave the European Union (known as Brexit) is expected to affect the U.S. economy by driving up the value of the dollar.But it
Some events change aggregate demand from AD0 to AD1 and aggregate supply from AS0 to AS1. What is the new macroeconomic equilibrium?
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
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.
Initially, the economy is at point B.
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
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.
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 equilibrium?
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

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