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international economics theory

Questions and Answers of International Economics Theory

2. Which of the following is NOT a type of financial asset?a. bondsb. stocksc. bank depositsd. loanse. houses 230 s e c t i o n 5 The Financial Sector
1. Decreasing which of the following is a task of the financial system?I. transaction costs II. risk III. liquiditya. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
2. What relationship would you expect to find between the level of development of a country’s financial system and its level of economic development? Explain in terms of the country’s levels of
1. Rank the following assets from the lowest level to the highest level of (i) transaction costs, (ii) risk, (iii) liquidity. Ties are acceptable for items that have indistinguishable rankings.a. a
d. The quantity of money in the economy declines and interest rates increase.
b. Firms come to believe that a recession in the near future is likely.c. Anticipating the possibility of war, the government increases its purchases of military equipment.
b. There is a rise in the expected growth rate of real GDP.c. A sizable inflow of foreign funds into the country lowers the interest rate.
a. Real GDP equals $100 billion, potential output equals$160 billion, and the marginal propensity to consume is 0.75.
d.Compare the equilibrium points E1 and E2 in your diagram for partc. What was the effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?
c. What other two types of money have been used throughout history? Define each.
the United States today?
b. What is the term used to describe the type of money used in
2.a. The U.S. dollar derives its value from what? That is, what“backs” U.S. currency?
d. In which monetary aggregate(s) calculated by the Federal Reserve are checkable deposits included?Answer (6 points)1 point: It can be easily converted into cash.1 point: A Federal Reserve note 1
c. Which of the assets listed above is the least liquid? Explain.
5. Which of the following is the best example of using money as a store of value?a. A customer pays in advance for $10 worth of gasoline at a gas station.b. A babysitter puts her earnings in a
4. Which of the following is the most liquid monetary aggregate?a. M1b. M2c. M3d. near-moneyse. dollar bills
3. In the United States, the dollar isa. backed by silver.b. backed by gold and silver.c. commodity-backed money.d. commodity money.e. fiat money.
2. When you decide you want “$10 worth” of a product, money is serving which role(s)?I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and II onlye.
1. When you use money to purchase your lunch, money is serving which role(s)?I. medium of exchange II. store of value III. unit of accounta. I onlyb. II onlyc. III onlyd. I and III onlye. I, II, and
3. Explain why a system of commodity -backed money uses resources more efficiently than a system of commodity money.
2. Although most bank accounts pay some interest, depositors can get a higher interest rate by buying a certificate of deposit, or CD. The difference between a CD and a checking account is that the
1. Suppose you hold a gift certificate, good for certain products at participating stores. Is this gift certificate money? Why or why not?
2. List and describe the four most important types of financial intermediaries.
1. Identify and describe the three tasks of a well-functioning financial system.Answer (6 points)1 point: Decrease transaction costs 1 point: A well -functioning financial system facilitates
5. A financial intermediary that provides liquid financial assets in the form of deposits to lenders and uses their funds to finance the illiquid investment spending needs of borrowers is called aa.
4. A nonprofit institution collects the savings of its members and invests those funds in a wide variety of assets in order to provide its members with income after retirement. This describes aa.
3. The federal government is said to be “dissaving” whena. there is a budget deficit.b. there is a budget surplus.c. there is no budget surplus or deficit.d. savings does not equal investment
2. Which of the following is NOT a type of financial asset?a. bondsb. stocksc. bank depositsd. loanse. houses 230 s e c t i o n 5 The Financial Sector
1. Decreasing which of the following is a task of the financial system?I. transaction costs II. risk III. liquiditya. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
2. What relationship would you expect to find between the level of development of a country’s financial system and its level of economic development? Explain in terms of the country’s levels of
1. Rank the following assets from the lowest level to the highest level of (i) transaction costs, (ii) risk, (iii) liquidity. Ties are acceptable for items that have indistinguishable rankings.a. a
d. The quantity of money in the economy declines and interest rates increase.
b. Firms come to believe that a recession in the near future is likely.c. Anticipating the possibility of war, the government increases its purchases of military equipment.
25. 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?
24. 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. Use a diagram to illustrate the macroeconomic situation in Albernia 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?
23. 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.AD1
b. There is a rise in the expected growth rate of real GDP.c. A sizable inflow of foreign funds into the country lowers the interest rate.
22. Explain how each of the following actions will affect the level of investment spending and unplanned inventory investment.a. The Federal Reserve raises the interest rate.
b. The U.S. Environmental Protection Agency decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide.c. Baby boomers begin to retire in
21. How will investment spending change as the following events occur?a. The interest rate falls as a result of Federal Reserve policy.
c. What is the aggregate consumption function?20. From the end of 1995 to March 2000, the Standard and Poor’s 500 (S&P 500) stock index, a broad measure of stock market prices, rose almost 150%,
b. What is the marginal propensity to consume? What is the marginal propensity to save?
a. Plot the aggregate consumption function for Eastlandia.
19. From 2003 to 2008, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did
b. If the government needed to close a recessionary or inflationary gap, at which group should it primarily aim its fiscal policy of changes in government purchases of goods and services?
a. Suppose the government engages in increased purchases of goods and services. For each of the income groups in the accompanying table, what is the value of the multiplier—that is, what is the
18. The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of income.
c. Real GDP equals $180 billion, potential output equals$100 billion, and the marginal propensity to consume is 0.8.
b.Real GDP equals $250 billion, potential output equals$200 billion, and the marginal propensity to consume is 0.5.
a. Real GDP equals $100 billion, potential output equals$160 billion, and the marginal propensity to consume is 0.75.
16. 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
Explain this experience using aggregate demand and aggregate supply curves. Illustrate with a diagram.
15. 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 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.Real GDP Aggregate
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?
14. 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,
Explain and illustrate with a 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?
13. The economy is in short -run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.a. Is the economy facing an inflationary or a
12. 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
b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases.Section 4 Summary 218 s e c t i o n 4 National Income and Price
a. There is a decrease in households’ wealth due to a decline in the stock market.
11. 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
d.Compare the equilibrium points E1 and E2 in your diagram for partc. What was the effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?
c. The Housing Price Index, published by the Office of Federal Housing Enterprise Oversight, calculates that U.S. home prices fell by an average of 3.0% in the 12 months between January 2007 and
a supply shock? Redraw the diagram from part a to illustrate the effect of this shock by shifting the appropriate curve.
b. Data taken from the Department of Energy indicate that the average price of crude oil in the world increased from $54.63 per barrel on January 5, 2007, to $92.93 on December 28, 2007. Would an
a. Draw typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis “Real GDP” and the vertical axis “Aggregate price level.” Label the equilibrium point E1, the
10. 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
c. How should the government respond to this news? What are some policy measures that could be used to help neutralize the effect of falling consumer confidence?
b. Explain your answer to part a with the help of the AD–AS model. Draw a typical diagram showing two equilibrium points (E1) and (E2). Label the vertical axis “Aggregate price level” and the
a. As an economist, is this news encouraging for economic growth?
9. 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
8. 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
d. The government reduces military spending.
c. To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.
b. The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children.
7. 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.
6. 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
5. 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
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 money supply by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates.
4. Determine whether, in the short run, each of the following events causes a shift of a curve or a movement along a curve.Also determine which curve is involved and the direction of the change.a. As
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 short-run aggregate supply curve and the vertical long -run aggregate supply curve. How would you explain the shapes of these two curves?
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,
c. Given the value of the multiplier you calculated in part b, what marginal propensity to save would have led to that value of the multiplier?
b. Now suppose that the change in government purchases of goods and services was $20 million. What value of the multiplier would result in an increase in real GDP of$200 million?
a. Suppose that the MPC is equal to 0.75. What was the size of the change in government purchases of goods and services that resulted in the increase in real GDP of $200 million?
2. A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assume the absence of taxes, international trade, and changes in the aggregate price

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