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international economics theory

Questions and Answers of International Economics Theory

d. If we relax the assumption of no taxes, automatic changes in tax revenue as income changes will have what effect on the size of the multiplier?Answer (5 points)1 point: Multiplier = 1/(1 − MPC )
c. What would happen to the size of the effect on real GDP if the MPC fell? Explain.
b. By how much will real GDP change as a result of the increase in government purchases?
1. Assume the MPC in an economy is 0.8 and the government increases government purchases of goods and services by$50 million. Also assume the absence of taxes, international trade, and changes in the
5. Which of the following is NOT an automatic stabilizer?a. income taxesb. unemployment insurancec. Medicaidd. food stampse. monetary policy
4. A lump-sum tax isa. higher as income increases.b. lower as income increases.c. independent of income.d. the most common form of tax.e. a type of business tax.
3. The presence of taxes has what effect on the multiplier? Theya. increase it.b. decrease it.c. destabilize it.d. negate it.e. have no effect on it.
2. Assume that taxes and interest rates remain unchanged when government spending increases, and that both savings and consumer spending increase when income increases. The ultimate effect on real
1. The marginal propensity to consume I. has a negative relationship to the multiplier.II. is equal to 1.III. represents the proportion of consumers’ disposable income that is spent.a. I onlyb. II
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 tax increase.
. An income tax rebate is an example ofa. an expansionary fiscal policy.b. a contractionary fiscal policy.c. an expansionary monetary policy.d. a contractionary monetary policy.e. none of the above.
4. Which of the following is a fiscal policy that is appropriate to combat inflation?a. decreasing taxesb. decreasing government spendingc. increasing government transfersd. increasing interest
3. Which of the following is an example of expansionary fiscal policy?a. increasing taxesb. increasing government spendingc. decreasing government transfersd. decreasing interest ratese. increasing
2. Which of the following is a government transfer program?a. Social Securityb. Medicare/Medicaidc. unemployment insuranced. food stampse. all of the above
1. Which of the following contributes to the lag in implementing fiscal policy?I. It takes time for Congress and the President to pass spending and tax changes.II. Current economic data take time to
b. Is this a valid argument against stabilization policy? Why or why not?Solutions appear at the back of the book.Tackle the Test: Multiple-Choice Questions
a. Explain what this means in terms of the AD–AS model.
3. 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.”
e. What will happen to the size of the output gap in the long run?
d. Calculate the size of the output gap.
c. What type of gap exists in this economy?
5. The economy depicted in the graph is experiencing a(n)a. contractionary gap.b. recessionary gap.c. inflationary gap.d. demand gap.e. supply gap.Real GDP Aggregate price level Y1 LRAS SRAS AD EP1
4. Which of the following statements is true if this economy is operating at P1 and Y1?I. The level of aggregate output equals potential output.II. It is in short-run macroeconomic equilibrium.III.
3. During stagflation, what happens to the aggregate price level and real GDP?Aggregate price level Real GDPa. decreases increasesb. decreases decreasesc. increases increasesd. increases decreasese.
2. Which of the following causes a positive demand shock?a. an increase in wealthb. pessimistic consumer expectationsc. a decrease in government spendingd. an increase in taxese. an increase in the
1. Which of the following causes a negative supply shock?I. a technological advance II. increasing productivity III. an increase in oil pricesa. I onlyb. II onlyc. III onlyd. I and III onlye. I, II,
d. Severe weather destroys crops around the world.
c. Congress raises taxes and cuts spending.
b. Solar energy firms launch a major program of investment spending.
a. The government sharply increases the minimum wage, raising the wages of many workers.
1. Describe the short -run effects of each of the following shocks on the aggregate price level and on aggregate output.
5. That employers are reluctant to decrease nominal wages during economic downturns and raise nominal wages during economic expansions leads nominal wages to be described asa. long-run.b.
4. A decrease in which of the following will cause the short-run aggregate supply curve to shift to the left?a. commodity pricesb. the cost of health care insurance premiums paid by employersc.
3. The horizontal intercept of the long-run aggregate supply curve isa. at the origin.b. negative.c. at potential output.d. equal to the vertical intercept.e. always the same as the horizontal
2. Because changes in the aggregate price level have no effect on aggregate output in the long run, the long-run aggregate supply curve isa. vertical.b. horizontal.c. fixed.d. negatively sloped.e.
1. Which of the following will shift the short-run aggregate supply curve? A change ina. profit per unit at any given price level.b. commodity prices.c. nominal wages.d. productivity.e. all of the
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
2. Identify the two effects that cause the aggregate demand curve to have a downward slope. Explain each.
1.a. Draw a correctly labeled graph showing aggregate demand.b. On your graph from parta, illustrate an increase in aggregate demand.c. List the four factors that shift aggregate demand.d. Describe a
5. Which of the following government policies will shift the aggregate demand curve to the left?a. a decrease in the quantity of moneyb. an increase in government purchases of goods and servicesc. a
4. Decreases in the stock market decrease aggregate demand by decreasing which of the following?a. consumer wealthb. the price levelc. the stock of existing physical capitald. interest ratese. tax
3. The Consumer Confidence Index is used to measure which of the following?a. the level of consumer spendingb. the rate of return on investmentsc. consumer expectationsd. planned investment
2. Which of the following will shift the aggregate demand curve to the right?a. a decrease in wealthb. pessimistic consumer expectationsc. a decrease in the existing stock of capitald. contractionary
1. Which of the following explains the slope of the aggregate demand curve?I. the wealth effect of a change in the aggregate price level II. the interest rate effect of a change in the aggregate
e. On your graph from partc, show what would happen if expected future income decreased.
d. What is the slope of this consumption function?
c. Draw a correctly labeled graph showing this consumption function.
b. If individual household current disposable income is$40,000, individual household consumer spending will equal how much?
a. What is the value of the marginal propensity to consume?
1. Use the consumption function provided to answer the following questions.c = $15,000 + 0.8 × yd
2. List the three most important factors affecting planned investment spending. Explain how each is related to actual investment spending.Consumer spending Current disposable income$15,000 cf2 cf1 0
5. Actual investment spending in any period is equal toa. planned investment spending + unplanned inventory investment.b. planned investment spending − unplanned inventory investment.c. planned
4. The level of planned investment spending is negatively related to thea. rate of return on investment.b. level of consumer spending.m o d u l e 1 6 Income and Expenditure 171 Section 4 National
3. Given the consumption function c = $16,000 + 0.5 yd, if individual household current disposable income is $20,000, individual household consumer spending will equala. $36,000.b. $26,000.c.
2. The slope of a family’s consumption function is equal toa. the real interest rate.b. the inflation rate.c. the marginal propensity to consume.d. the rate of increase in household current
1. Changes in which of the following leads to a shift of the aggregate consumption function?I. expected future disposable income II. aggregate wealth III. current disposable incomea. I onlyb. II
4. For each event, explain whether the initial effect is a change in planned investment spending or a change in unplanned inventory investment, and indicate the direction of the change.a. an
3. Suppose a crisis in the capital markets makes consumers unable to borrow and unable to save money. What implication does this have for the effects of expected future disposable income on consumer
2. What is the multiplier if the marginal propensity to consume is 0.5? What is it if MPC is 0.8?
1. Explain why a decline in investment spending caused by a change in business expectations leads to a fall in consumer spending.
c. Did borrowers who took out seven-year loans in Japan gain or lose overall versus lenders? Explain.
b. Rank the countries in order of inflation rates that most favored borrowers with seven-year loans that were taken out in 2000. Assume that the expected inflation rate was the inflation rate in 2000.
a. Given the expected relationship between average inflation and menu costs, rank the countries in descending order of menu costs using average inflation over the period 2000–2007.
20. The accompanying table provides the inflation rate in the year 2000 and the average inflation rate over the period 2000–2007 for eight different countries.
19. The accompanying diagram shows mortgage interest rates and inflation during 1990–2005 in the economy of Albernia.When would home mortgages have been especially attractive and why?Year Inflation
b. As the accompanying diagram shows, the rate of growth of real GDP has picked up in Japan since 2001. Explain the likely effect of this increase in GDP growth on the unemployment rate. Is the
18. With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of the United States; from 1960 to 1995, the unemployment rate in Japan exceeded 3%
d.Union membership declines.
c. Greater access to the Internet leads both potential employers and potential employees to use the Internet to list and find jobs.
b. More teenagers focus on their studies and do not look for jobs until after college.
a. The government reduces the time during which an unemployed worker can receive benefits.
17. How will the following changes affect the natural rate of unemployment?
c. Jane speaks Korean and sells ice cream in a neighborhood in which Korean is the primary language. It is difficult to find another worker who speaks Korean.
b. Jane sells ice cream without any direct supervision by her boss.
a. Jane and her boss work as a team selling ice cream.
16. In which of the following cases is it likely for efficiency wages to exist? Why?
d. What can you infer about the rise in unemployment rates over this period? Was it caused by a net loss in the number of jobs or by a large increase in the number of people seeking jobs?
c. Compute unemployment rates in the different regions of the country in March 2007 and March 2008.
b. For each region, calculate the growth in the labor force from March 2007 to March 2008.
a. Calculate the number of workers employed in each of the regions in March 2007 and March 2008. Use your answers to calculate the change in the total number of workers employed between March 2007
15. A country’s labor force is the sum of the number of employed and unemployed workers. The accompanying table provides data on the size of the labor force and the number of unemployed workers for
d. If the concern for retaining workers and encouraging highquality work leads firms to set a wage rate equal to $16, what will be the level of employment, the size of the labor force, and the
c. If unions bargain with the firms in Profunctia and set a wage rate equal to $14, what will be the level of employment, the size of the labor force, and the unemployment rate?
b. If the government of Profunctia sets a minimum wage equal to $12 per hour, what will be the level of employment, the size of the labor force, and the unemployment rate?
a. What is the equilibrium wage rate in Profunctia? At this wage rate, what are the level of employment, the size of the labor force, and the unemployment rate?
154 s e c t i o n 3 Measurement of Economic Performance and demand for labor, to answer the following questions. Illustrate each answer with a diagram.
14. There is only one labor market in Profunctia. All workers have the same skills, and all firms hire workers with these skills.Use the accompanying diagram, which shows the supply of
13. In general, how do changes in the unemployment rate vary with changes in real GDP? After several quarters of a severe recession, explain why we might observe a decrease in the official
12. Each month, usually on the first Friday of the month, the Bureau of Labor Statistics releases the Employment Situation Summary for the previous month. Go to www.bls.gov and find the latest
b. Assume the quantity of goods purchased in each category, that is, the market basket, is identical for 2006 and 2007.Calculate an inflation rate for each type of college student between 2006 and
a. Calculate the cost of living for an average college student in each category for 2006 and 2007.
11. The cost of a college education in the United States is rising at a rate faster than inflation. The table below shows the average cost of a college education in the United States in 2006 and 2007
. Each month the Bureau of Labor Statistics releases the Consumer Price Index Summary for the previous month. Go to www.bls.gov and find the latest report. (On the Bureau of Labor Statistics home
Calculate the overall CPI for the retired person and for the college student by multiplying the CPI for each of the categories by the relative importance of that category to the individual and then
8. The consumer price index, or CPI, measures the cost of living for a typical urban household by multiplying the price for each category of expenditure (housing, food, and so on) times a measure of
e. What is the percent change in the price index from 2008 to 2010?
d. Using 2008 as a base year, create a price index for these books for all years.
c. What is the percent change in the price of an economics textbook from 2008 to 2010?
b. What is the percent change in the price of a math textbook from 2008 to 2010?

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