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introduction to economic

Questions and Answers of Introduction To Economic

8. If all banks heeded Shakespeare’s admonition “Neither a borrower nor a lender be,” what would happen to the circular flow? LO2
7. If people never withdrew cash from banks, how much money could the banking system potentially create?Could this really happen? What might limit deposit creation in this case? LO3
6. Does the fact that your bank keeps only a fraction of your account balance in reserve make you uncomfortable? Why don’t people rush to the bank and retrieve their money? What would happen if
5. If you can purchase airline tickets with online computer services, should your electronic account be counted in the money supply? Explain. LO1
4. What percentage of your monthly bills do you pay with(a) cash, (b) check, (c) credit card, and ( d ) automatic transfers. How do you pay off the credit card balance?How does your use of cash
3. How are an economy’s production possibilities affected when workers are paid in bras and coffins rather than cash? (See World View, p. 271, about bartering in Russia.) LO1
2. In what respects are modern forms of money superior to the colonial use of wampum as money? LO1
LO3. Demonstrate how the money multiplier works.
LO2. Describe how banks create money.
LO1. Explain what money is.
10. Use the accompanying graph to illustrate changes in the structural and total deficits for fiscal years 2002–2009 (data in Table 12.3 ).(a) In how many years do the two deficits change in
9. (a) What percent of U.S. debt do foreigners hold? (See Figure 12.4 .)(b) If the interest rate on U.S. Treasury debt is 4 percent, how much interest do foreigners collect each year from the U.S.
8. In Figure 12.5 , what is the opportunity cost of increasing government spending from g1 to g2 if(a) No external financing is available?(b) Complete external financing is available?
7. (a) According to the News on page 253, how much fiscal restraint occurred between 1931 and 1933?(b) By how much did this policy reduce aggregate demand if the MPC was 0.8?
6. Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $10 billion while raising only $8 billion worth of taxes.(a) What will be the government’s deficit?(b) If the
5. Use Table 12.3 to determine how much fiscal stimulus or restraint occured between(a) 2003 and 2004.(b) 2006 and 2007.(c) 2008 and 2009.
4. What would happen to the budget deficit if the(a) GDP growth rate jumped from 1 percent to 3 percent?(b) Inflation rate increased by two percentage points?( Note: See Table 12.2 for clues.)
3. What country had the largest budget deficit (as percent of GDP) in 2008?
2. Since 1980, in how many years has the federal budget had a surplus? (See Figure 12.1 .)
1. From 2006 to 2008 how did each of the following change?(a) Tax revenue(b) Government spending(c) Budget deficit( Note: See Table 12.1 .)
10. Which of the following options do you favor for re solving future Social Security deficits? What are the advantages and disadvantages of each option? (a) cutting Social Security benefits, (b)
9. How long would it take to pay off the national debt?How would the economy be affected? LO3
8. By how much did defense spending increase in 1940 to 1944? (See back endpapers of this book.) What was crowded out? LO2
7. A constitutional amendment has been proposed that would require Congress to balance the budget each year. Is it possible to balance the budget each year? Is it desirable? LO1
6. If deficit spending “crowds out” some private investment, could future generations be worse off? If external financing eliminates crowding out, are future generations thereby protected? LO2
5. What’s considered “too much” debt or “too large” a deficit? Are you able to provide any guidelines for deficit or debt ceilings? LO2
4. In what ways do future generations benefit from this generation’s deficit spending? Cite three examples. LO3
3. Can you forecast next year’s deficit without knowing how fast GDP will grow? LO1
2. When are larger deficits desirable? LO2
1. Who paid for the Revolutionary War? Did the deficit financing initiated by the Continental Congress pass the cost of the war on to future generations? LO3
LO3. Identify the burden of the national debt.
LO2. Explain how “crowding out” works.
LO1. Distinguish between cyclical and structural defi cits.
12. Use the following data to answer the following questions:Price level 10 20 30 40 50 60 70 80 90 100 Real GDP $500 600 680 750 820 880 910 940 960 970 supplied Real GDP $960 920 880 840 800 760
11. If the marginal propensity to consume was 0.8, how large would each of the following need to be in order to restore a full-employment equilibrium in Figure 11.6 ?(a) A tax increase.(b) A
10. Suppose that an increase in income transfers rather than government spending was the preferred policy for stimulating the economy depicted in Figure 11.4 . By how much would transfers have to
9. According to the News on page 231, how much of a cumulative impact on spending could be expected from President Obama’s(a) Increase in government spending?(b) Tax cuts?Assume an MPC of 0.8.
8. According to the World View on page 230,(a) How large was China’s 2008 fiscal stimulus? $(b) How much faster was GDP expected to grow as a result?(c) According to the News on page 231, and Table
7. (a) According to the News on page 233, how much more did the average household spend on appliances, electronics, and furniture when it received the 2008 tax rebate?(b) If the MPC was 0.9, how much
6. If the AD excess is $400 billion and the MPC is 0.9,(a) How much fiscal restraint is desired?(b) By how much do income taxes have to be increased to get that restraint?
5. If the AD shortfall is $800 billion and the MPC is 0.8,(a) How large is the desired fiscal stimulus?(b) How large an income tax cut is needed?(c) Alternatively, how much more government spending
4. On the accompanying graph, identify and label(a) Macro equilibrium.(b) The real GDP gap.(c) The AD excess or AD shortfall.(d) The new equilibrium that would occur with appropriate fiscal policy.
3. Suppose the government decides to increase taxes by $30 billion in order to increase Social Security benefits by the same amount. How will this combined tax-transfer policy affect aggregate demand
2. Suppose the consumption function is C 5 $500 billion 1 0.9Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before
1. In the tax-cut example on pages 231–233,(a) By how much does consumer saving increase initially?(b) How large is the initial spending injection?
11. What were the differences in size, content, and expected impact between the U.S.’s and China’s 2009 stimulus packages? (World View, p. 230; News, p. 231, and Table 11.2 .) LO2
10. When Barack Obama was campaigning for president in 2008, he proposed more government spending paid for with higher taxes on “the rich.” What impact would those options have on macro
9. Why do critics charge that fiscal policy has a “big-government bias”? LO2
8. How quickly should Congress act to remedy an AD excess or AD shortfall? What are the risks of quick fiscal policy responses? LO2, LO3
7. According to the World View on page 230, what prompted China’s fiscal stimulus in 2008? Had the government not intervened, what might have happened? LO1
5. Will consumers always spend the same percentage of any tax cut? Why might they spend more or less than usual? LO2
4. Why are the AD shortfall and AD excess larger than their respective GDP gaps? Are they ever the same size as the GDP gap? LO1
3. What happens to aggregate demand when transfer payments and the taxes to pay them both rise by the same amount? LO3
2. How did consumers spend their 2008 tax cut (News, p. 233)? Does it matter what they spend it on?Explain. LO3
Can government spending and tax policies ensure full employment?
LO3. Predict how fi scal stimulus or restraint affects macro outcomes.
LO2. Describe the tools of fi scal policy.
LO1. Explain what the AD shortfall and AD excess measure.
10. The accompanying graph depicts a macro equilibrium. Answer the questions based on the information in the graph.(a) What is the equilibrium rate of GDP?(b) If full-employment real GDP is $1,200,
9. How large is the inflationary GDP gap in Figure 10.9 ?
8. According to World Bank estimates (see p. 217), by how much did consumer spending decline as a result of the 7-point drop in the index of consumer confidence at the end of 2007 ( Figure 10.10 )?
7. If Korean exports to the U.S. decline by $15 billion (World View, p. 212) by how much will total Korean spending drop if their MPC is 0.60?
6. By how much did annualized consumption decline in November 2008 when GDP was$14 trillion? (See News, p. 208.)
5. Illustrate in the graph below the impact of a sudden decline in consumer confidence that reduces autonomous consumption by $50 billion at the price level P F . Assume MPC 5 0.8.(a) What is the new
4. Suppose that investment demand increases by $100 billion in a closed and private economy(no government or foreign trade). Assume further that households have a marginal propensity to consume of 80
3. If the marginal propensity to consume is 0.75,(a) What is the value of the multiplier?(b) What is the marginal propensity to save?
2. If the consumption function is C $200 billion 0.9 Y,(a) How much do consumers spend with incomes of $3 trillion?(b) How much do they save?
1. From 1929 to 2008, in how many years did(a) Real consumption decline?(b) Real investment decline?(c) Real government spending increase at least $100 billion? (Data on end covers of text.)
10. Will the price level always rise when AD increases?Why or why not? LO2
9. What is the “ripple effect” in the News on page 211? LO2
8. Why might “belt-tightening” by consumers in a recession be unwelcome? (See News, p. 218.) LO3
7. What forces might turn an economic bust into an economic boom? What forces might put an end to the boom? LO3
6. Why was President Obama so concerned about the economy at the outset of his presidency? LO3
5. How might construction-industry job losses affect incomes in the clothing and travel industries? LO2
4. How can equilibrium output exceed full-employment output (as in Figure 10.9 )? LO3
3. When unwanted inventories pile up in retail stores, how is production affected? What are the steps in this process? LO3
1. How might declining prices affect a firm’s decision to borrow and invest? (See News, p. 207.) LO3
Could market responses actually worsen macro outcomes?
Why might markets not self-adjust?
Why does anyone think the market might self-adjust(returning to a desired equilibrium)?
LO3. Explain how recessionary and infl ationary GDP gaps arise.
LO2. Describe what the multiplier is and how it works.
LO1. Identify the sources of circular fl ow leakages and injections.
According to the World View on page 470,(a) How much money is spent annually to combat baldness? $(b) How much medical care would that money buy for each child who dies from malaria each year?
(a) Which low-income nation in Table 22.3 has GDP growth equal to the United States?(b) How much faster is that nation’s population growth? %(c) How much lower is its per capita GDP growth? %
According to Table 22.3, now many years will it take for per capita GDP to double in(a) China?(b) Madagascar?(c) Zimbabwe?
If the industrialized nations were to satisfy the U.N.’s Millennium Aid Goal, how much more foreign aid would they give annually? (See Table 22.2.) $
(a) How much foreign aid does the U.S. now provide? (See Table 22.2.) $(b) How much more is required to satisfy the U.N.’s Millennium Aid Goal if U.S. GDP 5 $15 trillion? $
In Namibia,(a) What percent of total output is received by the richest 10 percent of households? (See World View, p. 468.) %(b) How much output did this share amount to in 2007, when Namibia’s GDP
Close to half the world’s population of 6 billion people is in “severe” poverty with less than $3 of income per day (with inflation adjustments).(a) What is the maximum combined income of this
Adjusted for inflation, the World Bank’s threshold for “extreme” poverty is now close to $1.50 per person per day.(a) How much annual income does this imply? $(b) What portion of the official
What market failure does Bill Gates (World View, p. 470)cite as the motivation for global philanthropy? LO3
If economic growth reduced poverty but widened inequalities, would it still be desirable? LO3
How do nations expect nationalization of basic industries to foster economic growth? LO3
Why do economists put so much emphasis on entrepreneurship? How can poor nations encourage it? LO3
How might Bolivia match China’s investment rate?(See Table 22.4.) LO2
Would you invest in Cambodia or Kenya on the basis of the information in Figure 22.6? LO3
Can poor nations develop without substantial increases in agricultural productivity? (See Figure 22.3.)How? LO3
How does microfinance alter prospects for economic growth? The distribution of political power? LO3
Could a nation reorder Rostow’s five stages of development and still grow? Explain. LO3

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