Questions and Answers of Macroeconomic Theory

THE YEN-DOLLAR EXCHANGE RATE The Federal Reserve Board of Governors provides exchange rates for various currencies for the last decade at www.federalreserve.gov/releases (Foreign Exchange Rates;
THE U.S. BALANCE ON GOODS AND SERVICES—WHAT ARE THE LATEST FIGURES? The U.S. Census Bureau reports the latest data on U.S. trade in goods and services at its Web site,
What have been the major causes of the large U.S. trade deficits since 1997? What are the major benefits and costs associated with trade deficits? Explain: “A trade deficit means that a nation is
KEY QUESTION Explain why the U.S. demand for Mexican pesos is downward-sloping and the supply of pesos to Americans is upward-sloping. Assuming a system of flexible exchange rates between Mexico and
Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the
“A rise in the dollar price of yen necessarily means a fall in the yen price of dollars.” Do you agree? Illustrate and elaborate: “The critical thing about exchange rates is that they provide a
China had a $150 billion overall current account surplus in 2005. Assuming that China’s net debt forgiveness was zero in 2005 (its capital account balance was zero), what can you specifically
KEY QUESTION Alpha’s balance-of-payments data for 2006 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on
KEY QUESTION Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:a. A U.S. airline firm purchases several Airbus planes assembled in
Explain how a U.S. automobile importer might finance a shipment of Toyotas from Japan. Trace the steps as to how a U.S. export of machinery to Italy might be financed. Explain: “U.S. exports earn
THE U.S. INTERNATIONAL TRADE COMMISSION—WHAT IS IT AND WHAT DOES IT DO? Go to www.usitc.gov to determine the duties of the U.S. International Trade Commission (USITC). How does this organization
TRADE LIBERALIZATION—THE WTO Go to the Web site of the World Trade Organization ( www.wto.org ) to retrieve the latest news from the WTO. List and summarize three recent news items relating to the
LAST WORD What are the main concerns of the WTO protesters? What problems, if any, arise when too many extraneous issues are tied to efforts to liberalize trade?
What is the WTO and how does it relate to international trade? How many nations belong to the WTO? (Update the number given in this book at www.wto.org .) What did the Uruguay Round (1994) of WTO
What is offshoring of white-collar service jobs, and how does it relate to international trade? Why has it recently increased? Why do you think more than half of all the offshored jobs have gone to
What forms do trade adjustment assistance take in the United States? How does such assistance promote support for free trade agreements? Do you think workers who lose their jobs because of changes in
Suppose Japan agreed to a voluntary export restriction(VER) that reduced U.S. imports of Japanese steel by 10 percent. What would be the likely short-run effects of that VER on the U.S. and Japanese
Evaluate the following statements:a. Protective tariffs reduce both the imports and the exports of the nation that levies tariffs.b. The extensive application of protective tariffs destroys the
“The potentially valid arguments for tariff protection are also the most easily abused.” What are those arguments?Why are they susceptible to abuse? Evaluate the use of artificial trade barriers,
KEY QUESTION Draw a domestic supply and demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and
KEY QUESTION Refer to Figure 3.6, page 54.Assume that the graph depicts the U.S. domestic market for corn. How many bushels of corn, if any, will the United States export or import at a world price
“The United States can produce X more efficiently than can Great Britain. Yet we import X from Great Britain.”Explain.
KEY QUESTION To the right are hypothetical production possibilities tables for New Zealand and Spain. Each country can produce apples and plums.Plot the production possibilities data for each of the
Suppose nation A can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for nation B are 60 units of X and 60 units
Distinguish among land-, labor-, and capital-intensive commodities, citing one nontextbook example of each.What role do these distinctions play in explaining international trade? What role do
Quantitatively, how important is international trade to the United States relative to other nations?
THE EQUATION OF EXCHANGE—WHAT IS THE CURRENT VELOCITY OF MONEY? In the equation of exchange, MV PQ, the velocity of money, V, is found by dividing nominal GDP ( PQ) by M, the money supply.
LAST WORD Compare and contrast the Taylor rule for monetary policy with the older, simpler monetary rule advocated by Milton Friedman.
You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a
KEY QUESTION Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in
Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive”fiscal policy advocated by new classical economists.Explain: “The problem
Answer parts a andb, below, on the basis of the following information for a hypothetical economy in year 1: money supply $400 billion; long-term annual growth of potential GDP 3 percent; velocity
Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at
KEY QUESTION Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy
Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig.They bumped into
Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
KEY QUESTION Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and
State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability?How might adverse aggregate supply
KEY QUESTION Use the aggregate demand–aggregate supply model to compare the “old” classical and the Keynesian interpretations of (a) the aggregate supply curve and (b) the stability of the
AID-DEPENDENCY RATIOS—WHICH NATIONS ARE THE MOST DEPENDENT? Use the search function at the World Bank Web site, www.worldbank.org , to find the most recent data on “aid-dependency ratios.”
THE WORLD BANK GROUP—MILLENNIUM DEVELOPMENT GOALS Go to the World Bank Web site, www.worldbank.org , and identify the five major agencies that make up the World Bank Group. What are the specifics
LAST WORD Explain how civil wars, population growth, and public policy decisions have contributed to periodic famines in Africa.
KEY QUESTION Use Figure 16W.2(changing the box labels as necessary) to explain rapid economic growth in a country such as South Korea or Chile. What factors other than those contained in the figure
Do you think that IACs such as the United States should open their doors wider to the immigration of low-skilled DVC workers in order to help the DVCs develop? Do you think that it is appropriate for
What types of products do the DVCs typically export?How do those exports relate to the law of comparative advantage? How do tariffs by IACs reduce the standard of living of DVCs?
Do you favor debt forgiveness to all the DVCs, just the poorest ones, or none at all? What incentive problem might debt relief create? Would you be willing to pay $20 a year more in personal income
What were the trends in government-provided foreign aid versus private capital flows to the DVCs in the 1990s? Why do you think those trends occurred?
Do you think that the nature of the problems the DVCs face requires government-directed as opposed to a privateenterprise-directed development process? Explain why or why not.
KEY QUESTION Because real capital is supposed to earn a higher return where it is scarce, how do you explain the fact that most international investment flows to the IACs (where capital is relatively
Discuss and evaluate:a. The path to economic development has been blazed by American capitalism. It is up to the DVCs to follow that trail.b. The problem with the DVCs is that income is too equally
KEY QUESTION Assume a DVC and an IAC presently have real per capita outputs of $500 and $5000, respectively. If both nations have a 3 percent increase in their real per capita outputs, by how much
Explain how the absolute per capita income gap between rich and poor nations might increase, even though per capita income (or output) is growing faster in DVCs than in IACs.
What are the characteristics of a developing nation? List the two basic avenues of economic growth available to such a nation. State and explain the obstacles that DVCs face in breaking the poverty
PRODUCTIVITY AND TECHNOLOGY—EXAMPLES OF INNOVATIONS IN COMPUTERS AND COMMUNICATIONS Recent innovations in computers and communications technologies are increasing productivity. Lucent
WHAT’S UP WITH PRODUCTIVITY? Visit the Bureau of Labor Statistics Web site, www.bls.gov . In sequence, select Productivity and Costs, Get Detailed Statistics, and Most Requested Statistics to find
U.S. ECONOMIC GROWTH—WHAT ARE THE LATEST RATES? Go to the Bureau of Economic Analysis Web site, www.bea.gov , and use the data interactivity feature to find National Income and Product Account
LAST WORD Based on the information in this chapter, contrast the economic growth rates of the United States and China over the last 25 years. How does the real GDP per capita of China compare with
What is meant when economists say that the U.S. economy has “a higher safe speed limit” than it had previously? If the New Economy has a higher safe speed limit, what explains the series of
Provide three examples of products or services that can be simultaneously consumed by many people. Explain why labor productivity greatly rises as the firm sells more units of the product or service.
KEY QUESTION Relate each of the following to the New Economy:a. The rate of productivity growthb. Information technologyc. Increasing returnsd. Network effectse. Global competition
Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage.
DYNAMIC TAX SCORING—WHAT IS IT, AND WHO WANTS IT? Go to www.google.com and search for information on“dynamic tax scoring.” What is it? How does it relate to supply-side economics? Which
THE LAFFER CURVE—DOES IT SHIFT? Congress did not substantially change Federal income tax rates between 1993 and 2000. Visit the Bureau of Economic Analysis Web site, www.bea.gov/ , and use the
LAST WORD Suppose that a tax cut involves two alternative schemes: (a) a $2 tax cut or tax rebate for each of the 10 people in the breakfast club, or (b) a tax savings for each of the 10 in
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over
KEY QUESTION Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at
KEY QUESTION Suppose the full-employment level of real output ( Q) for a hypothetical economy is $250 and the price level ( P) initially is 100.Use the short-run aggregate supply schedules below to
THE FEDERAL RESERVE ANNUAL REPORT Visit the Federal Reserve’s Web site at www.federalreserve.gov, and select Monetary Policy and then Monetary Policy Report to the Congress to retrieve the current
CURRENT U.S. INTEREST RATES Visit the Federal Reserve’s Web site at www.federalreserve.gov , and select Economic Research and Data, then Statistics: Releases and Historical Data, Selected Interest
KEY QUESTION Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate.What change in the Federal funds
KEY QUESTION In the accompanying table you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the
Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the impact of each of the following transactions on commercial bank reserves:a. Federal Reserve Banks purchase securities
KEY QUESTION Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. Compute and enter in the spaces provided in the accompanying
KEY QUESTION Assume that the following data characterize a hypothetical economy: money supply $200 billion;quantity of money demanded for transactions $150 billion;quantity of money demanded as an
KEY QUESTION What is the basic determinant of ( a ) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money
RESERVE REQUIREMENTS—ANY CHANGES TO TABLE 13.1? Go to the Fed’s Web site, www.federalreserve.gov/, and select “Monetary Policy.” Then, in order, select Reserve Requirements and find the link
ASSETS AND LIABILITIES OF ALL COMMERCIAL BANKS IN THE UNITED STATES The Federal Reserve, at www.federalreserve.gov/releases/h8/Current/, provides an aggregate balance sheet for commercial banks in
LAST WORD Explain how the bank panics of 1930 to 1933 produced a decline in the nation’s money supply. Why are such panics highly unlikely today?
KEY QUESTION Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is 25 percent.a. What amount of
Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Joe, who deposits the $100 in his checking account in Serenity Bank. Assuming a
Suppose a bank discovers that its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds market?Now assume the bank
Suppose again that the Third National Bank has reserves of$20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5000 in securities to the Federal Reserve
The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank that is added to reserves. What
KEY QUESTION Suppose that Continental Bank has the simplified balance sheet shown on the previous page and that the reserve ratio is 20 percent:a. What is the maximum amount of new loans that this
Suppose the National Bank of Commerce has excess reserves of $8000 and outstanding checkable deposits of$150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?
Assume that Jones deposits $500 in currency into her checkable-deposit account in First National Bank. A halfhour later Smith obtains a loan for $750 at this bank. By howmuch and in what direction
Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is
KEY QUESTION “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.”Explain.
“Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Do you agree? Explain why or why not.
KEY QUESTION Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are
Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?
What the monetary multiplier is and how to calculate it.
How a bank can create money through granting loans.
Why the U.S. banking system is called a “fractional reserve” system.
CURRENCY TRIVIA Visit the Web site of the Federal Reserve Bank of Atlanta, www.frbatlanta.org/publica/brochure/fundfac/money.htm , to answer the following questions: What are the denominations of
WHO ARE THE MEMBERS OF THE FEDERAL RESERVE BOARD? The Federal Reserve Board Web site, www.federalreserve.gov/BIOS/ , provides a detailed biography of the seven members of the Board of Governors. What
How does a debit card differ from a credit card? How does a stored-value card differ from both? Suppose that a person has a credit card, debit card, and stored-value card. Create a fictional scenario

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