Questions and Answers of Macroeconomic Theory

What are the major categories of firms that make up the U.S. financial services industry? Did the bank and thrift share of the financial services market rise, fall, or stay the same between 1980 and
Following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not?a. Upon taking office,
KEY QUESTION Suppose the price level and value of the dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the
KEY QUESTION What are the components of the M 1 money supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic
Explain and evaluate the following statements:a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been
TEXT TABLE 11.1, COLUMN 3—WHAT ARE THE LATEST NUMBERS? Go to the Congressional Budget Office Web site, www.cbo.gov , and select Historical Budget Data.Find the historical data for the actual budget
LEADING ECONOMIC INDICATORS—HOW GOES THE ECONOMY? The Conference Board, at www.conferenceboard.org/ , tracks the leading economic indicators. Check the summary of the index of leading indicators
What is the index of leading economic indicators, and how does it relate to discretionary fiscal policy?
Why might economists be quite concerned if the annual interest payments on the debt sharply increased as a percentage of GDP?
True or false? If false, explain why.a. The total public debt is more relevant to an economy than the public debt as percentage of GDP.b. An internally held public debt is like a debt of the left
KEY QUESTION How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the
ADVANCED ANALYSIS (For students who were assigned Chapter 9) Assume that, without taxes, the consumption schedule for an economy is as shown below:a. Graph this consumption schedule, and determine
KEY QUESTION Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy
Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly
KEY QUESTION Define the standardized budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is GDP 3
Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?
(For students who were assigned Chapter 9) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary
KEY QUESTION What are government’s fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand–aggregate supply model to show the impact of these policies on the price
KEY QUESTION Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve
What is the role of the Council of Economic Advisers(CEA) as it relates to fiscal policy? Class assignment: Determine the names and educational backgrounds of the present members of the CEA.
Suppose that the price level is constant and that investment decreases sharply. How would you show this decrease in the aggregate expenditures model? What would be the outcome for real GDP? How would
Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not the aggregate demand curve.”
THE RECESSION OF 2001—WHICH COMPONENT OF AD DECLINED THE MOST? Use the interactive feature of the Bureau of Economic Analysis Web site, www.bea.gov, to access the National Income and Product
FEELING WEALTHIER; SPENDING MORE? Access the Bureau of Economic Analysis Web site, www.bea.gov, interactively via the National Income and Product Account Tables.From Table 1.2 find the annual levels
LAST WORD Go to the OPEC Web site, www.opec.org, and find the current “OPEC basket price” of oil. By clicking on that amount, you will find the annual prices of oil for the past 5 years. By what
In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. Use AD-AS analysis
Use shifts of the AD and AS curves to explain (a) the U.S.experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b)how a strong negative
Explain: “Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.” In each case, specify the price-level outcomes.
Why does a reduction in aggregate demand reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect.
KEY QUESTION Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the
KEY QUESTION What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the
KEY QUESTION Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output:a. What is productivity in this
KEY QUESTION Suppose that the aggregate demand and supply schedules for a hypothetical economy are as shown below:a. Use these sets of data to graph the aggregate demand and aggregate supply curves.
Why is the long-run aggregate supply curve vertical?Explain the shape of the short-run aggregate supply curve.Why is the short-run curve relatively flat to the left of the full-employment output and
Distinguish between “real-balances effect” and “wealth effect,” as the terms are used in this chapter. How does each relate to the aggregate demand curve?
Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in
GDP GAP AND EXPENDITURE GAP The St. Louis Federal Reserve Bank at www.research.stlouisfed.org/fred2 provides data on both real GDP (chained 2000 dollars) and real potential GDP for the United States.
THE MULTIPLIER—CALCULATING HYPOTHETICAL CHANGES IN GDP Go to the Bureau of Economic Analysis at www.bea.gov , and use the BEA interactivity feature to select National Income and Product Account
LAST WORD What is Say’s law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use
Answer the following questions, which relate to the aggregate expenditures model:a. If C a is $100, I g is $50, X n is $10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an
ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption C 50 0.8 Y. Assume further that planned investment I g and net exports X n are independent
KEY QUESTION Refer to the table below in answering the questions that follow:a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary
KEY QUESTION Refer to columns 1 and 6 in the table for question 9.Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also
Explain graphically the determination of equilibrium GDP for a private economy through the aggregate expenditures model. Now add government purchases (any amount you choose) to your graph, showing
Assume that, without taxes, the consumption schedule of an economy is as follows:GDP, Consumption, Billions Billions $100 $120 200 200 300 280 400 360 500 440 600 520 700 600a. Graph this consumption
KEY QUESTION The data in columns 1 and 2 in the accompanying table are for a private closed economy:a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.b. Now open
Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is
Using the consumption and saving data in question 2 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and
KEY QUESTION Assuming the level of investment is$16 billion and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment
What is an investment schedule and how does it differ from an investment demand curve?
How economists integrate the international sector(exports and imports) and the public sector(government expenditures and taxes) into the aggregate expenditures model.
How changes in equilibrium real GDP can occur and how those changes relate to the multiplier.
How economists combine consumption and investment to depict an aggregate expenditures schedule for a private closed economy.
INVESTMENT INSTABILITY—CHANGES IN REAL PRIVATE NONRESIDENTIAL FIXED INVESTMENT The Bureau of Economic Analysis provides data for real private nonresidential fixed investment in table form at
THE BEIGE BOOK AND CURRENT CONSUMER SPEND- ING Go to the Federal Reserve Web site, federalreserve.gov, and select About the Fed and then Federal Reserve Districts and Banks. Find your Federal Reserve
LAST WORD What is the central economic idea humorously illustrated in Art Buchwald’s piece, “Squaring the Economic Circle”? How does the central idea relate to recessions, on the one hand, and
ADVANCED ANALYSIS Suppose that the linear equation for consumption in a hypothetical economy is C 40 .8Y.Also suppose that income (Y ) is $400. Determine (a) the marginal propensity to consume, (b)
ADVANCED ANALYSIS Linear equations for the consumption and saving schedules take the general form C a bYand S a (1 b)Y, where C, S, and Y are consumption, saving, and national income,
Why is the actual multiplier for the U.S. economy less than the multiplier in this chapter’s simple examples?
KEY QUESTION What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier?The MPS? What will the multiplier be when the MPS is 0,.4, .6, and 1? What will it be
KEY QUESTION Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding
KEY QUESTION Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year’s net revenue. What
What are the basic determinants of investment? Explain the relationship between the real interest rate and the level of investment. Why is investment spending unstable? How is it possible for
KEY QUESTION Complete the following table:a. Show the consumption and saving schedules graphically.b. Find the break-even level of income. Explain how it is possible for households to dissave at very
Explain why an upward shift of the consumption schedule typically involves an equal downshift of the saving schedule.What is the exception to this relationship?
Explain how each of the following will affect the consumption and saving schedules (as they relate to GDP) or the investment schedule, other things equal:a. A large increase in the value of real
Precisely how do the APC and the MPC differ? Why must the sum of the MPC and the MPS equal 1? What are the basic determinants of the consumption and saving schedules?Of your personal level of
Very briefly summarize the relationships shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment demand curve, and (d) the multiplier effect. Which of these relationships
WHAT IS THE CURRENT U.S. INFLATION RATE? Visit the Bureau of Labor Statistics Web Site, www.bls.gov/news.release/cpi.toc.htm, and select Consumer Price Index Summary. What month (and year) is
WHAT IS THE CURRENT U.S. UNEMPLOYMENT RATE?Visit the Bureau of Labor Statistics Web Site, www.bls.gov/news.release/empsit.toc.htm, and select Employment Situation Summary. What month (and year) is
LAST WORD Suppose that stock prices were to fall by 10 percent in the stock market. All else equal, would the lower stock prices be likely to cause a decrease in real GDP? How might they predict a
Evaluate as accurately as you can how each of the following individuals would be affected by unanticipated inflation of 10 percent per year:a. A pensioned railroad worker.b. A department-store
Explain how hyperinflation might lead to a severe decline in total output.
Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP
KEY QUESTION If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? What is the “rule of 70”? How long would it take for the price level to double if
What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics calculate the rate of inflation from one year to the next? What effect does
Explain how an increase in your nominal income and a decrease in your real income might occur simultaneously.Who loses from inflation? Who loses from unemployment?If you had to choose between (a)
KEY QUESTION Assume that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in
Since the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?
KEY QUESTION Use the following data to calculate (a) the size of the labor force and (b) the official unemployment rate:total population, 500; population under 16 years of age or institutionalized,
What factors make it difficult to determine the unemployment rate? Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic
KEY QUESTION What are the four phases of the business cycle? How long do business cycles last? How do seasonal variations and long-run trends complicate measurement of the business cycle? Why does
Briefly describe the growth record of the United States.Compare the rates of growth of real GDP and real GDP per capita, explaining any differences. Compare the average growth rates of Japan and the
KEY QUESTION Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year 2.What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2.What is the
Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades?
GDPS IN THE AMERICAS—HOW DO NATIONS COMPARE? Visit the World Bank Web site, www.worldbank.org , and type “GDP” in the search space. Find the latest data for total GDP (not PPP GDP) for the
NOMINAL GDP AND REAL GDP—BOTH UP? Visit the Bureau of Economic Analysis Web site, www.bea.gov, and access the BEA interactively by selecting National Income and Product Account Tables. Select
UPDATE THE KEY NATIONAL INCOME AND PRODUCT ACCOUNT NUMBERS Go to the Bureau of Economic Analysis Web site, www.bea.gov, and access the BEA interactively by selecting National Income and Product
Which of the following are included in this year’s GDP?Explain your answer in each case.a. Interest on an AT&T corporate bond.b. Social Security payments received by a retired factory worker.c. The
KEY QUESTION The following table shows nominal GDP and an appropriate price index for a group of selected years.Compute real GDP. Indicate in each calculation whether you are inflating or deflating
KEY QUESTION Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken.Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in
Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions.Compensation of employees $194.2 U.S. exports of goods and services 17.8
KEY QUESTION Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income
Define net exports. Explain how U.S. exports and imports each affect domestic production. Suppose foreigners spend$7 billion on U.S. exports in a specific year and Americans spend $5 billion on
Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private
THE DOHA ROUND—WHAT IS THE CURRENT STATUS?Determine and briefly summarize the current status of the Doha Round of trade negotiations by accessing the World Trade Organization site, www.wto.org. Is
FOREIGN EXCHANGE RATES—THE YEN FOR DOLLARS The Federal Reserve System Web site, www.federalreserve.gov/releases/H10/hist/, provides historical foreignexchange-rate data for a wide variety of
TRADE BALANCES WITH PARTNER COUNTRIES The U.S. Census Bureau, at www.census.gov/foreign-trade/statistics, lists the top trading partners of the United States(imports and exports added together) as
Explain: “Free-trade zones such as the EU and NAFTA lead a double life: They can promote free trade among members, but they pose serious trade obstacles for nonmembers.” Do you think the net

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