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macroeconomics

Questions and Answers of Macroeconomics

A pretzel manufacturer is considering buying another pretzel-making machine that costs \(\$ 100,000\). The machine will depreciate by \(8 \%\) per year. It will generate real profits equal to \(\$
Suppose that at age 22, you have just finished college and have been offered a job with a starting salary of \(\$ 40,000\). Your salary will remain constant in real terms. However, you have also been
Suppose that every consumer is born with zero financial wealth and lives for three periods: youth, middle age, and old age. Consumers work in the first two periods and retire in the last one. Their
Continue with the setup from Problem 5, but suppose now that borrowing restrictions do not allow young consumers to borrow. If we call the sum of income and total financial wealth "cash on hand,"
Consider a consumer who lives for three periods: youth, middle age, and old age. When young, the consumer earns \(\$ 20,000\) in labor income. Earnings during middle age are uncertain; there is a
Go to the FRED database operated by the Federal Reserve Bank of St. Louis. Find annual data for personal consumption expenditures and gross private domestic investment as well as for real GDP. The
Go to the Web site of the FRED economic data base and download the series for real personal disposable income per capita (series name A229RXO), the University of Michigan Survey of Consumers Index of
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. Changes in the current one-year real interest rate are likely to have a
Consider these two quotes concerning recent Federal Reserve policy On December 12, 2012 the Federal Reserve issued the following statement:"In particular, the Committee decided to keep the target
For each of the changes in expectations in parts (a) through (d), determine whether there is a shift in the IS curve, the LM curve, both curves, or neither. In each case assume that no other
Consider the following statement: "The rational expectations assumption is unrealistic because, essentially, it amounts to the assumption that every consumer has perfect knowledge of the economy."
A new president, who promised during the campaign that she would cut taxes, has just been elected. People trust that she will keep her promise, but expect that the tax cuts will be implemented only
The Focus box "Can a Budget Deficit Reduction Lead to an Output Expansion? Ireland in the 1980s" provides an example of fiscal consolidation. Ireland had a large budget deficit in 1981 and 1982.a.
Suppose, in a hypothetical economy, that the chairman of the Fed unexpectedly announces that he will retire in one year. At the same time, the President announces her nominee to replace the retiring
As seen in the following table, the crisis left the United States with an enormous federal budget deficit in 2009. There was a substantial fiscal consolidation from 2011 onward yet real output
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. If there are no statistical discrepancies, countries with current account
Consider two fictional economies, one called the domestic country and the other the foreign country. Given the transactions listed in(a) through (g), construct the balance of payments for each
Consider two bonds, one issued in euros ( \(€\) ) in Germany, and one issued in dollars ($) in the United States. Assume that both government securities are one-year bonds - paying the face value
Consider a world with three equal-sized economies ( \(A, B\), and \(C\) ) and three goods (clothes, cars, and computers). Assume that consumers in all three economies want to spend an equal amount on
Suppose the domestic currency depreciates (i.e., E falls).Assume that \(P\) and \(P *\) remain constant.a. How does the nominal depreciation affect the relative price of domestic goods (i.e., the
Retrieve the nominal exchange rates between Japan and the United States from the Federal Reserve Bank of St. Louis FRED data site. It is series AEXJPUS. This exchange rate written as yen per
Retrieve the most recent World Economic Outlook (WEO) from the Web site of the International Monetary Fund (www.imf.org). In the Statistical Appendix, find the table titled "Balances on Current
Saving and investment throughout the world Retrieve the most recent World Economic Outlook (WEO) from the Web site of the International Monetary Fund (www.imf. org). In the Statistical Appendix, find
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The current U.S. trade deficit is the result of unusually high investment,
Real and nominal exchange rates and inflation Using the definition of the real exchange rate (and Propositions 7 and 8 in Appendix 2 at the end of the book), you can show
A further look at Table 18-1 Table 18-1 has four entries. Using Figure 18-5 as a guide, draw the situations illustrated in each of the 4 entries in Table 18-1. Be sure you understand why the
Net exports and foreign demanda. Suppose there is an increase in foreign output. Show the effect on the domestic economy (i.e., replicate Figure 18-4). What is the effect on domestic output? On
Eliminating a trade deficita. Consider an economy with a trade deficit \((N X
Multipliers, openness, and fiscal policy Consider an open economy characterized by the following equations:\[\begin{aligned}C & =c_{0}+c_{1}(Y-T) \\I & =d_{0}+d_{1} Y \\I M & =m_{1} Y \\X & =x_{1}
Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by\[C=10+0.8(Y-T), I=10, G=10 \text {, and }
The U.S. trade deficit, current account deficit, and investmenta. Define national saving as private saving plus the government surplus-that is, as \(S+T-G\). Now, using equation (18.5), describe the
Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.a. The interest rate parity condition means that interest rates are equal
Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of
In this chapter, we showed that a reduction in the interest rate in an economy operating under flexible exchange rates leads to an increase in output and a depreciation of the domestic currency.a.
Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.a. In an IS-LM-UIP diagram,
Suppose there is an expansionary fiscal policy in the foreign country that increases \(Y^{*}\) and \(i^{*}\) at the same time.a. In an IS-LM-UIP diagram, show the effect of the increase in foreign
Consider a fixed exchange rate system, in which a group of countries (called follower countries) peg their currencies to the currency of one country (called the leader country). Because the currency
A flexible exchange rate combined with a willingness to change the domestic interest rate can increase the effectiveness of monetary policy in an open economy. Consider an economy that suffers a fall
This question explores how an increase in demand for U.S. assets may have slowed the depreciation of the dollar that many economists believe is warranted by the large U.S. trade deficit and the need
Bond yields and long run currency movementsa. Go the web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section "Markets \& Data" and then the
In year 1, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that$1,500, he saves $200. What is Adam’s MPC out of his $500 raise?a.
If the MPS rises, then the MPC will:a. fall.b. rise.c. stay the same.
Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent
Which of the following scenarios will shift the investment demand curve right? Select one or more answers from the choices shown.a. Business taxes increase.b. The expected return on capital
True or False. Real GDP is more volatile (variable) than gross investment.
If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?a. 1.0b. 2.5c. 4.0d. 5.0
True or False. Larger MPCs imply larger multipliers.
Refer to the table in Figure 10.5 and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that the expected rate of return declines by 2 percentage points at
What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1?What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of
True or False. The aggregate expenditures model assumes flexible prices.
If total spending is just sufficient to purchase an economy’s output, then the economy is:a. in equilibrium.b. in recession.c. in debt.d. in expansion.
True or False. If spending exceeds output, real GDP will decline as firms cut back on production.
If inventories unexpectedly rise, then production _________ sales and firms will respond by ________ output.a. trails; expandingb. trails; reducingc. exceeds; expandingd. exceeds; reducing
If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:a. $2 billion.c. $8 billion.b. $3 billion.d. $15 billion.e. none of the above.
A depression abroad will tend to ________ our exports, which in turn will _______ net exports, which in turn will _______ equilibrium real GDP.a. reduce; reduce; reduceb. increase; increase;
The economy’s current level of equilibrium GDP is $780 billion.The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that _______ the economy faces
If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP _________ by taxes or ________ government
What were the monetary and fiscal policy responses to the Great Recession? What were some of the reasons suggested for why those policy responses didn’t seem to have as large an effect as
Which of the following help to explain why the aggregate demand curve slopes downward?a. When the domestic price level rises, our goods and services become more expensive to foreigners.b. When
Which of the following will shift the aggregate demand curve to the left?a. The government reduces personal income taxes.b. Interest rates rise.c. The government raises corporate profit taxes.d.
Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.b. A vertical line.c.
Which of the following will shift the aggregate supply curve to the right?a. A new networking technology increases productivity all over the economy.b. The price of oil rises substantially.c.
At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:a. above equilibrium.b. at
True or False. Decreases in AD normally lead to decreases in both output and the price level.
True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.
What are government’s fiscal policy options for ending severe demand-pull inflation?
Which of the following would help a government reduce an inflationary output gap?a. Raising taxes.b. Lowering taxes.c. Increasing government spending.d. Decreasing government spending.
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine
During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax
Last year, while a hypothetical economy was in a recession, government spending was $595 billion, and government revenue was $505 billion. Economists estimate that if the economy had been at its
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag.a. To fight a recession, Congress has passed a bill to increase infrastructure
In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50
What do economists mean when they say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’banks?
How did the Wall Street Reform and Consumer Protection Act of 2010 try to address some of the problems that helped cause the financial crisis of 2007–2008?
Why are federal prosecutors reluctant to bring major charges against large financial firms? What was the main regulatory action of the Glass-Steagall law? Why might having many smaller financial
The three functions of money are:a. liquidity, store of value, and gifting.b. medium of exchange, unit of account, and liquidity.c. liquidity, unit of account, and gifting.d. medium of exchange, unit
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits,$200 million of savings deposits, $40 million of small-denominated time deposits,
Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?a. It
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?a. Federal Reserve Systemb. the 12 Federal Reserve Banksc. Board of Governors of the
An important reason why members of the Federal Reserve’s Board of Governors are each given extremely long, 14-year terms is to:a. insulate members from political pressures that could result in
Which of the following is not a function of the Fed?a. Setting reserve requirements for banks.b. Advising Congress on fiscal policy.c. Regulating the supply of money.d. Serving as a lender of last
James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a
City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s
Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering
A goldsmith has $2 million of gold in his vaults. He issues$5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?a. 1/10b. 1/5c. 2/5d. 5/5
A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves?a. $100
The actual reason that banks must hold required reserves is:a. to enhance liquidity and deter bank runs.b. to help fund the Federal Deposit Insurance Corporation, which insures bank deposits.c. to
A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan ______________.a. total reservesb. excess reservesc. total depositsd. excess deposits
The two conflicting goals facing commercial banks are:a. profit and liquidity.b. profit and loss.c. deposits and withdrawals.d. assets and liabilities.
Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would
Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be
Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers.What happened to the money supply?a. Increased.b. Decreased.c. Stayed
What are the two parts of the Fed’s dual mandate? How does the dual mandate relate to the bullseye chart? Which quadrants of the bullseye chart give conflicting signals to the Fed and what is the
Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.
What component of aggregate demand is influenced by technological change? What about for aggregate supply? How would improvements in productivity affect investment spending? Other things equal, how
When bond prices go up, interest rates go .a. upb. downc. nowhere
A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply:a. increases by $100,000.b. decreases by $100,000.c. is unaffected by the transaction.
A bank currently has $100,000 in checkable deposits and$15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has in money-creating potential. If the reserve ratio is 14 percent,
A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the
Which of the following Fed actions will increase bank lending?Select one or more answers from the choices shown.a. The Fed raises the discount rate from 5 percent to 6 percent.b. The Fed raises the

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