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business
macroeconomics principles
Questions and Answers of
Macroeconomics Principles
LO2 Use potential output and the output gap to analyze an economy’s position in the business cycle.
LO1 List the four phases of the business cycle and explain the primary characteristics of recessions and expansions.
7. A country’s domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: (LO3) S = 1,800 +
6. Use a diagram like Figure 11.4 (solid lines only) to show the effects of each of the following on the real interest rate and capital investment of a country that is a net borrower from abroad.
5. How do each of the following transactions affect (1) the trade surplus or deficit and (2) capital inflows or outflows for the United States? Show that in each case, the identity that the trade
4. You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats
3. Your financial investments consist of U.S. government bonds maturing in 10 years and shares in a start-up company doing research in pharmaceuticals. How would you expect each of the following news
2. Shares in Brothers Grimm Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5.50 in one year and to sell for $99.00 per share at that time. How much should you be
1. Simon purchases a bond, newly issued by the Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the
6. How would increased political instability in a country likely affect capital inflows, the domestic real interest rate, and investment in new capital goods? Show graphically. (LO3)
5. Explain with examples why, in any period, a country’s net capital inflows equal its trade deficit. (LO3)
4. How are capital inflows or outflows related to domestic investment in new capital goods? (LO3)
3. Suppose you are much less concerned about risk than the typical person. Are stocks a good financial investment for you? Why or why not? (LO1, LO2)
2. Give two ways that the financial system helps improve the allocation of savings. Illustrate with examples. (LO2)
1. Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond? Explain. (LO1)
LO3 Analyze the factors that determine international capital flows to understand how domestic saving, the trade balance, and net capital flows are related.
LO2 Show how the financial market improves the allocation of saving to productive uses.
LO1 Describe the role of financial intermediaries, such as commercial banks in the financial system, and differentiate between bonds and stocks.
8. Consider the following hypothetical data for 2019 and 2020: (LO4) 2019 2020 Money supply 1,000 1,050 Velocity 8 8 Real GDP 12,000 12,000 a. Find the price level for 2019 and 2020. What is the rate
7. Consider a country in which real GDP is $9 trillion, nominal GDP is $12 trillion, M1 is $2.5 trillion, and M2 is $5.5 trillion. (LO4) a. Find velocity for M1 and for M2. b. Show that the quantity
6. The Federal Reserve System was created by the Federal Reserve Act, passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the
5. Refer to Table 10.7. Suppose that the Fed had decided to set the U.S. money supply in December 1932 and in December 1933 at the same value as in December 1930. Assuming that the values of currency
4. When a central bank increases bank reserves by $1, the money supply rises by more than $1. The amount of extra money created when the central bank increases bank reserves by $1 is called the money
3. Answer each of the following questions: (LO2) a. Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply. b. The
2. Redo the example of Gorgonzola in the text (see Tables 10.2 to 10.6), assuming that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation, and (2) commercial banks
1. During World War II, an Allied soldier named Robert Radford spent several years in a large German prisonerof-war camp. At times, more than 50,000 prisoners were held in the camp, with some
6. Use the quantity equation to explain why money growth and inflation tend to be closely linked. (LO4)
5. Define velocity. How has the introduction of new payment technologies affected velocity? Explain. (LO4)
4. What is a banking panic? Prior to the introduction of deposit insurance, why might even a bank that had made sound loans have reason to fear a panic? (LO3)
3. The Fed wants to reduce the U.S. money supply using open-market operations. Describe what it would do and explain how this action would accomplish the Fed’s objective. (LO3)
2. Suppose that the public switches from doing most of its shopping with currency to using checks instead. If the Fed takes no action, what will happen to the national money supply? Explain. (LO2,
1. What is money? Why do people hold money even though it pays a lower return than other financial assets? (LO1)
LO4 Explain why control of the money supply is important and how the money supply is related to inflation in the long run.
LO3 Describe the structure and responsibilities of the Federal Reserve System.
LO2 Analyze how the lending behavior of commercial banks affects the money supply.
LO1 Discuss the three functions of money and how the money supply is measured.
8. For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment. Show all your diagrams. (LO5) a.
7. The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the
6. Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at $200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the
5. In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. (LO3) a. Household saving = 200 Business saving = 400
4. Individual retirement accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income
3. Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms
2. State whether each of the following is a stock or a flow, and explain. (LO1) a. The gross domestic product. b. National saving. c. The value of the U.S. housing stock on January 1, 2020. d. The
1. Corey has a mountain bike worth $300, credit card debt of $150, $200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. (LO1) a.
6. Name one factor that could increase the supply of saving and one that could increase the demand for saving. Show the effects of each on saving, investment, and the real interest rate.
5. Why do increases in real interest rates reduce the quantity of saving demanded? (Hint: Who are the “demanders” of saving?) (LO4, LO5)
4. Household saving rates in the U.S. are very low. Is this fact a problem for the U.S. economy? Why or why not? (LO3)
3. Define national saving, relating your definition to the general concept of saving. Why does the standard U.S. definition of national saving potentially understate the true amount of saving being
2. Give three basic motivations for saving. Illustrate each with an example. What other factors would psychologists cite as being possibly important for saving? (LO2)
1. Explain the relationship between saving and wealth, using the concepts of flows and stocks. Is saving the only means by which wealth can increase? Explain. (LO1)
LO5 Analyze financial markets using the tools of supply and demand.
LO4 Discuss the reasons firms choose to invest in capital.
LO3 Identify and apply the components of national saving.
LO2 Discuss the reasons people save and how psychological factors influence saving.
LO1 Explain the relationship between saving and wealth.
7. For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer. (LO4) a. Ted lost his job when the steel mill closed down. He
6. Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. (LO3) a. Suppose that electronic equipment is introduced
5. How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3) a. Demand for the type of car made by the plant
4. How would each of the following factors be likely to affect the economywide supply of labor? (LO2) a. The age at which people are eligible for Medicare is increasedb. Increased productivity causes
3. The following table lists the marginal product per hour of workers in a lightbulb factory. Lightbulbs sell for $2 each, and there are no costs to producing them other than labor costs. (LO2
2. Production data for Bob’s Bicycle Factory are as follows:Number of workers Bikes assembled/day 1 10 2 18 3 24 4 28 5 30 Other than wages, Bob has costs of $100 (for parts and so on) for each
1. Data on the average earnings of people of different education levels are available from the Bureau of the Census (try online at www.census.gov/population/ socdemo/education/tableA-3.txt). Using
5. List three types of unemployment and their causes. Which of these types is economically and socially the least costly? Explain. (LO4)
4. What are two major factors contributing to increased inequality in wages? Briefly, why do these factors raise wage inequality? Contrast possible policy responses to increasing inequality in terms
3. Why have real wages risen by so much in the United States in the past century? Why did real wage growth slow for 25 years beginning in the early 1970s? What has been happening to real wages
2. Acme Corporation is considering hiring Marisa Fabrizio. Based on her other opportunities in the job market, Marisa has told Acme that she will work for them for $40,000 per year. How should Acme
1. List and discuss the five important labor market trends given in the first section of the chapter. How do these trends either support or qualify the proposition that increasing labor productivity
LO4 Differentiate among the three types of unemployment defined by economists and the costs associated with each.
LO3 Explain how changes in the supply of and demand for labor account for trends in real wages and employment in the past few decades.
LO2 Apply a supply and demand model to understand the labor market.
LO1 Discuss five important trends that have characterized labor markets in the industrialized world in the past few decades.
10. Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the United States is
9. Discuss the following statement, using concrete examples where possible to illustrate your arguments: For advances in basic science to translate into improvements in standards of living, they
8. Hester’s Hatchery raises fish. At the end of the current season, Hester has 1,000 fish in the hatchery. She can harvest any number of fish that she wishes, selling them to restaurants for $5
7. Harrison, Carla, and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour using a standard paintbrush, and Fred can paint 80 square feet per hour. Any of the three can
6. The Good’n’Fresh Grocery Store has two checkout lanes and four employees. Employees are equally skilled, and all are able either to operate a register (checkers) or bag groceries (baggers).
5. Joanne has just completed high school and is trying to determine whether to go to community college for two years or go directly to work. Her objective is to maximize the savings she will have in
4. Consider the following table containing data for Germany and Japan on the ratio of employment to population in 1980 and 2010:1980 2010 Germany 0.33 0.52 Japan 0.48 0.49Using data from Table 7.1,
3. The “graying of America” will substantially increase the fraction of the population that is retired in the decades to come. To illustrate the implications for U.S. living standards, suppose
2. Suppose labor productivity in the United States was $100,000 per worker in 2015. Calculate the value of labor productivity in the year 2035 (20 years later) if (LO1) a. productivity continues to
1. Richland’s real GDP per person is $40,000, and Poorland’s real GDP per person is $20,000. However, Richland’s real GDP per person is growing at 1 percent per year and Poorland’s is growing
8. Discuss the following statement: “Because the environment is fragile and natural resources are finite, ultimately economic growth must come to an end.” (LO6)
7. What major contributions can the government make to the goal of increasing average labor productivity? (LO5)
6. What are the costs of increasing economic growth? (LO4)
5. Discuss how talented entrepreneurs and effective managers can enhance average labor productivity. (LO3)
4. You have employed five workers of varying physical strength to dig a ditch. Workers without shovels have zero productivity in ditchdigging. How should you assign shovels to workers if you don’t
3. What is human capital? Why is it economically important? How is new human capital created? (LO3)
2. Why do economists consider growth in average labor productivity to be the key factor in determining longrun living standards? (LO2)
1. What has happened to real GDP per person in the industrialized countries over the past century? What implications does this have for the average person? Are there implications for different
LO6 Analyze whether having finite resources implies that there are limits to growth.
LO5 Evaluate government policies that promote economic growth.
LO4 Identify the costs of increasing economic growth.
LO3 List the determinants of average labor productivity within a particular country and use these concepts to analyze per capita GDP differences across countries.
LO2 Explain why GDP per capita is the product of average labor productivity and the proportion of the population that is employed and use this decomposition to discuss the sources of economic growth.
LO1 Show how small differences in growth rates can lead to large differences in living standards.
10.* The Bureau of Labor Statistics has found that the base-year expenditures of the typical consumer break down as follows:Suppose that since the base year, the prices of food and beverages have
9. Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. a. The CPI (times 100) is 100 at the time that Frank makes the loan.
8. On January 1, 2012, Albert invested $1,000 at 6 percent interest per year for three years. The CPI on January 1, 2012, stood at 100. On January 1, 2013, the CPI (times 100) was 105; on January 1,
7. The following table lists the actual per-gallon prices for unleaded regular gasoline for June of each year between 1978 and 1986, together with the values of the CPIs for those years. For each
6. The typical consumer’s food basket in the base year 2015 is as follows: 30 chickens at $2.00 each 10 hams at $6.00 each 10 steaks at $8.00 each A chicken feed shortage causes the price of
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