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macroeconomics principles

Questions and Answers of Macroeconomics Principles

10. Define quantitative easing. How is it different from standard open market operations? L-9658
9. What is the current required reserve ratio?What would happen to the money supply if the Fed decreased the ratio? L-9658
8. How is the discount rate different from the federal funds rate? L-9658
7. How does the Fed increase and decrease the money supply through open market operations? L-9658
6. Why can’t a bank lend out all of its reserves? L-9658
5. Why is the actual money multiplier usually less than the simple money multiplier?
4. Suppose you withdraw $100 from your checking account. What impact would this action alone have on the following?a.the money supply b.your bank’s required reserves c.your bank’s excess reserves
3. What are the components of M1 and M2? List them. L-9658
2. What are the three functions of money?Which function is the defining characteristic? L-9658
1. What is the difference between commodity money and fiat money? L-9658
What percentage of M1 does currency make up? Of M2? L-9658
✷ How does the Federal Reserve control the money supply? L-9658
✷ How do banks create money? L-9658
✷ What is money? L-9658
7. Assuming that complete crowding-out always holds, what happens to consumption, investment, and interest rates if the government decreases borrowing, all else being equal? l-58
6. Many people emphasize just one portion of the Laffer curve and forget that there are actually two sides. First, explain the math behind the positively sloped region of the Laffer curve. That is,
5. In what circumstances would contractionary fiscal policy be recommended? How might you implement this type of policy? Why would you implement this policy—that is, what are the reasons why it
4. Explain the three types of fiscal policy lags.What are automatic stabilizers? Which lags do automatic stabilizers affect? l-58
3. Explain why the government budget deficit increases during a recession even without countercyclical fiscal policy. l-58
2. Using the aggregate demand–aggregate supply model, one might argue that the economy will adjust on its own when aggregate demand drops. How does this adjustment work? Why might this adjustment
1. How are government budget balances affected by countercyclical fiscal policy? Be sure to describe the effects of both expansionary and contractionary fiscal policy.
What other factors beyond GDP growth might account for the high unemployment numbers since late 2008? l-58
The GDP growth numbers from 2010 onward are similar to the GDP numbers from 2002 to 2008. What is dierent? l-58
✷ What is supply-side fiscal policy? l-58
✷ What are the shortcomings of fiscal policy? l-58
✷ What is fiscal policy? l-58
2. Greece, Ireland, Portugal, and Spain all went through national budget difficulties in recent years. Use the following data to answer questions regarding the sovereign debts of these nations. (All
1. Use the marginal income tax rates in Figure 15.6 to compute the following:a. tax due on taxable income of $100,000,$200,000, and $500,000b. average tax rate on taxable income of$100,000, $200,000,
6. Explain the difference between average tax rates and marginal tax rates. Is it possible for a person’s average tax rate to equal his or her marginal tax rate? If so, how? l-58
5. Explain why mandatory outlays are predicted to grow (as a portion of the total budget) over the next two decades. l-58
4. This question refers to Figure 15.10, which shows the U.S. outlays and revenue as portions of GDP.a. List three periods when the U.S. budget deficit was relatively large.b. What historical events
3. Going back to 1965, there have been a few years in which the U.S. government budget was in surplus. What years were these? Why do you think those surpluses disappeared when they did? Figure 15.10
2. Explain the difference between a budget deficit and the national debt. l-58
1. Since the 1960s, Social Security and Medicare have grown as portions of U.S. government spending.a. What major categories of government spending have shrunk during the same period?b. Has the U.S.
✷ What are budget deficits? l-58
✷ How does the government tax? l-58
✷ How does the government spend?
2. For this problem, we want to practice working with the aggregate demand–aggregate supply model.a. Set up an aggregate demand–aggregate supply model in long-run equilibrium, with both short-run
1. Explain whether each of the following statements is more likely to come from a classical economist or a Keynesian economist:a. “The recent decline in consumer confidence will likely spell
6. Consider the following statements about the macroeconomy. For each, indicate whether the statement best distinguishes the strict Keynesian view, strict classical view, or neither of these views.a.
5. In Chapter 13, we covered a list of factors that shift aggregate demand. Which of those factors changed during the Great Depression, and how did they change? l-58
4. In Chapter 13, we covered three factors that shift long-run aggregate supply. What are those factors? Which of those factors changed during the period of the Great Recession, and how did they
3. What is the key side (supply or demand) of the economy for Keynesian economists? What assumption about prices leads them to this emphasis? What is the key side of the economy (supply or demand)
2. What specific numerical evidence would you give to explain why the Great Depression was so much worse than the Great Recession? l-58
1. What were the cause(s) of the long-run aggregate supply shift during the Great Recession?What were the cause(s) of the aggregate demand shift during the Great Recession? l-58
✷ What are the big disagreements in macroeconomics? l-58
✷ Exactly what happened during the Great Recession and the Great Depression? l-58
2. Describe whether the following changes cause the long-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. The stock of capital in the economy increases.c.
1. Describe whether the following changes cause the short-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. Input prices decrease.c. Firms and workers expect the
8. The interest rate effect can be viewed as a chain of reactions in the economy.a. Below is the chain of reactions with some of the steps filled in. Fill in the missing steps in the chain and be
7. Consider two economies, both in recession.In the first economy, all workers have longterm contracts that guarantee high nominal wages for the next five years. In the second economy, all workers
6. Suppose the economy is in a recession caused by lower aggregate demand. If no policy action is taken, what will happen to the price level, output, and employment in the long run? l-58
5. How does strong economic growth in China affect aggregate demand in the United States? l-58
4. Why is the long-run aggregate supply curve vertical? l-58
3. How are the factors that shift the long-run aggregate supply curve different from those that shift the short-run aggregate supply curve? l-58
2. What are three reasons the short-run aggregate supply curve slopes upward? Name at least three factors that shift the short-run aggregate supply curve. l-58
1. What are three reasons the aggregate demand curve slopes downward? Name at least three factors that shift the aggregate demand curve. l-58
Looking at the year immediately following each recession, can you determine which economic recovery was most dicult? On what do you base your answer? l-58
✷ How does the aggregate demand–aggregate supply model help us understand the economy? l-58
✷ What is aggregate supply? l-58
✷ What is aggregate demand? l-58
✷ What is the aggregate demand–aggregate supply model? l-58
3. Suppose the people in the United States increase their savings rate. How will this change affect the rate of economic growth in the United States? l-58
2. Define human capital. Draw a graph that illustrates an increase in effective labor on a production function. l-58
1. The Solow model focuses on how resources affect output. In this chapter, we focused on capital.a. Name the other two major categories of resources.b. Draw an aggregate production function with a
9. Modern growth theory still uses the basic Solow production function as a starting point, but the emphasis is much different.a. What is the key theoretical distinction between modern growth theory
8. Robert Solow formulated a model that still serves as the basis for growth theory.a. What is the steady state of an economy, and what key piece of the Solow model implies that the steady state is
7. How can an increase in educational opportunities increase growth? Use a graph to illustrate how educational opportunities affect a nation’s production function. l-58
6. The basic Solow growth model implies convergence. What is convergence? What key assumption about the marginal product of capital implies convergence? l-58
5. China is a land of vast resources. In addition, technology is easily transportable across international borders. If we rule out these two sources of growth, to what can we attribute the economic
4. The Solow model assumes that technological changes are exogenous. What does the term“exogenous” mean? Why does the assumption of exogenous technological change matter for growth policy? What
3. Explain why a nation cannot continue to grow forever by just adding more capital. l-58
2. About 50 years ago, Robert Solow formulated a simple model of economic growth. What are the two key properties of the aggregate production function at the center of Solow’s first
1. Modern economic theory points to three sources of economic growth. What are these three sources? Give an example of each. l-58
How does technological progress aid resources to promote growth? l-58
How does private property ownership(versus government ownership) aect the incentives for productive use of resources? l-58
✷ Why are institutions the key to economic growth? l-58
✷ How does technology affect growth? l-58
✷ What is the Solow growth model? l-58
✷ How do macroeconomic theories evolve? l-58
7. Economic growth is a very particular concept in economics. The term “economic growth” is not always used correctly in media reports.a. Define economic growth.b. Consider the following
6. Assume that you plan to retire in 40 years and are evaluating the three different accounts listed in question 5. How much would your$1,000 be worth in 40 years under each of the three
5. The rule of 70 applies in any growth rate application. Let’s say you have $1,000 in savings and you have three alternatives:• a savings account earning 1% interest per year• a U.S.
4. Use the data in the table below to compute economic growth rates for the United States for 2008, 2009, and 2010. Note that all data are from the end of the year specified.Nominal GDP(billions of
3. Let’s revisit the data from Table 11.3, showing the following world economic growth rates for specific historical eras:Years Growth rate AD 1–1800 0.02%1800–1900 0.64%1900–1950
2. The table below presents long-run macroeconomic data for two hypothetical nations, A and B:A B Nominal GDP growth 12% 5%Inflation 10% 2%Nominal interest 4% 4%Unemployment rate 12% 5%Population
1. Real per capita GDP in China in 1959 was about $350, but it doubled to about $700 by 1978, when Deng Xiaoping started market reforms.✷a. What was the average annual economic growth rate in China
10. What do economists mean by the term “institutions”? Name five different laws that are institutions that affect production incentives.Name three social practices that affect production in a
9. The difference between 1% growth and 2%growth seems insignificant. Explain why it really matters. l-58
8. In 2011, when the U.S. unemployment rate was over 9%, President Barack Obama said,“There are some structural issues with our economy where a lot of businesses have learned to become much more
7. The flow of funds across borders is a source of growth for economies. Use what you learned about loanable funds in Chapter 9 to describe how foreign funds might expand output in a nation. l-58
6. Many historical accounts credit the economic success of the United States to its abundance of natural resources.a. What is missing from this argument?b. Name five poor nations that have
5. List five human welfare conditions that are positively affected by economic growth. l-58
4. Describe the pattern of world economic growth over the past 2,000 years. Approximately when did economic growth really take off? l-58
If a growth rate of 1.17% persists in South Africa, how long it will take for income to double? Use the Rule of 70. l-58
✷ How do resources and technology contribute to economic growth? l-58
✷ Why does economic growth matter? l-58
7. The following table presents partial information for several different bonds that each mature in one year. Use the information given along with Equation 10.1 to fill in the blank cells in the
6. In this chapter, we discussed Target Corporation bonds to illustrate the effect of default risk on the price of a bond. In particular, when the default risk rises, the demand for a bond falls and
5. Use supply and demand curves to illustrate how default risk affects both the price and the interest rate of a bond.

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