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macroeconomics principles

Questions and Answers of Macroeconomics Principles

4. This question involves the hypothetical iPong firm from question 3.a. How will demand be affected if a ratings agency upgrades your bond rating to AA?b. How will the ratings upgrade affect the
3. Let’s say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you
2. In 2008, when the U.S. automobile industry was struggling, the price of Ford Motor Company bonds rose. In this question, you need to calculate how the price increase also affected the interest
1. Toyota bonds are currently rated AA, and Ford bonds are rated BB. Suppose the price of a$1,000 one-year Toyota bond is $970.a. What is the rate of return on the one-year Toyota bond?b. The price
7. What is a U.S. Treasury bond? Why are Treasury bonds such a popular asset in world markets?
6. What is a mortgage-backed security (MBS)?Why is it difficult for ratings agencies to determine the risk of an MBS? Describe how the existence of MBSs helps homebuyers in the United States.
5. Why might a firm prefer to finance its investments with bonds rather than stocks? Alternatively, why might a firm prefer stocks to bonds? L-89
4. What is the primary use of U.S. Treasury securities? Why are the interest rates on Treasury securities so low? If people worried about the United States defaulting on the national debt, what would
3. One principle we learned in this chapter is that the dollar price and the interest rate on a bond move in opposite directions. Why is this always the case? L-89
2. What is securitization? Discuss how securitization benefits borrowers. L-89
1. What is the difference between direct and indirect finance? Discuss the reasons why a firm (a borrower) might choose each method.Discuss the reasons why a saver might choose each method. L-89
Why do movements in overall stock prices indicate something about the entire macroeconomy? L-89
Approximately how long did it take the Dow to rise from 1,000 to 10,000? From 10,000 to 15,000? L-89
✷ What are the key financial tools for the macroeconomy? L-89
✷ How do financial markets help the economy? L-89
2. Many interest rates in the United States have fallen over the past couple of decades. Which of the following factors could have been the cause?a. increase in the demand for loanable fundsb.
1. Assume that the residents of a nation become more patient (experience a reduction in their time preferences).a. What will happen to the interest rate in that nation? What will happen to the
7. Many people believe that a high interest rate is bad for the economy. Of course, all else equal, a higher interest rate means greater borrowing costs for firms. But a high interest rate is also
6. Why does inflation have a positive effect on the nominal interest rate? L-89
5. List the factors that affect the demand side of the loanable funds market. Which factors shift the curve? L-89
4. List the factors that affect the supply side of the loanable funds market. Which factors shift the curve? L-89
3. Consider two alternatives to prepare for retirement: (1) saving in a bank where your funds earn interest and (2) buying fine art that rises in value over time. Each grows your retirement account
2. All else equal, what does a lower interest rate mean for firms? What does a lower interest rate mean for savers? L-89
1. Explain the importance of the loanable funds market to basic GDP in a macroeconomy. L-89
Explain why financial markets play a critical role in the macroeconomy L-89
Suppose your bank uses your savings to make a loan to a computer company.Is this an example of direct finance or indirect finance? L-89
✷ How do we apply the loanable funds market model? L-89
✷ What factors shift the demand for loanable funds? L-89
✷ What factors shift the supply of loanable funds? L-89
✷ What is the loanable funds market? L-89
7. Let’s say you graduate from college and accept a job in 2018. You decide to compare your starting salary with your grandfather’s and mother’s starting salaries. The salaries you compare are:
6. The equation of exchange is helpful for determining the effect of money supply changes on the price level. Use the equation of exchange to answer each of the following questions.a. Real GDP grows
5. If healthcare costs make up 10% of total expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise? L-89
4. Suppose that the residents of Greenland play golf incessantly. In fact, golf is the only thing that they spend their money on. They buy golf balls, clubs, and tees. In 2016, they bought 1,000 golf
3. While rooting through the attic, you discover a box of old tax forms. You find that your grandmother made $75 working part-time during December 1964, when the CPI was 31.3. How much would you need
2. Visit the Bureau of Labor Statistics web site for the CPI (www.bls.gov/cpi), and find the latest news release. Table 1 in that release presents CPI data for all items and also for many individual
1. In 1991, the Barenaked Ladies released their hit song “If I Had a Million Dollars.” How much money would the group need in 2015 to have the same amount of real purchasing power they had in
9. Inflation causes a lot of problems for the macroeconomy.a. What is the key misconception people have about inflation, and why does this problem generally not accompany inflation? L-89
8. Following is a list of potential problems that inflation might cause. Use the space on the left to name each of these with the terms used in this chapter.a. ________ Lenders and workers are
7. What are the seven problems caused by inflation? Briefly explain each one. L-89
6. Wage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you
5. In a sentence or two, evaluate the accuracy of the following statement, including a clear and precise statement of historical comparison:Inflation in the United States last year was 0%.This is
4. If a country is experiencing a relatively high rate of inflation, what impact will this have on the country’s long-term rate of economic growth? L-89
3. If the prices of homes go up by 5% and the prices of concert tickets rise by 10%, which will have the larger impact on the CPI? Why? L-89
2. What three issues are at the center of the debate regarding the accuracy of the CPI? Give an example of each issue. L-89
1. The price of a typical laptop computer has fallen from $2,000 in 1985 to $800 today. At the same time, the consumer price index has risen from 100 to 238. Adjusting for inflation, how much did the
Explain why television and computer prices continue to fall but we still observe increases in the CPI. L-89
When was the last time the inflation rate exceeded 5% in the United States? L-89
✷ What is the cause of inflation? L-89
✷ What problems does inflation bring? L-89
✷ How is inflation measured? L-89
5. Consider a country with 300 million residents, a labor force of 150 million, and 10 million unemployed. Answer the following questions.a. What is the labor force participation rate?b. What is the
4. Visit www.bls.gov and search through the tables on unemployment to answer the following questions.a. What is the current national unemployment rate for the United States?b. What is the current
3. A country with a civilian (work-eligible) population of 90,000 (all over age 16) has 70,000 employed and 10,000 unemployed persons.Of the unemployed, 5,000 are frictionally unemployed and another
2. In January 2015, the U.S. economy added 257,000 new jobs. Yet the unemployment rate rose from 5.6% to 5.7%. How is this possible? L-89
1. In his song “Allentown,” Billy Joel sings about the demise of the steel and coal industries in Pennsylvania. Why do you think the loss of manufacturing jobs was so difficult on the workers in
8. What can cause an increase in frictional unemployment? Give at least one example. What can cause an increase in structural unemployment? Give at least one example? L-89
7. What does an increase in the natural rate of unemployment imply about each of the three types of unemployment? L-89
6. Does the duration of unemployment matter?Explain your answer. L-89
5. What groups does the Bureau of Labor Statistics count in the labor force? Explain why the official unemployment rate tends to underestimate the level of labor market problems. L-89
4. What type of unemployment is affected when online job search engines reduce the time necessary for job searches? Does this outcome affect the natural rate of unemployment? If so, how? L-89
3. The news media almost always bemoans the current state of the U.S. economy. How does the most recent unemployment rate relate to the long-run average? L-89
2. Is there any unemployment when an economy has “full employment”? If so, what type(s)? L-89
1. Until the late 1960s, most economists assumed that less unemployment was always preferable to more unemployment. Define and explain the two types of unemployment that are consistent with a
How do you explain the labor force participation rate changes between men and women? L-89
In the Great Recession of the late 2000s, roughly how many percentage points did the unemployment rate of black (African American) men rise? L-89
✷ What can we learn from the employment data? L-89
✷ What are the major reasons for unemployment? L-89
2. In the following situations, explain what is counted (or is not counted) in this year’s GDP.a. You bought a new Wii at GameStop last year and resold it on eBay this year.b. You purchase a new
1. A friend who knows of your interest in economics comes up to you after reading the latest GDP data and excitedly exclaims, “Did you see that nominal GDP rose from $19 trillion to $19.5
8. Real GDP for 2015 is less than nominal GDP for that year. But real GDP for 2000 is more than nominal GDP for that year. Why? L-P82
7. Phil owns an old set of golf clubs that he purchased for $1,000 seven years ago. He decides to post them on Craigslist and quickly sells the clubs for $250. How does this sale affect GDP? L-P82
6. If Max receives an unemployment check, would we include that transfer payment from the government in this year’s GDP? Why or why not? L-P82
5. Is a larger GDP always better than a smaller GDP? Explain your answer with an example.
4. A friend of yours is reading a financial blog and comes to you for some advice about GDP.She wants to know whether she should pay attention to nominal GDP or real GDP. Which one do you recommend,
3. A farmer sells cotton to a clothing company for $1,000, and the clothing company turns the cotton into T-shirts that it sells to a store for a total of $2,000. How much did GDP increase as a
2. What is the largest component (C, I, G, or NX)of GDP? Give an example of each component.
Why do economists stress real GDP rather than nominal GDP when looking at GDP changes over time?
What component of consumption do we spend a much greater percentage on now than in 1965? L-P82
✷ What are some shortcomings of GDP data?
✷ How is GDP computed? L-P82
✷ What does GDP tell us about the economy? L-P82
✷ How is macroeconomics different from microeconomics?
4. Suppose that a group of die-hard sports fans are upset about the high price of tickets to many games. As a result of their lobbying efforts, a new law caps the maximum ticket price to any sporting
3. Suppose that the federal government places a binding price floor on chocolate. To help support the price floor, the government purchases all of the leftover chocolate that consumers do not buy. If
2. Imagine that the community you live in decides to enact a rent control of $700 per month on every one-bedroom apartment. Using the following table, determine the market price and equilibrium
1. In the song “Minimum Wage,” the punk band Fenix TX comments on the inadequacy of the minimum wage for making ends meet. Using the poverty thresholds provided by the Census Bureau,* determine
4. Are price gouging laws an example of a price floor or a price ceiling? L-P82
3. Will a surplus or a shortage caused by a price control become smaller or larger over time? Explain. L-P82
2. Does a nonbinding price floor cause a shortage or a surplus? Provide an example to support your answer. L-P82
1. Does a binding price ceiling cause a shortage or a surplus? Provide an example to support your answer. L-P82
Suppose you live in Arkansas and are looking for a job. The state minimum wage rate is $7.50/hour, the federal minimum wage rate is$7.25/hour, and the market equilibrium wage for the job is
✷ What effects do price floors have on economic activity? L-P82
✷ When do price floors matter? L-P82
✷ What effects do price ceilings have on economic activity? L-P82
✷ When do price ceilings matter? L-P82
1. A college student enjoys eating pizza. Her willingness to pay for each slice is shown in the following table:Number of pizza Willingness to pay slices (per slice)1 $6 2 5 3 4 4 3 5 2 6 1 7 0a. If
7. What happens to tax revenues as tax rates increase? L-P82
6. Suppose that the government taxes a good that has very elastic demand. Illustrate what will happen to consumer surplus, producer surplus, tax revenue, and deadweight loss on a supply and demand
5. What type of goods should be taxed in order to minimize deadweight loss? L-P82

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