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macroeconomics principles

Questions and Answers of Macroeconomics Principles

1. 12. Explain how problems in the banking sector, such as insufficient capital, can affect the transmission mechanism between interest rate cuts and aggregate demand.
1. 11. Discuss how monetary expansion can lead to high inflation, using the quantity equation.
1. 10. What is monetarism?
1. 9. What is the quantity equation? What is the quantity theory of money?
1. 8. Describe how ECB policy operated during the 2000–2015 period.
1. 7. Show the effects of an expansionary monetary policy in a Keynesian cross diagram.
1. 6. How is investment related to the interest rate? What other factors affect investment? Use a graphical analysis to show these relationships.
1.5. Describe how a change in the ECB’s main refinancing rate might lead to changes in the money supply M1.
1. 4. Describe two tools the ECB uses to keep money market interest rates close to its main refinancing rate.
1. 3. Describe how decisions by a bank to extend loans finally lead to an increase in reserves in the banking sector and why the increase in reserves is usually lower than the increase in initial
1. 2. Show what happens to the ECB’s balance sheet and the balance sheet of a commercial bank when the commercial bank borrows from the ECB.
1.1. Draw up and explain the components of the balance sheet of the ECB.
1. 2. How does the issue of time lags affect fiscal and monetary policy?
1.1. What are some arguments in favor of having the ECB having a broader mandate? What are some arguments against it?
1. 2. Has inflation been reported to be a problem in any recent news reports?Check recent inflation data at http://ec.europa.eu/eurostat/de. How do you think this is related to recent ECB monetary
1.1. What is the difference between the quantity theory of money and the quantity equation?
1. 2. Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great Recession and in the euro crisis?
1.1. What is quantitative easing? How is it different from the ECB’s main refinancing operations? What other “unconventional” tools has the ECB employed since the outbreak of the euro crisis?
1. 2. Is it always true that a cut in interest rates leads to an increase in investment and aggregate demand? Why or why not?
1.1. What sorts of interest rates are relevant to your own economic activities? Do you think that ECB policies affect their levels?
1. 2. The setup of the ECB’s instruments with the main refinancing operation, the deposit facility, and the marginal lending facility is often also called a “corridor system.” Can you explain
1.1. Describe in words how the money supply increases in the euro area and which role the ECB plays in the process.
1. 2. The Bank of England has also been given independence from government interference by an Act of the British Parliament. How far do you think this type of independence compares to that of the ECB?
1.1. What is the ECB, the Eurosystem, and a national central bank in the euro area? Why was the ECB created?
1.7. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Excess reserves 1. The ease of use of an asset as a medium of exchangeb. Barter 2. A measure of the
1. 6. State whether the following statements are true or false. If false, also write a corrected statement.a. Inflation erodes the value of savings.b. Inflation creates “menu costs.”c. Inflation
1. 5. Assume a required reserve of 0.20 (20 percent) to complete the following:Assets Liabilities Reserves€3,000,000 Deposits€11,500,000 Loans€6,000,000 Bonds€2,500,000 Total€11,500,000
1.4. Assume a required reserve of 0.01 (1 percent) to complete the following:Assets Liabilities Reserves€100,000 Loans from the ECB€200,000 Loans€1,000,000 Deposits€1,800,000 Bonds€900,000
1. 3. Determine whether each of the following belongs on the asset side or the liability side of the balance sheet identified in parentheses.a. €20,000 loan for a new automobile (balance sheet for
1. 2. Use the statistics section on the ECB’s Web site (www.ecb.int categories), to locate monetary data for M1 money and M2 money(monthly data of each stock, seasonally adjusted). How do the two
1.1. Search for the “World Economic Outlook Database” on the Internet and locate the most recent version. Use this database to select inflation data(units of percentage change) for the euro area,
1. 10. What does it mean to say that foreign currency can be a store of value but not a medium of exchange?
1. 9. What is a financial bubble? Give some examples, and explain some of the causes of financial bubbles.
1. What is the primary advantage of the pooling process?
1. 8. What are “pooled funds”? Describe two different kinds of pooled funds.
1. 7. What is meant by leverage? What are its advantages and its dangers?
1. 6. What characteristics are needed to make commodity money effective?
1. 5. Draw up and explain the components of a balance sheet for a private bank.
1. 4. Describe at least two measures of money.
1. 3. Describe at least three different types of money.
1. 2. Describe the three roles played by money.
1.1. Describe three scenarios that could describe economies in very different situations, with regard to their banking systems and price (in)stability.
1. 2. Do you think that it is a good idea to allow commercial banks to invest in stocks? In real estate? In junk bonds? Explain.
1.1. What is the difference between the real, monetary, and financial economies? In what way are they related to each other? Should growth in one imply growth in the others?
1. 2. Does it bother you that banks hold only a small fraction of the value of their deposits on reserve? Why or why not?
1.1. How do banks lend money that they do not physically possess to their customers? To what extent are they creating money in the process?
1. 2. What do you commonly use to make payments? Cash? Credit cards?Online payments? In which of these cases are you using “money”?
1.1. Suppose that you asked someone who has not taken an economics class why a euro bill has value. What do you think he or she would say?Would he or she be correct?
1. 3. What are the main problems about deflation? Isn’t it great if the purchasing power of savings increases?
1. 2. Unemployment and inflation are usually considered the “bads” that can come with business cycles. Compare the costs to society of unemployment to the costs to society of inflation.
1.1. Which of the three conditions just described—low inflation, high inflation, or deflation—best characterizes the euro-area economy right now? Do you know of any country currently in one of
1. 4. Which of the following are examples of automatic stabilizers, and which are examples of discretionary policy? Could some be both? Explain.a. Tax revenues rise during an economic expansionb.
1. 3. Go to the European Commission’s Directorate for Economic and Financial Affairs’Web(http://ec.europa.eu/economy_finance/eu/forecasts/index_en.htm site).Locate the most recent economic
1. 2. Using Table 10.1 and the formulas and numbers given in the text for the multiplier and tax multiplier, calculate the effect on equilibrium GDP of a government spending level of 100 combined
1.1. Using the data in Table 10.1, determine the economic equilibrium for a government spending level of 60.
1. 8. What is crowding out? How specifically does crowding out happen?Explain. What is crowding in?
1. 7. What is a cyclical deficit? What is a structural deficit? How are they different?
1. 6. What are some of the advantages and disadvantages of discretionary fiscal policy? Give some examples of the use of discretionary fiscal policy.
1. 5. What is meant by an automatic stabilizer? Give some examples of economic institutions that function as automatic stabilizers.
1. 4. How is the budget surplus or deficit defined? How has the budget position of the euro area (and your country) varied in recent years?
1. 3. Give some examples of expansionary and contractionary fiscal policy.
1. 2. What is the impact of a lump-sum change in taxes on aggregate expenditure and economic equilibrium? How does it differ from a change in government spending?
1.1. What is the impact of a change in government spending on aggregate expenditure and economic equilibrium?
1. 2. Why doesn’t the government run surpluses every year instead of deficits? Wouldn’t doing so be better for the economy?
1.1. Do you think that your country’s government is mostly responsible for persistent budget deficits? Are budget deficits necessarily bad?
1. 2. In general, tax increases are politically unpopular. Would you ever be likely to favor a tax increase? Under what circumstances, if any, might a tax increase be beneficial to the economy?
1.1. What recent changes in government spending or tax policy have been in the news? How would you expect these to affect GDP and employment levels?
1. 8. Match each concept in Column A with a definition or example in Column B.Column Aa. mult ĪI Column B 1. Peak 2.b. an injectionc. an assumption evident in the equation AE = C+IId. okun’s
1. Answer the following questions, using algebraic manipulations only.1. What is the equation for the AE curve?2. What is the level of equilibrium income?3. If intended investment increases by 10
1. 6. Suppose that the behavior of households and firms in an economy is determined by the following equations:C = 90 + 0.75Y Ii = 35 1. Show in a table what the levels of C and AE would be at income
1. 5. What happens in the Keynesian model if households decide to be“thriftier”—that is, spend less and save more? Do the following multistep exercise to find out.a. Suppose that the economy
1. 4. Draw a Keynesian cross graph and assume that the macroeconomy starts and ends in equilibrium. Label the initial aggregate expenditure line AE0. Then show what happens in the diagram when a rise
1. 3. Suppose that the relation between consumption and income is C = 90 +0.75Y.a. For each additional euro that households receive, how much do they save? How much do they spend?b. What is the level
1. 2. Suppose that you see a toy store increasing its inventories in early December, right before the Christmas/Chanukah/Kwanzaa season. Is this a case of excess inventory accumulation? Why or why
1.1. Carefully draw and label a supply-and-demand diagram for the classical loanable funds market. Assuming that the market starts and ends in equilibrium, indicate what happens if there is a sudden
1. 19. What is “the income/spending multiplier”? Explain why a drop in autonomous intended investment or in autonomous consumption leads to a much larger drop in equilibrium income.
1. 18. Does a macroeconomy’s being “in equilibrium” always mean it is in a good state? Why or why not?
1. 17. Describe how adjustment to equilibrium occurs in the Keynesian model.
1.16. Draw a “Keynesian cross” diagram, carefully labeling the curves and the equilibrium point.
1. 15. Do firms always end up investing the amount that they intend? Why or why not?
1. 14. What determines aggregate expenditure in the Keynesian model? Draw and label a graph.
1. 13. What did Keynes think was the most important factor in determining investment behavior?
1. 12. Why isn’t the interest rate included in the Keynesian consumption function?
1. 11. List five factors, aside from the level of income, that can affect the level of consumption in a macroeconomy.
1. 10. How did Keynes model consumption behavior? Draw and label a graph.
1. 9. Describe how the problem of leakages is solved in the classical model.
1. 8. Describe the classical market for loanable funds. Who are the actors, and what do they each do?
1. 7. How can an increase in saving (if not balanced by an increase in intended investment) cause a shrinkage of the output-income-spending flow?
1. 6. Saving is described as a “leakage” from the circular flow. How is it a leakage?
1. 5. What conditions comprise equilibrium in a macroeconomy?
1. 4. What is the definition of aggregate expenditure? How does it differ from measured GDP?
1. 3. In the model laid out in this chapter, who receives income? Who spends?Who saves?
1. 2. During the 1930s, how did economists’ opinions about the Great Depression differ?
1.1. During a business-cycle recession, which of the following typically rises:the level of output, the unemployment rate, the level of investment, or the inflation rate?
1. 2. Have you ever read articles or editorials that claim that high consumption is essential for a healthy economy? Does the Keynesian model seem to confirm or challenge this idea? What are some
1.1. Which theory—classical or Keynesian—seems more realistic in describing today’s economy? Explain why.
1. 2. Describe verbally how, in the Keynesian model, an economy can end up in an equilibrium of persistent unemployment.
1.1. If you received a raise of €100 per month, how would you increase your spending per month? How much would you change your saving? What is your mpc? What is your mps?
1. 2. Explain verbally why, in the classical model, the demand for loanable funds curve slopes downward.Explain verbally why the supply of loanable funds curve slopes upward.
1.1. Who are the actors in this simple macroeconomic model? What is the role of each in determining the flow of currently produced goods and services? What is the role of each in the classical market

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