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macroeconomics principles

Questions and Answers of Macroeconomics Principles

Would you predict that government expenditures would be higher or lower if taxes (or user charges)were required for the finance of all expenditures?Why? Do you think the government would spend funds
How does the Social Security system currently influence the size of the budget deficit? How will it influence the deficit a decade from now? Is this a cause for concern? Why or why not?*
When government bonds are held by foreigners, the interest income from the bonds goes to foreigners rather than to Americans. Would Americans be better off if we prohibited the sale of bonds to
What is the difference between the national debt and privately held federal debt? Why is the distinction between the two important?*
Does the national debt have to be paid off at some time in the future? What will happen if it is not?
What does the Japanese experience of the 1990s indicate with regard to the return of housing and stock prices to their pre-crisis levels? Why might the future pattern in the United States differ from
What are the most important lessons Americans can learn from the Japanese experience of the 1990s?
How did the policy response in the United States following the sharp reductions in housing and stock prices in 2008 differ from that of Japan following the collapse of asset prices in 1990? How were
How was the economic experience of Japan prior to and after 1990 similar to that of the United States prior to and after 2008?*2. Describe the fiscal policy of Japan during the 1990s. Did the
Could the United States ever experience another Great Depression? Why or why not?*5. “I’m for international trade, but not when it takes jobs from Americans. If the American worker can produce
“Franklin Roosevelt is recognized as one of our greatest presidents because his New Deal policies brought the Great Depression to an end.” Evaluate this statement.
Do the length and severity of the Great Depression reflect a defect in the operation of markets?Do they reflect a failure of government policy?Discuss.
“The Great Depression was caused by the 1929 stock market crash. The 1929 collapse of stock prices was the most severe in U.S. history, and therefore it is not surprising that it caused a prolonged
Some charge that the Crisis of 2008 was caused by the “greed” of Wall Street firms and other bankers.Do you agree with this view? Do you think there was more greed on Wall Street in the first
When did mortgage default and housing foreclosure rates begin to rise rapidly? When did the economy go into the current recession? Was there a causal relationship between the two? Discuss.*5. When
What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the house, and creditworthiness of the borrower) between 1995 and 2005? Why did the credit
Why did housing prices rise rapidly during 2002–2005? Why did the mortgage default rate increase so sharply during 2006 and 2007 even before the current recession began?
Are stocks a risky investment? How can one reduce the risk accompanying stock market investments ?
Congress is currently considering legislation that would increase both the tax on dividends and the tax on capital gains derived from the appreciation of assets. How would an increase in the tax rate
What is the random walk theory of stock prices?What does it indicate about the ability of “experts”to forecast accurately the future direction of stock prices?
What is an indexed equity mutual fund? What is a managed equity mutual fund? How will the administrative costs of the two differ?
If an investment adviser gives you some hot new stock tip, is it likely to be a “sure thing”? Why or why not? If you have a stockbroker and purchase the stocks promoted by the broker, are you
Suppose that more expansionary monetary policy leads to inflation and higher nominal interest rates.How is this likely to affect the value of stocks?Explain.*3. Microsoft stock rose from less than
Indicate how the production, marketing, and distribution of each of the following are likely to be influenced by the development of the Internet: (a) popular music, (b) movies, (c) automobiles, (d)
What effect does the Internet have on the efficiency of markets? Explain. How is the Internet likely to influence productivity and the growth of output in the years immediately ahead?*2. The share of
How have the size and functions of government changed during the last two centuries? Did the framers of the U.S. Constitution seek to limit the size of the federal government? If so, how?
Compared with the situation prior to 1981, the marginal tax rates imposed on individuals and families with high incomes are now lower. What was the top marginal personal income tax rate in 1980? What
Because the structure of the personal income tax is progressive, a larger share of income is taxed at higher rates as income grows. Therefore, economic growth automatically results in higher taxes
During the last four decades, a smaller share of the federal budget has been allocated to national defense and a larger share to income transfers and health care. Does economics indicate that this
Is a trade surplus indicative of a strong, healthy economy? Why or why not?*13. ”Changes in exchange rates will automatically direct a country to a current-account balance under a flexible exchange
If taxes imposed on personal and corporate income increased substantially in the United States and the monetary policy of the United States was less stable and more inflationary than other countries,
Rapidly growing strong economies often experience trade deficits, whereas economies with sluggish growth often have trade surpluses. Can you explain this puzzle?*8. In recent years, a substantial
Explain why the current-account balance and capital-account balance must sum to zero under a pure flexible rate system.
Will a flexible exchange rate bring the imports of goods and services into balance with the exports of goods and services? Why or why not?*4. The accompanying chart indicates an actual newspaper
How will the purchases of items from foreigners compare with the sales of items to foreigners when the foreign exchange market is in equilibrium?Explain.
“Physical obstacles like bad roads and stormy weather increase transaction costs and thereby reduce the volume of trade. Tariffs, quotas, exchange rate controls, and other human-made trade
As U.S. trade with low-wage countries like Mexico increases, will wages in the United States be pushed down? Why or why not? Are low-wage workers in the United States hurt when there is more trade
“The United States is suffering from an excess of imports. Cheap foreign products are driving American firms out of business and leaving the U.S. economy in shambles.” Evaluate this view.*14. The
In recent years, the European Union has virtually eliminated trade restrictions among its members, and most members now use a common currency.What impact have these changes had on European
How do tariffs and quotas differ? Can you think of any reason why foreign producers might prefer a quota rather than a tariff? Explain your answer.*10. It is often alleged that Japanese producers
Suppose that a very high tariff was placed on steel imported into the United States. How would that affect employment in the U.S. auto industry? (Hint:Think about how higher steel prices will impact
“The average American is hurt by imports and helped by exports.” Do you agree or disagree with this statement?*6. “An increased scarcity of a product benefits producers and harms consumers. In
Suppose as the result of the Civil War that the United States had been divided into two countries and that, through the years, high trade barriers had grown up between the two. How might the standard
Why do American households and businesses buy things from foreigners? What are the characteristics of the items we buy from foreigners? What are the characteristics of the things we sell to
Why will political decentralization make it more difficult for governments to levy taxes and spend the revenues on things that provide citizens with little value relative to cost?
Even though workers in low-wage countries often seek to emigrate to higher-wage countries, the flow of investment toward low-wage countries is small.Why is this so?*
Firms can choose where to establish a production facility. What are some of the major factors that will influence whether a firm will invest and produce in a country?*
Why are income levels in the United States so high? Is the United States prosperous because it is democratic? Discuss.*
Does a country have to be democratic in order to achieve economic freedom? If a country is democratic, will it necessarily be economically free?Why or why not?
Do we count on majority rule to protect civil liberties such as the right to free speech, freedom of the press, the right to assembly, and religious freedom?Should we count on majority rule to
What conditions must be present for a country to achieve a high score on the Economic Freedom of the World index?
If there were no high-income developed countries like those of Western Europe, North America, and Japan, would less-developed countries like Hong Kong, Singapore, South Korea, China, and India have
Does the legal system of a country influence its economic performance? From an economic viewpoint, what are the key characteristics of a sound legal system?*
What are the major sources of economic growth?Why do some countries grow and achieve high income levels while others stagnate in poverty?What do you think can be done to change this situation?
Indicate five of the world’s economies that are most free. How do the income levels and growth rates of freer economies compare with those that are less free?
What is economic freedom? Indicate some of the ways in which institutions and policies in economies that are more free differ from those that are less free.
”The rich countries are getting richer, while the poor are getting poorer.” Evaluate this statement.
Indicate five of the fastest-growing economies in the world since 1990. Why do you think these economies have grown so rapidly?
Indicate five countries with a high income per capita. Why do you think the income is so high in these countries? How many of your high-income countries also ranked among the fastest-growing
Suppose that you have just been appointed to a high-level position in the economic analysis unit of the State Department. The Secretary of State has asked you to prepare a memo describing the key
“The institutional environment is the key to economic growth. If a nation creates an environment conducive to economic growth, people will supply and develop the resources and technology.”
What impact do natural resources have on economic growth? Will it be possible for a country with few natural resources to grow rapidly? Why or why not?
How does money of stable value influence the volume of trade? When the inflation rate is volatile, how is the volume of trade affected? How will this influence the income levels of people?
What must an entrepreneur do in order to introduce a new innovative product? What determines whether the new product will be a success or failure? How important is innovation as a source of economic
“Regulatory policies that restrict trade and voluntary agreements between parties will retard economic progress.” Indicate why you either agree or disagree with this statement.
More than 200 years ago, Adam Smith argued that the wealth of nations depends on gains from (a)specialization and trade, (b) expanding the size of the market, and (c) discovering better (more
Indicate in your own words why trade, entrepreneurial discovery, and investment are important sources of economic growth and achievement of high income levels.*3. “Without aid from industrial
How does economic growth influence the living standards of people? Does it really make much difference whether an economy grows at 2 percent or 4 percent annually? Discuss.
Is a market economy inherently unstable?Historically, have policy errors been the primary source of economic instability? Cite empirical evidence to support your response to each of these questions.
Prior to the mid-1970s, many economists thought that inflation would lead to a lower rate of unemployment. Why? How does the modern view of the Phillips curve differ from the earlier view?*11. Answer
How did integration of expectations into the Phillips curve analysis and rejection of the view that higher inflation will reduce the unemployment rate affect macro policy in the last two decades?
Many central banks now indicate that their primary objective is to keep inflation at a persistently low rate. If the rate of inflation is persistently low, will this help reduce the ups and downs of
Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short
What is the index of leading indicators? Why is it useful to macro policy makers?*5. How would you expect the actual unemployment rate to compare with the natural unemployment rate in the following
State in your own words the adaptive-expectations hypothesis. How does the theory of rational expectations differ from that of adaptive expectations?
The chair of the Council of Economic Advisers has requested that you write a short paper explaining how economic policy can be used to stabilize the economy and achieve a high level of economic
Did monetary policy contribute to the economic crisis of 2008? Why or why not? How did monetary policy makers respond to this crisis? Has their response created an environment for future stability
a. What is the quantity theory of money?b. Is the quantity theory of money valid?c. Does it explain the impact of shifts in monetary policy on the economy? Why or why not?
What is the Taylor Rule? Why is the Taylor Rule important? What did the Taylor Rule indicate about monetary policy during 2002–2006?
Political officials often call on the monetary authorities to expand the money supply more rapidly so that interest rates can be reduced. Will expansion-ary monetary policy reduce interest rates in
Did monetary policy help promote economic stability during 1985 through 1999? Has monetary policy exerted a stabilizing impact on the U.S. economy during the past decade? Explain your response to
If the Fed shifts to a more restrictive monetary policy, it will generally sell some of its current holdings of bonds in the open market. How will this action influence each of the following? Briefly
How rapidly has the money supply (M1) grown during the past twelve months? How rapidly has M2 grown? Do you think the monetary authorities should increase or decrease the growth rate of the money
What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors
Historically, shifts toward a more expansionary monetary policy have often been associated with increases in real output. Is this surprising? Why or why not? Would a more expansionary policy increase
What is the opportunity cost of the following?a. obtaining a $100,000 houseb. holding the house for one yearc. obtaining $1,000d. holding the $1,000 in your checking account for one year
How would each of the following influence the quantity of money you would want to hold?a. an increase in the interest rate on checking depositsb. an increase in the expected rate of inflationc. an
Why do people hold money? How will an increase in the interest rate influence the amount of money that people will want to hold?*
Suppose that the reserve requirement is 10 percent and the balance sheet of the People’s National Bank looks like the accompanying example.a. What are the required reserves of People’s National
How would the following influence the growth rates of the M1 and M2 money supply figures over time?a. an increase in the quantity of U.S. currency held overseasb. a shift of funds from
Why is the actual money deposit multiplier generally less than the potential multiplier?
What is the federal funds interest rate? If the Fed wants to use open market operations to lower the federal funds rate, what action should it take?Explain.*12. If the Fed wants to expand the money
What’s wrong with this way of thinking? “When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy,
The excess reserves of the banking system were quite large during mid-year 2009. If the banks use these excess reserves to extend additional loans, what will happen to the money supply? Explain. Is
Why can banks continue to hold reserves that are only a fraction of the demand and saving deposits of their customers? Is your money safe in a bank?Why or why not?*6. Suppose you withdraw $100 from
“People are poor because they don’t have very much money. Yet, central bankers keep money scarce. If people had more money, poverty could be eliminated.” Evaluate this view. Do you think it
What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills
The American Wind Energy Association argues for additional government support because windgenerated electricity creates more employment per kilowatt-hour than the alternatives: 27 percent more jobs
If there is a shift to a more expansionary fiscal policy in order to stimulate recovery from a recession, does it make any difference whether tax rates are cut or government expenditures increased?
If the impact on tax revenues is the same, does it make any difference whether the government cuts taxes by (a) reducing marginal tax rates or(b) increasing the personal exemption allowance?Explain.

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