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modern principles of economics

Questions and Answers of Modern Principles Of Economics

1.1. Why would a substantial fall in housing prices exacerbate a recession? How good are economists at predicting recessions? The answer is: not always that good. The 2008–2009 recession is a good
1.Question 2 According to the Efficiency Wage Theory, employers occasionally pay workers more than the equilibrium wage in the market in order to increase productivity. Explain how this would lead to
1.Question 1 When an unemployed individual gives up looking for work and leaves the labor force, she is no longer considered unemployed.What happens to the unemployment rate as a result? Does this
1.Obtain data on “average hourly earnings of production workers” and the unemployment rate for your state or area over a recent two-year period. Has unemployment increased or decreased? What has
1.Suppose the inflation–unemployment relationship depicted by the Phillips Curve was stable. Do you think the U.S. trade-off and the Japanese trade-off would be identical? If not, what kinds of
1.Obtain monthly data on the unemployment rate and the inflation rate for the last two years. (This data can be found at www.bls.gov or in a recent issue of the Survey of Current Business or in the
1.In May 2018, the U.S. unemployment rate dropped to 3.8 percent, its lowest level in 18 years. At the same time, inflation remained at a low level by historical standards. Can you offer an
1.[Related to the Economics in Practice] The Economics in Practice discusses data gathered from 1996–2010, a period of low unemployment and high growth. The years 2016–2018 have also been
1.How might social, or implicit, contracts result in sticky wages?Use a labor market graph to show the effect of social contracts on wages and on unemployment if the economy enters a recession.
1.In which if the following situations will you be best off, and in which will you be worst off, in terms of your real wage? Explain your answer.a. You are offered a 5 percent wage increase and the
1.[Related to the Economics in Practice ] The Economics in Practice box states that job applicants who have been unemployed for a long period of time have a more difficult time getting job interviews
1.Economists and politicians have long debated the extent to which unemployment benefits affect the duration of unemployment. The table on the following page represents unemployment and unemployment
1.The unemployment rate stood at 9.6 percent late in 2010.Despite the fact that the economy had been growing out of the recession for over a year (real GDP was up 3 percent by Q2 2010), there was
1.In 2019, the country of Sorbet was suffering from a period of high unemployment. The new president, Gelato, appointed Sherrie Sherbert as his chief economist. Ms. Sherbert and her staff estimated
1.Using a supply and demand graph for the labor market, explain the classical view that the economy will remain at full employment, even with a decrease in the demand for labor.How will this labor
1.How will the following affect labor force participation rates, labor supply, and unemployment?a. In an attempt to get a handle on increasing Social Security shortfalls, Congress and the president
1.The following policies have at times been advocated for coping with unemployment. Briefly explain how each might work and explain which type or types of unemployment (frictional, structural, or
1.1. What does this result tell us about how easy it is for firms to see worker quality? Almost everyone has been or will be unemployed for a period of time during his or her work career. After
1.1. Why do you think wages are sticky even during high growth periods? It should be clear to you from the text the important role the assumption of sticky wages plays in helping to explain both
1.Question 2 Since 2014, a number of economies have experienced negative interest rates. This was not even considered possible by most economists before the 2008/2009 Great Recession, but negative
1.Question 1 In 2017, the government passed a series of large tax cuts when the economy was at or near full employment. That is, the economy was producing a value of Real GDP close to or equal to
1.During 2001, the U.S. economy slipped into a recession. For the next several years, the Fed and Congress used monetary and fiscal policies in an attempt to stimulate the economy. Obtain data on
1.[Related to the Economics in Practice ] Use aggregate supply and aggregate demand curves to illustrate the effect the mild monsoon season had on the rice crop in India. Explain what affect this had
1.Evaluate the following statement: In the short run, if an economy experiences inflation of 10 percent, the cause of the inflation is unimportant. Whatever the cause, the only important issue the
1.From the following graph, identify the initial equilibrium, the short-run equilibrium, and the long-run equilibrium based on the scenarios below. Explain your answers and identify what happened to
1.From June 2014 to January 2016, the price of oil dropped sharply on world markets. What impact would you expect there to be on the aggregate price level and on real GDP? Illustrate your answer with
1.In country A, all wage contracts are indexed to inflation. That is, each month wages are adjusted to reflect increases in the cost of living as reflected in changes in the price level. In country
1.By using aggregate supply and aggregate demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP in the short run:a. An
1.In Japan during the first half of 2000, the Bank of Japan kept interest rates at a near zero level in an attempt to stimulate demand. In addition, the government passed a substantial increase in
1.Explain the effect, if any, that each of the following occurrences should have on the aggregate demand curve.a. The Fed raises the discount rate.b. The price level increases.c. The federal
1.Contractionary policies are designed to slow the economy and reduce inflation by decreasing aggregate demand and aggregate output. Explain why contractionary fiscal policy and contractionary
1.Describe what will happen to the interest rate and aggregate output with the implementation of the following policy mixes:a. Expansionary fiscal policy and expansionary monetary policyb.
1.By late summer 2010, the target federal funds rate was between zero and 0.25 percent. At the same time, “animal spirits” were dormant and there was excess capacity in most industries. That is,
1.Paranoia, the largest country in central Antarctica, receives word of an imminent penguin attack. The news causes expectations about the future to be shaken. As a consequence, there is a sharp
1.For each of the following scenarios, tell a story and predict the effects on the equilibrium level of aggregate output and the interest ratea. During 2009, the Federal Reserve was easing monetary
1.By using aggregate supply and aggregate demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP in the short run:a. A tax cut
1.During the third quarter of 1997, Japanese GDP was falling at a rate of over 11 percent. Many blamed the big increase in Japan’s taxes in the spring of 1997, which was designed to balance the
1.1. What two features of the Indian economy meant that an increase in rice prices was likely to spread through the economy and influence the overall inflation rate?
1.Question 2 Investments in physical and human capital can increase the value of Potential GDP in the economy. How would you represent this in the Aggregate Demand and Aggregate Supply model?
1.Question 1 If moderate inflation takes place, and households believe that this increase in the price level is only temporary, they may delay some purchases until the price level falls back to its
1.[Related to the Economics in Practice ] The Economics in Practice describes the simple Keynesian AS curve as one in which there is a maximum level of output given the constraints of a fixed capital
1.Using AS and AD curves to illustrate, describe the effects of the following events on the price level and on equilibrium GDP in the long run assuming that input prices fully adjust to output prices
1.During 1999 and 2000, a debate raged over whether the United States was at or above potential GDP. Some economists feared the economy was operating at a level of output above potential GDP and
1.Two separate capacity constraints are discussed in this chapter:(1) the actual physical capacity of existing plants and equipment, shown as the vertical portion of the short-run AS curve, and (2)
1.The economy of Mayberry is currently in equilibrium at point on the graph. Prince Barney of Mayberry has decided that he wants the economy to grow and has ordered the Royal Central Bank of Mayberry
1.In the tiny island nation of Bongo, the nation’s wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings.
1.Illustrate each of the following situations with a graph showing AS and AD curves, and explain what happens to the equilibrium values of the price level and aggregate output:a. A decrease in with
1.[Related to the Economics in Practice ] The Federal Reserve Bank of St. Louis publishes PCE price index data on its Website at:https://research.stlouisfed.org/fred2/categories/9. Go to this Web
1.[Related to the Economics in Practice ] In a June 13, 2018 press conference, Fed Chair Jerome Powell announced a 0.25 point increase in the federal funds rate target, to between 1.75 percent and
1.In the first few chapters of this book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity
1.The AD curve slopes downward because when the price level is lower, people can afford to buy more and aggregate demand rises. When prices rise, people can afford to buy less and aggregate demand
1.Illustrate each of the following situations with a graph showing the IS curve and the Fed rule, and explain what happens to the equilibrium values of the interest rate and output:a. A decrease in
1.Describe the Fed’s tendency to “lean against the wind.” Do the Fed’s policies tend to stabilize or destabilize the economy?
1.Some economists argue that the “animal spirits” of investors are so important in determining the level of investment in the economy that interest rates do not matter at all. Suppose this were
1.On November 9, 2011, the European Central Bank acted to decrease the short-term interest rate in Europe by one-fourth of a percentage point, to 1.25 percent, and additional cuts were made over the
1.Illustrate each of the following situations with a graph showing short-run aggregate supply:a. A decrease in the size of the labor forceb. An increase in available capitalc. An increase in
1.1. Why is the distance between AE3 and AE2 called an inflationary gap?
1.1. How do you think Fed policy might change if it included energy and food prices in its measure of the price level? As we indicated in the text, price stability is one of the main goals of the
1.The following table gives three key U.S. interest rates in 1980 and again in 1993:Provide an explanation for the extreme differences that you see.Specifically, comment on (1) the fact that rates in
1.Question 2 In this chapter, you learned that the money multiplier is calculated as one divided by the required reserve ratio. This definition implicitly assumes that banks are not holding excess
1.Question 1 Money serves three common functions: a means of payment, a store of value, and a unit of account. How well do cryptocurrencies, such as Bitcoin, provide these functions?
1.What are the three traditional tools the Fed can use to control the interest rate via changing the money supply? Briefly describe how the Fed can use each of these tools to either increase or
1.Suppose in the Republic of Sasquatch that the regulation of banking rested with the Sasquatchian Congress, including the determination of the reserve ratio. The Central Bank of Sasquatch is charged
1.If the head of the Central Bank of Brazil wanted to decrease the supply of money in Brazil in 2019, which of the following would do it? Explain your answer. Increase the required reserve ratio
1.In 2000, the federal debt was being paid down because the federal budget was in surplus. Recall that surplus means that tax collections exceed government spending The surplus was used to buy back
1.In the Republic of Doppelganger, the currency is the ditto.During 2018, the Treasury of Doppelganger sold bonds to finance the Doppelganger budget deficit. In all, the Treasury sold 80,000 ten-year
1.Normally, people from the United States and around the world think of highly rated corporate or government bonds as a safe place to put their savings relative to common stocks. Because the stock
1.The United States entered a deep recession at the end of 2007.The Fed under Ben Bernanke used aggressive monetary policy to prevent the recession from becoming another Great Depression. The Fed
1.[Related to the Economics in Practice ] The Economics in Practice states that the capital value of Professor Serebryakov’s estate is not the value for which he could sell the estate if the
1.Explain why there is a negative relationship between the amount of money you should hold and the interest rate.
1.The United States is divided into 12 Federal Reserve districts, each with a District Bank. These Districts and the locations for the District Bank in each region are shown in Figure 25.4 . Do some
1.[Related to the Economics in Practice ] In the digital age, customer preference for conducting business online versus patronizing a traditional brick-and-mortar location has grown rapidly in many
1.Suppose Ginger deposits $12,000 in cash into her checking account at the Bank of Skidoo. The Bank of Skidoo has no excess reserves and is subject to a 4 percent required reserve ratio.a. Show this
1.2.5 You are given this account for a bank:The required reserve ratio is 10 percent.Fed to control the money supply precisely. Explain why this is true.2.5 You are given this account for a bank:a.
1.When the Fed adds new reserves to the system, some of these new reserves find their way out of the country into foreign banks or foreign investment funds. In addition, some portion of the new
1.Do you agree or disagree with each of the following statements? Explain your answers.a. When the Treasury of the United States issues bonds and sells them to the public to finance the deficit, the
1.The U.S. money supply (M1) at the beginning of June, 2018 was$3,676.7 billion broken down as follows: $1,580.4 billion in currency, $1.8 billion in traveler’s checks, and $2,094.5 billion in
1.For each of the following, determine whether it is an asset or a liability on the accounting books of a bank. Explain why in each case. – Cash in the vault– Demand deposits– Savings
1.Suppose on your 21st birthday, your eccentric grandmother invites you to her house, takes you into her library, removes a black velvet painting of Elvis Presley from the wall, opens a hidden safe
1.Although the official currency of the United States is the U.S.dollar, some towns and cities actually issue their own money. In these communities, consumers are able to buy local currency at a
1.After suffering two years of staggering hyperinflation, the African nation of Zimbabwe officially abandoned its currency, the Zimbabwean dollar, in April 2009 and made the U.S. dollar its official
1.Why is M2 sometimes a more stable measure of money than M1? Explain in your own words using the definitions of M1 and M2.
1.As king of Medivalia, you are constantly strapped for funds to pay your army. Your chief economic wizard suggests the following plan: “When you collect your tax payments from your subjects,
1.1. What would happen to the value of the estate if the interest rate on the securities that Professor Serebryakov is talking about fell? In Chekhov’s play Uncle Vanya, Alexander Vladimirovitch
1.1. How do Earp’s remarks illustrate the advantages of paper money over gold? Frank Capra’s 1946 classic film, It’s a Wonderful Life, stars Jimmy Stewart as George Bailey, the-salt-of-the
1.1. Why do red feather rolls and dolphin teeth make good commodity monies, whereas coconut shells would not? In most countries commodity monies were abandoned many years ago. At one point, sea
1.Assume the following for the economy of a countrySolve for equilibrium income. (Hint: Be very careful in doing the calculations. They are not difficult, but it is easy to make careless mistakes
1.Question 2 An equal-sized increase in government spending and taxes may be considered expansionary or contractionary fiscal policy. What information would you need in order to make this distinction?
1.Question 1 Households in the lowest quintile of the U.S. income distribution have larger marginal propensities to consume than households in the highest quintile. If the government wishes to reduce
1.Suppose all tax collections are fixed (instead of dependent on income) and all spending and transfer programs are fixed (in the sense that they do not depend on the state of the economy, as, for
1.[Related to the Economics in Practice ] Federal government expenditures and receipts for the simple economy of the nation of Topanga are listed in the table below. The government of Topanga would
1.You are appointed secretary of the treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year, and the budget
1.What is the balanced-budget multiplier? Explain why the balanced-budget multiplier is equal to one.
1.Answer the following:a. MPS = 0.1.What is the government spending multiplier?b. MPC = 0.6.What is the government spending multiplier?c. MPS 0.25. What is the government spending multiplier?d. MPC =
1.A $1 increase in government spending will raise equilibrium income more than a $1 tax cut will, yet both have the same impact on the budget deficit. So if we care about the budget deficit, the best
1.Suppose that the government of Ansonia is experiencing a large budget deficit with fixed government expenditures of G = 250 and fixed taxes of T= 150Assume that consumers of Ansonia behave as
1.Use your answer to Problem 1.6 to calculate the MPC, MPS, government spending multiplier, and tax multiplier. Draw a graph showing the data for consumption spending, planned aggregate expenditures,
1.For each of the following sets of data, determine if output will need to increase, decrease, or remain the same to move the economy to equilibrium: a. Y 1,000; C b. Y c. Y = = 5,000; C 2,000; C d.
1.For the data in the following table, the consumption function is C = 800 + 0.6 (Y − T).Fill in the columns in the table and identify the equilibrium output. Output Not Taxes Disposable
1.Evaluate the following statement: for an economy to be in equilibrium, planned investment spending plus government purchases must equal saving plus net taxes.

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