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modern principles of economics

Questions and Answers of Modern Principles Of Economics

1.Some economists claim World War II ended the Great Depression of the 1930s. The war effort was financed by borrowing massive sums of money from the public. Explain how a war could end a recession.
1.Assume that in 2019, the following prevails in the Republic of Nurd:Assume that households consume 80 percent of their income, they save 20 percent of their income, MPC-0.8, and MPS = 0.2. That is,
1. Expert economists in the economy of Bongo estimate the following:Assume that Bongoliers consume 80 percent of their disposable incomes and save 20 percent.Assume that households consume 80 percent
1.Define saving and investment. Data for the simple economy of Newt show that in 2018, saving exceeded investment and the government is running a balanced budget. What is likely to happen? What would
1.1. Why does the aging of the population increase the debt? In December of 2017 Congress passed and President Trump signed a major overhaul in the federal tax code. Corporate tax rates were
1.Question 2 When homeowners watch the values of their homes rise quickly in a booming real estate market, they often choose to save a smaller fraction of their income. How would this behavior affect
1.Question 1 The marginal propensity to consume is not equal across all members of society. The marginal propensity to consume for individuals in the lowest quintile of the U.S. income distribution
1.According to the Bureau of Economic Analysis, during the recession of 2008–2009, household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the
1.Use the graph to answer the questions that follow.a. What is the value of the MPC?b. What is the value of the MPS?c. What is the value of the multiplier?d. What is the amount of unplanned
1.[Related to the Economics in Practice ] If households decide to save more, saving in the aggregate may fall. Explain this in words. Planned aggregate expenditure, AE 450 1200 0 300 900 1,300
1.Explain the multiplier intuitively. Why is it that an increase in planned investment of $100 raises equilibrium output by more than $100? Why is the effect on equilibrium output finite? How do we
1.[Related to the Economics in Practice ] Suppose the economy enters an unexpected recession. What would happen to the unplanned inventory of a company like General Motors? What would happen to the
1.You are given the following data concerning Freedonia, a legendary country:1. Consumption function: C = 200 + 0.8Y 2. Investment function: I = 100 3.AE ≡ C + I 4.AE = Ya. What is the marginal
1.This chapter argues that saving and spending behavior depend in part on wealth (accumulated savings and inheritance), but our simple model does not incorporate this effect. Consider the following
1.The following questions refer to this table:a. At each level of output, calculate saving. At each level of output, calculate unplanned investment (inventory change). What is likely to happen to
1.Go to www.commerce.gov. Click on “Bureau of Economic Analysis.” Click next on “National” and then on the latest GDP release. Look through the report. Which of the components of aggregate
1.The following data are estimates for the small island nation of Kaboom Real GNP ( ........................ 800 million Kaboomian dollars Planned investment spending) ........................ 200
1.Explain whether you agree or disagree with the following statement: “All else equal, businesses will generally plan more investment projects when interest rates rise, because higher interest
1.Suppose that in the year 2019, Oceanaire, Inc. planned to produce 500,000 units of its lightweight scuba tanks. Of the 500,000 it planned to produce, a total of 50,000 units would be added to the
1.Explain the difference between actual investment and planned investment. When are actual investment and planned investment equal? When is actual investment greater than planned investment? When is
1.Assume in a simple economy that the level of saving is –800 when aggregate output equals zero and that the marginal propensity to save is 0.25. Derive the saving function and the consumption
1.[Related to the Economics in Practice ] The Economics in Practice describes some of the difficulties that households have with regard to decisions involving trade-offs between the present and the
1.Fill in the aggregate saving column in the following table. Use the data in the table to calculate the consumption function and the saving function, and plot these functions as well as the
1.Briefly define the following terms and explain the relationship between MPC and MPS and the relationship between aggregate output and aggregate income.a. MPCb. MPSc. Aggregate outputd. Aggregate
1.1. Draw a consumption function corresponding to S0 and S1 and describe what is happening. By consuming less, households have actually caused the hard times about which they were apprehensive.
1.1. Do you expect inventory turns for the average firm in the economy to increase or decrease as we enter a recession? We have indicated in the text that a change in inventories is a component of
1.Question 2 Suppose that you purchased a new car last year, and that you took out a five-year car loan to pay for it. Would unexpected inflation this year lead you to repay less or more for your car
1.Question 1 During a recession, many workers with part-time jobs want full-time jobs, but cannot find them. These workers are referred to as“underemployed.” Does the existence of underemployment
1.An article in the Gotham Times states that the stock of capital and the workforce in Gotham are both increasing at an annual rate of 7 percent. The same article states that real output is growing
1.What was the rate of growth in real GDP during the most recent quarter? You can find the answer in publications such as the Survey of Current Business, The Economist, and Business Week.Has growth
1.Policy makers talk about the “capacity” of the economy to grow.What specifically is meant by the “capacity” of the economy?How might capacity be measured? In what ways is capacity limited
1.The CPI is 120 in year 1 and 150 in year 2. All inflation is anticipated. If the Gringotts Bank charges an interest rate of 30 percent in year 2, what is the bank’s real interest rate?
1.Consider the following five situations. In which situation would a borrower be best off and in which situation would a lender be best off?a. The nominal interest rate is 6 percent and the inflation
1.[Related to the Economics in Practice ] Since 2009, the federal minimum wage has been set at $7.25 per hour. In 2018, 29 states and Washington, DC had higher minimum wages than the federal minimum
1.The CPI is a fixed-weight index. It compares the price of a fixed bundle of goods in one year with the price of the same bundle of goods in some base year. Calculate the price of a bundle
1.What do the CPI and PPIs measure? Why do we need both of these types of price indexes? (Think about what purpose you would use each one for.)
1.Suppose all wages, salaries, welfare benefits, and other sources of income were indexed to inflation. Would inflation still be considered a problem? Why or why not?
1.In each of the following cases, classify the person as cyclically unemployed, structurally unemployed, frictionally unemployed, or not in the labor force. Explain your answers.a. Samuel quit his
1.On average, nations in Europe pay higher unemployment benefits for longer periods of time than does the United States.How do you suppose this would impact the unemployment rates in these nations?
1.Suppose the number of employed people in an economy is 312,545,372. The unemployment rate in this economy is 7.4 percent, or 074, and the labor force participation rate is 80 percent, or 80.a. What
1.Consider the following statements:a. Fewer people are employed in Freedonia now than at any time in the past 75 years.b. The unemployment rate in Freedonia is lower now than it has been in 75
1.Go to www.bls.gov and click on the links for state and area employment and unemployment. Look at your home state and describe what changes have taken place in the workforce. Has the labor force
1.[Related to the Economics in Practice ] According to the National Bureau of Economic Research (NBER), the United States experienced five recessions from 1980 to 2010. Following is the NBER’s list
1.[Related to the Economics in Practice ] For each of the following events, explain what is likely to happen to the labor force participation rate:a. The federal minimum wage is abolished.b. The
1.What is the unemployment rate in your state today? What was it in 1970, 1975, 1982, and 2008? How has your state done relative to the national average? Do you know or can you determine why?
1.When an inefficient firm or a firm producing a product that people no longer want goes out of business, people are unemployed, but that is part of the normal process of economic growth and
1.In late 2010 economists were debating whether the U.S.economy was in a recession. GDP seemed to be rising, yet the unemployment rate was stuck at close to 10 percent. In thinking about the economic
1.1. Tax brackets are also tied to the fixed-weight CPI. How would tax revenue be affected if the chain-linked CPI were used instead? The calculations described in Chapter 21 on how to construct a
1.1. Describe a mechanism that might help explain the persistence of wage-effects from a recession. Throughout the recession of 2008–2009 and the slow recovery afterward, many young college
1.1. When a household decides to hire someone else to clean their house and uses their extra time to watch television, the wages paid to that household worker increase GDP. Is economic output in fact
1.1. How would you expect the time use of the unemployed to differ in a boom time? During the recession of 2008–2009, aggregate market work hours in the United States decreased substantially. A
For each of the following transactions, determine whether it will be recorded in the U.S. current account or capital account and whether the entry will be positive or negative.a. A resident of the
Explain why the supply curve for foreign currency is vertical. Let’s say you return from a trip to Mexico with 1,000 pesos. If you decide to exchange these pesos for dollars, does your action shift
The price of a dozen roses in the United States is about $30. Use this information, along with the exchange rates given in Table 33.1, to answer the following questions.a. Assuming that PPP holds
Explain the numerical effect on both the U.S.current account and the U.S. capital account from each of these examples.a. In the United States, the Best Buy company purchases $1 million worth of TVs
From Chapter 21, we know that the primary cause of inflation is expansion of the money supply. In this chapter, we find an additional side effect of monetary expansion. What is this effect? Use
If interest rates in India rise relative to interest rates around the world, how is the world value of the rupee affected? Illustrate these effects in the market for rupees.
The rate of inflation in India from 2007 to 2011 was 8%. Over the same period, the inflation rate in the United States was 2.7%.a. What is the implication of these inflation rates for the exchange
Is a trade deficit a sign of economic weakness?Why or why not?
What are three factors that might make a capital account surplus grow?
Sometimes, official government reserves are singled out in the balance of payments accounts. For example, when China buys U.S.financial assets (currency and Treasury securities), this purchase is
Why are current account balances generally mirror images of capital account balances?
The United States currently has a current account deficit. How would each of the following events affect this deficit, assuming no other changes?a. U.S. economic growth slows relative to the rest of
The United States imports Molson beer from Canada. Assume that Canada and the United States share the same currency and that a bottle of Molson beer costs $2 in Toronto, Canada, but just $1 in
Is it possible for a producer to have both an absolute advantage and a comparative advantage?
Determine whether each statement is true or false.Developing countries stand to gain from international trade becausea. trade enables them to specialize in producing where they have a comparative
Continuing with the example given in the previous problem, assume that Germany and Japan produce their own cars and beer and allocate half their labor force to the production of each.a. What
Germany and Japan both produce cars and beer. The table below shows production possibilities per worker in each country. For example, one worker in Germany produces 8 cars or 10 cases of beer per
What are the two trade restriction policies we discussed in this chapter? Who benefits and who loses from each of these policies? What is the new outcome for society?
Suppose that the comparative-cost ratios of two products—mangoes and sardines—are as follows in the hypothetical nations of Mangolia and Sardinia:Mangolia: 1 mango = 2 cans of sardines Sardinia:
Consider the following table for the neighboring nations of Quahog and Pawnee. Assume that the opportunity cost of producing each good is constant.a. What is the opportunity cost of producing
Tariffs reduce the volume of imports. Do tariffs also reduce the volume of exports? Explain your response.
Why might foreign producers voluntarily agree to a quota rather than face an imposed tariff?
How might a nation’s endowment of natural resources, labor, and climate shape the nature of its comparative advantage?
What would happen to the standard of living in the United States if all foreign trade were eliminated?
What are three problems with trade restrictions?What are three reasons often given in support of trade restrictions?
The following table presents actual inflation rates for a hypothetical nation for 10 years.a. Replicate the table on a separate sheet of paper and leave space for five more columns.Label column 3
In each of the following scenarios, estimate the unemployment rate in comparison with the natural rate (u*).a. Inflation is steady at 2% for two years but then increases to 5% for a year.b. Inflation
In the past, some people believed that the Federal Reserve routinely expanded the money supply during presidential election years to stimulate the economy and help the incumbent president. For this
Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment rate at 5%. Now assume that the central bank increases the money supply by 6%.a. Illustrate the
Suppose the economy is in long-run equilibrium, with real GDP at $19 trillion and the unemployment rate at 5%. Now assume that the central bank unexpectedly decreases the money supply by 6%.a.
Use the aggregate demand–aggregate supply model to illustrate the downward-sloping relationship between inflation and unemployment rates in the short-run Phillips curve.
Explain the difference between active and passive monetary policy.
Who is harmed when inflation is less than anticipated? In what ways are they harmed?Who is harmed when inflation is greater than anticipated? In what ways are they harmed?
Explain why a stable 5% inflation rate can be preferable to one that averages 4% but varies between 1% and 7% regularly.
During the economic slowdown that began at the end of 2007, the Federal Reserve used monetary policy to reduce interest rates in the economy. Use what you have learned in this chapter to give a
Many people focus on the effect of monetary policy on interest rates in the economy.a. Use the loanable funds market to explain how unexpected contractionary monetary policy affects interest rates in
Why is it possible to change real economic factors in the short run simply by increasing the money supply?
Suppose the Fed buys $1 million in Treasury securities from a commercial bank. What effect will this action have on the bank’s reserves and the money supply? Use a required reserve ratio of 10%,
What is the simple money multiplier if the required reserve ratio is 15%? If it is 12.5%?
Determine whether each of the following is considered standard open market operations or quantitative easing:a. The Fed buys $100 billion in student-loan-backed securities.b. The Fed sells $400
Determine if the following changes affect M1 and/or M2:a. an increase in savings depositsb. a decrease in credit card balancesc. a decrease in the amount of currency in circulationd. the conversion
Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, imagine that $300 is deposited into a checking account. By how much more does the money supply increase if the
Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what is the value of government securities the Fed must purchase if it wants to increase the money supply by $2
Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which of the following scenarios produces a larger increase in the money supply? Explain why.a. Someone takes
Consider the balance sheet for the Wahoo Bank as presented below.Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write the changes to the balance sheet for
Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. Assuming a required reserve ratio of 10%, what is the largest amount by which the money supply can
Define quantitative easing. How is it different from standard open market operations?
What is the current required reserve ratio?What would happen to the money supply if the Fed decreased the ratio?
How is the discount rate different from the federal funds rate?

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