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modern principles of economics

Questions and Answers of Modern Principles Of Economics

How does the Fed increase and decrease the money supply through open market operations?
Why can’t a bank lend out all of its reserves?
Why is the actual money multiplier usually less than the simple money multiplier?
Suppose you withdraw $100 from your checking account. What impact would this action alone have on the following?a. the money supplyb. your bank’s required reservesc. your bank’s excess reserves
What are the components of M1 and M2? List them.
What are the three functions of money?Which function is the defining characteristic?
What is the difference between commodity money and fiat money?
Assume that the equilibrium in the loanable funds market is at an interest rate (R) of 3%and the total quantity of loans is $500 billion.In addition, in this initial situation, the government is
Fill in the blanks in the table below. Assume that the MPC is constant over everyone in the economy. Change in MPC Spending multiplier government spending Change in income 5 $100 2.5 -$250 0.5 $200
The new classical critique of activist fiscal policy is theoretically different from the crowding-out critique. Explain the difference by using a graph of the loanable funds market.
To explore crowding-out, let’s set up a simple loanable funds market in initial equilibrium.a. Draw a graph showing initial equilibrium in the loanable funds market at $800 million and an interest
Explain the difference between typical demand-side fiscal policy and supply-side fiscal policy. For each of the following fiscal policy proposals, determine whether the primary focus is on aggregate
Assuming that complete crowding-out always holds, what happens to consumption, investment, and interest rates if the government decreases borrowing, all else being equal?
Many people emphasize just one portion of the Laffer curve and forget that there are actually two sides. First, explain the math behind the positively sloped region of the Laffer curve. That is,
In what circumstances would contractionary fiscal policy be recommended? How might you implement this type of policy? Why would you implement this policy—that is, what are the reasons why it might
Explain the three types of fiscal policy lags.What are automatic stabilizers? Which lags do automatic stabilizers affect?
Using the aggregate demand–aggregate supply model, one might argue that the economy will adjust on its own when aggregate demand drops. How does this adjustment work? Why might this adjustment take
How are government budget balances affected by countercyclical fiscal policy? Be sure to describe the effects of both expansionary and contractionary fiscal policy.
Use the table in problem 4 to compute the debt-to-GDP ratio for Greece in both 2000 and 2010.
Greece has been through significant national budget turmoil. In 2010, it was discovered that the government had been concealing the true size of the national debt for several years. The data in the
There are three different ways to report budget deficit data: nominal deficits, real deficits, and deficit-to-GDP ratios. Which of the three is most informative? Why?
Greece, Ireland, Portugal, and Spain all went through national budget difficulties in recent years. Use the following data to answer questions regarding the sovereign debts of these nations. (All
Use the marginal income tax rates in Figure 28.6 to compute the following:a. tax due on taxable income of $100,000,$200,000, and $500,000b. average tax rate on taxable income of$100,000, $200,000,
Explain the difference between average tax rates and marginal tax rates. Is it possible for a person’s average tax rate to equal his or her marginal tax rate? If so, how?
Explain why mandatory outlays are predicted to grow (as a portion of the total budget) over the next two decades.
This question refers to Figure 28.10, which shows the U.S. outlays and revenue as portions of GDP.a. List three periods when the U.S. budget deficit was relatively large.b. What historical events
Going back to 1965, there have been a few years in which the U.S. government budget was in surplus. What years were these? Why do you think those surpluses disappeared when they did? Figure 28.10
Explain the difference between a budget deficit and the national debt.
Since the 1960s, Social Security and Medicare have grown as portions of U.S. government spending.a. What major categories of government spending have shrunk during the same period?b. Has the U.S.
Assume that the following values apply to the Spanish economy:• Autonomous consumption (A) is $200 billion.• The marginal propensity to consume (MPC)is 0.8.• Planned investment expenditure is
Why is it that, in the AE model, all adjustments to equilibrium occur as changes in output? In other words, why does real GDP always change to move the economy to equilibrium?
The AE model implies that a $1 change in government spending eventually leads to more than a $1 change in equilibrium real GDP. Explain how this multiplier process works.
The slope of both the consumption function and the aggregate expenditures (AE) line is equal to the marginal propensity to consume(MPC).a. Explain why the slope of the consumption function is equal
Let’s say that in 2019 the United States experiences abnormally good weather. This weather is particularly beneficial for agricultural crop production. Determine how the run of good weather affects
Recently, the value of the U.S. dollar has been rising in world markets.a. Determine how the rising value of the dollar affects the U.S. price level, real GDP, and the unemployment rate in both the
You work for Dr. Zhang, the autocratic dictator of Zhouland. After taking an economics course, you decide that devaluing your currency (Zhoullars) is the way to increase GDP. Following your advice,
In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects because oil is an important resource
Suppose that a sudden increase in aggregate demand moves the economy from its long-run equilibrium.a. Illustrate this change using the aggregate demand–aggregate supply model.b. What are the
Describe whether the following changes cause aggregate demand to increase, decrease, or neither.a. The price level increases.b. Investment decreases.c. Imports decrease and exports increase.d. The
How does a lower price level in the United States affect the purchases of imported goods?Explain, using aggregate demand.
On the following graph, illustrate the short-run and long-run effects of an increase in aggregate demand. Describe what happens to the price level, output, and employment. Price level LRAS (P) SRAS
Describe whether the following changes cause the long-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. The stock of capital in the economy increases.c. Natural
Describe whether the following changes cause the short-run aggregate supply to increase, decrease, or neither.a. The price level increases.b. Input prices decrease.c. Firms and workers expect the
The interest rate effect can be viewed as a chain of reactions in the economy.a. Below is the chain of reactions with some of the steps filled in. Fill in the missing steps in the chain and be sure
Consider two economies, both in recession.In the first economy, all workers have long-term contracts that guarantee high nominal wages for the next five years. In the second economy, all workers have
Suppose the economy is in a recession caused by lower aggregate demand. If no policy action is taken, what will happen to the price level, output, and employment in the long run?
How does strong economic growth in China affect aggregate demand in the United States?
Why is the long-run aggregate supply curve vertical?
How are the factors that shift the long-run aggregate supply curve different from those that shift the short-run aggregate supply curve?
What are three reasons the short-run aggregate supply curve slopes upward? Name at least three factors that shift the short-run aggregate supply curve.
What are three reasons the aggregate demand curve slopes downward? Name at least three factors that shift the aggregate demand curve.
The following list describes policy proposals that have been advanced to help the economies of developing nations. Determine whether each proposal is consistent with the Solow model, modern growth
The Solow model is still at the core of all modern growth theory.a. Draw an aggregate production function for a hypothetical nation. Draw the production function as we do in this chapter, with an
Economic growth derives from many sources.Some of these cause a parallel shift in a nation’s production function, while others change the slope of the production function.Below is a graph of three
Suppose the people in the United States increase their savings rate. How will this change affect the rate of economic growth in the United States?
Define human capital. Draw a graph that illustrates an increase in effective labor on a production function.
The Solow model focuses on how resources affect output. In this chapter, we focused on capital.a. Name the other two major categories of resources.b. Draw an aggregate production function with a
Modern growth theory still uses the basic Solow production function as a starting point, but the emphasis is much different.a. What is the key theoretical distinction between modern growth theory and
Robert Solow formulated a model that still serves as the basis for growth theory.a. What is the steady state of an economy, and what key piece of the Solow model implies that the steady state is an
How can an increase in educational opportunities increase growth? Use a graph to illustrate how educational opportunities affect a nation’s production function.
The basic Solow growth model implies convergence.What is convergence? What key assumption about the marginal product of capital implies convergence?
China is a land of vast resources. In addition, technology is easily transportable across international borders. If we rule out these two sources of growth, to what can we attribute the economic
The Solow model assumes that technological changes are exogenous. What does the term“exogenous” mean? Why does the assumption of exogenous technological change matter for growth policy? What does
Explain why a nation cannot continue to grow forever by just adding more capital.
About 50 years ago, Robert Solow formulated a simple model of economic growth. What are the two key properties of the aggregate production function at the center of Solow’s first contribution?
Modern economic theory points to three sources of economic growth. What are these three sources? Give an example of each.
Economic growth is a very particular concept in economics. The term “economic growth” is not always used correctly in media reports.a. Define economic growth.b. Consider the following economy:Is
How much would your$1,000 be worth in 40 years under each of the three alternatives?
Assume that you plan to retire in 40 years and are evaluating the three different accounts listed in question
The rule of 70 applies in any growth rate application.Let’s say you have $1,000 in savings and you have three alternatives:• a savings account earning 1% interest per year• a U.S. Treasury bond
Use the data in the table below to compute economic growth rates for the United States for 2008, 2009, and 2010. Note that all data are from the end of the year specified. Nominal GDP (billions of
Let’s revisit the data from Table 24.3, showing the following world economic growth rates for specific historical eras:Years Growth rate AD 1–1800 0.02%1800–1900 0.64%1900–1950
The table below presents long-run macroeconomic data for two hypothetical nations, A and B:Assume that both nations start with real GDP of $1,000 per citizen. Fill in the blanks in the following
Real per capita GDP in China in 1959 was about $350, but it doubled to about $700 by 1978, when Deng Xiaoping started market reforms.a. What was the average annual economic growth rate in China over
What do economists mean by the term “institutions”?Name five different laws that are institutions that affect production incentives.Name three social practices that affect production in a society.
The difference between 1% growth and 2%growth seems insignificant. Explain why it really matters.
In 2011, when the U.S. unemployment rate was over 9%, President Barack Obama said,“There are some structural issues with our economy where a lot of businesses have learned to become much more
The flow of funds across borders is a source of growth for economies. Use what you learned about loanable funds in Chapter 22 to describe how foreign funds might expand output in a nation.
Many historical accounts credit the economic success of the United States to its abundance of natural resources.a. What is missing from this argument?b. Name five poor nations that have significant
List five human welfare conditions that are positively affected by economic growth.
Describe the pattern of world economic growth over the past 2,000 years. Approximately when did economic growth really take off?
How is economic growth measured?
What is human capital, and how is it different from the quantity of workers available for work? Name three ways to increase a nation’s human capital. Is an increase in the size of the labor force
What are the three factors that influence economic growth?
The following table presents partial information for several different bonds that each mature in one year. Use the information given along with Equation 23.1 to fill in the blank cells in the table.
In this chapter, we discussed Target Corporation bonds to illustrate the effect of default risk on the price of a bond. In particular, when the default risk rises, the demand for a bond falls and
Use supply and demand curves to illustrate how default risk affects both the price and the interest rate of a bond.
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 price
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
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
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 of a
What is a U.S. Treasury bond? Why are Treasury bonds such a popular asset in world markets?
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. Describe
Why might a firm prefer to finance its investments with bonds rather than stocks? Alternatively, why might a firm prefer stocks to bonds?
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 you
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?
What is securitization? Discuss how securitization benefits borrowers.
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.
The Ragged Mountain Running Shop (RMRS)sells running shoes and apparel in Charlottesville, Virginia. The owners of RMRS are considering the possibility of opening new retail locations. After careful
Some people have proposed an increase in the retirement age for U.S. citizens. Consider the effects of this proposed new policy.a. How would this change affect supply and demand in the market for

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