Questions and Answers of Principles Of Behavior

If the government follows an easy monetary policy and the exchange rate is flexible, which of the following will likely be the result? (LO4)a. A falling real interest rate but higher net exports.b. A
The annual demand for and supply of shekels in the foreign exchange market is as given in Problem 9.The shekel is fixed at 0.30 dollars per shekel. The country’s international reserves are $600.
The demand for and supply of shekels in the foreign exchange market are Demand 5 30,000 2 8,000e, Supply 5 25,000 1 12,000e, where the nominal exchange rate is expressed as U.S.dollars per shekel.
Consider an Apple iPod that costs $240. (LO3)a. If the euro–dollar exchange rate is 1 euro per dollar, so that it costs a European 1 euro to buy a dollar, how much will the iPod cost in France?b.
Suppose a French bottle of champagne costs 20 euros.(LO3)a. If the euro–dollar exchange rate is 0.8 euro per dollar, so that a dollar can buy 0.8 euro, how much will the champagne cost in the
How would each of the following be likely to affect the value of the dollar, all else being equal? Explain. (LO3)a. U.S. stocks are perceived as having become much riskier financial investments.b.
a. Gold is $350 per ounce in the United States and 2,800 pesos per ounce in Mexico. What nominal exchange rate between U.S. dollars and Mexican pesos is implied by the PPP theory? (LO2)b. Mexico
The demand for U.S.-made cars in Japan is given by Japanese demand 5 10,000 2 0.001(Price of U.S. cars in yen).Similarly, the demand for Japanese-made cars in the United States is U.S. demand 5
Blueland’s currency unit, the blue, was worth $1 (U.S.) last year and is worth 90 cents (U.S.)this year. Redland’s currency unit, the red, was worth 50 cents (U.S.) last year and is worth 45
Using the data in Table 21.1, find the nominal exchange rate between the Mexican peso and the Japanese yen.Express in two ways. How do your answers change if the peso appreciates by 10 percent
Would you expect the law of one price to apply to crude oil? To fresh milk? To taxi rides? To compact discs produced in different countries by local recording artists? Explain your answer in each
Detail how exchange rates can be fixed.
An economy is initially in recession. Using the AD-AS diagram, show the process of adjustment (LO4)a. If the Fed responds by easing monetary policy(moving its reaction function down).b. If the Fed
For each of the following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. (LO2)a. An increase in consumer
This problem asks you to trace out the adjustment of inflation when the economy starts with an output gap. Suppose that the economy’s aggregate demand curve is Y 5 1,000 2 1,000π, where Y is
An economy’s relationship between short-run equilibrium output and inflation (its aggregate demand curve)is described by the equation Y 5 13,000 2 20,000π.Initially, the inflation rate is 4
For the economy in Problem 1, suppose that potential output Y* 5 960.From the policy reaction function in the table in Problem 1, what can you infer about the Fed’s objective for the inflation rate
We have seen that short-run equilibrium output falls when the Fed raises the real interest rate. Suppose the relationship between short-run equilibrium output Y and the real interest rate r set by
State how each of the following affects the AD curve and explain: (LO1)a. An increase in government purchases.b. A cut in taxes.c. A decline in planned investment spending by firms.d. A decision by
What two variables are related by the aggregate demand (AD) curve? Explain how the behavior of the Fed helps to determine the slope of this curve. List and discuss two other factors that lead the
Discuss the short-run and long-run effects of an anti-inflationary monetary policy
Analyze how the economy is impacted by aggregate spending shocks, inflation shocks, and shocks to potential output.
Supposing that the Fed follows the Taylor rule (The Economic Naturalist 19.6), find the real interest rate and the nominal interest rate that the Fed will set in each of the following situations:
An economy with a potential output Y* of 4,000 is described by the equation below: (LO5)Y 5 5,800 212,000ra. If real interest rate is 0.10 (10%), compute the numerical value for aggregate expenditure
An economy is described by the following information:(LO5)a. State the relationship between aggregate expenditure and output Y to the real interest rate r for this economy in the format of an
In August of 2015, the Chinese central bank decided to reduce China’s required reserve-deposit ratio from 18.5% to 18%. Assuming no change in the amount of cash held by the Chinese public, that
Using a supply and demand graph of the market for money, show the effects on the nominal interest rate if the Fed takes the following monetary policy actions:(LO2, LO3)a. The Fed lowers the discount
How would you expect each of the following to affect the economywide demand for U.S. money? Explain. (LO1)a. Competition among brokers forces down the commission charge for selling holdings of bonds
The following table shows Uma’s estimated annual benefits of holding different amounts of money: (LO1)a. How much money will Uma hold on average if the nominal interest rate is 9 percent? 5
During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. (LO1)a. What would you expect to happen to the money demand curve
Discuss to what extent monetary policymaking is an art or science.
Describe the unconventional monetary policy methods that the Fed can use when interest rates hit the zero lower bound.
Give three examples of automatic stabilizers of the economy. (LO8)
For each of these hyperbolized statements, identify the fiscal policy qualification to which it is related. (LO8)a. Fiscal policy is just as likely to impact a nation’s actual GDP as its potential
An economy is described by the following equations:(LO7)a. What is aggregate expenditure when Y = 600.b. Consumers and businesses alike become more pessimistic about the future and reduce their
Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below. (LO6)a. Find the Simpson household’s marginal propensity to consume.b. How
According to Keynes’s assumption about the short run, firms that are experiencing a reduction in sales due to a recession will respond by: (LO5)a. lowering prices to bring sales in line with their
Of the following, identify the incorrect statement. (LO4)a. Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy.b. Low aggregate spending
From the homepage of the Bureau of Labor Statistics(www.bls.gov), obtain the most recent available data on the unemployment rate for workers aged 16–19 and workers aged 20 or over. How do they
Given here are data on real GDP and potential GDP for the United States for the years 2003–2013, in billions of 2009 dollars. For each year calculate the output gap as a percentage of potential
From the homepage of the Bureau of Economic Analysis(www.bea.gov) obtain quarterly data for U.S. real GDP from four recessions: 1981–1982, 1990–1991, 2001, and 2007–2009. (LO1)a. How many
Using Table 18.1, find the average duration, the minimum duration, and the maximum duration of expansions in the United States since 1929. Are expansions getting longer or shorter on average over
Discuss three reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model. (LO8)
Define the multiplier. In economic terms, why is the multiplier greater than 1? (LO6)
What is the key assumption of basic Keynesian theory? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term economic
Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service?Which is likely to see its profits reduced
Why is the traditional term business cycles a misnomer? How does your answer relate to the ease or difficulty of forecasting peaks and troughs? (LO1)
Use a diagram like Figure 17.4 (solid lines only) to show the effects of each of the following on the real interest rate and capital investment of a country that is a net borrower from abroad.
How do each of the following transactions affect (1)the trade surplus or deficit and (2) capital inflows or outflows for the United States? Show that in each case the identity that the trade balance
You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a 10 percent return if the Democrats are
Shares in Brothers Grimm, Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $5 in one year and to sell for $100 per share at that time.How much should you be willing to pay
Simon purchases a bond, newly issued by the Amalgamated Corporation, for $1,000. The bond pays $60 to its holder at the end of the first and second years and pays $1,060 upon its maturity at the end
The Federal Reserve System was created by the Federal Reserve Act, passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the
Refer to Table 17.7. Suppose that the Fed had decided to set the U.S. money supply in December 1932 and in December 1933 at the same value as in December 1930. Assuming that the values of currency
Answer each of the following questions: (LO2)a. Bank reserves are 100, the public holds 200 in currency, and the desired reserve-deposit ratio is 0.25.Find deposits and the money supply.b. The money
Redo the example of Gorgonzola in the text (see Tables 17.2 to 17.6), assuming that (1) initially, the Gorgonzolan central bank puts 5,000,000 guilders into circulation, and (2) commercial banks
During World War II, an Allied soldier named Robert Radford spent several years in a large German prisonerof-war camp. At times more than 50,000 prisoners were held in the camp, with some freedom to
Arjay plans to sell a bond that matures in one year and has a principal value of $1,000. Can he expect to receive $1,000 in the bond market for the bond?Explain. (LO4)
Give two ways that the financial system helps to improve the allocation of savings. Illustrate with examples. (LO4)
Analyze the factors that determine international capital flows to understand how domestic saving, the trade balance, and net capital flows are related.
For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate, national saving, and investment.Show all your diagrams. (LO5)a. The
The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number
Ellie and Vince are trying to decide whether to purchase a new home. The house they want is priced at$200,000. Annual expenses such as maintenance, taxes, and insurance equal 4 percent of the
In each part that follows, use the economic data given to find national saving, private saving, public saving, and the national saving rate. (LO3)a. Household saving 5 200 Business saving 5 400
Individual Retirement Accounts, or IRAs, were established by the U.S. government to encourage saving. An individual who deposits part of current earnings in an IRA does not have to pay income taxes
Ellie and Vince are a married couple, both with college degrees and jobs. How would you expect each of the following events to affect the amount they save each month? Explain your answers in terms of
State whether each of the following is a stock or a flow, and explain. (LO1)a. The gross domestic productb. National savingc. The value of the U.S. housing stock on January 1, 2015d. The amount of
Corey has a mountain bike worth $300, a credit card debt of $150, $200 in cash, a Sandy Koufax baseball card worth $400, $1,200 in a checking account, and an electric bill due for $250. (LO1)a.
For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical.Justify your answer. (LO4)a. Ted lost his job when the steel mill closed down. He lacks the
Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. (LO3)a. Suppose that electronic equipment is introduced that
How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3)a. Demand for the type of car made by the plant increases.b.
How would each of the following factors be likely to affect the economywide supply of labor? (LO2)a. The age at which people are eligible for Medicare is increased.b. Increased productivity causes
The table below lists the marginal product per hour of workers in a lightbulb factory. Lightbulbs sell for $2 each, and there are no costs to producing them other than labor costs. (LO2)a. The going
Production data for Bob’s Bicycle Factory are as follows:Other than wages, Bob has costs of $100 (for parts and so on) for each bike assembled. (LO2)a. Bikes sell for $130 each. Find the marginal
Data on the average earnings of people of different education levels are available from the Bureau of the Census (try online at www.census.gov/population/socdemo/education/tableA-3.txt). Using these
Explain how changes in the supply of and demand for labor explain trends in real wages and employment in the past few decades.
Write a short essay evaluating the U.S. economy in terms of each of the six determinants of average labor productivity discussed in the text. Are there any areas in which the U.S. is exceptionally
We discussed how the opportunity cost of sending children to school affects the level of school enrollment across countries. The United Nations Human Development Report 2013 reports the following
The government is considering a policy to reduce air pollution by restricting the use of “dirty” fuels by factories. In deciding whether to implement that policy, how, if at all, should the
Hester’s Hatchery raises fish. At the end of the current season Hester has 1,000 fish in the hatchery. She can harvest any number of fish that she wishes, selling them to restaurants for $5 apiece.
Harrison, Carla, and Fred are housepainters. Harrison and Carla can paint 100 square feet per hour using a standard paintbrush, and Fred can paint 80 square feet per hour. Any of the three can paint
The Good’n’Fresh Grocery Store has two checkout lanes and four employees. Employees are equally skilled, and all are able either to operate a register(checkers) or bag groceries (baggers). The
Joanne has just completed high school and is trying to determine whether to go to junior college for two years or go directly to work. Her objective is to maximize the savings she will have in the
Consider the table below containing data for Germany and Japan on the ratio of employment to population in 1980 and 2010:Using data from Table 14.1, find average labor productivity for each country
The “graying of America” will substantially increase the fraction of the population that is retired in the decades to come. To illustrate the implications for U.S.living standards, suppose that
Suppose labor productivity in the United States was$110,000 per worker in 2015. Calculate the value of labor productivity in the year 2035 (20 years later) if: (LO1)a. Productivity continues to grow
Richland’s real GDP per person is $10,000, and Poorland’s real GDP per person is $5,000. However, Richland’s real GDP per person is growing at 1 percent per year and Poorland’s is growing at
You have employed five workers of varying physical strength to dig a ditch. Workers without shovels have zero productivity in ditchdigging. How should you assign shovels to workers if you don’t
Analyze whether having finite resources implies that there are limits to growth.
Evaluate government policies that promote economic growth.
Identify the costs of increasing economic growth.
The following table lists the actual per-gallon prices for unleaded regular gasoline for June of each year between 1978 and 1986, together with the values of the CPIs for those years. For each year
Imagine two economies, A and B. In Economy A, technological improvements are rare, and the basket of goods and services that households consume is essentially unchanged from one year to the next. In
A recent report found that the real entry-level wage for college graduates declined by 8 percent between 1990 and 1997. The nominal entry-level wage in 1997 was$13.65 per hour. Assuming that the
According to the U.S. Census Bureau (www.census.gov), nominal income for the typical family of four in the United States (median income) was $23,618 in 1985, $34,076 in 1995, $46,326 in 2005, and
Here are values of the CPI (multiplied by 100) for each year from 1990 to 2000. For each year beginning with 1991, calculate the rate of inflation from the previous year.What happened to inflation
Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows:20 pizzas at $10 each Rent of apartment, $600 per month Gasoline
Here is a report from a BLS survey taker: “There were 65 people in the houses I visited, 10 of them children under 16 and 10 retired; 25 people had fulltime jobs, and 5 had part-time jobs. There
The nation of Potchatoonie produces hockey pucks, cases of root beer, and back rubs. Here are data on prices and quantities of the three goods in the years 2000 and 2005. (LO3)Assume that 2000 is the
Calculate the four components of expenditure and GDP for the following economy using data from the table below. (LO2) Consumption expenditures Exports $600 75 Government purchases of goods and

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