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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

6. Which of the following is a positive, rather than a normative, statement?a. Law X will reduce national income.b. Law X is a good piece of legislation.c. Parliament ought to pass Law X.d. Law X
5. Which of the following topics does NOT fall within the study of microeconomics?a. the impact of cigarette taxes on the smoking behaviour of teenagersb. the role of Microsoft's market power in the
4. An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, what would happen?a. it would expand the production
3. Is a point inside the production possibilities frontier efficient and feasible?a. efficient but not feasibleb. feasible but not efficientc. both efficient and feasibled. neither efficient nor
2. What does the circular-flow diagram illustrate in terms of markets for the factors of production?a. households are sellers and firms are buyersb. households are buyers and firms are sellersc.
1. What is an economic model?a. a mechanical machine that replicates the functioning of the economyb. a fully detailed, realistic description of the economyc. a simplified representation of some
7. Use a production possibilities frontier to describe the 9. What is the difference between a positive and a idea of "efficiency." normative statement? Give an example of each.
6. Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the economy's cow population?
7 Consider why economists sometimes disagree with one another
6 Examine the role of economists in making policy
5 Learn the difference between positive and normative statements
4 Distinguish between microeconomics and macroeconomics
3 Learn two simple models-the circular flow and the production possibilities frontier
2 Consider how assumptions and models can shed light on the world
1 See how economists apply the methods of science
13. Suppose Canadians decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in
12. In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred?
11. Discuss each of the following statements from the standpoints of equity and efficiency.a. "Everyone in society should be guaranteed the best health care possible."b. "When workers are laid off,
10. Explain whether each of the following government activities is motivated by a concern about equity or a concern about efficiency. In the case of efficiency, discuss the type of market failure
9. Nations with corrupt police and court systems typically have lower standards of living than nations with less corruption. Why might that be the case?
8. Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all of the cooking and you did all of the cleaning, would your chores take
7. In 1997, the Govermnent of Ontario reformed that province's welfare system. The reform reduced the amount of welfare payments to a person with no income, but also allowed welfare recipients to
6. The welfare system provides income for people who are very poor, with low incomes and few assets. If a recipient of welfare payments decides to work and earn some money, the amount he or she
4. You win $100 in a hockey pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of
1. Describe some of the tradeoffs faced by each of the following.a. a family deciding whether to buy a new carb. a member of Parliament deciding how much to spend on national parksc. a company
6. If a nation has high and persistent inflation, what is the most likely explanation?a. the central bank is creating excessive amounts of moneyb. unions are bargaining for excessively high wagesc.
5. When policymakers make policies that change the costs and benefits that people face, what is the result for society?a. people's behaviours are alteredb. people ignore incentivesc. inflation
4. What is Adam Smith's "invisible hand"?a. the subtle and often hidden methods that businesses use to profit at consumers' expenseb. the ability of free markets to reach desirable outcomes despite
3. Which of the following describes a marginal change?a. one that is NOT important for public policyb. one that incrementally alters an existing planc. one that makes an outcome inefficientd. one
2. What is your opportunity cost of going to a movie?a. the price of the ticketb. the price of the ticket plus the cost of any soda and popcorn you buy at the theatrec. the total cash expenditure
1. Economics is best defined as the study of which of the following?a. how society manages its scarce resourcesb. how to run a business most profitablyc. how to predict inflation, unemployment, and
1. What is a tradeoff? Give three examples of tradeoffs involved in undertaking postsecondary studies.
8 Learn what determines some trends in the overall economy
7 Discuss why markets are a good, but not perfect, way to allocate resources
6 Consider why trade among people or nations can be good for everyone
5 Discuss how incentives affect people's behaviour
4 See how to use marginal reasoning when making decisions
3 Learn the meaning of opportunity cost
2 Examine some of the tradeoffs that people face
1 Learn that economics is about the allocation of scarce resources
6. Do you believe the traditional or the Ricardian view of government debt? Why?
6. List three policy rules that the Fed might follow.Which of these would you advocate? Why?
5. What is meant by the “time inconsistency’’ of economic policy? Why might policymakers be tempted to renege on an announcement they made earlier? In this situation, what is the advantage of a
4. How does a person’s interpretation of macroeconomic history affect his view of macroeconomic policy?
3. Describe the Lucas critique.
2. Why would more accurate economic forecasting make it easier for policymakers to stabilize the economy? Describe two ways economists try to forecast developments in the economy.
1. What are the inside lag and the outside lag?Which has the longer inside lag—monetary or fiscal policy? Which has the longer outside lag?Why?
6. Explain two ways in which a recession might raise the natural rate of unemployment.
5. Under what circumstances might it be possible to reduce inflation without causing a recession?
4. Explain the differences between demand-pull inflation and cost-push inflation.
3. Why might inflation be inertial?
2. How is the Phillips curve related to aggregate supply?
1. Explain the three theories of aggregate supply.On what market imperfection does each theory rely? What do the theories have in common?
4. What are the advantages of floating exchange rates and fixed exchange rates?
3. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when a quota on imported cars is removed.What would
2. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced.What would happen
1. In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when taxes are raised.What would happen if exchange
4.What happens? What are the new equilibrium interest rate and level of income?g. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or
3. Consider the economy of Hicksonia.a. The consumption function is given by C = 200 + 0.75(Y − T).The investment function is I = 200 − 25r.Government purchases and taxes are both 100.For this
1. According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?a. The central bank increases the money supply.b. The
2. In the Keynesian cross, assume that the consumption function is given by C = 200 + 0.75 (Y − T ).Planned investment is 100; government purchases and taxes are both 100.
1. Use the Keynesian cross to predict the impact ofa. An increase in government purchases.b. An increase in taxes.c. An equal increase in government purchases and taxes.
=+c. In light of your answer to part (b), how might the long-run distributional effects differ from the answer you gave in part (a)?
=+What would happen to wages?
=+What would happen to productivity?
=+ What would happen to the capital available to each worker?
=+b. What would happen to the capital stock over time?
=+a. Who would benefit from this tax change most directly?
=+12. Suppose the government reduced the tax rate on income from savings and raised taxes on labor income to avoid increasing the budget deficit.
=+How might the government increase national saving?
=+11. What is the fundamental trade-off that society faces if it chooses to save more?
=+how both of these statements can be true.
=+10. The chapter says that budget deficits reduce the income of future generations but can boost output and income during a recession. Explain
=+d. An increase in Social Security benefits
=+c. Greater investments in highways and bridges
=+b. More generous subsidies for education loans
=+a. An increase in the budget deficit
=+ 9. Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old or from old to young?
=+likely to happen to your taxes and your children’s taxes in the future? Can you personally do something today to offset this future effect?
=+to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are maintained for 20 years, what is
=+ 8. Suppose the federal government cuts taxes and increases spending, raising the budget deficit
=+debate about whether the central bank should aim for zero inflation, which areas of disagreement involve positive statements and which involve normative judgments?
=+6. Chapter 2 explains the difference between positive analysis and normative analysis. In the
=+c. Given your answer to part (b), would investors believe the government’s announcement? What can the government do to increase the credibility of announced policy changes?
=+b. After investors have responded to the announced tax reduction, does the government have an incentive to renege on its policy? Explain.
=+a. If investors believed that capital taxes would remain low, how would the government’s action affect the level of investment?
=+ 5. The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new
=+be the forecasts of future values of inflation and output. What are the advantages of using forecasts instead of actual values? What are the disadvantages?
=+b. Some economists advocate such a rule for monetary policy but believe π and y should
=+a. Explain the logic that might lie behind this rule for setting interest rates. Would you support the Fed’s use of this rule?
=+ where π is the average of the inflation rate over the past year, y is real GDP as recently measured, y* is an estimate of the natural rate of output, and π* is the Fed’s goal for inflation.
=+4. Economist John Taylor has suggested that the Fed use the following rule for choosing its target for the federal funds interest rate (r):r = 2% + π + 1⁄2 (y – y*) / y* + 1⁄2 (π – π*),
=+ Would it help to allow the Fed to respond to predicted unemployment instead of current unemployment? Explain.
=+c. Which of the foregoing rules better stabilizes the economy?
=+year plus 1 percentage point for every percentage point that unemployment rises above its normal level?Illustrate your answer.
=+b. What would be the effect of this change on the economy if the Fed followed a rule of increasing the money supply by 3 percent per
=+a money-market diagram and an aggregatedemand/aggregate-supply diagram.
=+a rule of increasing the money supply by 3 percent per year?Illustrate your answer with
=+a. What would be the effect of this change on the economy if the Federal Reserve followed
=+ 3. Suppose that people suddenly wanted to hold more money balances.

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