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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years.
This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit.a. Why is it difficult to implement both of these
“Some economists worry that the aging populations of industrial countries are going to start running down their savings just when the investment appetite of emerging economies is growing”
Suppose the government borrows $20 billion more next year than this year.a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?b. What happens to investment?
Suppose that Intel is considering building a new chip-making factory.a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision
Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:Y = 10,000 C = 6,000 T = 1,500 G = 1,700 The economists also estimate that
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed, calculate consumption, government purchases,
Explain the difference between saving and investment as defined by a macroeconomist.Which of the following situations represent investment? Saving? Explain.a. Your family takes out a mortgage and
Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior?Why might a person not want to hold stock in the company where he
When the Russian government defaulted on its debt to foreigners in 1998, interest rates rose on bonds issued by many other developing countries.Why do you suppose this happened?
Theodore Roosevelt once said, “There is no moral difference between gambling at cards or in lotteries or on the race track and gambling in the stock market.” What social purpose do you think is
For each of the following pairs, which bond would you expect to pay a higher interest rate?Explain.a. a bond of the U.S. government or a bond of an East European governmentb. a bond that repays the
What is a government budget deficit? How does it affect interest rates, investment, and economic growth?
Describe a change in the tax code that might increase private saving. If this policy were implemented, how would it affect the market for loanable funds?
What is investment? How is it related to national saving?
What is national saving? What is private saving?What is public saving? How are these three variables related?
Why is it important for people who own stocks and bonds to diversify their holdings? What type of financial institution makes diversification easier?
What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.
From 1950 to 2000, manufacturing employment as a percentage of total employment in the U.S.economy fell from 28 percent to 13 percent. At the same time, manufacturing output experienced slightly more
International data show a positive correlation between political stability and economic growth.a. Through what mechanism could political stability lead to strong economic growth?b. Through what
International data show a positive correlation between income per person and the health of the population.a. Explain how higher income might cause better health outcomes.b. Explain how better health
In many developing nations, young women have lower enrollment rates in secondary school than do young men. Describe several ways in which greater educational opportunities for young women could lead
In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China made significant direct and portfolio investments in the United States. At the time, many
Suppose that an auto company owned entirely by German citizens opens a new factory in South Carolina.a. What sort of foreign investment would this represent?b. What would be the effect of this
What is the opportunity cost of investing in capital?Do you think a country can “overinvest” in capital? What is the opportunity cost of investing in human capital? Do you think a country can
Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending.a.
Suppose that society decided to reduce consumption and increase investment.a. How would this change affect economic growth?b. What groups in society would benefit from this change? What groups might
Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it
Describe two ways the U.S. government tries to encourage advances in technological knowledge.
How does the rate of population growth influence the level of GDP per person?
Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth?
Does a higher rate of saving lead to higher growth temporarily or indefinitely?
Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving?
In what way is a college degree a form of capital?
List and describe four determinants of productivity.
What does the level of a nation’s GDP measure?What does the growth rate of GDP measure?Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low
Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan.Then inflation turns out to be higher than they both expected.a. Is the real interest rate on this loan
When deciding how much of their income to save for retirement, should workers consider the real or the nominal interest rate that their savings will earn? Explain.
The chapter explains that Social Security benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates actual inflation.a. If
The New York Times cost $0.15 in 1970 and $0.75 in 2000. The average wage in manufacturing was $3.23 per hour in 1970 and $14.32 in 2000.a. By what percentage did the price of a newspaper rise?b. By
Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.a. the invention of the iPodb. the introduction of air bags in carsc. increased
Beginning in 1994, environmental regulations have required that gasoline contain a new additive to reduce air pollution. This requirement raised the cost of gasoline. The Bureau of Labor Statistics
A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts:Karaoke Machines CDs Quantity Price Quantity Price
Suppose that people consume only three goods, as shown in this table:Bottle of Tennis Balls Golf Balls Gatorade 2009 price $2 $4 $1 2009 quantity 100 100 200 2010 price $2 $6 $2 2010 quantity 100 100
Go to the website of the Bureau of Labor Statistics(http://www.bls.gov) and find data on the consumer price index. By how much has the index including all items risen over the past year? For which
Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots.In 2008, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500
Explain the meaning of nominal interest rate and real interest rate. How are they related?
Adjusted for overall inflation, how much did the price of the candy bar change?
Over a long period of time, the price of a candy bar rose from $0.10 to $0.60. Over the same period, the consumer price index rose from 150 to
If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected more? Why?
Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?
One day, Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment depreciates in value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes
The participation of women in the U.S. labor force has risen dramatically since 1970.a. How do you think this rise affected GDP?b. Now imagine a measure of well-being that includes time spent working
Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column
A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers
Revised estimates of U.S. GDP are usually released by the government near the end of each month. Find a newspaper article that reports on the most recent release, or read the news release yourself at
Consider the following data on U.S. GDP:Nominal GDP GDP Deflator Year (in billions of dollars) (base year 1996)2000 9,873 118 1999 9,269 113a. What was the growth rate of nominal GDP between 1999 and
Below are some data from the land of milk and honey.Price of Quantity of Price of Quantity of Year Milk Milk Honey Honey 2008 $1 100 quarts $2 50 quarts 2009 $1 200 $2 100 2010 $2 200 $4 100a.
Consider an economy that produces only one good. In year 1, the quantity produced is Q1 and the price is P1. In year 2, the quantity produced is Q2 and the price is P2. In year 3, the quantity
As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?
The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.
What components of GDP (if any) would each of the following transactions affect? Explain.a. A family buys a new refrigerator.b. Aunt Jane buys a new house.c. Ford sells a Mustang from its
Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.
In the year 2010, the economy produces 100 loaves of bread that sell for $2 each. In the year 2011, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP,
Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
List the four components of GDP. Give an example of each.
Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?
A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for$3. What is the total contribution of these transactions to GDP?
Which contributes more to GDP—the production of an economy car or the production of a luxury car? Why?
Explain why an economy’s income must equal its expenditure.
Assume the United States is an importer of televisions and there are no trade restrictions. U.S.consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000
Kawmin is a small country that produces and consumes jelly beans. The world price of jelly beans is $1 per bag, and Kawmin’s domestic demand and supply for jelly beans are governed by the following
Consider a country that imports a good from abroad. For each of following statements, say whether it is true or false. Explain your answer.a. “The greater the elasticity of demand, the greater the
China is a major producer of grains, such as wheat, corn, and rice. In 2008 the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on
The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam
Senator Ernest Hollings once wrote that“consumers do not benefit from lower-priced imports. Glance through some mail-order catalogs and you’ll see that consumers pay exactly the same price for
Consider the arguments for restricting trade.a. Assume you are a lobbyist for timber, an established industry suffering from lowpriced foreign competition. Which two or three of the five arguments do
Imagine that winemakers in the state of Washington petitioned the state government to tax wines imported from California. They argue that this tax would both raise tax revenue for the state
When China’s clothing industry expands, the increase in world supply lowers the world price of clothing.a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus,
Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show on
The world price of wine is below the price that would prevail in Canada in the absence of trade.a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph
Mexico represents a small part of the world orange market.a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price,
What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each.
List five arguments often given to support trade restrictions. How do economists respond to these arguments?
Describe what a tariff is and its economic effects.
Draw the supply-and-demand diagram for an importing country. What is consumer surplus and producer surplus before trade is allowed?What is consumer surplus and producer surplus with free trade? What
When does a country become an exporter of a good? An importer?
What does the domestic price that prevails without international trade tell us about a nation’s comparative advantage?
(Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)e. The
Suppose that a market is described by the following supply and demand equations:QS = 2P QD = 300 – Pa. Solve for the equilibrium price and the equilibrium quantity.b. Suppose that a tax of T is
Calculate tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less than double? Explain.
Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of the tax.(Hint: The area of a triangle is 1⁄2 × base ×height.)b. The mayor now doubles the tax to $20. The
Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room.After the tax is imposed, the
This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy.Suppose that the government subsidizes a good:For each unit of the good sold, the government pays $2 to
Suppose the government currently raises $100 million through a 1-cent tax on widgets, and another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate on widgets and
The government places a tax on the purchase of socks.a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the
Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollowtipped bullets.a. Do you expect that this tax would raise much
After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a“good” way
Suppose that the government imposes a tax on heating oil.a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.b. Would the

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