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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

The 19th-century economist Henry George argued that the government should levy a sizable tax on land, the supply of which he took to be completely inelastic.a. George believed that economic growth
Consider the market for rubber bands.a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use
Evaluate the following two statements. Do you agree? Why or why not?a. “A tax that has no deadweight loss cannot raise any revenue for the government.”b. “A tax that raises no revenue for the
The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.a. Draw the competitive market equilibrium.Label the price, quantity, consumer surplus, and
What happens to the deadweight loss and tax revenue when a tax is increased?
Why do experts disagree about whether labor taxes have small or large deadweight losses?
How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
Draw a supply-and-demand diagram with a tax on the sale of the good. Show the deadweight loss. Show the tax revenue.
What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.
Consider how health insurance affects the quantity of healthcare services performed.Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out
Suppose a technological advance reduces the cost of making computers.a. Draw a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market
There are four consumers willing to pay the following amounts for haircuts:Jerry: $7 Oprah: $2 Ellen: $8 Phil: $5 There are four haircutting businesses with the following costs:Firm A: $3 Firm B: $6
The cost of producing flat-screen TVs has fallen over the past several decades. Let’s consider some implications of this fact.a. Draw a supply-and-demand diagram to show the effect of falling
Consider a market in which Bert from Problem 4 is the buyer and Ernie from Problem 5 is the seller.a. Use Ernie’s supply schedule and Bert’s demand schedule to find the quantity supplied and
Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to
It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1a. From
Suppose the demand for French bread rises.Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour.Illustrate your
An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate
Melissa buys an iPod for $120 and gets consumer surplus of $80.a. What is her willingness to pay?b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?c. If the
Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
What does the invisible hand do?
What is efficiency? Is it the only goal of economic policymakers?
In a supply-and-demand diagram, show producer and consumer surplus in the market equilibrium.
Explain how sellers’ costs, producer surplus, and the supply curve are related.
Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are related.
What determines how the burden of a tax is divided between buyers and sellers? Why?
How does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?
Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this
Explain why economists usually oppose controls on prices.
What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.
Give an example of a price ceiling and an example of a price floor.
Maria has decided always to spend one-third of her income on clothing.a. What is her income elasticity of clothing demand?b. What is her price elasticity of clothing demand?c. If Maria’s tastes
You have the following information about good X and good Y:• Income elasticity of demand for good X: –3• Cross-price elasticity of demand for good X with respect to the price of good Y: 2 Would
Suppose that your demand schedule for compact discs is as follows:Quantity Demanded Quantity Demanded Price (income = $10,000) (income = $12,000)$ 8 40 CDs 50 CDs 10 32 45 12 24 30 14 16 20 16 8 12a.
The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right?
A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent.Is the demand curve elastic or inelastic?Explain.
Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.a. If the price of heating oil rises from $1.80 to$2.20 per gallon, what happens to the quantity
Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:Quantity Demanded Quantity Demanded Price (business travelers) (vacationers)$150
For each of the following pairs of goods, which good would you expect to have more elastic demand and why?a. required textbooks or mystery novelsb. Beethoven recordings or classical music recordings
How did elasticity help explain why drug interdiction could reduce the supply of drugs, yet possibly increase drug-related crime?
Is the price elasticity of supply usually larger in the short run or in the long run? Why?
What is the price elasticity of supply of Picasso paintings?
How is the price elasticity of supply calculated?Explain what it measures.
What do we call a good whose income elasticity is less than 0?
If demand is elastic, how will an increase in price change total revenue? Explain.
On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers.
Suppose that the price of basketball tickets at your college is determined by market forces.Currently, the demand and supply schedules are as follows:Price Quantity Demanded Quantity Supplied $ 4
The market for pizza has the following demand and supply schedules:Price Quantity Demanded Quantity Supplied$4 135 pizzas 26 pizzas 5 104 53 6 81 81 7 68 98 8 53 110 9 39 121a. Graph the demand and
Suppose that in the year 2010 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2015 and 2025? (Hint: 5-year-olds need babysitters, whereas
Over the past 20 years, technological advances have reduced the cost of computer chips.How do you think this affected the market for computers? For computer software? For typewriters?
Consider the markets for DVD movies, TV screens, and tickets at movie theaters.a. For each pair, identify whether they are complements or substitutes:• DVDs and TV screens• DVDs and movie
Identify the flaw in this analysis: “If more Americans go on a low-carb diet, the demand for bread will fall. The decrease in the demand for bread will cause the price of bread to fall.The lower
Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the
Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve? Does a change in price lead to a movement along the demand curve or a shift in the
The following table describes the production possibilities of two cities in the country of Baseballia:Pairs of Red Socks Pairs of White Socks per Worker per Hour per Worker per Hour Boston 3 3
American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year.To keep things
Find a recent copy of the Economic Report of the President at your library or on the Internet(http://www.gpoaccess.gov/eop/index.html).Read a chapter about an issue that interests you.Summarize the
Classify each of the statements in Table 1 as positive, normative, or ambiguous. Explain.
An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash
How is economics like a science?
Suppose Americans decide to save more of their incomes. If banks lend this extra savings to businesses, which use the funds to build new factories, how might this lead to faster growth in
Suppose the United States adopted central planning for its economy, and you became the chief planner. Among the millions of decisions that you need to make for next year are how many compact discs to
A recent bill reforming the government’s antipoverty programs limited many welfare recipients to only two years of benefits.a. How does this change affect the incentives for working?b. How might
If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced.a. How does the provision of Social Security
The Social Security system provides income for people over age
Three managers of the Magic Potion Company are discussing a possible increase in production.Each suggests a way to make this decision.Harry: We should examine whether our company’s
8. You read in a newspaper that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that the real interest rates are equalized in the two
7. “Traveling in Italy is much cheaper now than it was ten years ago,’’ says a friend.“Ten years ago, a dollar bought 1,000 lire; this year, a dollar buys 1,500 lire.’’Is your friend
e. What happens to our real exchange rate?144 | PART II Classical Theory: The Economy in the Long Run
d. What happens to our trade balance?
c. What happens to investment in our small open economy?
b. What happens to the world interest rate?
a. What happens to world investment demand as a function of the world interest rate?
6. Suppose that some foreign countries begin to subsidize investment by instituting an investment tax credit.
5. In 1995, President Clinton considered placing a 100-percent tariff on the import of Japanese luxury cars. Discuss the economics and politics of such a policy. In particular, how would the policy
4. What will happen to the trade balance and the real exchange rate of a small open economy when government purchases increase, such as during a war? Does your answer depend on whether this is a
3. The country of Leverett is a small open economy.Suddenly, a change in world fashions makes the exports of Leverett unpopular.a. What happens in Leverett to saving, investment, net exports, the
2. Consider an economy described by the following equations:Y = C + I + G + NX, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y − T), I = 1,000 − 50r, NX = 500 − 500e, r = r* = 5.a. In this
1. Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events.a. A
5. If Germany has low inflation and Italy has high inflation, what will happen to the exchange rate between the German mark and the Italian lira?
4. If a small open economy bans the import of Japanese VCRs, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?
3. If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?
2. Define the nominal exchange rate and the real exchange rate.
1. What are the net capital outflow and the trade balance? Explain how they are related.
6. The nominal exchange rate is determined by the real exchange rate and the price levels in the two countries. Other things equal, a high rate of inflation leads to a depreciating currency?
5. Because the real exchange rate is the price of domestic goods relative to foreign goods, an appreciation of the real exchange rate tends to reduce net exports.The equilibrium real exchange rate is
4. The nominal exchange rate is the rate at which people trade the currency of one country for the currency of another country.The real exchange rate is the rate at which people trade the goods
3. The impact of any policy on the trade balance can be determined by examining its impact on saving and investment. Policies that raise saving or lower investment lead to a trade surplus, and
1. Net exports are the difference between exports and imports.They are equal to the difference between what we produce and what we demand for consumption, investment, and government purchases.2. The
1. In the Cagan model, if the money supply is expected to grow at some constant rate m (so that Emt+s = mt + s m), then Equation A9 can be shown to imply that pt = mt + gm.a. Interpret this result.b.
9. Use the Internet to identify a country that has had high inflation over the past year and another country that has had low inflation. (Hint: One useful Web site is www.economist.com) For these two
8. Suppose that consumption depends on the level of real money balances (on the grounds that real money balances are part of wealth). Show that if real money balances depend on the nominal interest
7. Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. (The discoveries of 1896 are an example.) Why
6. Calvin Coolidge once said that “inflation is repudiation.’’What might he have meant by this? Do you agree? Why or why not? Does it matter whether the inflation is expected or unexpected?
5. During World War II, both Germany and England had plans for a paper weapon: they each printed the other’s currency, with the intention of dropping large quantities by airplane.Why might this
4. Suppose you are advising a small country (such as Bermuda) on whether to print its own money or to use the money of its larger neighbor (such as the United States).What are the costs and benefits
3. A newspaper article written by the Associated Press in 1994 reported that the U.S. economy
What is the real interest rate?
2. In the country of Wiknam, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent.

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