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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

1. What are the three functions of money? Which of the functions do the following items satisfy?Which do they not satisfy?a. A credit cardb. A painting by Rembrandtc. A subway token
10. Define the terms “real variable” and “nominal variable,” and give an example of each.
9. Explain the roles of monetary and fiscal policy in causing and ending hyperinflations.
8. List all the costs of inflation you can think of, and rank them according to how important you think they are.
7. If inflation rises from 6 to 8 percent, what hap pens to real and nominal interest rates according to the Fisher effect?
6. Who pays the inflation tax?
5. What does the assumption of constant velocity imply?
4. Write the quantity equation and explain it.
3. Who controls the money supply and how?
2. What is fiat money? What is commodity money?
1. Describe the functions of money.
8. According to classical economic theory, money is neutral: the money supply does not affect real variables. Therefore, classical theory allows us to study how real variables are determined without
7. During hyperinflations, most of the costs of inflation become severe. Hyperinflations typically begin when governments finance large budget deficits by printing money. They end when fiscal reforms
6. The costs of expected inflation include shoeleather costs, menu costs, the cost of relative price variability, tax distortions, and the inconvenience of making inflation corrections. In addition,
5. The nominal interest rate is the opportunity cost of holding money. Thus, one might expect the demand for money to depend on the nominal interest rate. If it does, then the price level depends on
4. The nominal interest rate is the sum of the real interest rate and the inflation rate.The Fisher effect says that the nominal interest rate moves one-for-one with expected inflation.
3. Seigniorage is the revenue that the government raises by printing money. It is a tax on money holding.Although seigniorage is quantitatively small in most economies, it is often a major source of
2. The quantity theory of money assumes that the velocity of money is stable and concludes that nominal GDP is proportional to the stock of money. Because the factors of production and the production
1. Money is the stock of assets used for transactions. It serves as a store of value, a unit of account, and a medium of exchange. Different sorts of assets are used as money: commodity money systems
6. Consider an economy described by the following equations:Y = C + I + G, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y − T), I = 1,000 − 50r.a. In this economy, compute private saving,
3. According to the neoclassical theory of distribution, the real wage earned by any worker equals that worker’s marginal productivity. Let’s use this insight to examine the incomes of two groups
4. What determines consumption and investment?
1. What determines the amount of output an economy produces?
➤ What equilibrates the demand for and supply of goods and services? What ensures that desired spending on consumption, investment, and government purchases equals the level of production?
➤ Who buys the output of the economy? How much do households purchase for consumption, how much do households and firms purchase for investment, and how much does the government buy for public
➤ Who gets the income from production? How much goes to compensate workers, and how much goes to compensate owners of capital?
How much do the firms in the economy produce? What determines a nation’s total income?
9. In a speech that Senator Robert Kennedy gave when he was running for president in 1968, he said the following about GDP:[It] does not allow for the health of our children, the quality of their
8. Consider how each of the following events is likely to affect real GDP. Do you think the change in real GDP reflects a similar change in economic well-being?a. A hurricane in Florida forces Disney
How much have prices risen between year 2000 and year 2010? Compare the answers given by the Laspeyres and Paasche price indices. Explain the difference.
6. Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years?
Do you see any stable relationships in the data? Do you see any trends? (Hint: A good place to look for data is the statistical appendices of the Economic Report of the President, which is written
5. Find data on GDP and its components, and compute the percentage of GDP for the following components for 1950, 1975, and 2000.a. Personal consumption expendituresb. Gross private domestic
3. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an
2. A farmer grows a bushel of wheat and sells it to a miller for $1.00.The miller turns the wheat into flour and then sells the flour to a baker for $3.00.The baker uses the flour to make bread and
How do you interpret these statistics?
What new economic statistics have been released?
1. Look at the newspapers for the past few days.
4. Explain Okun’s law.
3. List the three categories used by the Bureau of?
2. What does the consumer price index measure?
5. The unemployment rate shows what fraction of those who would like to work do not have a job.When the unemployment rate rises, real GDP typically grows slower than its normal rate and may even fall.
4. The consumer price index (CPI) measures the price of a fixed basket of goods and services purchased by a typical consumer. Like the GDP deflator, which is the ratio of nominal GDP to real GDP, the
3. GDP is the sum of four categories of expenditure: consumption, investment, government purchases, and net exports.
2. Nominal GDP values goods and services at current prices. Real GDP values goods and services at constant prices. Real GDP rises only when the amount of goods and services has increased, whereas
1. Gross domestic product (GDP) measures both the income of everyone in the economy and the total expenditure on the economy’s output of goods and services.
1. What macroeconomic issues have been in the news lately?
3. What is a market-clearing model? When is the assumption of market clearing appropriate?
2. Why do economists build models?
=+In which economy would it have a larger impact on the price level? Explain.
=+ In which economy would a 5 percent increase in the money supply have a larger impact on output?
=+their wages rise and fall automatically with the price level. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped short-run aggregate- supply curve?
=+them. In economy B, half of all workers have these nominal wage contracts, while the other half have indexed employment contracts, so
=+14. In economy A, all workers agree in advance on the nominal wages that their employers will pay
=+c. How might the investment boom affect the long-run aggregate-supply curve? Explain.
=+b. Now use the diagram from part (a) to show the new long-run equilibrium of the economy. (For now, assume there is no change in the long-run aggregate-supply curve.)Explain in words why the
=+new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes.
=+a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the
=+13. Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
=+the dollar falls in foreign-exchange markets.Draw a diagram to show the short-run effect of these events, and explain why these changes occur.
=+change cause the government to significantly restrict the production of electricity from fossil fuels. Because of this change in policy, foreign investors lose confidence in the economy, and
=+12. Suppose the U.S. economy begins in long-run equilibrium. Concerns about global climate
=+d. A recession overseas causes foreigners to buy fewer U.S. goods.
=+c. A technological improvement raises productivity.
=+b. The federal government increases spending on national defense.
=+a. The stock market declines sharply, reducing consumers’ wealth.
=+the price level, assuming policymakers take no action.
=+11. For each of the following events, explain the short-run and long-run effects on output and
=+c. Increased job opportunities overseas cause many people to leave the country.
=+b. Florida orange groves suffer a prolonged period of below-freezing temperatures.
=+. Households decide to save a larger share of their income.
=+the aggregate-demand curve, both, or neither.For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.
=+10. Explain whether each of the following events shifts the short-run aggregate-supply curve,
=+f. Do you think this Fed chairman was a good appointment?
=+e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of output produced?
=+d. How does this change in profitability affect the short-run aggregate-supply curve?
=+c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?
=+b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?
=+a. How would this news affect the price level that people would expect to prevail?
=+chairman of the Federal Reserve. This new chairman is well-known for his view that inflation is not a major problem for an economy.
=+ 9. The economy begins in long-run equilibrium.Then one day, the president appoints a new
=+will the economy change over time? Explain in words and using an aggregate-demand/aggregate-supply diagram.
=+ 8. Suppose that the economy is currently in a recession. If policymakers take no action, how
=+outcome if the Fed expanded the money supply but the public didn’t change its expectation of the price level.
=+ 7. Suppose the Fed expands the money supply, but because the public expects this Fed action, it simultaneously raises its expectation of the price level. What will happen to output and the price
=+b. What determines the speed of that recovery.
=+a. How the economy recovers from a recession and returns to its long-run equilibrium without any policy intervention.
=+ 6. For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following:
=+d. “Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left.”
=+c. “If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.”
=+b. “The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply.”
=+a. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.”
=+ 5. Explain why the following statements are false.
=+shopping period before Christmas would be longer. Explain what President Roosevelt might have been trying to achieve, using the model of aggregate demand and aggregate supply.
=+ 4. In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the
=+has real effects in the short run but is neutral in the long run?
=+f. Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money
=+A compare to real wages at point B? How do real wages at point A compare to real wages at point C?
=+e. According to the sticky-wage theory of aggregate supply, how do real wages at point
=+How do nominal wages at point A compare to nominal wages at point C?

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