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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

=+ 4. 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
=+shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.
=+ 3. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a
=+result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger“peace dividend,” measured by the increase in butter production?
=+d. Imagine that an aggressive neighboring country reduces the size of its military. As a
=+military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.
=+c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller
=+b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
=+a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.
=+ 2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns”and “butter.”
=+d. Sally earns $10,000 from her 10 percent ownership of Acme Industrial.
=+c. Shanna spends $30 to get a haircut.
=+b. Stuart earns $4.50 per hour working at a fastfood restaurant.
=+a. Selena pays a storekeeper $1 for a quart of milk.
=+1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
=+10. Why do economists sometimes offer conflicting advice to policymakers?
=+ 9. What is the difference between a positive and a normative statement? Give an example of each.
=+ 8. What are the two subfields into which economics is divided? Explain what each subfield studies.
=+ 7. Use a production possibilities frontier to describe the idea of “efficiency.”
=+cookies. What happens to this frontier if disease kills half of the economy’s cows?
=+ 6. Draw and explain a production possibilities frontier for an economy that produces milk and
=+ 5. Name one economic interaction that isn’t covered by the simplified circular-flow diagram.
=+ 4. Name a way that your family interacts in the factor market, and a way that it interacts in the product market.
=+ 3. Should an economic model describe reality exactly?
=+ 2. Why do economists make assumptions?
=+1. How is economics like a science?
=+Why might economic advisers to the president disagree about a question of policy?
=+• Name three parts of government that regularly rely on advice from economists
=+Give an example of a positive statement and an example of a normative statement that somehow relates to your daily life.
=+Show the effects of a drought.
=+ Show an efficient point, an inefficient point, and an infeasible point.
=+• Draw a production possibilities frontier for a society that produces food and clothing.
=+In what sense is economics like a science?
12. What is the WTO, and how does it affect international trade? How many nations belong to the WTO? (Update the number given in this book at www.wto.org .) Is the Doha Round (or Doha Agenda) still
11. Explain: “Free-trade zones such as the EU and NAFTA lead a double life: They can promote free trade among members, but they pose serious trade obstacles for nonmembers.” Do you think the net
10. Speculate as to why some U.S. firms strongly support trade liberalization while other U.S. firms favor protectionism.Speculate as to why some U.S. labor unions strongly support trade
9. What measures do governments take to promote exports and restrict imports? Who benefits and who loses from protectionist policies? What is the net outcome for society?LO4
8. If the European euro were to depreciate relative to the U.S.dollar in the foreign exchange market, would it be easier or harder for the French to sell their wine in the United States? Suppose you
6. Explain why the U.S. demand for Mexican pesos is downward-sloping and the supply of pesos to Americans is upward-sloping. Indicate whether each of the following would cause the Mexican peso to
5. What is offshoring of white-collar service jobs, and how does it relate to international trade? Why has it recently increased?Why do you think more than half of all offshored jobs have gone to
4. What effect do rising costs (rather than constant costs) have on the extent of specialization and trade? Explain. LO2
3. The following are production possibilities tables for South Korea and the United States. Assume that before specialization and trade the optimal product mix for South Korea is alternative B and
2. Below are hypothetical production possibilities tables for New Zealand and Spain. Each country can produce apples and plums. LO2 Referring to the tables, answer the following:a. What is each
1. Quantitatively, how important is international trade to the United States relative to its importance to other nations?What country is the United States’ most important trading partner,
5 The role played by free-trade zones and the World Trade Organization (WTO) in promoting international trade.
4 The rebuttals to common arguments for protectionism.
3 How exchange rates are determined in currency markets.
2 About comparative advantage, specialization, and international trade.
1 Some key facts about U.S. international trade.
12. The capital gains tax is the tax on the income realized when someone sells an asset for more than its purchase price. Why might tax revenues from this tax source actually decline for awhile if
11. Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same
10. What is the Laffer Curve, and how does it relate to supplyside economics? Why is determining the economy’s location on the curve so important in assessing tax policy? LO5
9. What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve?
7. Suppose that the U.S. inflation rate and unemployment rate both increased relative to previous years for several years in a row. What might explain this, and what could you conclude about the
5. Between 1990 and 2007, the GDP price level rose by about 47 percent while real GDP increased by about 63 percent.Use the long-run aggregate demand–aggregate supply model to illustrate these
4. Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its
1. Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?LO1
5 The relationship between tax rates, tax revenues, and long-run aggregate supply.
4 Why there is no long-run trade-off between inflation and unemployment.
3 About the short-run trade-off between inflation and unemployment (the Phillips Curve).
2 How to apply the long-run AD-AS model to inflation, recessions, and economic growth.
1 About the relationship between short-run aggregate supply and long-run aggregate supply.
10. What actions did the Fed take in the second half of 2007 and early 2008? What motivated these actions? LO5
9. Distinguish between the Federal funds rate and the prime interest rate. Which of these two rates does the Fed explicitly target in undertaking its monetary policy? In 2004 and 2005 the Fed used
8. What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? Why is this possibility significant to policymakers? LO4
7. Why is monetary policy easier to undertake than fiscal policy in a highly divided national political environment? LO4
6. Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in (a) the reserve ratio,
5. Why do changes in bank reserves resulting from open-market operations by the Fed produce multiple changes in checkable deposits (and therefore money) in the economy? LO3
4. What is the impact of each of the following transactions on commercial bank reserves? LO2a. The New York Federal Reserve Bank purchases government securities from private businesses and
3. What is the basic objective of monetary policy? State the cause-effect chain through which monetary policy is made effective. What are the major strengths of monetary policy?LO2
1. What is the basic determinant of (a) the strength of the transactions demand for money (the location of the transactions demand for money curve) and (b) the amount of money demanded for assets,
5 How the Fed has used monetary policy in recent years to promote macroeconomic stability.
4 The effectiveness of monetary policy and its shortcomings.
3 The mechanisms by which monetary policy affects GDP and the price level.
2 The goals and tools of monetary policy.
1 How the equilibrium interest rate is determined in the market for money.
12. Suppose that Continental Bank has the simplified balance sheet shown below and that the reserve ratio is 20 percent:LO5a. What is the maximum amount of new loans that this bank can make? Show in
11. Suppose the National Bank of Commerce has excess reserves of $8000 and outstanding checkable deposits of$150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual
10. Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What
9. “Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the M 1 supply of money is reduced.” Do you agree? Explain why or why not.LO5
8. Why does the Federal Reserve require that commercial banks have reserves? What are excess reserves? How do you calculate the amount of excess reserves held by a bank?What is the significance of
7. Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?LO5
6. What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’banks? What are the seven basic functions of the Federal Reserve System? LO4
5. Who selects the chairperson of the Federal Reserve System?Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the
4. How does the purchasing power of the dollar relate to the nation’s price level? LO2
3. What are the components of the M 1 money supply? What is the largest component? Which of the components of M 1 is legal tender? Why is the face value of a coin greater than its intrinsic value?
2. Which two of the following financial institutions offer checkable deposits included within the M 1 money supply:mutual fund companies; insurance companies; commercial banks; securities firms;
1. What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions. LO1
5 How banks create money in a “fractional reserve”banking system.
4 The functions and responsibilities of the Federal Reserve.
3 The makeup of the Federal Reserve and the U.S.banking system.
2 What “backs” the money supply.
1 About the functions of money and the components of the U.S. money supply.
13. What do economists mean when they refer to Social Security as a pay-as-you-go plan? What is the Social Security trust fund? What is the nature of the long-run fiscal imbalance in the Social
11. Why might economists be quite concerned if the annual interest payments on the debt sharply increased as a percentage of GDP? LO4
10. True or false? If the statement is false, explain why: LO4a. An internally held public debt is like a debt of the left hand owed to the right hand.b. The Federal Reserve and Federal government
9. Distinguish between the total U.S. debt and the debt held by the public. Why is the debt as a percentage of GDP more relevant than the total debt? Contrast the effects of paying off an internally
8. Why did the budget deficits rise sharply in 1991 and 1992?What explains the large budget surpluses of the late 1990s and early 2000s? What caused the swing from the budget surpluses to the series
7. Use Figure 8.4 . to explain why the deliberate increase of the standardized budget deficit (resulting from the tax cut) will reduce the size of the actual budget deficit if the fiscal policy
6. Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. How might “politics” complicate fiscal policy? How might expectations of a near-term policy reversal

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