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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

Each year, the United States produces more per person than most other advanced economies. In 2015 real GDP per capita was $56,000 in the United States. The real GDP per capita in that same year was
Carly wants to buy and operate an ice-cream truck but doesn’t have the financial resources to start the business. She borrows $20,000 from her friend Freddie, to whom she promises an interest rate
From 2008 to 2012, in the aftermath of the financial crisis, the ratio of government debt to GDP in the United Statesa. increased markedly.b. decreased markedly.c. was stable at a historically high
Which of the following actions by the Fed would tend to increase the money supply?a. an open-market sale of government bondsb. a decrease in reserve requirementsc. an increase in the interest rate
If the Fed raises the interest rate it pays on reserves, it will _________ the money supply by increasing _________.a. decrease; the money multiplierb. decrease; excess reservesc. increase; the money
In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold _________ currency or if banks choose to hold _________
I walked into the empty restaurant in Managua carrying a backpack stuffed with cash, thick stacks of Nicaraguan córdobas bound by rubber bands. The waiter, as expected, asked me to hand over the
Assuming a tax rate of 40 percent, compute the before-tax real interest rate and the after-tax real interest rate for each of the following cases.a. The nominal interest rate is 10 percent, and the
As a percentage of U.S. GDP, today exports are _________ and imports are _________ than they were in 1950.a. higher; higherb. lower; lowerc. higher; lowerd. lower; higher
In an open economy, national saving equals domestic investmenta. plus the government’s budget deficit.b. minus the net exports of goods and services.c. plus the net outflow of capital.d. minus
If the value of a nation’s imports exceeds the value of its exports, which of the following is NOT true?a. Net exports are negative.b. GDP is less than the sum of consumption, investment, and
If a nation’s currency doubles in value on foreign exchange markets, the currency is said to _________, reflecting a change in the _________ exchange rate.a. appreciate; nominalb. appreciate;
If the U.S. dollar appreciates and prices remain the same at home and abroad, foreign goods become _________ expensive relative to American goods, pushing the U.S. trade balance toward _________.a.
The dollar–yen exchange rate falls from 100 to 80 yen per dollar. At the same time, the price level in the United States rises from 180 to 200, and the price level in Japan remains the same. As a
If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?a. 1/4 euro per dollarb. 1/3 euro per dollarc. 3 euros per dollard. 4 euros
The theory of purchasing-power parity says that higher inflation in a nation causes the nation’s currency to _________, leaving the _________ exchange rate unchanged.a. appreciate; nominalb.
Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam.a. In 2020, a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the
Holding other things constant, an increase in a nation’s interest rate reducesa. national saving and domestic investment.b. national saving and the net capital outflow.c. domestic investment and
Holding other things constant, an appreciation of a nation’s currency causesa. exports to rise and imports to fall.b. exports to fall and imports to rise.c. both exports and imports to rise.d. both
In the model just developed, two markets determine two prices, which area. the nominal exchange rate and the nominal interest rate.b. the nominal exchange rate and the real interest rate.c. the real
Other things equal, an increase in the U.S. net capital outflow _________ the demand for loanable funds and _________ the supply of dollars in the market for foreign currency exchange.a. increases;
The government in an open economy cuts spending to reduce the budget deficit. As a result, the interest rate _________, leading to a capital _________ and a currency _________.a. falls; outflow;
The nation of Elbonia has long banned the export of its highly prized puka shells. A newly elected president, however, removes the export ban. This change in policy causes the nation’s currency to
A civil war abroad causes foreign investors to move their funds to the safe haven of the United States, leading to _________U.S. interest rates and a _________ U.S. dollar.a. higher; weakerb. higher;
If business leaders in Great Britain become more confident in their economy, they will increase investment, causing the British pound to _________ and pushing the British trade balance toward
The Phillips curve started as an observed _________ correlation between the inflation rate and the _________.a. positive; nominal interest rateb. positive; unemployment ratec. negative; nominal
When the Federal Reserve increases the money supply and expands aggregate demand, it moves the economy along the Phillips curve to a point with _________ inflation and _________ unemployment.a.
The natural rate of unemployment isa. the socially optimal level of joblessness.b. the level of joblessness the economy reaches in the short run.c. the amount of joblessness that cannot be reduced by
If the Federal Reserve reduces the rate of money growth and maintains it at the new lower rate, eventually expected inflation will _________ and the short-run Phillips curve will shift _________.a.
When an adverse supply shock shifts the short-run aggregate-supply curve to the left, it alsoa. moves the economy along the short-run Phillips curve to a point with higher inflation and lower
From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change?a. The central bank
From one year to the next, inflation falls from 5 to 4 percent, while unemployment falls from 7 to 6 percent. Which of the following events could be responsible for this change?a. The central bank
Reducing inflation will tend to be costly ifa. policymakers are credibly committed to low inflation.b. wages and prices are not very sticky.c. expectations of inflation are slow to adjust.d. central
Advocates of the theory of rational expectations believe thata. the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.b. if disinflation catches people
Approximately how long does it take a change in monetary policy to influence aggregate demand?a. one monthb. six monthsc. two yearsd. five years
Fiscal policy has a long lag mainly becausea. policymakers at the Federal Reserve do not meet frequently.b. firms making investments are slow to respond to changes in interest rates.c. the political
According to traditional Keynesian analysis, which of the following increases aggregate demand the most?a. $100 billion increase in taxesb. $100 billion decrease in taxesc. $100 billion increase in
A cut in income tax rates tends to _________ aggregate demand and _________ aggregate supply.a. increase; increaseb. increase; decreasec. decrease; increased. decrease; decrease
Advocates for setting monetary policy by rule rather than discretion often argue thata. central bankers with discretion are tempted to renege on their announced commitments to low inflation.b.
A policy of inflation targetinga. removes the need for discretionary decision making by central bankers.b. frees central bankers from having to respond to shocks to aggregate demand.c. makes central
Which of the following is NOT an argument for a zero rate of inflation?a. It eliminates distortions from a non-indexed tax code.b. It encourages people to hold a greater quantity of money.c. It
Which of the following is NOT an argument for a positive rate of inflation?a. It permits real interest rates to be negative.b. It increases the variability of relative prices.c. It allows real wages
Throughout U.S. history, what has been the most common cause of substantial increases in government debt?a. recessionsb. warsc. financial crisesd. tax cuts
Other things equal, when the government runs a large budget deficit, it _________ national saving and thereby _________ capital formation and productivity growth.a. increases; increasesb. increases;
Advocates of taxing consumption rather than income argue thata. the current tax code discourages people from saving.b. the rich consume a higher fraction of income than the poor.c. a consumption tax
Critics of taxing consumption rather than income argue thata. switching to a consumption tax would benefit the rich.b. private saving does not respond much to tax incentives.c. reducing the budget
China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a
What components of GDP (if any) would each of the following transactions affect? Explain.a. Uncle Henry buys a new refrigerator from a domestic manufacturer.b. Aunt Jane buys a new house from a local
Fill in the blanks: Year 1970 1980 Real GDP (in 2000 dollars) 3,000 5,000 1990 2000 2010 2020 10,000 2030 20,000 Nominal GDP (in current dollars) 1,200 6,000 8,000 15,000 50,000 GDP Deflator (base
Consider the following data on U.S. GDP:a. What was the growth rate of nominal GDP between 1994 and 2014? (Hint: The growth rate of a variable X over an N-year period is calculated as 100 3
Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.a. the invention of cell phonesb. the introduction of air bags in carsc.
What benefit do people get from the market for insurance? What two problems impede the insurance market from working perfectly?
What is diversification? Does a stockholder get a greater benefit from diversification when going from 1 to 10 stocks or when going from 100 to 120 stocks?
Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice
Assume that the reserve requirement is 5 percent. All other things being equal, will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that
It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth
Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In
Explain whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply.a. The United States experiences a wave of immigration.b. Congress raises the
Consider an economy described by the following equations:where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at
Explain how each of the following can limit the economic growth of developing nations.a. A lack of savings and investmentb. Unskilled laborc. A lack of social overhead capital
It is well known that children who grow up in highpoverty areas on average end up as adults with lower educational attainments, poorer health, lower income levels, and a higher likelihood of being
Describe the selection bias likely to exist in the following situations:a. A study of 3,600 children in Australia found that the children who slept early and woke up early had a lower BMI as
Identify each of the following scenarios as examples of causation, positive correlation, and/or negative correlation, and explain your answers.a. Most students who subscribe to online courses tend
Of the following four scenarios, which survey results are likely to be the most statistically significant and which are likely to be the least statistically significant? Explain your answer.Scenario
Researchers are eager to quantify the effect that studying abroad has on a student’s academic performance after returning to his/her home institution, because they want to quantify the benefits of
Which of the following consumption functions best fits the values in the table below?1. C = 10 + 0.2Y 2. C = 6 + 0.8Y 3. C = 4 + 0.7Y4. C = 10 + 0.5Y Aggregate Income (Y) Aggregate Consumption
Most economic interventions are made in response to an unsatisfactory situation based on inferences from available data. The aim of experimental evaluations, or randomized controlled trials (RCTs),
The neighboring towns of East Magoo and West Magoo are divided by the Quincy River. The towns are similar in geographic size and population. The homes in both towns are powered entirely by
There is a great deal of disagreement concerning the shape of the AS curve. One view of the aggregate supply curve, the simple “Keynesian” view, holds that at any given moment, the economy has a
Identify an example of two variables that are correlated, but where there is no direct causal link between the two variables.
The hefty pension payments and healthcare expenditure that benefit Japan’s retiree aging population has started to raise red flags among the Japanese. Japan is burdened with swelling government
Novigrad city has elected a mayor who wishes to enact a new health initiative. She imposes a 10 percent tax on cigarettes to deter people from smoking. After one year, tax revenues from cigarettes
In March 2009, the Official Bank Rate (interest rate) in the United Kingdom was reduced to 0.5 percent, where it stayed for a few years. In August 2016, it was reduced to 0.25 percent. By November
In the tiny island of Pangea, national wealth is broken down as follows: 30 percent is cash in checking and savings accounts, 40 percent is real estate, and 30 percent is stock holdings. Last year,
If moderate inflation takes place, and households believe that this increase in the price level is only temporary, they may delay some purchases until the price level falls back to its initial level.
In 2018, South Africa was reeling from a three-year-long drought, the worst in a century. As water levels in dams dropped dangerously to 30 percent, the government declared this drought a national
Investments in physical and human capital can increase the value of Potential GDP in the economy. How would you represent this in the Aggregate Demand and Aggregate Supply model?
The year 2018 saw heightened speculation regarding the European Central Bank increasing key interest rates in the near future, possibly starting with the year 2019. How might this impact aggregate
Suppose that the economy of your country is growing at its full potential. Given long years of growth, your country’s consumers have very high expectations regarding the future performance of the
Illustrate each of the following situations with a graph showing the IS curve and the Fed rule, and explain what happens to the equilibrium values of the interest rate and output:a. An increase in
In a June 13, 2018 press conference, Fed Chair Jerome Powell announced a 0.25 point increase in the federal funds rate target, to between 1.75 percent and 2.00 percent, the seventh rate hike since
Check the Website of your country’s central bank and find the price level indicator that the bank relies on to formulate its monetary policy. Does it differ from the indicators used by the Federal
In February 2010, the Greek government adopted several austerity packages as part of its bailout by the International Monetary Fund. Since then, it has had to reduce tax evasion, impose limits on
For each of the following scenarios, tell a story and predict the effects on the equilibrium level of aggregate output (Y) and the interest rate (r):a. Faced with a likely recession, country A’s
In mid-2014, the price of oil dropped significantly and reached its lowest in January 2016, when a barrel of Brent oil cost only $28. How would you expect it to impact the aggregate price level and
In 2008, the United Kingdom slipped into a recession. For the next few years, the Bank of England and the British government used monetary and fiscal policies in an attempt to stimulate the economy.
In 2017, the government passed a series of large tax cuts when the economy was at or near full employment. That is, the economy was producing a value of Real GDP close to or equal to Potential GDP.
Since 2014, a number of economies have experienced negative interest rates. This was not even considered possible by most economists before the 2008/2009 Great Recession, but negative rates have
Explain the effect, if any, that each of the following occurrences should have on the aggregate demand curve.a. The government decreases income tax to encourage consumer spending.b. The central bank
Economists and politicians have long debated the extent to which unemployment benefits affect the duration of unemployment. The table on the following page represents unemployment and unemployment
It should be clear to you from the text the important role the assumption of sticky wages plays in helping to explain both unemployment and the ability of fiscal stimulus in a period of unemployment
In 2019, the country of Cheeseling was suffering from a period of high unemployment. The new president, Chad Cheddar, appointed Merry Parmesan as his chief economist.Ms. Parmesan and her staff
In March 2018, the unemployment rate in the Czech Republic was at 3.7 percent, the third lowest in the European Union. At the same time, the country experienced an average inflation rate of 2.45
Obtain data on average hourly wages of production workers and the unemployment rate for the manufacturing sector in your country. How have these two sets of data evolved recently? To what extent do
The last few decades have witnessed prolonged levels of high unemployment across the world. As much as technological advancement has been blamed for many job losses, recent research suggests1 that it
When an unemployed individual gives up looking for work and leaves the labor force, she is no longer considered unemployed. What happens to the unemployment rate as a result? Does this mean that the
How will the following affect labor force participation rates, labor supply, and unemployment in your country?a. The government steps up public funding for nurseries.b. A growing majority of the
Country X came out of a prolonged recessional period a few years ago, thanks to a vigorous fiscal stimulus by the government. The country’s economy had resumed growing two years ago, reaching a
As indicated in Figure 14.3, housing prices have risen substantially over the past few years. The composition of buyers (based on credit scores and median household incomes), however, is different
According to the Efficiency Wage Theory, employers occasionally pay workers more than the equilibrium wage in the market in order to increase productivity. Explain how this would lead to reduced

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