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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

6. Explain the roles of monetary policy and fiscal policy in causing and ending hyperinflations.
4. If inflation rises from 6 percent to 8 percent, what happens to real and nominal interest rates, according to the Fisher effect?
6. If the demand for real money balances depends on the nominal interest rate, then higher inflation cana. increase the quantity of real money balances.b. reduce the nominal interest rate.c. result
5. Hyperinflations tend to occur whena. monopoly firms raise prices above competitive levels.b. the menu costs of price changes become too small.c. central banks finance large government budget
4. Because most loans are specified in nominal terms, high inflation hurts .a. expected, debtorsb. expected, creditorsc. unexpected, debtorsd. unexpected, creditors
3. According to the Fisher effect, an increase in inflation causes an equal increase in the interest rate.a. expected, nominalb. expected, realc. unexpected, nominald. unexpected, real
2. An economy with constant velocity has real GDP growth of 3 percent, money growth of 7 percent, and a real interest rate of 2 percent. The nominal interest rate is percent.a. 2b. 6c. 8d. 12
1. An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. The velocity of money isa. 1/8.b. 1/2.c. 2.d. 8.
6. Why might a banking crisis lead to a decrease in the money supply?
6. Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. If the Fed does nothing, the money supply tends to . But the Fed can
5. Because of leverage, a 5 percent decline in the value of a bank’s assets causes the value of the bank’s to fall by than 5 percent.a. capital, moreb. capital, lessc. deposits, mored. deposits,
4. When the Federal Reserve reduces the interest rate it pays on reserves, this tends to the money multiplier and the money supply.a. increase, increaseb. increase, decreasec. decrease, increased.
3. If a central bank wants to increase the money supply, it can bonds in open-market operations or reserve requirements.a. buy, increaseb. buy, decreasec. sell, increased. sell, decrease
2. In a system of fractional-reserve banking, bank lending increases thea. monetary base.b. money supply.c. amount of excess reserves.d. economy’s net worth.
1. Which of the following is not part of the money supply?a. the metal coins in your pocketb. the paper currency in your walletc. the balances in your retirement accountd. the funds in your checking
14. Macroeconomic data do not show a strong correlation between investment and interest rates. Let’s examine why this might be so. Use our model in which the interest rate adjusts to equilibrate
13. Suppose that consumption depends on the interest rate.How, if at all, does this assumption alter the conclusions reached in the chapter about the impact of an increase in government purchases on
12. When the government subsidizes investment, such as with an investment tax credit, the subsidy often applies to only some types of investment. This question asks you to consider the effect of such
11. Suppose that the government increases taxes and government purchases by equal amounts. What happens to the interest rate and investment in response to this budgetneutral change? Explain how your
10. • Consider an economy described as follows:a. In this economy, compute private saving, public saving, and national saving.b. Find the equilibrium interest rate.c. Now suppose that G is reduced
9. Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases the amount they want to consume today.This change might be interpreted
7. (This problem requires the use of calculus.) Consider a Cobb–Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is
6. According to the neoclassical theory of distribution, a worker’s real wage reflects her productivity. Let’s use this insight to examine the incomes of two groups of workers:farmers and
5. Figure 3-5 shows that in U.S. data, labor’s share of total income is approximately a constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor
4. Suppose that an economy’s production function is Cobb–Douglas with parameter α = 0.3.a. What fractions of income do capital and labor receive?b. Suppose that immigration increases the labor
3. If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale. If it causes output to
2. • Suppose the production function in medieval Europe is Y = K0.5L0.5, where K is the amount of land and L is the amount of labor. The economy begins with 100 units of land and 100 units of
1. Use the neoclassical theory of distribution to predict the impact of each of the following events on the real wage and the real rental price of capital:a. A wave of immigration increases the labor
4. Write a Cobb–Douglas production function describing an economy in which capital earns one-fourth of total income.
6. A decrease in government purchases of goods and services, holding taxes constant, will the equilibrium real interest rate and investment.a. increase, increaseb. increase, decreasec. decrease,
5. If national income is $1,200, consumption is $600, taxes are$200, and government purchases are $300, then national saving isa. $300.b. $400.c. $500.d. $600.
4. An increase in the interest rate investment.a. nominal, increasesb. nominal, decreasesc. real, increasesd. real, decreases
3. If immigration increases the labor force in an economy described by a Cobb–Douglas production function, the wage and the rental price of capital.a. increases, increasesb. increases, decreasesc.
2. An economy has the Cobb–Douglas production function Y = 10K1/3L2/3. If the economy’s stock of capital doubles, the share of total income paid to the owners of capital willa. increase by 10
1. A manager of a perfectly competitive firm observes that the marginal product of labor is 5 units per hour, the marginal product of capital is 40 units per machine, the wage is $20 per hour, the
11. Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think the well-being of the average person in society most likely changes in the
10. When Senator Robert Kennedy ran for president in 1968, he gave a speech in which he said the following about GDP:[It] does not allow for the health of our children, the quality of their
9. • An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for jobs, 10
8. Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green
7. • Consider an economy that produces and consumes hot dogs and hamburgers. In the following table are data for two different years.2010 2020 Good Quantity Price Quantity Price Hot dogs 200 $2 250
6. • Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns. TLM’s equipment depreciates in value by $125,000.
5. Find data on GDP and its components and compute the percentage of GDP for the following components for 1950, 1990, and the most recent year available.a. Personal consumption expendituresb. Gross
4. Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports.a. Apple sells a computer to a public school
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. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells
1. Go to the website of the Bureau of Economic Analysis and find the growth rate of real GDP for the most recent quarter. Go to the website of the Bureau of Labor Statistics and find the inflation
6. Describe the two ways the BLS measures total employment.Why do they differ?
5. List the three categories used by the Bureau of Labor Statistics to classify everyone in the economy. How does the BLS compute the unemployment rate?
4. How are the CPI and the PCE deflator similar, and how are they different?
3. What does the consumer price index measure? List three ways in which it differs from the GDP deflator.
2. What are the four components of GDP? Give an example of each.
1. What two things does GDP measure? How can GDP measure these two things at once?
6. If a person quits his job to become a stay-at-home parent, the labor-force participation rate , and the unemployment rate .a. rises, risesb. rises, stays the samec. falls, risesd. falls, stays the
5. Which of the following events would affect the CPI but not the GDP deflator?a. Boeing, the American airplane manufacturer, raises the price it charges the U.S. Air Force for fighter jets.b. Volvo,
4. If nominal GDP and real GDP both rise by 10 percent, then the GDP deflatora. also rises by 10 percent.b. rises by about 20 percent.c. falls by 10 percent.d. is unchanged.
3. The Ford Motor Company makes a car in 2020 and sells it to the Jones family in 2021. This event increasesa. both consumption and GDP in 2020.b. both consumption and GDP in 2021.c. consumption in
2. The largest component of GDP isa. consumption.b. investment.c. government purchases.d. net exports.
1. GDP measures the value of the economy’s output at current prices and is a variable.a. Nominal, stockb. Nominal, flowc. Real, stockd. Real, flow
2. What do you think are the defining characteristics of a science? Do you think macroeconomics should be called a science? Why or why not?
1. List three macroeconomic issues that have been in the news lately.
6. Microeconomics isa. the study of how macroeconomic data is constructed from individual observations.b. useful for understanding the decisions behind macroeconomic relationships.c. a separate field
5. Market-clearing models assume that prices are and are best applied to understand the economy in the run.a. flexible, longb. flexible, shortc. sticky, longd. sticky, short
4. Economists use models because theya. clarify our thinking.b. show how exogenous variables influence endogenous variables.c. are fun.d. all of the above
3. In U.S. history, deflationa. is the norm.b. is about as common as inflation.c. is rare now but has occurred at times in the past.d. has never occurred.
2. The unemployment rate measures the fraction ofa. the adult population that has stopped looking for work.b. the adult population that is not working.c. the labor force that has stopped looking for
1. Recessions are periods ofa. rising incomes.b. falling incomes.c. rising prices.d. falling prices.
1. Suppose Zeeland pegs its currency, the zee, at 1 zee = 36 grains of gold while Aeeland pegs its currency, the aeellar, at 1 aellar = 10 grains of gold. LO27.7a. What would the exchange rate be
1. Think back to the gold standard period. If the United States suffered a recession, to what degree could it engage in expansionary monetary policy? LO27.7
1. Compare and contrast the Bretton Woods system of exchange rates with that of the gold standard. What caused the collapse of the gold standard? What caused the demise of the Bretton Woods system?
5. Return to problem 3 and assume that the exchange rate is fixed at 110. In year 1, what would be the minimum initial size of the U.S. reserve of loonies such that the United States could maintain
4. Suppose that the current Canadian dollar (CAD) to U.S. dollar exchange rate is $0.85 CAD = $1 US and that the U.S. dollar price of an Apple iPhone is $300. What is the Canadian dollar price of an
3. Refer to the following table, in which Qd is the quantity of loonies demanded, P is the dollar price of loonies, Qs is the quantity of loonies supplied in year 1, and Qs′ is the quantity of
2. China had a $214 billion overall current account surplus in 2012. Assuming that China’s net debt forgiveness was zero in 2012 (its capital account balance was zero), by how much did Chinese
1. Alpha’s balance-of-payments data for 2016 are shown below.All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on current
10. Other things equal, if the United States continually runs trade deficits, foreigners will own U.S. assets.LO27.6a. More and more.b. Less and less.c. The same amount of.
9. If the economy booms in the United States while going into recession in other countries, the U.S. trade deficit will tend to. LO27.6a. Increase.b. Decrease.c. Remain the same.
8. Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Other things
7. Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the
6. Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is$5 = Z1). Then show on your diagram a decline in the demand for zee.
5. Suppose that the Fed is fixing the dollar-pound exchange rate at$2.50 = £1. If the Fed’s reserve of pounds falls by £500 million, by how much would the supply of dollars increase, all other
4. A meal at a McDonald’s restaurant in New York costs $8. The identical meal at a McDonald’s restaurant in London costs £4.According to the purchasing-power-parity theory of exchange rates, the
3. The exchange rate between the U.S. dollar and the British pound starts at $1 = £0.5. It then changes to $1 = £0.75. Given this change, we would say that the U.S. dollar has while the British
2. Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of −$200 billion. The balance on the capital and
1. An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S.dollar and the Chinese yuan
11. last word If a country like Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives
10. What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: “A trade deficit means that a
9. Would it be accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor? LO27.2
8. Explain why you agree or disagree with the following statements.Assume other things equal. LO27.3a. A country that grows faster than its major trading partners can expect the international value
7. Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping.Assuming a system of flexible exchange rates between Mexico and the United States,
6. Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to
5. Generally speaking, how is the dollar price of euros determined?Cite a factor that might increase the dollar price of euros.Cite a different factor that might decrease the dollar price of euros.
4. “Exports pay for imports. Yet in 2012 the nations of the world exported about $540 billion more of goods and services to the United States than they imported from the United States.”Resolve
3. What do the plus signs and negative signs signify in the U.S.balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial
2. Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros
1. Do all international financial transactions necessarily involve exchanging one nation’s distinct currency for another? Explain.Could a nation that neither imports goods and services nor exports
LO27.7 (Appendix) Explain how exchange rates worked under the gold standard and Bretton Woods.
LO27.6 Identify the causes and consequences of recent U.S. trade deficits.
LO27.5 Explain the current system of managed floating exchange rates.
LO27.4 Describe the differences between flexible and fixed exchange rates, including how changes in foreign exchange reserves bring about automatic changes in the domestic money supply under a fixed
LO27.3 Discuss how exchange rates are determined in currency markets that have flexible exchange rates.

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