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business
the macro economy

Questions and Answers of The Macro Economy

5. How might the existence of multiplier effects increase the risk of inflation when interest rates are cut? LO 1
4. Can there be any inflation without an increase in the money supply? How? L03
3. If the Federal Reserve banks mailed everyone a brandnew $100 bill, what would happen to prices, output, and income? Illustrate your answer by using the equation of exchange. LO 1
2. Why do high interest rates so adversely affect the demand for housing and yet have so little influence on the demand for pizzas? LO 1
1. What proportions of your money balance are held for transactions, precautionary, and speculative purposes?Can you think of any other purposes for holding money? LO 1
How effective is monetary policy, compared to fiscal policy?
How can the Fed use its control of the money supply or interest rates to alter macro outcomes?
What's the relationship between the money supply, interest rates, and aggregate demand?
L03. The differences between Keynesian and monetarist monetary theories.
L02. The constraints on monetary-policy impact.
L01. How monetary policy affects macro outcomes.
9. If bondholders expect the Fed to raise interest rates, what action might they take? How would this affect the Fed's goal? L03
8. In 2001, the Fed reduced both the discount and federal fund rates dramatically. But bank loan volume didn't increase. What considerations might have constrained the market's response to Fed
7. In 2000-2001, bond yields in Japan fell to less than 1.5 percent as the Bank of Japan bid up bond prices. Yet, relatively few people moved their assets out of bonds into banks. How might this
6. Why would a zero-coupon bond (see News, page 281)have a lower price than a bond paying annual interest? L03
5. Why might the Fed want to decrease the money supply? L02
4. Why did China raise reserve requirements in 2007? How did they expect consumers and businesses to respond?(See World View, page 284.) L02
3. What is the current price and yield of 10-year U.S. Treasury bonds? Of General Motors bonds? (Check the financial section of your daily newspaper.) What accounts for the difference? L03
2. Why do people hold bonds rather than larger savings account or checking account balances? Under what circumstances might they change their portfolios, moving their funds out of bonds and into bank
1. Why do banks want to maintain as little excess reserves as possible? Under what circumstances might banks want to hold excess reserves? (Hint: See Figure 14.2.) L02
How are banks and bond markets affected by the government's policies?
Which government agency is responsible for exercising this control?
How does the government control the amount of money in the economy?
L03. How open market operations work.
L02. The Fed's major policy tools.
L01. How the Federal Reserve is organized.
9. How did the banking crisis in Argentina (World View, page 269) affect that nation's GDP growth prospects? L03
8. How does federal deposit insurance encourage greater risk-taking by banks? Could the banking system function without government deposit insurance? How? L02
7. If all banks heeded Shakespeare's admonition "Neither a borrower nor a lender be," what would happen to the circular flow? L02
6. If people never withdrew cash from banks, how much money could the banking system potentially create?Could this really happen? What might limit deposit creation in this case? L03
5. Does the fact that your bank keeps only a fraction of your account balance in reserve make you uncomfortable?Why don't people rush to the bank and retrieve their money? What would happen if they
4. If you can purchase airline tickets with online computer services, should your electronic account be counted in the money supply? Explain. LO 1
3. What percentage of your monthly bills do you pay with(a) cash, (b) check, (c) credit card and (d) automatic transfers. How do you pay off the credit card balance?How does your use of cash compare
2. How are an economy's production possibilities affected when workers are paid in bras and coffins rather than cash? (See World View, page 255, about bartering in Russia.) LO 1
1. Why are checking account balances, but not credit cards, regarded as "money"? LO 1
What role do banks play in the circular flow of income and spending?
L03. How the money multiplier works.
L02. How banks create money.
L01. What money is.
The Economy Tomorrow: On the following graph, show the effect of a successful advertising campaign on the firm’s cost, demand, and marginal revenue curves.
On the accompanying graph, identify each of the following market outcomes:(a) Short-run equilibrium output in competition.(b) Long-run equilibrium output in competition.(c) Long-run equilibrium
(a) In the short-run equilibrium of the previous problem, what is(i) The price of the product?(ii) The opportunity cost of producing the last unit?(b) In the long-run equilibrium of the previous
(a) Use the accompanying graph to illustrate the short-run equilibrium of a monopolistically competitive firm.(b) At that equilibrium, what is(i) Price? (ii) Output? (iii) Total profit?(c) Identify
In Figure 12.3, at what output rate is economic profit equal to zero?
If Starbucks raises its price by 5 percent and McDonald’s experiences a 0.4 percent increase in demand for its coffee, what is the cross-price elasticity of demand?
According to In the News “Starbucks Ups the Price of Iced Drinks,”(a) By what percent did Starbucks increase the price of a venti frappuccino?(b) If the price elasticity for frappuccinos is 0.2,
What is the concentration ratio in an industry with the following market shares?Firm A 13.2 Firm C 4.2 Firm E 2.7 Firm G 1.6 Firm B 11.4 Firm D 3.6 Firm F 2.2 Other firms 61.1
According to World View “The Best Global Brands,”what gives brand names their value? LO12-2
Why are people willing to pay more for Dreyer’s ice cream when it has a Starbucks brand on it? LO12-2
How would our consumption of cereal change if cereal manufacturers stopped advertising? Would we be better or worse off? LO12-3
What happens to the demand curve facing a Starbucks shop when a Dunkin’ Donuts store opens next to it?What can Starbucks do to maintain its business? LO12-4
Why would Starbucks invest $20 million in a new“Roastery” if the coffee-shop market is already saturated(In the News “Coffee Shops Seeking New Identities”)?LO12-4
In the News “The Cola Wars: It’s Not All Taste” suggests that most consumers can’t identify their favorite cola in blind taste tests. Why then do people stick with one brand? What accounts
If one gas station reduces its prices, must other gas stations match the price reduction? Why or why not? LO12-2
Name three products each for which you have (a) high brand loyalty and (b) low brand loyalty. LO12-2
Why do 4,000 new pizzerias open every year? Why do just as many close? LO12-4
What is the “pricing power” referred to in In the News“Starbucks Ups the Price of Iced Drinks”? LO12-2
Why economic profits tend toward zero in monopolistic competition.
How monopolistically competitive firms maximize profits.
The unique behavior of monopolistically competitive firms.
The unique structure of monopolistic competition.
The Economy Tomorrow: According to the In the News “Joe Camel Acquires Newport,” what were the values of(a) The concentration ratio in the cigarette industry(i) prior to the merger?(ii) after the
What is the price elasticity of demand between points F and G in Figure 11.2 (use the midpoint method)?
Suppose that the following schedule summarizes the sales (demand) situation confronting an oligopolist:Price (per unit) $20 $19 $18 $17 $16 $14 $12 $10 $ 8 Quantity demanded(units per period) 2 3 4 5
Suppose the payoff to each of four strategic interactions is as follows:Rival Response Action Reduce Price Don’t Reduce Price Reduce price Loss = $800 Gain = $50,000 Don’t reduce price Loss =
How large would the probability of a “don’t match” outcome have to be to make a Universal price cut statistically worthwhile? (See expected payoff in section “Expected Gain (Loss).”)
Assume an oligopolist confronts two possible demand curves for its own output, as illustrated here. The first (A) prevails if other oligopolists don’t match price changes. The second (B)prevails if
If the price of a medallion is a proxy for the profits of the NYC taxi industry, by what percentage did the industry’s profits decline when Uber entered the market?
(a) According to In the News “Joe Camel Acquires Newport,” how many years will it take Reynolds to recoup its purchase price through cost savings?(b) If Reynolds increases cigarette prices by 10
According to In the News “RC Targeting Young Soda Drinkers”(a) What is the concentration ratio in the U.S. soda market?(b) If Dr Pepper Snapple split into two equal sized firms, what is the new
According to World View “Oil Spikes on OPEC Pact,”(a) By what percentage did the price of oil increase after OPEC’s announcement?(b) By what percentage was the quantity supplied reduced?(c)
According to Table 11.2, in how many markets do fewer than four firms produce at least 80 percent of total output?
Why did the price of NYC taxi medallions decline so much when Uber started ride-sharing service in New York? Why are the medallions still worth$250,000? LO11-2
Domino’s and Pizza Hut hold 66 percent of the delivered-pizza market. Should antitrust action be taken? LO11-1
Using the payoff matrix in Table 11.4, decide whether Universal should cut its price. What factors will influence the decision? LO11-3
The Ivy League schools defended their price-fixing arrangement (see Ivy League Colleges in Coordination Problems section) by arguing that their coordination assured a fair distribution of scholarship
What reasons might rival airlines have for not matching Delta’s fare increase? (See In the News “Delta Rolls Back Fare Hike.”) LO11-3
What evidence of economies of scale is cited in the proposed cigarette merger (In the News “Joe Camel Acquires Newport”)? Should the acquisition be approved? LO11-2
How might the high concentration ratio in the credit card industry (Table 11.2) affect the annual fees and interest charges for credit card services? LO11-2
If an oligopolist knows rivals will match a price cut, would it ever reduce its price? LO11-3
Why does RC Cola depend on advertising to gain market share? (See In the News “RC Targeting Young Soda Drinkers.”) Why not offer cheaper sodas than Coke or Pepsi? LO11-3
What entry barriers exist in (a) the fast-food industry,(b) cable television, (c) the auto industry, (d) illegal drug trade, (e) potato chips, and (f) beauty parlors? LO11-1
How many bookstores are on or near your campus? If there were more bookstores, how would the price of new and used books be affected? LO11-1
How interdependence affects oligopolists’ pricing decisions.
How oligopolies maximize profits.
The unique characteristics of oligopoly.
The Economy Tomorrow: Identify the market and the barrier to entry that best matches the case studies presented in The Economy Tomorrow.(a) Microsoft.(b) AT&T.(c) Google.
The following table summarizes the weekly sales and cost situation confronting a monopolist:LO10-2 LO10-3 LO10-2 LO10-2 Average Quantity Total Marginal Total Marginal Total Price Demanded Revenue
What was the profit per unit for the drug Daraprim (In the News “Drugmaker Hikes Price of AIDS Drug 5,000 Percent!”):(a) Before Turing increased the price?(b) After Turing increased the price?(c)
According to the In the News “US FTC Enables Boeing–Lockheed ‘Monopoly,’ ”(a) What was the annual cost saving for the rocket monopoly (in $ millions)?(b) How much of this saving did the FTC
If the on-campus demand for soda is as follows:Price (per can) $2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 Quantity demanded(per day) 100 90 80 70 60 50 40 30 and the marginal cost of supplying a soda
The following table indicates the prices various buyers are willing to pay for a MINI Cooper car:Buyer Maximum Price Buyer Maximum Price Buyer A $50,000 Buyer D $20,000 Buyer B 40,000 Buyer E 10,000
Given the following information about demand for a local utility service, graph the demand and marginal revenue curves.Price $ 6 5 4 3 2 Quantity demanded 20 50 90 150 210 Identify the barrier to
(a) Complete the following table:Price $24 $21 $18 $15 $12 $9 $6 $3 Quantity demanded 1 2 3 4 5 6 7 8 Marginal revenue(b) At what rate of output does marginal revenue turn negative?(c) If marginal
Use Figure 10.3 to answer the following questions:(a) What is the highest price the monopolist could charge and still sell fish?(b) What is total revenue at that highest price?(c) What rate of output
Is the demand for a life-saving drug like Daraprim (In the News “Drugmaker Hikes Price of AIDS Drug 5,000 Percent!”) likely to be elastic or inelastic? How does that affect the pricing decision
How might Google’s search-engine dominance harm consumers? Help them? LO10-3
How might consumers have benefited from the merger of XM and Sirius (In the News “A Sirius Mistake? FCC Approves XM–Sirius Merger”)? How might they have lost? LO10-3
What similarities exist between the AT&T, Microsoft, and Google antitrust cases? LO10-3
What entry barriers helped protect the following? LO10-2(a) The Russian sable monopoly (World View“Russia’s Sable Monopoly Persists”).(b) The Live Nation monopoly (In the News “Live Nation

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