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principles of economics

Questions and Answers of Principles Of Economics

1.2. Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregatedemand curve.
1.1. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregatedemand curve?
1.Suppose a wave of negative “animal spirits” overruns the economy, and people become pessimistic about the future. What happens to aggregate demand? If the Fed wants to stabilize aggregate
1.Suppose that the government reduces spending on highway construction by $10 billion. Which way does the aggregate-demand curve shift? Explain why the shift might be larger than $10 billion. Explain
1.Use the theory of liquidity preference to explain how a de crease in the money supply affects the equilibrium interest rate. How does this change in monetary policy affect the aggregate-demand
3 How does real GDP change in the short run when there is an increase in autonomous expenditure? Does real GDP change by the same amount as the change in aggregate demand? Why or why not?
2 If autonomous expenditure increases with no change in the price level, what happens to the AE curve and the AD curve? Which curve shifts by an amount that is determined by the multiplier?
1 How does a change in the price level influence the AE curve and the AD curve?
4 If autonomous expenditure decreases, which phase of the business cycle does the economy enter?
3 How do the marginal propensity to consume, the marginal tax rate and the marginal propensity to import influence the multiplier?
2 Why does the multiplier matter?
1 What is the multiplier? What does it determine?
6 If real GDP and aggregate expenditure are greater than their equilibrium levels, what happens to firms’ inventories or stocks? How do firms change their production? What happens to real GDP?
5 If real GDP and aggregate expenditure are less than their equilibrium levels, what happens to firms’ inventories or stocks? How do firms change their production? What happens to real GDP?
4 What adjusts to achieve equilibrium expenditure?
3 What is the relationship between aggregate planned expenditure and real GDP at equilibrium expenditure?
2 Distinguish between autonomous expenditure and induced expenditure.
1 Explain the relationship between aggregate planned expenditure and real GDP.
4 How do we calculate the effects of real GDP on consumption expenditure and imports?
3 What is your estimate of your own marginal propensity to consume? After you graduate and begin work, will your marginal propensity to consume change? Why or why not?
2 Define the marginal propensity to consume.
1 Which components of aggregate planned expenditure are influenced by real GDP?
2 Obtain information about the economy of China during the 1990s. Try to figure out what has happened to the production possibilities frontier and production function and to the demand for labour and
1 Obtain information about the economy of Russia during the 1990s. Try to figure out what has happened to the production possibilities frontier and production function and to the demand for labour
2 You are working as an Economic Assistant in the Treasury and must write a memo for the Chancellor that provides a checklist of policy initiatives that will increase potential GDP. Be as imaginative
1 Study Reading Between the Lines on pp. 520–521 and then answer the following questions: a How are labour shortages in key industries in the United Kingdom to be satisfied in the coming years? b
8 In problem 7, the government of Cocoa Island introduces a minimum wage of a4 an hour. a Find the new equilibrium real wage rate and quantity of labour employed. b What now is the potential GDP in
6 Nautica’s economy, described in problems 2 and 4, experiences a surge in its population. The supply of labour increases and 50 per cent more hours are supplied at each real wage rate. a Make a
*5 Crusoe, whose economy is described in problems 1 and 3, gets a bright idea. He diverts a stream and increases his food production by 50 per cent. That is, each hour that he works produces 50 per
4 Use the information provided in problem 2 about the economy of Nautica. Also, use the information that the people of Nautica are willing to work 20 hours a day for a real wage rate of a10 an hour.
*3 Use the information provided in problem 1 about the economy of Crusoe. Also, use the information that Crusoe must earn a4.50 an hour. If he earns less than this amount, he does not have enough
2 The people of Nautica have 100 hours every day to allocate between leisure and work. The table shows the combinations of real GDP and leisure in the economy of Nautica:Leisure Real GDP Possibility
*1 Robinson Crusoe lives on a desert island on the equator. He has 12 hours of daylight every day to allocate between leisure and work. The table shows seven alternative combinations of leisure and
3 How do advances in technology change the real wage rate, full employment and potential GDP?
2 How does an increase in capital change the real wage rate, full employment and potential GDP?
1 When the population increases but nothing else changes, why does real GDP per hour of work decrease?
8 How does the minimum wage create unemployment?
7 How do insider interests influence the amount of job-rationing unemployment?
6 How does an efficiency wage influence the real wage rate, employment and unemployment?
5 What is job rationing and why does it occur?
4 What factors have changed the amount of jobsearch unemployment in the United Kingdom?
3 What is job search and why does it occur?
2 Why does the natural rate of unemployment fluctuate?
1 Why does the economy experience unemployment at full employment?
6 How is potential GDP determined?
5 What happens in the labour market if the real wage rate is above or below the full-employment level?
4 Why does a rise in the real wage rate bring an increase in the quantity of labour supplied, other things remaining the same?
3 Why does a rise in the real wage rate bring a decrease in the quantity of labour demanded, other things remaining the same?
2 What does the outward-bowed shape of the leisure time–real GDP PPF imply about the opportunity cost of real GDP and why is the PPF bowed outward?
1 What is the relationship between the leisure time–real GDP PPF and the production function?
2 Find data on recent change in and forecasts of real GDP and the price level in the European Union. Then: a What is your forecast of EU real GDP for the coming year? b What is your forecast of the
1 Visit the Website of the Office for National Statistics to obtain the data on real GDP and the price level for the United Kingdom. Then: a Use the data to update Figure 22.14. b What has happened
1 After you have studied Reading Between the Lines on pp. 498–499, answer the following questions. a Describe the growth of the UK economy during the period between 2000 and the first quarter of
10 In the economy shown in the figure, initially long-run aggregate supply is LAS0, short-run aggregate supply is SAS0, and aggregate demand is AD. Then some events change aggregate supply and the
*9 In the economy shown in the graph (overleaf), initially the short-run aggregate supply is SAS0 and aggregate demand is AD0. Then some events change aggregate demand and the aggregate demand curve
8 In problem 4, aggregate supply increases by a150 billion. What now is the short-run macroeconomic equilibrium?
*7 In problem 3, aggregate supply decreases by a100 billion. What now is the short-run macroeconomic equilibrium?
6 In problem 4, aggregate demand is decreased by a150 billion. How do real GDP and the price level change in the short run?
*5 In problem 3, aggregate demand is increased by a100 billion. How do real GDP and the price level change in the short run?
4 The economy of Miniland has the following aggregate demand and supply schedules: Real GDP Real GDP supplied demanded in the short run Price level (billions of 2001 euros) 90 600 150 100 500 200 110
*3 The economy of Mainland has the following aggregate demand and supply schedules: Real GDP Real GDP supplied demanded in the short run Price level (billions of 2001 euros) 90 450 350 100 400 400
2 The following events occur that influence the economy of Coolland: i A strong expansion in the world economy. ii Businesses expect huge profits in the near future. iii The Coolland government cuts
*1 The following events occur that influence the economy of Toughtimes: i A deep recession hits the world economy. ii Oil prices rise sharply. iii Businesses expect huge losses in the near future. a
4 How do fluctuations in aggregate demand and short-run aggregate supply bring fluctuations in real GDP around potential GDP?
3 Describe the three types of short-run macroeconomic equilibrium.
2 Does inflation result from increases in aggregate demand, short-run aggregate supply or long-run aggregate supply?
1 Does economic growth result from increases in aggregate demand, short-run aggregate supply or long-run aggregate supply?
5 How do changes in foreign exchange rate and foreign incomes change aggregate demand and shift the aggregate demand curve?
4 How do changes in fiscal policy and monetary policy change aggregate demand and shift the aggregate demand curve?
2 Why does the aggregate demand curve slope downward? 3 How do changes in expectations about future income, inflation and profits change aggregate demand and shift the aggregate demand curve?
1 What factors change and what factors remain the same when there is a movement along the aggregate demand curve?
4 If the money wage rate rises and potential GDP remains the same, what happens to aggregate supply? Is there a shift of or a movement along the LAS curve and the SAS curve?
3 If potential GDP increases, what happens to aggregate supply? Is there a shift of or a movement along the LAS curve and the SAS curve?
2 If the price level rises and the money wage rate remains constant, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move?
1 If the price level rises and if the money wage rate also rises by the same percentage, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move?
3 Obtain data on the RPI for the United Kingdom and the CPI for the United Kingdom and the other EU countries. a What have been the changes in the inflation rates of the EU countries during the past
2 Obtain data on unemployment in your economic region of the United Kingdom. a What have been the changes in the employment rate, unemployment rate and the economic activity rate in your own region
1 Obtain data on business cycle turning points in the European Union. a Which countries have experienced the most recessions during the past twenty years? b Compare the cycles in the United Kingdom
3 You’ve seen in this chapter that the average working week has shortened over the years. Do you think that shorter work hours are a problem or a benefit? Do you expect the average working week to
2 The figures below show the unemployment rate and the OECD estimate of the natural rate of unemployment for five large economies of the OECD for 2001 and 2002. The countries are the United States,
1 Study Reading Between the Lines on pp. 474–475 and then answer the following questions: a What is the labour market signalling about the trend in unemployment in 2001? b Why does the claimant
*9 A typical family on Sandy Island consumes only juice and cloth. Last year, which was the reference base period, the family spent £40 on juice and £25 on cloth. Last year, juice was £4 a bottle
8 In July 2003, in the economy of Sandy Island, 11,000 people were employed, 900 were unemployed, and 5,000 of working age were not in the workforce. During August 2002, 40 people lost their jobs,
*7 In July 2002, in the economy of Sandy Island, 10,000 people were employed, 1,000 were unemployed, and 5,000 of working age were not in the workforce. During August 2002, 80 people lost their jobs,
6 In March 2003, the unemployment rate in Sweden was 5.3 per cent. In March 2004, the unemployment rate was 6.4 per cent. (These are seasonally adjusted rates that exclude the winter seasonal
*5 In January 2003, the unemployment rate was 5.1 per cent. In January 2004, the unemployment rate was 4.7 per cent. What do you predict happened between January 2003 and January 2004 to the numbers
4 During the first quarter of 2004, the working-age population increased by 234,000, employment increased by 251,000, and the workforce increased by 180,000. Use the data in problem 2 to calculate
*3 During 2002, the working-age population increased by 277,000, employment increased by 156,000 and the economically active labour force increased by 41,000. Use the data in problem 1 to calculate
2 In 2003, the Labour Force Survey measured the UK workforce at 29,580,000, employment at 28,095,000 and the working-age population at 46,903,000. Calculate for 2003 the a Unemployment rate. b
*1 In 2001, the Labour Force Survey measured the UK workforce at 29,088,000, employment at 27,660,000, and the working-age population at 46,351,000. Calculate for 2001 the a Unemployment rate. b
3 How might a price index be biased? 4 What problems arise from biased RPI and CPI?
2 What is the relationship between the RPI and the inflation rate?
1 What are the RPI and CPI and how are they calculated?
5 How does the unemployment rate fluctuate over the business cycle?
4 What factors might make the natural rate of unemployment change?
3 What is the natural rate of unemployment?
2 Define frictional, structural and cyclical unemployment and provide an example of each type of unemployment.
1 What are the categories of people who become unemployed?
4 Why have aggregate hours not grown while total employment has? 5 How have average hourly real wage rates changed since 1973?
3 Why has the economic activity rate increased, but the employment rate not increased by much?

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