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principles of economics

Questions and Answers of Principles Of Economics

1 Imagine a homeless man on the street near your university. Use the big questions and the economic way of thinking to organize a short essay about the economic life of this man. Make sure you answer
6 Which of the following statements are positive and which are normative: a An increase in productivity will increase living standards. b The government should raise taxes and spend the money on
*5 Which of the following statements are positive and which are normative: a A cut in wages will reduce the number of people willing to work. b High interest rates prohibit many young people from
parking in the new car park with the old parking system. Which is less costly and by how much?
4 A city has built a new high-rise car park. There is always an available parking spot, but it costs a1 a day. Before the new high-rise car park was built, it usually took 15 minutes of cruising to
*3 The local shopping centre has free parking, but the centre is always very busy and it usually takes 30 minutes to find a parking space. Today when you found a vacant spot, Harry also wanted it.
2 You plan a major adventure trip for the summer. You won’t be able to take your usual summer job that pays a6,000 and you won’t be able to live at home for free. The cost of your travel on the
*1 You plan to upgrade your computer skills by taking a training course this summer. If you do, you won’t be able to take your usual job that pays a6,000 for the summer and you won’t be able to
Suppose the central bank expands the money supply, but because the public expects this action, it simultaneously raises its expectation of the price level.What will happen to output and the price
For each of the three theories for the upwards slope of the short-run AS curve, carefully explain the following.a. How the economy recovers from a recession and returns to its long-run equilibrium
Explain why the following statements are false.a. ‘The AD curve slopes downwards because it is the horizontal sum of the demand curves for individual goods.’b. ‘The long-run AS curve is
In Figure 32.7, how does the unemployment rate at points B and C compare to the unemployment rate at point A? Under the sticky wage explanation of the shortrun AS curve, how does the real wage at
Explain whether each of the following events will increase, decrease or have no effect on long-run AS.a. The country experiences a wave of immigration.b. The government raises the minimum wage above
Suppose that the economy is in a long-run equilibrium.a. Use a diagram to illustrate the state of the economy. Be sure to show AD, short-run AS and long-run AS.b. Now suppose that a financial crisis
Why do you think that investment is more variable over the business cycle than consumer spending? Which category of consumer spending do you think would be most volatile: durable goods (such as
What outcomes are possible if both aggregate demand and aggregate supply are both shifting? Use the model of aggregate demand and aggregate supply to outline some of these possible outcomes.
What might shift the aggregate supply curve to the left?Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.
What might shift the aggregate demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.
List and explain the three theories for why the short-run aggregate supply curve is upwards sloping.
Explain why the long-run aggregate supply curve is vertical.
List and explain the three reasons why the aggregate demand curve is downwards sloping.
Draw a diagram with aggregate demand, short-run aggregate supply and long-run aggregate supply. Be careful to label the axes correctly.
Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.
What is the official definition of a recession?
What do you understand by the term ‘economic activity’?
Do you think that Keynes’ ideas still have some relevance today? Explain.
Assume that a period of deflation leads to a rise in the supply of real money balances. Explain the effect of this change on the economy using the IS-LM model and then what effect it would have on
Use IS-LM analysis to explain the following:a. The government institutes significant cuts in public expenditure.b. The central bank institutes an asset purchasing facility which expands the money
What determines the slope of the IS curve? What determines the slope of the LM curve? In relation to your answer to these questions, explain why these determinants can be a source of disagreement
What does the IS curve show? What does the LM curve show?
Assume the economy is in equilibrium. Analyse the effect of a cut in autonomous expenditure on economic activity and the level of unemployment. You should use a diagram to help illustrate your answer.
Suppose the government reduces taxes by €2 billion, that there is no crowding out and that the marginal propensity to consume is 0.75.a. What is the initial effect of the tax reduction on aggregate
Suppose economists observe that an increase in government spending of €10 billion raises the total demand for goods and services by €30 billion.a. If these economists ignore the possibility of
Explain, using an appropriate diagram, how a deflationary gap can occur and how this gap can be eliminated.
What, according to Keynes, was the main reason why recessions and depressions occurred? As a result of identifying this key reason, what did Keynes suggest was an appropriate policy repose?
A central bank wishes to reduce inflationary expectations by increasing interest rates. Use the ISMP model to analyse the effect on the economy of such a move.
Using the IS-LM model, explain the effect on the economy of a reduction in autonomous expenditure resulting from a cut in public spending by the government.
Use diagrams to describe how the IS and LM curves are derived.
Explain how the marginal propensity to withdraw affects the outcome of a rise in autonomous expenditure.
What is the multiplier? Can the multiplier be negative as well as positive? Explain.
Why does the MPC + MPS = 1?
What is the marginal propensity to consume?
What is meant by the terms: inflationary gap and deflationary gap?
Draw a Keynesian cross diagram to show the effects of a rise in autonomous expenditure on an economy operating below full employment output.
Distinguish between planned expenditure and actual expenditure.
What is the key difference between real business cycle models and other business cycle models?
Why do Keynesian models of the business cycle emphasize that markets do not always clear immediately?
What is the role of unanticipated price changes in the new classical model of business cycles?
What role does household and firms’ confidence play in business cycles?
Why might changes in household decision-making cause a deviation in GDP from trend?
Unemployment is classified as a lagging indicator.Explain what this means and why unemployment is classed as such.
Would you expect the following variables to be procyclical or countercyclical if GDP was above trend?Explain.a. inflationb. unemploymentc. employmentd. real wagese. nominal interest rates.
What is the difference between a deterministic trend and a stochastic trend?
What are the main stages of a typical business cycle and how long do these stages last?
What is time series data? Give three examples of key macroeconomic variables that are examples of time series data.
Assume that saving in China has been used to finance investment into the EU. That is, the Chinese have been buying European capital assets.a. If the Chinese decided they no longer wanted to buy
Suppose that Germans decide to increase their saving.a. If the elasticity of German net capital outflow with respect to the real interest rate is very high, will this increase in private saving have
Suppose that real interest rates increase across Europe.Explain how this development will affect UK net capital outflow. Then explain how it will affect UK net exports by using a formula from the
Suppose your country is running a trade deficit and you hear your trade minister on the radio, saying: ‘The trade deficit must be reduced, but import quotas only annoy our trading partners. If we
Suppose the French suddenly develop a strong taste for British wine. Answer the following questions in words and using a diagram.a. What happens to the demand for pounds in the market for foreign
Explain in words why European export industries would benefit from a reduction in restrictions on imports into the European Union.
Assume that there is a rise in the trade deficit of a country due largely to the rise in a government budget deficit. Assume also that some commentators in the popular press claim that the increased
Suppose that the government passes an investment tax credit, which subsidizes domestic investment.How does this policy affect national saving, domestic investment, net capital outflow, the interest
If the UK prime minister announces that the government are solidly on a course of deficit reduction, which should make the pound more attractive to investors, would such a deficit reduction in fact
Germany generally runs a trade surplus. Do you think this is most related to high foreign demand for German goods, low German demand for foreign goods, a high German saving rate relative to German
What is capital flight? When a country experiences capital flight, what is the effect on its interest rate and exchange rate?
What effect would you expect a tariff to have on the real exchange rate? Explain using appropriate diagrams.
Suppose that a steel workers’ union encourages people to buy only European steel. What would this policy do to the European overall trade balance and the real exchange rate? What is the impact on
What is ‘trade policy’?
Why are budget deficits and trade deficits sometimes called the twin deficits?
What effect would you expect a government budget surplus to have on the exchange rate? Explain.
What effect does a government budget deficit have on the interest rate? Draw a diagram to illustrate your answer.
Describe supply and demand in the market for loanable funds and the market for foreign currency exchange.How are these markets linked?
How is the interest rate in an open economy determined?
Why do we describe the formula S = I + NCO as ‘an identity’?
How would the following transactions affect UK net capital outflow? Also, state whether each involves direct investment or portfolio investment.a. A British mobile telephone company establishes an
Describe the difference between foreign direct investment and foreign portfolio investment. Who is more likely to engage in foreign direct investment – a corporation or an individual investor? Who
International trade in each of the following products has increased over time. Suggest some reasons why this might be so:a. wheatb. banking servicesc. computer softwared. automobiles.
Explain the effect of an appreciation of the euro on German exporters and German importers.How would the following transactions affect UK exports, imports and net exports?a. A British art lecturer
If the European Central Bank started printing large quantities of euros, what would happen to the number of Japanese yen a euro could buy?
Describe the economic logic behind the theory of purchasing power parity.
yen, what are the nominal and real exchange rates?
If a Japanese car is priced at 500,000 yen, a similar German car is priced at €10,000, and a euro can buy
Explain the relationship between saving, investment and net capital outflow.
Define net exports and net capital outflow. Explain how and why they are related.
What is a trade deficit and why is it important?
If a British citizen visits the French Alps to go for a skiing holiday, is this an import for France or an export? Explain.
What do you understand by the term an ‘open economy’?
Why do economists sometimes conduct analysis under assumptions of a closed economy?
Explain whether the following statements are true, false or uncertain.a. ‘Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.’b. ‘If prices change
per cent. Describe how this unexpectedly high inflation rate would help or hurt the following:a. the governmentb. a homeowner with a fixed-rate mortgagec. a union worker in the second year of a
per cent, but in fact prices rise by
Suppose that people expect inflation to equal
per cent.
per cent and the inflation rate is
per cent.c. The nominal interest rate is
per cent and the inflation rate is
per cent.b. The nominal interest rate is
per cent and the inflation rate is
per cent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases.a. The nominal interest rate is

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