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principles of economics

Questions and Answers of Principles Of Economics

1 What is wrong with this statement: How much money did you make last year?
A change in the composition of the money supply can change the size of the money supply. For example, suppose M1 $1,000 billion, where the breakdown is $300 billion currency outside banks and $700
Banks in the United States operate under a fractional reserve system, in which they must maintain only a fraction of their deposits in the form of reserves (i.e., in the form of deposits at the Fed
Credit cards are not money. When a credit card is used to make a purchase, a liability is incurred. This is not the case when money is used to make a purchase.
M2 includes M1, savings deposits (including money market deposit accounts), small-denomination time deposits, and money market mutual funds (retail).
M1 includes currency held outside banks, checkable deposits, and traveler’s checks.
Our money today has value because of its general acceptability
Money evolved out of a barter economy as traders attempted to make exchange easier. A few goods that have been used as money are gold, silver, copper, cattle, rocks, and shells.
Money serves as a medium of exchange, a unit of account, and a store of value.
Money is any good that is widely accepted for purposes of exchange and in the repayment of debts.
3. Bank A has $1.2 million in reserves and $10 million in deposits. The required reserve ratio is 10 percent.If bank A loses $200,000 in reserves, by what dollar amount is it reserve deficient?
2. If the Fed creates $600 million in new reserves, what is the maximum change in checkable deposits that can occur if the required reserve ratio is 10 percent?
1. If a bank’s deposits equal $579 million and the required reserve ratio is 9.5 percent, what dollar amount must the bank hold in reserve form?
Because checkable deposits are part of the money supply, by extending loans and, in the process, creating checkable deposits, the banking system increases the money supply.
The banking system, with the newly created $1,000 in hand, made loans and, in the process, created checkable deposits for the people who received the loans.
The reserves of bank A increased. The reserves of no other bank decreased.
The Fed created $1,000 worth of new money and gave it to Bill, who then deposited it in bank A.
3. How does money reduce the transaction costs of making trades?
2. If individuals remove funds from their checkable deposits and transfer them to their money market accounts, will M1 fall and M2 rise? Explain your answer.
1. Why (not how) did money evolve out of a barter economy?
3. It sure is difficult to get money (credit) in today’s tight mortgage market.
2. Most of her money (wealth) is tied up in real estate.
1. How much money (income) did you earn last year?
c. Fiscal policy only partly eliminates a recessionary gap.Working with Numbers and Graphs
b. Fiscal policy eliminates an inflationary gap.
a. Fiscal policy destabilizes the economy.
8 Graphically illustrate the following:
7 Graphically illustrate how government can use supply-side fiscal policy to get an economy out of a recessionary gap.
6 Graphically show how fiscal policy works in the ideal case.
b. Would a progressive tax with a rate of 5 percent on an income of $0–$40,000, a rate of 8 percent on everything over $40,000 and under $100,000, and a rate of 15 percent of everything over
a. How much tax revenue is raised under a proportional income tax where the tax rate is 10 percent? How much is raised if the tax rate is 15 percent?
5 There are three income earners in a hypothetical society, and all three must pay income taxes. The taxable income of Smith is $40,000, the taxable income of Jones is $100,000, and the taxable
4 What is the average tax rate of someone with a taxable income of $13,766?
3 What is the marginal tax rate on the 10,001st dollar? What is the marginal tax rate on the 10,000th dollar?
2 If a person’s income is $14,000, how much does she pay in taxes?
1 If a person’s income is $6,000, how much does he pay in taxes?
24 Georgia Dickens is sitting with a friend at a coffee shop.Georgia and her fiend are talking about the new tax bill.Georgia thinks it would be wrong to cut tax rates at this time: “Lower tax
23 Will tax revenue necessarily rise if tax rates are lowered?Explain your answer.
22 What is the difference between a marginal tax rate and an average tax rate?
21 Will tax cuts that are perceived to be temporary (by the public)affect the SRAS and LRAS curves differently than tax cuts that are perceived to be permanent? Explain your answer.
20 The economy is in a recessionary gap, and both Smith and Jones advocate expansionary fiscal policy. Does it follow that both Smith and Jones favor so-called big government?
19 Identify and explain the five lags associated with fiscal policy.
18 Explain how expansionary fiscal policy can, under certain conditions, destabilize the economy.
17 Tax cuts will likely affect aggregate demand and aggregate supply. Does it matter which is affected more? Explain in terms of the AD-AS framework.
16 Is crowding out equally likely under all economic conditions?Explain your answer.
15 The debate over using government spending and taxing powers to stabilize the economy involves more than technical economic issues. Do you agree or disagree? Explain your answer.
14 Give an example to illustrate the difference between indirect and direct crowding out.
13 Give a numerical example to illustrate the difference between complete crowding out and incomplete crowding out.
12 Some economists argue for the use of fiscal policy to solve economic problems; others argue against its use. What are some of the arguments on both sides?
11 Why is crowding out an important issue in the debate over the use of fiscal policy?
10 Explain two ways crowding out may occur.
9 What is the difference between discretionary fiscal policy and automatic fiscal policy?
8 What is the difference between a structural deficit and a cyclical deficit?
7 Jim favors progressive taxation and equal after-tax pay for equal work. Comment.
6 A progressive income tax always raises more revenue than a proportional income tax. Do you agree or disagree? Explain your answer.
5 Is it true that under a proportional income tax structure, a person who earns a high income will pay more in taxes than a person who earns a low income? Explain your answer.
4 What percentage of total income did the top 5 percent of income earners earn in 2005? What percentage of federal income taxes did this group pay in 2005?
3 The bulk of federal government expenditures go for four programs. What are they?
2 How much were government expenditures in 2007? How much were government tax revenues in 2007?
1 What is the difference between government expenditures and government purchases?
Tax revenues equal the tax base multiplied by the (average)tax rate. Whether tax revenues decrease or increase as a result of a tax rate reduction depends on whether the percentage increase in the
When fiscal policy measures affect tax rates, they may affect both aggregate supply and aggregate demand. It is generally accepted that a marginal tax rate reduction increases the attractiveness of
The federal income tax is a progressive income tax.
With a proportional income tax, everyone pays taxes at the same rate, whatever his or her income level. With a progressive income tax, a person pays taxes at a higher rate (up to some top rate) as
In 2007, the federal government spent $2.731 trillion. This was 20 percent of the country’s GDP. About 63.6 percent of the money went for Social Security, Medicare, Medicaid, and national defense.
3. Give an example of the indirect effect of crowding out.
2. How might lags reduce the effectiveness of fiscal policy?
1. How does crowding out create questions about the effectiveness of expansionary demand-side fiscal policy? Give an example.
4. What is the cyclical budget deficit?
3. What three taxes account for the bulk of federal tax revenues?
2. What percentage of all income taxes was paid by the top 5 percent of income earners in 2005? What percentage of total income did this income group receive in 2005?
1. Explain the differences among progressive, proportional, and regressive income tax structures.
25 How will a rise in government purchases change the TE curve in Exhibit 9
24 If Real GDP is $10.4 trillion in Exhibit 9, what is the state of business inventories?
23 Identify the three states of the economy in terms of TE and TP.
22 What role do inventories play in the equilibrating process in the simple Keynesian model (as described in the TE-TP framework)?
21 Explain how to derive a total expenditures (TE) curve.
20 Suppose consumption rises while investment and government purchases remain constant. How will the AD curve shift in the simple Keynesian model? Under what condition will the rise in Real GDP be
19 “In the simple Keynesian model, increases in AD that occur below Natural Real GDP will have no effect on the price level.” Do you agree or disagree with this statement? Explain your answer.
18 What does the aggregate supply curve look like in the simple Keynesian model?
17 According to Keynes, can the private sector always remove the economy from a recessionary gap? Explain your answer.
16 Can a person believe that wages are inflexible downward for, say, one year and also believe in a self-regulating economy?Explain your answer.
15 According to Keynes, an increase in saving and a decrease in consumption may lower total spending in the economy.But how could this happen if the increased saving lowers interest rates (as shown
14 What factors will shift the AD curve in the simple Keynesian model?
13 According to Keynes, can an increase in saving shift the AD curve to the left? Explain your answer.
12 In which factors will a change lead to a change in consumption?
11 Explain how a rise in autonomous spending can increase total spending by some multiple.
10 What is the relationship between the MPC and the multiplier?
9 Explain the multiplier process.
8 Using the Keynesian consumption function, prove numerically that as the MPC rises, saving declines.
7 Look at the Keynesian consumption function: C C0 (MPC )(Yd ). What part of it relates to autonomous consumption?What part of it relates to induced consumption? Define autonomous consumption and
6 Given the Keynesian consumption function, how would a cut in income tax rates affect consumption? Explain your answer.
5 According to New Keynesian economists, why might business firms pay wage rates above market-clearing levels?
4 How was Keynes’s position different from the classical position with respect to saving and investment?
3 Give two reasons explaining the possibility that wage rates may not fall.
2 Classical economists assumed that wage rates, prices, and interest rates are flexible and will adjust quickly. Consider an extreme case: Suppose classical economists believed that wage rates,
1 How is Keynes’s position different from the classical position with respect to wages, prices, and Say’s law?
3. An economist who believes the economy is self-regulating is more likely to advocate laissez-faire than one who believes the economy is inherently unstable. Do you agree or disagree? Explain your
2. What will happen to Real GDP if autonomous spending rises and the economy is operating in the horizontal section of the Keynesian AS curve? Explain your answer.
1. What was Keynes’s position on the self-regulating properties of an economy?

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