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principles of economics

Questions and Answers of Principles Of Economics

. The government may have a management role to play in the economy. According to Keynes, government may have to raise aggregate demand enough to stimulate the economy to move it out of the
4. The private sector may not be able to get the economy out of a recessionary gap.In other words, the private sector (households and businesses) may not be able to increase C or I enough to get the
3. According to Keynes, the economy could be in equilibrium and in a recessionary gap, too. In other words, the economy can be at point A in Exhibit 7.
2. The AD curve shifts if there are changes in C, I, or G.
1. The price level is constant until Natural Real GDP is reached.
3. What happens to the multiplier as the MPC falls?
2. If the MPC is 0.70, what does the multiplier equal?
1. How is autonomous consumption different from consumption?
3. When disposable income changes, consumption changes by less.
2. Consumption and disposable income move in the same direction.
1. Consumption depends on disposable income (income minus taxes).
3. According to Keynes, why might aggregate demand be too low?
2. “What matters is not whether the economy is self-regulating or not, but whether prices and wages are flexible and adjust quickly.” Comment.
1. What do Keynesians mean when they say the economy is inherently unstable?
5 Diagrammatically show what happens when the institutional constraints in the economy become less effective.
4 Economist Jones believes there is always sufficient (aggregate)demand in the economy to buy all the goods and services supplied at full employment. Diagrammatically represent what the economy looks
18 Beginning in long-run equilibrium, explain what will happen to the price level and Real GDP in the short run and in the long run as a result of (a) a decline in AD,(b) a rise in AD, (c) a decline
17 Jim says, “I think it’s a little like when you have a cold or the flu. You don’t need to see a doctor. In time, your body heals itself. That’s sort of the way the economy works too. We
16 Yvonne is telling her friend Wendy that wages are rising but that then so is the unemployment rate. She tells Wendy that she may be the next person to be fired at her company and that she may have
15 Suppose that the economy is self-regulating, that the price level is 110, that the quantity demanded of Real GDP is$4 trillion, that the quantity supplied of Real GDP in the short run is $4.9
14 Suppose that the economy is self-regulating, that the price level is 132, that the quantity demanded of Real GDP is$4 trillion, that the quantity supplied of Real GDP in the short run is $3.9
13 Explain the importance of the real balance, interest rate, and international trade effects to long-run (equilibrium)adjustment in the economy.
12 If wage rates are not flexible, can the economy be selfregulating?Explain your answer.
11 According to economists who believe in a self-regulating economy, what happens—step by step—when the economy is in a recessionary gap? What happens when the economy is in an inflationary gap?
10 Explain how an economy can operate beyond its institutional PPF but not beyond its physical PPF.
9 Diagrammatically represent an economy in (a) an inflationary gap, (b) a recessionary gap, and (c) long-run equilibrium.
8 Describe the relationship of the (actual) unemployment rate to the natural unemployment rate in each of the following economic states: (a) a recessionary gap, (b) an inflationary gap, and (c)
7 What is the state of the labor market in each of the following states: (a) a recessionary gap, (b) an inflationary gap,(c) long-run equilibrium?
6 What does it mean to say the economy is in a recessionary gap? In an inflationary gap? In long-run equilibrium?
5 According to classical economists, does an increase in saving shift the AD curve to the left? Explain your answer.
4 What is the explanation for why saving rises as the interest rate rises?
3 What is the explanation for why investment falls as the interest rate rises?
2 According to classical economists, does Say’s law hold in a money economy? Explain your answer.
1 What is the classical economics position on (a) wages,(b) prices, and (c) interest rates?
In an inflationary gap, the Real GDP that the economy is producing is greater than the Natural Real GDP. The unemployment rate in the economy is less than the natural unemployment rate, and a
In a recessionary gap, the Real GDP that the economy is producing is less than the Natural Real GDP. The unemployment rate in the economy is greater than the natural unemployment rate, and a surplus
In long-run equilibrium, the Real GDP that the economy is producing is equal to the Natural Real GDP. The unemployment rate in the economy is equal to the natural unemployment rate, and the labor
3. If the economy is self-regulating, how do changes in aggregate demand affect the economy in the long run?
2. If the economy is self-regulating, what happens if it is in an inflationary gap?
1. If the economy is self-regulating, what happens if it is in a recessionary gap?
3. If the economy is in an inflationary gap, locate its position in terms of the two PPFs discussed in this section.
2. What is the state of the labor market when the economy is in a recessionary gap? In an inflationary gap?
1. What is a recessionary gap? An inflationary gap?
3. What is the classical position on prices and wages?
2. According to classical economists, if saving rises and consumption spending falls, will total spending in the economy decrease? Explain your answer.
1. Explain Say’s law in terms of a barter economy.
21 Does a cash leakage affect the change in checkable deposits and the money supply expansion process? Explain your answer..
20 Describe the money supply contraction process.
19 Describe the money supply expansion process.
18 How does a bank’s reserve deficiency affect the amount of loans it is likely to extend?
17 The smaller the required reserve ratio is, the larger the simple deposit multiplier is. Do you agree or disagree with this statement. Explain your answer.
16 Give an example that illustrates a change in the composition of the money supply.
15 If Jones, who has a checking account at bank A, withdraws her money, deposits half of it into bank B, and keeps the other half in currency, do reserves in the banking system change? Explain your
14 If Smith, who has a checking account at bank A, withdraws his money and deposits all of it into bank B, do reserves in the banking system change? Explain your answer.
e. Reserves.
d. Fractional reserve banking.
c. Money market deposit account.
b. Money market mutual fund.
a. Time deposit.
13 Define the following:
12 Why isn’t a credit card money?
11 Can M1 fall as M2 rises? Can M1 rise without M2 rising too? Explain your answers.
10 If you were on an island with ten other people and there was no money, do you think money would emerge on the scene?Why or why not?
9 Money is a means of lowering the transaction costs of making exchanges. Do you agree or disagree? Explain your answer
8 Explain why gold backing is not necessary to give paper money value.
7 Money makes trade easier. Would having a money supply twice as large as it is currently make trade twice as easy?Would having a money supply half its current size make trade half as easy?
6 Some economists have proposed that the Fed move to a 100 percent required reserve ratio. This would make the simple deposit multiplier 1 (1/r 1/1.00 1). Do you think banks would argue for or
5 There would be very few comedians in a barter economy.Do you agree or disagree with this statement? Explain your answer.
4 People in a barter economy came up with the idea of money because they wanted to do something to make society better off. Do you agree or disagree with this statement? Explain your answer.
3 Does inflation, which is an increase in the price level, affect the three functions of money? If so, how?
2 During much of 2007, the value of the dollar declined relative to other currencies (such as the euro, the pound, etc.).How does this affect the three functions of money?
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.

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