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business
principles of economics

Questions and Answers of Principles Of Economics

*11Suppose that when the recession occurs in Virtual Reality in problem 1, the economy moves to D, G and L. Which theory of the business cycle, if any, explains this outcome?
10 Suppose that when the expansion occurs in Vital Signs in problem 2, the economy moves to C, G and L. Which theory of the business cycle, if any, explains this outcome?
*9 Suppose that when the recession occurs in Virtual Reality in problem 1, the economy moves to C, H and K. Which theory of the business cycle, if any, explains this outcome?
8 Suppose that when the expansion occurs in Vital Signs in problem 2 the economy moves to D, G and L. Which theory of the business cycle, if any, explains this outcome?
*7 Suppose that when the recession occurs in Virtual Reality in problem 1, the economy moves to D, H and K. Which theory of the business cycle, if any, explains this outcome?
6 Suppose that when the expansion occurs in Vital Signs in problem 2, the economy moves to C, H and L. Which theory of the business cycle, if any, explains this outcome?
*5 Suppose that when the recession occurs in Virtual Reality in problem 1, the economy moves to C, G and K. Which theory of the business cycle, if any, explains this outcome?
4 Suppose that when the expansion occurs in Vital Signs in problem 2, the economy moves to D, H and L. Which theory of the business cycle, if any, explains this outcome?
*3 Suppose that when the recession occurs in Virtual Reality in problem 1, the economy moves to D, G and K. Which theory of the business cycle, if any, explains this outcome?
2 The figure shows the economy of Vital Signs. When the economy is in a long-run equilibrium, it is at points A, E and I. When an expansion occurs in Vital Signs, the economy moves away from these
*1 The figure shows the economy of Virtual Reality. When the economy is in a long-run equilibrium, it is at points B, F and J. When a recession occurs in Virtual Reality, the economy moves away from
3 What mechanisms translated the shocks into a recession?
2 What role did external factors play and what role did UK policy play in the 1990–1992 recession?
1 What events triggered the 1990–1992 recession in the United Kingdom?
3 According to real business cycle theory, how does a fall in productivity growth influence long-run aggregate supply, aggregate demand, real GDP and the price level?
2 According to real business cycle theory, how does a fall in productivity growth influence investment demand, the real interest rate, the demand for labour, the supply of labour, employment and the
1 According to real business cycle theory, what causes the business cycle? What is the role of fluctuations in the rate of technological change?
5 What, according to new classical theory and new Keynesian theory, causes the business cycle? What are the roles of rational expectations and unanticipated fluctuations in aggregate demand in these
4 What, according to monetarist theory, are the business cycle mechanisms? Describe the roles of the Bank of England and the quantity of money in this theory.
3 What, according to monetarist theory, is the main business cycle impulse?
2 What, according to Keynesian theory, are the main business cycle mechanisms? Describe the roles of animal spirits, the multiplier, and a sticky money wage rate in this theory.
1 What, according to Keynesian theory, is the main business cycle impulse?
1 Visit the Penn World Table website and obtain data on real GDP per person for the United States, China, South Africa and Mexico since 1960. a Draw a graph of the data. b Which country has the
2 Write a letter to your Member of Parliament in which you set out the policies you believe the UK government must follow to speed up the growth rate of real GDP in the United Kingdom.
1 After studying Reading Between the Lines on pp. 696–697, answer the following questions: a What is the reason suggested by the ECB for the weaker growth in real GDP person in the Eurozone than in
8 Suppose that in Romeria, which is described in problem 7, technological advance slows and the real interest rate falls to 3 per cent a year. Describe what happens in Romeria.
*7 Romeria is a country that behaves according to the predictions of new growth theory. The target rate is 3 per cent a year. A technological advance increases the demand for capital and raises the
6 Martha’s Island is an economy that behaves according to the neoclassical growth model. The economy has no growth, a target rate of return of 10 per cent a year and the following productivity
*5 The following information has been discovered about the economy of Cape Despair. The subsistence real wage rate is £15 an hour. Whenever the real wage rate rises above this level the population
4 In Flatland, described in problem 2, capital per hour of labour in 1999 was £60 and real GDP per hour of labour was £8.44. In 2001, capital per hour of labour had increased to £1,200 and real
*3 In Longland, described in problem 1, capital per hour of labour in 1999 was £40 and real GDP per hour of labour was £8.31. In 2001, capital per hour of labour had increased to £50 and real GDP
2 The following information has been discovered about the economy of Flatland: the economy’s productivity curve is:Capital Real GDP per hour of labour per hour of labour (2001 pounds per hour)
*1 The following information has been discovered about the economy of Longland: The economy’s productivity curve is: Capital Real GDP per hour of labour per hour of labour (2001 pounds per hour)
3 What is the key proposition of the new growth theory that makes growth persist?
2 What, according to the neoclassical growth theory, is the fundamental cause of economic growth?
1 What is the central idea of classical growth theory that leads to the dismal outcome?
2 Explain how growth accounting can be used to provide information about the factors that contributed to the productivity growth slowdown.
1 Explain the one-third rule and explain how the rule is used in growth accounting to isolate the contributions of capital growth and technological change to productivity growth.
3 Provide some examples of how human capital has created new technologies that are embodied in both human and physical capital.
2 How do saving and investment in new capital, the growth of human capital and the discovery of new technologies generate economic growth?
1 How do markets, property rights and monetary exchange facilitate economic growth? What are the economic activities that they make possible that lead to economic growth?
3 Obtain the latest data on inflation, unemployment and money growth in Japan, the United Kingdom, the United States and Canada. Then: a Interpret the data for each country in terms of shifting
2 Obtain data on the inflation rate and the unemployment rate in the United States during the 1990s and 2000s. a Make a graph using the data you’ve obtained that is similar to the figure in Box
1 Obtain data on the growth rate of the quantity of money and the inflation rate in the United Kingdom since 2000. a Calculate the average growth rate of the quantity of money since 2000. b Calculate
1 Study Reading Between the Lines on pp. 674–675 and then answer the following questions. a Why did the inflation rate take off in Zimbabwe in 2000? b Try to think of reasons why the inflation rate
10 In the economy described in problem 9, some events occur that move the economy from point B to point C. a Describe the events that could move the economy from point B to point C. b Draw in the
*9 An economy has an unemployment rate of 4 per cent and an inflation rate of 5 per cent a year at point A in the graph. Some events then occur that move the economy to point D. a Describe the
8 per cent a year, what is the change in the unemployment rate? Explain why it occurs. 8 For the economy described in problem 7, the natural rate of unemployment rises to 5 per cent and the expected
*7 An economy with a natural rate of unemployment of 4 per cent and an expected inflation rate of 6 per cent a year has the following inflation and unemployment history:Year Inflation rate (per cent
6 In the economy described in problem 1, suppose that people anticipate deflation (a falling price level) but aggregate demand turns out to not change. a What happens to the short-run and long-run
*3 Quantecon is a country in which the quantity theory of money operates. The country has a constant population, capital stock and technology. In year 1, real GDP was a400 million, the price level
2 In the economy described in problem 1, some events then occur that generate a cost-push inflation. a List the events that might cause cost-push inflation. b Using the graph, describe the initial
*1 The figure shows an economy’s long-run aggregate supply curve, LAS, three aggregate demand curves AD0, AD1 and AD2, and three short-run aggregate supply curves SAS0, SAS1 and SAS2. The economy
3 When is a low inflation policy credible?
2 Why does a government find it hard to obtain a low inflation reputation?
1 What is an inflation tax and when is it used as a source of government revenue?
2 Why does inflation change the nominal interest rate?
1 What is the relationship between the real interest rate, the nominal interest rate and the inflation rate?
6 Does the United Kingdom have a stable long-run Phillips curve?
5 Can you identify a short-run Phillips curve for the United Kingdom? Has the UK short-run Phillips curve remained stable?
4 If the natural rate of unemployment increases, what happens to the short-run Phillips curve? What happens to the long-run Phillips curve? What happens to the expected inflation rate?
3 If the expected inflation rate increased by 10 percentage points, how would the short-run Phillips curve change and how would the long-run Phillips curve change?
2 What are the effects of an unanticipated increase in the inflation rate on the unemployment rate?
1 How would you illustrate an unanticipated change in the inflation rate by using the Phillips curve?
4 What are the effects of a rapid anticipated inflation? Does anticipated inflation bring an increase in real GDP?
3 How does anticipated inflation occur?
2 Why do people forecast inflation and what information do they use to do so?
1 What is a rational expectation? Are people who form rational expectations ever wrong?
4 What does the long-run historical evidence and international evidence on the relationship between money growth and inflation tell us about the quantity theory of money?
3 What is the equation of exchange? Can the equation of exchange be wrong?
2 What is the velocity of circulation of money and how is it calculated?
1 What is the quantity theory of money?
8 What must the Bank of England do to convert a one-time rise in the price level into a freewheeling cost-push inflation?
7 What is stagflation and why does cost-push inflation cause stagflation?
6 How does cost-push inflation begin? What are its initial effects on real GDP and the price level?
5 What must happen to create a demand-pull inflation spiral?
4 When real GDP exceeds potential GDP, what happens to the money wage rate and short-run aggregate supply? How do real GDP and the price level respond?
3 How does demand-pull inflation begin? What are the initial effects of demand-pull inflation on real GDP and the price level?
2 Distinguish between a one-time rise in the price level and inflation.
1 Distinguish between a rising relative price and inflation.
1 Visit the website of Office for National Statistics and look at the current economic conditions. On the basis of the current state of the UK economy, and in the light of what you now know about
1 Study Reading Between the Lines on pp. 642-643 and then answer the following questions: a What is happening to fiscal policy in the United Kingdom? What is the budget deficit expected to be in 2004
10 The economy is at full employment, and the government is worried that the growth rate of real GDP is too high because it is depleting the country’s natural resources. The government wants to
*9 The economy is at full employment, but the government is disappointed with the growth rate of real GDP. It wants to increase real GDP growth by stimulating investment. At the same time, it wants
8 The economy has an inflationary gap and the government wants to decrease aggregate demand, cut exports and decrease investment. It has three policy options: decrease government expenditures on
*7 The economy is in a recession and the government wants to increase aggregate demand, stimulate exports and increase investment. It has three policy options: increase government expenditures on
6 The economies of two countries, Gamma and Delta, are identical in every way except the following: in Gamma, a change in the interest rate of 1 percentage point (e.g. from 5 per cent to 6 per cent)
*5 The economies of two countries, Alpha and Beta, are identical in every way except the following: in Alpha, a change in the interest rate of 1 percentage point (e.g. from 5 per cent to 6 per cent)
4 In the economy described in Figure 28.1, suppose the Bank of England increases the supply of real money by £250 billion. a Work out the first round effects. b Explain how real GDP and the interest
*3 In the economy described in Figure 28.1, suppose the Bank of England decreases the money supply by £450 billion. a Work out the first round effects. b Explain how real GDP and the interest rate
2 In the economy described in Figure 28.1, suppose the government increases its expenditures on goods and services by £25 billion. a Work out the first round effects. b Explain how real GDP and the
*1 In the economy described in Figure 28.1, suppose the government decreases its expenditures on goods and services by £100 billion. a Work out the first round effects. b Explain how real GDP and
4 Explain how inflation can be avoided despite a government building up a large budget deficit.
3 Explain what happens if the government pursues an expansionary fiscal policy while the central bank pursues a contractionary monetary policy.
2 What are the main sources of conflict in policy between the central bank and the government?
1 What are the main things that can be achieved by coordinating fiscal policy and monetary policy?
4 Explain the long-run neutrality of money.
3 Explain crowding out at full employment.
2 Contrast the short-run effects of an expansionary monetary policy on real GDP and the price level with its long-run effects when the policy action occurs at full employment.
1 Contrast the short-run effects of an expansionary fiscal policy on real GDP and the price level with its long-run effects when the policy action occurs at full employment.

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