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principles of economics

Questions and Answers of Principles Of Economics

In 2018, Apple’s revenue was $267 billion, and it grew to $378 billion in 2021.a. What is the nominal growth rate of Apple’s revenue from 2018 to 2021?b. What is the value of Apple’s 2021
You open a savings account with a 0.5% per year nominal interest rate, and the economy experiences 3% per year inflation. What is your nominal and real annual interest rate on the account? What will
Behavioral economists have discovered that people view a 2% decrease in their income without inflation as unfair, but a 3% increase in their income in the presence of 5% inflation as fair. What are
Explain how you would trade your efforts for goods or services you need if the economy did not use money of any kind? How does money make trade easier?
Is inflation more costly when it is expected, or unexpected?
For each scenario, determine which function of money is being described.a. Robert pays $8.00 to cross the Golden Gate Bridge.b. Liza considers which is the better deal: a desk lamp priced at $24.99,
Identify which cost of inflation—menu costs or shoe-leather costs—is illustrated in each of the following scenarios.a. During the German hyperinflation of 1922–1923, some workers reportedly
You take out student loans to help pay for your degree at a 5% annual interest rate. Assume the bank expected inflation to average 3% per year. What real interest rate did they expect to earn from
The cost of the average consumer’s basket of goods and services in 2022 is roughly 12 times what it was in 1950. In other words, what the average consumer bought for $100 in 1950 would cost a
At your future job, you get an unexpected raise from $50,000 a year to $75,000 a year. How do your consumption and savings change? Provide a rough estimate of your marginal propensity to consume.
Real GDP per person falls during a devastating recession, which in turn causes consumption to fall by 5%. Would giving everyone 5% more income during the recession lead consumption to go up 5%? Why
Your friend just got an unexpected $1,000 tax refund. She plans to put $800 toward paying off credit card debt, put $100 toward her student loans, and use the remaining $100 to purchase a new grill
The table below contains data on per-person income and per-person consumption in the United States for several years.a. Draw the consumption function for the United States for these years.b. What is
Nicolas Cage, an award winning and prolific actor, once had a net worth of about $150 million (he earned $40 million in 2009 alone!). By 2011, he had to sell off much of his collection of homes,
In college, most students take out loans in order to finance their education. At the same time, they still spend money on consumer goods and services: food, clothes, books, haircuts, and so on. Use
Use the graph below, which illustrates the marginal benefit of consumption, to answer the following questions.a. You became a licensed electrician last year and have been enjoying a higher income
Which of the following people are consumption smoothing and which are not? Explain your reasoning using the opportunity cost and marginal principles.a. Sharon Tirabassi won $10 million in the Ontario
Over long periods of time, the percentage of households’ income spent on consumption does not change much even as income rises. Use the five insights into the relationship between income and
Describe some cognitive or behavioral limitations you have experienced when making consumption decisions and how these limitations can lead to hand-to-mouth consumption. Why is it easier to forecast
What factors lead people to be credit constrained? What are the consequences? What would you expect to happen to total consumption if many people and businesses in the economy became credit
For each of the following scenarios, predict how consumption changes for both consumption smoothers and hand-to-mouth consumers. How does total consumption change?a. Household incomes rise 6% this
The American Recovery and Reinvestment Act was legislation that included temporary tax cuts designed to help pull the U.S. economy out of the Great Recession by increasing consumer spending.a. Show
Graph the effect of an increase in the real interest rate on the consumption function for both savers and borrowers.
Consider the following situations. What is the effect on consumption for each scenario? Demonstrate each answer with a graph.a. The federal government raises taxes.b. Housing prices increase.c.
Explain why people tend to save more in times of economic uncertainty.
Paige is a supervisor at UPS. She just got a big promotion and went from working part time for $20,000 a year to full time for $55,000 a year. Her new manager tells her, “You should live like
The increasing cost of college has reduced how much young adults have saved for retirement. How does a higher cost of college change the life-cycle pattern of saving?
If parents increasingly worry about the costs their adult children and grandchildren will face because of climate change, how might that change their savings behavior?
Policymakers are increasingly worried that Americans are not saving enough, so one policymaker proposes increasing the amount of government support available when people experience tough times like
Consider the following data on the personal saving rate from 1980 until today in the United States.What patterns do you notice during and after the last four recessions? What explains these patterns?
You deposit money into a bank account. Explain what happens to that money and how the bank makes a profit.
Do you have a checking or savings account? Why or why not? Would you still have an account if you earned no interest on your deposits? What if you had to pay fees?
How does maturity transformation impact long-term investment spending? What are some risks a bank can face trying to balance the tension that maturity transformation creates?
Bank runs are often called manias, or panics, but are individual people acting irrationally when they participate in a bank run? Explain your reasoning.
For each situation, explain why seeking out an individual saver to borrow money from is not ideal. Then, identify which function of banks eliminates the problem. Banks serve five functions. Read all
When the Federal Deposit Insurance Corporation (FDIC) created deposit insurance after the Great Depression, what effect did this have on the occurrence of bank runs? Did the introduction of deposit
Explain the differences between a company issuing a bond versus taking a loan from a bank. How are they similar, and how are they different?
Your parents are thinking about purchasing bonds with a 25-year term, but they are a little worried that they might need the money before the 25-year term is up. How would they go about accessing the
Around $500 billion in U.S. Treasuries are traded each day and many countries hold U.S. Treasuries, as they are considered very safe. For example, as of May 2022, Japan held $1,213 billion in U.S.
You get a large bonus at the end of the year that you don’t plan on spending anytime soon. Should you put your money in stocks, in bonds, or in the bank as savings? What factors inform your
You are discussing buying stocks with a friend and mention that you want to buy a few shares of Amazon stock. Your friend says that’s a terrible idea because Amazon has never paid dividends to its
For each part, determine whether you should put your savings in stocks or bonds. Explain your reasoning.a. You want a high return and are not concerned about risk.b. You would like to participate in
Stitch Fix offers a subscription that provides users with a personal stylist and shopper, who ships clothes to the subscriber’s door. Use the stock market snapshot from Google Finance to interpret
Search online to find a company that issues stock on the New York Stock Exchange. Describe how you can assess the company’s fundamental value and how you could use that information to decide to
Do changes in stock prices precede economic downturns and expansions, or do they follow changes in economic activity? Are stock market prices a cause or an effect of changes in the macroeconomy?
The following graph shows the price of Bitcoin—an online cryptocurrency—over time.Do you think Bitcoin experienced a speculative bubble? Explain why someone acting rationally would purchase
Use the following data for Nordstrom to estimate the values for a comparable department store, Macy’s.Nordstrom:a. Macy’s book value per share was $19.27. If Macy’s produces the same
Your friend just received a promotion and wants to save the extra annual income from their raise. They tell you that they’re thinking of hiring a fund manager to help decide where to put their
On March 16, 2020, the stock market fell almost 13%. How can we reconcile these kinds of huge losses in the stock market with the efficient market hypothesis?
You just opened an online stock trading account. A friend that you trust advises you to put all your money in the stock of one certain company. “It’s done really well in the past,” she states.
Why do people value liquidity? What are the different ways that banks, the bond market, and the stock market create liquidity?
The 1990s was a period of rapid economic growth and a robust stock market that yielded an average annual return of 18.6%!a. If you started with $1,000 in stocks at the beginning of the decade, and
What are the factors that led international trade and global financial flows to rise over recent decades? Do you expect international trade and global financial flows to continue to grow? Why or why
Americans own almost three times as many foreign assets as they did four decades ago. Some people worry that this makes Americans more vulnerable to the ups and downs in the economies of other
The following graph depicts Japanese imports and exports.a. Describe the general trend in imports and exports for Japan since 2000.b. In which years did Japan run a trade surplus? A trade deficit?
Determine whether each of the following is an example of an import, export, financial inflow, or financial outflow. If it is a financial flow, is it an example of foreign direct investment or of
Think about your favorite country, and search online for its exchange rate. What is its nominal exchange rate—that is, the price of its currency in terms of U.S. dollars? Has the currency
Theresa, who lives in the United States, finds a jacket she really wants to buy, but it is only available from Amazon UK, where it is selling for £65. Luckily the seller is willing to ship
You just spent two weeks in Guatemala on vacation. Your trip is over, and you realize that you overestimated how much local cash you would need while in Guatemala. Now you want to convert your
Consider the following graph of the U.S./euro nominal exchange rate.a. If you traveled to Europe in 2013 and converted US$1,000 to euros, how many euros would you get? What if you were traveling in
In 2019, the United States enacted trade barriers to restrict imports from China. Use the three-step recipe for forecasting exchange rate movements to explain how you expect the price of the U.S.
What happens to the amount Americans pay for imported goods if the price of the U.S. dollar depreciates? Will Americans import more or fewer goods if the U.S. dollar depreciates?
How does a recession in Japan affect the market for U.S. dollars? What do you expect will hap pen to the price of a U.S. dollar in yen? Illustrate your answer with a graph.
If the U.S. Federal Reserve unexpectedly cuts the interest rate, what effect do you expect this will have on the U.S. dollar?
Technology-driven improvements in farm productivity led the cost of growing soybeans in the United States to fall, leading U.S. farmers to cut their prices. If the nominal exchange rate is unchanged,
You and your friend decide to backpack around Europe. You’ve been debating whether Europe or the United States is more expensive. They spy a McDonald’s and say that they can prove that Europe is
You are a purchasing manager for General Electric and need to decide whether you should buy stainless steel from a supplier in China or source it from a foundry in Pittsburgh. If you buy it from the
At a family gathering, one of your cousins says, “We spend so much more on imports than other countries spend on our exports. It isn’t fair and we should raise tariffs on imports to reduce how
In 2021, Germany had the world’s second largest current account surplus of US$266 billion. Using this one piece of information, answer the following questions.a. Which was greater, the income
A politician makes the following comment: “The fundamentals of our economy are very strong. According to market economists, we are producing more than anyone expected and even beyond what they call
What do economists mean when they say that business cycles are not cycles?
Use the graph to answer the following questions.a. In what year(s) did Germany experience a recession? Explain your reasoning.b. What likely happened to unemployment during the recessions? Real GDP
Use the accompanying table to answer the following questions.a. Calculate the output gap for each year.b. What does it mean when the output gap is negative? What does it mean when it is positive?c.
In the second quarter of 2022, the output gap in the United States was −2.1%. Make a prediction about what you think the output gap will be in a year’s time. Explain your reasoning.
Explain how you can use consumer and business confidence indices to make predictions about the future state of the economy. For example, how would you expect consumer spending to change over the next
Describe some of the historical similarities and differences between recessions. For example, do they always have the same duration and severity? What about expansions?
What does it mean if a macroeconomic variable is a leading indicator? A lagging indicator? Give some examples of both leading and lagging indicators.
If actual output falls from being equal to potential output to being 5 percentage points below potential output, how would you expect the unemployment rate to change?
Explain how you would use the five tips to track the economy to form an outlook of the economy and job market you are hoping to enter after finishing your education. Go online to find data that will
For each of the following, should you use seasonally adjusted data? Why or why not?a. You are trying to look at economic growth over the past few quarters and you want to figure out the trend so that
What indicators should you use to track each of the following, and why?a. The overall size of the economyb. Labor market performancec. The future trajectory of economic activityd. Wages and benefits
The S&P 500 has been increasing steadily over the past few months. What does this signal about how investors view future profits? Explain your reasoning.
What do you expect to happen to the S&P 500 if it is announced that GDP grew at an annual rate of 2% last quarter but economists were expecting it to grow at an annual rate of 3%?
Javier is a department manager at a big box store. Over the last month sales have slumped and he has lots of inventory going unsold. Now it’s time to put in his orders to restock for next month.
How is macroeconomic equilibrium related to equilibrium output? How does equilibrium output differ from potential output?
How will businesses adjust their production in response to each of the following changes to aggregate expenditure?a. Consumers become more confident in the economic outlook and increase their
In 2017, potential output was $18.17 trillion and output was $18.05 trillion. In 2018, potential output was $18.51 trillion and output was $18.56 trillion. Calculate the output gap for each year. How
Provide an example of how your own consumption would change as the real interest rate changes. Specifically, describe how your opportunity costs change. If other consumers made similar changes, how
Pick a product that you typically buy and draw the demand curve for it. Then draw the IS curve for the economy. Compare and contrast the two. What are the prices and quantities for each?
The following graph depicts an IS curve for the economy.a. How does the output gap change if the real interest rate rises from 1% to 3%?b. Explain the process by which the output gap changed. How did
For each of the following, illustrate how the IS curve will change with a graph.a. Poor numbers from several leading economic indicators cause businesses to become pessimistic about the future of the
What determines the risk premium, and how does it affect the real interest rate and MP curve?
The federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%.a. Draw an MP curve.b. Determine the risk premium. Label it and the
The economy is experiencing an output gap of − 3% . Discuss how monetary policy or fiscal policy could be used to raise actual output toward potential output. Could monetary policy and fiscal
Explain how prolonged recessions can occur and how an economy can become stuck in a slump with actual output falling short of potential output even if both buyers and sellers are making the best
Draw an IS-MP graph where the macroeconomic equilibrium is at a real interest rate of 6% and actual output is 10% below potential GDP. Use this graph to answer the following questions.a. You’re a
To combat a recession, the Indian government enacts expansionary fiscal policy, which increases government spending by 2 trillion rupees. In response, GDP rises by 6 trillion rupees.a. What is the
Recent releases of leading economic indicators have been a mixed bag: Some of them indicate stable economic growth, while others indicate a looming recession. Explain how businesses will adjust their
How can the Federal Reserve influence long-term interest rates, and shift the MP curve, without changing the current risk-free interest rate?
In 2018 and 2019, the United States enacted tariffs on imports from China. In retaliation, China enacted tariffs on goods exported from the United States. How will the output gap change in response

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