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principles of economics

Questions and Answers of Principles Of Economics

3 How can fiscal policy and monetary policy be combined to increase aggregate demand yet at the same time keep the interest rate constant?
2 Under what circumstances is the Keynesian view correct and under what circumstances is the monetarist view correct?
1 What two macroeconomic parameters influence the relative effectiveness of fiscal policy and monetary policy?
3 How does an expansionary monetary policy influence the exchange rate, imports and exports?
2 What are the second round effects of an expansionary monetary policy? What happens to the interest rate, investment and other components of interest-sensitive expenditure, aggregate demand, the
1 What are the first round effects of an expansionary monetary policy? What happens to the interest rate, investment and other components of interestsensitive expenditure, aggregate demand, the
6 How does an expansionary fiscal policy affect the exchange rate? What happens to imports and exports?
5 What is crowding in? How does crowding in influence the outcome of a fiscal policy action?
3 What are the second round effects of an expansionary fiscal policy action? Describe the forces at work and the changes that occur in the interest rate, investment, real GDP and the price level. 4
1 Describe macroeconomic equilibrium. What conditions are met in such an equilibrium? What are the links between aggregate demand, the money market and investment? 2 What is an expansionary fiscal
1 Visit the Bank of England Website. Find the latest data on the monetary base (M0), M4 and the base interest rate, and the minutes of the Monetary Policy Committee. a Is the Bank trying to slow
3 Gordon Brown, the Chancellor of the Exchequer, tells Mervyn King, Governor of the Bank of England, to keep the interest rate stable and the quantity of money stable. The Governor asks you to draft
2 Suppose that the United Kingdom joined the Eurozone: a What functions would the Bank of England retain and what functions would move to the ECB? b What would happen to the current inflation
1 Study Reading Between the Lines on pp. 620–621 and then answer the following questions: a What was inflation in May 2004 in the Eurozone and what is the inflation target for the ECB? b Why has
12 In Minland, the central bank conducts an open market purchase of bonds. a Describe in detail the effects of this action on the interest rate in Minland? b Describe the effects of the change in the
*11In Minland, the central bank lowers the interest rate from 5 per cent a year to 3 per cent a year. a Describe in detail the steps that the Bank of Minland must follow to make the interest rate
10 What is the real interest rate and why is it the opportunity cost of consumption and investment? How can a central bank change the real interest rate?
*9 What is the nominal interest rate and why is it not the opportunity cost of consumption and investment?
8 In Freezone, the central bank decides that it wants to keep the interest constant. If the demand for money in Freezone increases, what must the Bank of Freezone do? a Explain whether it buys or
*7 In Nocoin, the central bank decides that it wants to keep the quantity of money constant. If the demand for money in Nocoin increases, what must the Bank of Nocoin do? a Explain whether it buys or
6 In problem 4, when the Bank of Freezone has done its open market operation and the commercial banks have no excess reserves: a How has the supply of money changed? b What has happened to the
*5 In problem 3, when the Bank of Nocoin has done its open market operation and the commercial banks have no excess reserves: a How has the supply of money changed? b What has happened to the
4 In problem 2, suppose that the Freezone central bank undertakes an open market sale of bonds of a1 billion. a What happens to the monetary base? b What happens to the reserves of the banks?c After
*3 In problem 1, suppose that the Bank of Nocoin, the central bank, undertakes an open market purchase of bonds of a1 billion. a What happens to the monetary base? b What happens to the reserves of
2 You are given the following information about the economy of Freezone: the people and businesses in Freezone have bank deposits of a500 billion and hold a100 billion in notes and coin. The banks
1 You are given the following information about the economy of Nocoin: the banks have deposits of a300 billion. Their reserves are a15 billion, two-thirds of which is in deposits with the central
6 What does the interest-sensitive expenditure curve show?
5 How does the exchange rate influence net exports?
4 How does the interest rate influence the exchange rate?
3 Which interest rate influences expenditure decisions and why?
2 Which interest rate influences the quantity of money that people plan to hold and why?
1 What is the real interest rate and how does it differ from the nominal interest rate?
7 How can the Bank of England target the interest rate?
6 How can the Bank of England target the quantity of money?
5 How do the interest rate and the quantity of money change when the Bank of England conducts an open market sale of government bonds?
4 What determines the size of the money multiplier?
3 Describe the multiplier process that follows an open market operation.
2 What happens when the Bank of England sells government bonds to an institution that isn’t a bank in the open market?
1 What happens when the Bank of England sells government bonds to a commercial bank in the open market?
5 What policy tools are available to a central bank to conduct a nation’s monetary policy?
4 What are the main items in the balance sheet of a central bank?
3 What is the lender of last resort? Why do we need one?
2 How do the responsibilities of the European Central Bank differ from those of the Bank of England?
1 What is a central bank?
1 Visit Roy Davies’s Web site, “Money – Past, Present, and Future”, and study the section on e-money. Then answer the following questions: a What is e-money and what are the alternative forms
2 Rapid inflation in Brazil caused the cruzeiro, the former currency of Brazil, to lose its ability to function as money. People were unwilling to accept it because it lost value too fast. Which of
1 Study Reading Between the Lines on pp. 598–599 and then answer the following questions: a What changes in the payments technology are described in the news article? b What does the news article
14 In Minland in problem 7, a financial crisis occurs. The people begin to distrust the banks and withdraw their deposits. At the same time, they cut up their smart cards and start using currency
*13In Minland in problem 7, a new smart card replaces currency and the demand for money changes. Also, the new smart card causes business to boom and real GDP increases. a Modify the numbers in the
12 In problem 7, Real GDP in Minland is £20 billion. The supply of money decreases by £1 billion above the numbers shown in the spreadsheet. a What happens in Minland if the interest rate is 4 per
*11In problem 7, Real GDP in Minland is £20 billion. The supply of money increases by £1 billion above the numbers shown in the spreadsheet. a What happens in Minland if the interest rate is 4 per
10 In problem 7, a financial innovation changes the demand for money. People plan to hold £0.5 billion less than the numbers in the spreadsheet. a What happens to the interest rate? b What happens
*9 In problem 7, Minland experiences a strong expansion. Real GDP rises to £30 billion. Then a recession hits and real GDP falls to £10 billion. What happens to the interest rate in Minland during
8 In problem 7, Minland experiences a severe recession. Real GDP falls to £10 billion. a What happens in Minland if the interest rate is 4 per cent a year? b What is the equilibrium interest rate? c
*7 The spreadsheet figure provides information about the demand for money and supply of it in Minland. Column A is the interest rate, R. Columns B, C, and D show the quantity of money demanded at
6 The banks in Zip have: Reserves £125 million Loans £1,875 million Deposits £2,000 million Total assets £2,100 million a Construct the banks’ balance sheet. If you are missing any assets, call
*5 The banks in Zap have: Reserves £250 million Loans £1,000 million Deposits £2,000 million Total assets £2,500 million a Construct the banks’ balance sheet. If you are missing any assets,
4 Monica takes a10,000 from her account at a commercial bank in Spain and puts the funds into her building society account in the United Kingdom. What changes occur in Eurozone M3 and UK M4?
*3 Sara withdraws £1,000 from her savings account at her building society, keeps £50 in cash, and deposits the balance in her chequable account at her commercial bank. What is the immediate change
2 Which of the following items are money? Which are deposit money? a Deposits at the Bank of England. b British Telecom shares held by individuals. c The £5 commemorative crown for the Queen’s
*1 Which of the following items are money? a Bank of England notes in the commercial banks’ cash machines. b Your Visa card. c The coins inside public phones. d Pound coins in your wallet. e The
5 What happens to the interest rate if the quantity of money increases or decreases?
4 What do people do if they are holding more money than they plan to hold and what happens to the interest rate?
3 What do people do if they are holding less money than they plan to hold and what happens to the interest rate?
2 How is the interest rate determined?
1 What is a bond and what is the relationship between the price of a bond and the interest rate?
6 How has financial innovation altered the demand for money?
5 How does an increase in real GDP change the demand for money and how would you use the demand for money curve to show the effects?
4 How does an increase in the interest rate change the quantity of money demanded and how would you use the demand for money curve to show the effects?
3 What does the demand for money curve show?
2 Why is the interest rate the opportunity cost of holding money?
1 What are the main influences on the quantity of real money that people and businesses plan to hold?
3 What is the relationship between the desired reserve ratio and the deposit multiplier?
2 A bank manager tells you that he doesn’t create money. He just lends the money that people deposit in the bank. How do you explain to him that he’s wrong and that he does create money?
1 How do banks create deposits by making loans and what factors limit the amount of deposits and loans that banks can create?
3 What are the main economic functions of a financial intermediary?
2 What are the three main types of assets held by banks on their balance sheet?
1 What is a financial intermediary?
2 Visit the Office for National Statistics and obtain the most recent data you can find on the revenues, outlays, and budget surplus or deficit for the United Kingdom. a Compare the data you obtain
1 Obtain data on the components of government outlays in the main industrial countries. Then use the fiscal policy multiplier to predict which countries have strong automatic stabilizers and which
1 Study Reading Between the Lines on pp. 574–575 and then answer the following questions. a What policy has the Austrian government conducted with its expansionary fiscal policy? b Why have
6 In problem 5, if Dreamland’s real GDP is a40 million: a What is the government’s budget balance? b If potential GDP is a30 million, does Dreamland have a cyclical surplus or deficit? What is
*5 The figure shows revenues and outlays of the government of Dreamland. Potential GDP is a40 million. a What is the government’s budget balance if real GDP is a40 million? b Does Dreamland have a
4 Suppose that the price level in the economy of Zip as described in problem 2 is 100. The economy is also at full employment. a If the government of Zip decreases its expenditures on goods and
*3 Suppose that the price level in the economy of Zap as described in problem 1 is 100. The economy is also at full employment. a If the government of Zap increases its expenditures on goods and
2 In the economy of Zip, the marginal propensity to consume is 0.8. Investment is a60 billion, government expenditures on goods and services are a50 billion and autonomous taxes are a60 billion. Zip
*1 In the economy of Zap, the marginal propensity to consume is 0.9. Investment is a50 billion, government expenditures on goods and services are a40 billion, and autonomous taxes are a40 billion.
3 How would an income tax cut influence real GDP and the price level?
2 How would an income tax cut influence aggregate supply and aggregate demand?
1 How do income taxes and payroll taxes influence the labour market, and how would a cut in these taxes influence real GDP?
2 What is the long-run fiscal multiplier effect on real GDP and the price level?
1 How do changes in the price level influence the multiplier effects of fiscal policy on real GDP?
5 How do we tell whether a budget deficit needs government action to remove it?
4 How do income taxes and transfer payments work as automatic stabilizers to dampen the business cycle?
3 How do income taxes and imports influence the size of the fiscal policy multipliers?
2 Which multiplier effect is larger: the multiplier effect of a change in government expenditures or the multiplier effect of a change in autonomous taxes?
1 What are the government expenditures multiplier and the autonomous taxes multiplier?
7 Explain the connection between a government’s budget deficit and its debt.
6 Which members of the European Union had the largest debt levels in 2003?
5 Which members of the European Union ran a budget deficit in 2003?

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