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principles of economics

Questions and Answers of Principles Of Economics

The Grip of Gas U.S. drivers are ranked as the least sensitive to changes in the price of gasoline. For example, if the price rose from $3 to $4 per gallon and stayed there for a year U.S. purchases
The demand schedule for hotel rooms is Price Quantity demanded(dollars per night) (millions of rooms per night)200 100 250 80 400 50 500 40 800 25a. What happens to total revenue when the price falls
Explain how the market for Blu-ray format movies will change.
a. How would you expect the price of a used Toshiba player on eBay to change? Will the price change result from a change in demand, supply, or both, and in which directions?b. How would you expect
“Popcorn Movie” Experience Gets Pricier Cinemas are raising the price of popcorn.Demand for field corn, which is used for animal feed, corn syrup, and ethanol, has increased and its price has
Strawberry Prices Drop as Late Harvest Hits Market Shoppers bought strawberries in March for $1.25 a pound rather than the $3.49 a pound they paid last year. With the price so low, some growers
After you have studied Reading Between the Lines on pp. 74–75 answer the following questions.a. What happened to the price of coffee in 2010?b. What substitutions do you expect might have been made
If the virus in Problem 29 hits just as the new dip in Problem 28 comes onto the market, how does the price and quantity of chips change?Economics in the News
In Problem 27, if a virus destroys potato crops and the quantity of potato chips produced decreases by 40 million bags a week at each price, how does the supply of chips change?
In Problem 27, a new dip increases the quantity of potato chips that people want to buy by 30 million bags per week at each price.a. How does the demand and/or supply of chips change?b. How does the
The demand and supply schedules for potato chips are Price Quantity Quantity(cents demanded supplied per bag) (millions of bags per week)50 160 130 60 150 140 70 140 150 80 130 160 90 120 170 100 110
G.M. Cuts Production for Quarter General Motors cut its fourth-quarter production schedule by 10 percent because Ford Motor, Chrysler, and Toyota sales declined in August.Source: The New York Times,
Pump Prices on Pace to Top 2009 High by Weekend The cost of filling up the car is rising as the crude oil price soars and pump prices may exceed the peak price of 2009.Source: USA Today, January 7,
Frigid Florida Winter is Bad News for Tomato Lovers An unusually cold January in Florida destroyed entire fields of tomatoes and forced many farmers to delay their harvest. Florida’s growers are
Of Gambling, Grannies, and Good Sense Nevada has plenty of jobs for the over 50s and its elderly population is growing faster than that in other states.Source: The Economist, July 26, 2006 Explain
American to Cut Flights, Charge for Luggage American Airlines announced yesterday that it will begin charging passengers $15 for their first piece of checked luggage, in addition to raising other
The demand and supply schedules for gum are Quantity Quantity Price demanded supplied(cents per pack) (millions of packs a week)20 180 60 40 140 100 60 100 140 80 60 180 100 20 220a. Draw a graph of
Does any event (or events) illustrate the law of supply?
Use a graph to illustrate the effect of each event.
Explain the effect of each event on the supply of low-fat milk.
In 2008, the price of corn increased by 35 percent and some cotton farmers in Texas stopped growing cotton and started to grow corn.a. Does this fact illustrate the law of demand or the law of
In January 2010, the price of gasoline was$2.70 a gallon. By spring 2010, the price had increased to $3.00 a gallon. Assume that there were no changes in average income, population, or any other
During 2010, the average income in China increased by 10 percent. Compared to 2009, how do you expect the following would change:a. The demand for beef? Explain your answer.b. The demand for rice?
William Gregg owned a mill in South Carolina.In December 1862, he placed a notice in the Edgehill Advertiser announcing his willingness to exchange cloth for food and other items.Here is an extract:1
a. Draw a graph to illustrate production, consumption, and trade in the South before the Civil War.b. Was the South consuming inside, on, or outside its PPF ? Explain your answer.c. Draw a graph to
In what did the South have a comparative advantage?
Lots of Little Screens Inexpensive broadband access has created a generation of television producers for whom the Internet is their native medium. As they redirect the focus from TV to computers,
Malaria Eradication Back on the Table In response to the Gates Malaria Forum in October 2007, countries are debating the pros and cons of eradication. Dr. Arata Kochi of the World Health Organization
The table describes the preferences in Yucatan.Sunscreen Willingness to pay(gallons per month) (pounds of food per gallon)25 3 75 2 125 1a. What is the marginal benefit from sunscreen and how is it
Explain why the United States does not produce tea and instead imports it from India.
Sketch a figure similar to Fig. 2.6 on p. 40 to show how both the United States and Brazil can gain from specialization and trade.Use this news clip to work Problems 18 to 20.Time For Tea Americans
For 50 years, Cuba has had a centrally planned economy in which the government makes the big decisions on how resources will be allocated.a. Why would you expect Cuba’s production possibilities(per
Suppose that Tessa buys a new machine for making jackets that enables her to make 20 jackets an hour. (She can still make only 80 caps per hour.)a. Who now has a comparative advantage in producing
A farm grows wheat and produces pork. The marginal cost of producing each of these products increases as more of it is produced.a. Make a graph that illustrates the farm’s PPF.b. The farm adopts a
What is Harry’s marginal cost of tennis if he plays for (i) 3 hours a week; (ii) 5 hours a week;and (iii) 7 hours a week?
Define marginal benefit, explain how it is measured, and explain why the data in the table does not enable you to calculate Brazil’s marginal benefit from food.
a. If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol?b. If Brazil increases its production of food
a. Draw a graph of Brazil’s PPF and explain how your graph illustrates scarcity.b. If Brazil produces 40 barrels of ethanol a day, how much food must it produce to achieve production efficiency?c.
1.13. Suppose the government reduced the tax rate on income from savings.a. Who would benefit from this tax reduction most directly?b. What would happen to the capital stock over time?What would
1.12. What is the fundamental tradeoff that society faces if it chooses to save more?
1.11. The chapter says that budget deficits reduce the income of future generations, but can boost output and income during a recession. Explain how both of these statements can be true.
1.10. Surveys suggest that most people are opposed to budget deficits, but these same people elected representatives who in the 1980s and 1990s passed budgets with significant deficits. Why might the
1.9. Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old, or from old to young?a. an increase in the budget deficitb. more
1.8. Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 7 percent per year, are such budget deficits
1.7. Why are the benefits of reducing inflation permanent and the costs temporary? Why are the costs of increasing inflation permanent and the benefits temporary? Use Phillips-curve diagrams in your
1.6. Chapter 2 explains the difference between positive analysis and normative analysis. In the debate about whether the central bank should aim for zero inflation, which areas of disagreement
1.5. The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new
1.4. Some economists have proposed that the Fed use the following rule for choosing its target for the federal funds interest rate (r):r 2% π 1/2 (y y*)/y* 1/2 (π π*), where π is the
1.3. Suppose that people suddenly wanted to hold more money balances.a. What would be the effect of this change on the economy if the Federal Reserve followed a rule of increasing the money supply by
1.2. Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. Why is it difficult for policymakers to choose the appropriate
1.1. The chapter suggests that the economy, like the human body, has “natural restorative powers.”a. Illustrate the short-run effect of a fall in aggregate demand using an
1.11. What adverse effect might be caused by tax incentives to raise saving?
1.10. Give an example, other than tax policy, of how our society discourages saving.
1.9. Some income from capital is taxed twice. Explain.
1.8. Some economists say that the government can continue running a budget deficit forever. How is that possible?
1.7. Give an example of how the government might hurt young generations, even while reducing the government debt they inherit.
1.6. What are two situations in which most economists view a budget deficit as justifiable?
1.5. Explain two ways in which a government budget deficit hurts a future worker.
1.4. Why are some economists against a target of zero inflation?
1.3. Explain how credibility might affect the cost of reducing inflation.
1.2. What might motivate a central banker to cause a political business cycle? What does the political business cycle imply for the debate over policy rules?
1.1. What causes the lags in the effect of monetary and fiscal policy on aggregate demand? What are the implications of these lags for the debate over active versus passive policy?
1.Explain how reducing the government debt makes future generations better off. What fiscal policy might improve the lives of future generations more than reducing the government debt?
1.Explain the costs and benefits of reducing inflation to zero.Which are temporary and which are permanent?
1.Give an example of a monetary policy rule. Why might your rule be better than discretionary policy? Why might it be worse?
1.Explain why monetary and fiscal policy work with a lag.Why do these lags matter in the choice between active and passive policy?
1.11. Suppose Federal Reserve policymakers accept the theory of the short-run Phillips curve and the naturalrate hypothesis and want to keep unemployment close to its natural rate. Unfortunately,
1.10. Given the unpopularity of inflation, why don’t elected leaders always support efforts to reduce inflation?Economists believe that countries can reduce the cost of disinflation by letting
1.9. Imagine an economy in which all wages are set in threeyear contracts. In this world, the Fed announces a disinflationary change in monetary policy to begin immediately. Everyone in the economy
1.8. Some economists believe that the short-run Phillips curve is relatively steep and shifts quickly in response to changes in the economy. Would these economists be more or less likely to favor
1.7. Suppose the Federal Reserve announced that it would pursue contractionary monetary policy in order to reduce the inflation rate. Would the following conditions make the ensuing recession more or
1.6. The price of oil fell sharply in 1986 and again in 1998.a. Show the impact of such a change in both the aggregate-demand/aggregate-supply diagram and in the Phillips-curve diagram. What happens
1.5. Suppose the Federal Reserve believed that the natural rate of unemployment was 6 percent when the actual natural rate was 5.5 percent. If the Fed based its policy decisions on its belief, what
1.4. Suppose the economy is in a long-run equilibrium.a. Draw the economy’s short-run and long-run Phillips curves.b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect
1.3. Suppose that a fall in consumer spending causes a recession.a. Illustrate the changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. What
1.2. Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.a. a rise in the natural rate of
1.1. Suppose the natural rate of unemployment is 6 percent.On one graph, draw two Phillips curves that can be used to describe the four situations listed below. Label the point that shows the
1.5. The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs be reduced?
1.4. Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run tradeoff between inflation and unemployment?
1.3. What’s so natural about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries?
1.2. Draw the long-run tradeoff between inflation and unemployment. Explain how the short-run and longrun tradeoffs are related.
1.1. Draw the short-run tradeoff between inflation and unemployment. How might the Fed move the economy from one point on this curve to another?
1.What is the sacrifice ratio? How might the credibility of the Fed’s commitment to reduce inflation affect the sacrifice ratio?
1.Give an example of a favorable shock to aggregate supply.Use the model of aggregate demand and aggregate supply to explain the effects of such a shock. How does it affect the Phillips curve?
1.13. Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed.a. How would the Fed respond to an event
1.12. For various reasons, fiscal policy changes automatically when output and employment fluctuate.a. Explain why tax revenue changes when the economy goes into a recession.b. Explain why government
1.11. Assume the economy is in a recession. Explain how each of the following policies would affect consumption and investment. In each case, indicate any direct effects, any effects resulting from
1.10. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.a. when the investment accelerator is large, or when it
1.9. Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve took no action in response, or if the Fed were committed to maintaining a fixed
1.8. Suppose the government reduces taxes by $20 billion, that there is no crowding out, and that the marginal propensity to consume is 3/4.a. What is the initial effect of the tax reduction on
1.7. Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion.a. If these economists ignore the possibility of
1.6. This chapter explains that expansionary monetary policy reduces the interest rate and thus stimulates demand for investment goods. Explain how such a policy also stimulates the demand for net
1.5. In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously.a. If we define money to include checking deposits, what effect did
1.4. The interest rate in the United States fell sharply during 1991. Many observers believed this decline showed that monetary policy was quite expansionary during the year. Could this conclusion be
1.3. Consider two policies—a tax cut that will last for only one year, and a tax cut that is expected to be permanent.Which policy will stimulate greater spending by consumers? Which policy will
1.2. Suppose banks install automatic teller machines on every block and, by making cash readily available, reduce the amount of money people want to hold.a. Assume the Fed does not change the money
1.1. Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. Illustrate your answers with diagrams.a. The Fed’s bond traders
1.5. Give an example of a government policy that acts as an automatic stabilizer. Explain why this policy has this effect.
1.4. Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country.If policymakers do nothing, what will happen to aggregate demand? What should the Fed do
1.3. The government spends $3 billion to buy police cars.Explain why aggregate demand might increase by more than $3 billion. Explain why aggregate demand might increase by less than $3 billion.

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