Questions and Answers of Economics Today The Macro View

1.3 Explain how an open market purchase increases the money supply.
1.2 What is the difference between the Fed and the U.S.Treasury?
1.1 Identify the major responsibilities of the Federal Reserve System.
1.How does the Fed expand or contract the money supply?
1.4. If bank A borrows $10 million from the Fed, what happens to the reserves in bank A? in the banking system?
1.3. If bank A borrows $10 million from bank B, what happens to the reserves in bank A? in the banking system?
1.2. What is the difference between the federal funds rate and the discount rate?
1.1. How does the money supply change as a result of (a) an increase in the discount rate,(b) an open market purchase, (c) an increase in the required reserve ratio?
1.Why would the Fed want to increase the money supply?
1.3. What does it mean to say the Fed acts as “lender of last resort”?
1.2. What is the most important responsibility of the Fed?
1.1. The president of which Federal Reserve District Bank holds a permanent seat on the Federal Open Market Committee (FOMC)?
1.What is the difference between the U.S. Treasury and the Fed?
1.• How does the Fed expand or contract the money supply?
1.6 The Fed creates $100,000 in new money that is deposited in someone’s checking account in a bank.What is the maximum change in the money supply if the required reserve ratio is 5 percent? 10
1.5 Suppose r 10 percent and John walks into his bank, withdraws $2,000 in cash, and burns the money.What is the maximum change in the money supply as a result?
1.4 Suppose r 10 percent and the Fed creates $20,000 in new money that is deposited in someone’s checking account in a bank.What is the maximum change in the money supply as a result?
1.3 Suppose that instead of Joanna getting $10,000 from the sky or through a check from a friend, she gets the money from her mother, who had buried it in a can in her backyard. In this case, would
1.2 Suppose Joanna Ferris receives $10,000 from her friend Ethel and deposits the money in a checking account.Ethel gave Joanna the money by writing a check on her checking account.Would the maximum
1.1 Suppose $10,000 in new dollar bills (never seen before)falls magically from the sky into the hands of Joanna Ferris. What are the minimum increase and the maximum increase in the money supply
1.14 Does a cash leakage affect the change in checkable deposits and the money supply expansion process?Explain your answer.
1.13 Describe the money supply contraction process.
1.12 Describe the money supply expansion process.
1.11 Give an example that illustrates a change in the composition of the money supply.
1.10 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
1.9 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.
1.8 Why isn’t a credit card money?
1.7 Can M1 fall as M2 rises? Can M1 rise without M2 rising too? Explain your answers.
1.6 If you were on an island with 10 other people and there was no money, do you think money would emerge on the scene? Why or why not?
1.5 “Money is a means of lowering the transaction costs of making exchanges.” Do you agree or disagree? Explain your answer.
1.4 Explain why gold backing is not necessary to give paper money value.
1.3 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?
1.2 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
1.1 Does inflation, which is an increase in the price level, affect the three functions of money? If so, how?
1.What do William Shakespeare, Ludwig van Beethoven, Wolfgang Amadeus Mozart, Robert Louis Stevenson, and Albert Einstein have to do with money evolving out of a barter economy?
1.3. Bank A has $1.2 million in reserves and $10 million in deposits. The required reserve ratio is 10 percent. If bankA loses $200,000 in reserves, by what dollar amount is it reserve deficient?
1.2. 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?
1.1. 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?
1.A bank has $100 million in checkable deposits and the required reserve ratio is 10 percent. How much of the $100 million does the bank need to have in reserves?
1.3. How does money reduce the transaction costs of making trades?
1.2. 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.
1.1. Why (not how) did money evolve out of a barter economy?
1.Are we saying here that it was selfinterest that got people out of a barter economy and into a money economy?
1.• What do William Shakespeare, Ludwig van Beethoven,Wolfgang Amadeus Mozart, Robert Louis Stevenson, and Albert Einstein have to do with money evolving out of a barter economy?
1.8 Graphically illustrate the following:a Fiscal policy destabilizes the economy.b Fiscal policy eliminates an inflationary gap.c Fiscal policy only partly eliminates a recessionary gap.
1.7 Graphically illustrate how government can use supplyside fiscal policy to get an economy out of a recessionary gap.
1.6 Graphically show how fiscal policy works in the ideal case.
1.5 There are three income earners in society, and all three must pay income taxes.The taxable income of Smith is $40,000, the taxable income of Jones is $100,000, and the taxable income of Brown is
1.4 What is the average tax rate of someone with a taxable income of $13,766? Taxable Income $1,000-$5,000 $5,001-$10,000 $10,001-$15,000 Taxes 10% of taxable income $500+12% of everything over
1.3 What is the marginal tax rate on the 10,001st dollar?What is the marginal tax rate on the 10,000th dollar? Taxable Income $1,000-$5,000 $5,001-$10,000 $10,001-$15,000 Taxes 10% of taxable
1.2 If a person’s income is $14,000, how much does she pay in taxes? Taxable Income $1,000-$5,000 $5,001-$10,000 $10,001-$15,000 Taxes 10% of taxable income $500+12% of everything over $5,000
1.1 If a person’s income is $6,000, how much does he pay in taxes? Taxable Income $1,000-$5,000 $5,001-$10,000 $10,001-$15,000 Taxes 10% of taxable income $500+12% of everything over $5,000
1.12 Will tax cuts that are perceived to be temporary affect the SRAS and LRAS curves differently than tax cuts that are perceived to be permanent? Explain your answer.
1.11 The economy is in a recessionary gap and both Smith and Jones advocate expansionary fiscal policy. Does it follow that both Smith and Jones favor “big government”?
1.10 Explain how expansionary fiscal policy can, under certain conditions, destabilize the economy.
1.9 Tax cuts will likely affect aggregate demand and aggregate supply. Does it matter which is affected more?Explain in terms of the AD-AS framework.
1.8 Is crowding out equally likely under all economic conditions?Explain your answer.
1.7 The Laffer curve, which shows (among other things)that a tax rate reduction can increase tax revenues,became very popular and was widely cited a couple of years before, during, and for a few
1.6 The debate over using government spending and taxing powers to stabilize the economy involves more than technical economic issues. Do you agree or disagree?Explain your answer.
1.5 Some economists argue for the use of fiscal policy to solve economic problems; others argue against its use.What are some of the arguments on both sides?
1.4 Why is crowding out an important issue in the debate over the use of fiscal policy?
1.3 Explain two ways crowding out may occur.
1.2 A progressive income tax always raises more revenue than a proportional income tax. Do you agree or disagree?Explain your answer.
1.1 Is it true that under a proportional income tax structure, a person who earns a higher income will pay more in taxes than a person who earns a lower income?Explain your answer.
1.2. If income tax rates rise, will income tax revenues rise too?
1.1. Give an arithmetic example to illustrate the difference between the marginal and average tax rates.
1.3. Give an example of the indirect effect of crowding out.
1.2. How might lags reduce the effectiveness of fiscal policy?
1.1. How does crowding out question the effectiveness of expansionary demand-side fiscal policy?
1.It seems to me that economists should get together and decide, once and for all, whether or not crowding out exists and whether or not the fiscal policy lags are substantive enough to destroy the
1.4. What is the cyclical budget deficit?
1.3. What three taxes account for the bulk of federal tax revenues?
1.2. What percentage of all income taxes was paid by the top 5 percent of income earners in 2005? What percentage of total income did this income group receive in 2005?
1.1. Explain the differences among progressive, proportional, and regressive income tax structures.
1.• How much is spent on food stamps?On national defense?
1.• Will increases in federal government spending increase aggregate demand in the economy?
1.• Who are the rich and how much do they pay in taxes?
1.• Do lower tax rates mean a larger deficit?
1.8 In the previous figure, if Natural Real GDP is Q2, what state is the economy in at point A?
1.7 In the following figure, explain what happens if:a The economy is at Q1.b The economy is at Q2. TP, TE C A E B. 45 Line TE = C + 1+ G 0 Q Q3 Q Real GDP
1.6 Look at Exhibit 8(d). What does the vertical distance between the origin and the point at which the TE curve cuts the vertical axis represent?
1.5 The TE curve in Exhibit 8(d) is upward sloping because the consumption function is upward sloping.Explain.
1.4 Explain the following using the figure below.a According to Keynes, aggregate demand may be insufficient to bring about the full-employment output level (or Natural Real GDP).b A decrease in
1.3 Economist Smith believes that changes in aggregate demand affect only the price level, and economist Jones believes that changes in aggregate demand affect only Real GDP. What do the AD and AS
1.2 Write an investment function (equation) that specifies two components: (a) autonomous investment spending and (b) induced investment spending.
1.1 Compute the multiplier in each of the following cases:a MPC 0.60 b MPC 0.80 c MPC 0.50
1.19 How will a rise in government purchases change the TE curve in Exhibit 9?
1.18 If Real GDP is $10.4 trillion in Exhibit 9, what is the state of business inventories?
1.17 Identify the three states of the economy in terms of TE and TP.
1.16 What role do inventories play in the equilibrating process in the simple Keynesian model (as described in the TE-TP framework)?
1.15 Explain how to derive a total expenditures (TE) curve.
1.14 Suppose consumption rises and investment and government purchases remain constant. How will the AD curve shift in the simple Keynesian model? Under what condition will the rise in Real GDP be
1.13 What does the aggregate supply curve look like in the simple Keynesian model?
1.12 According to Keynes, can the private sector always remove the economy from a recessionary gap? Explain your answer.
1.11 Can a person believe that wages are inflexible downward for, say, one year and also believe in a self-regulating economy? Explain your answer.
1.10 According to Keynes, an increase in saving and decrease in consumption may lower total spending in the economy.But how could this happen if the increased saving lowers interest rates (as shown
1.9 What factors will shift the AD curve in the simple Keynesian model?
1.8 According to Keynes, can an increase in saving shift the AD curve to the left? Explain your answer.
1.7 A change in what factors will lead to a change in consumption?
1.6 Explain how a rise in autonomous spending can increase total spending by some multiple.

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