Question: According to the simple quantity of money,

> If the model of politics and government presented in this chapter is true, what are some of the things we would expect to see?

> Many individuals learn more about the car they are thinking of buying than about the candidates running for president of the United States. Explain why.

> Would voters have a greater incentive to vote in an election involving only a few registered voters or in one that has many? Why? Why might a Republican label her opponent too far left and a Democrat label his opponent too far right?

> The economist James Buchanan said, “If men should cease and desist from their talk about and their search for evil men and commence to look instead at the institutions manned by ordinary people, wide avenues for genuine social reform might appear.” What

> “Rent seeking may be rational from the individual’s perspective, but it is not rational from society’s perspective.” Do you agree or disagree? Explain your answer.

> Evaluate each of the following proposals for reform in terms of the material discussed in this chapter: (a) Linking all spending programs to visible tax hikes (b) A balanced-budget amendment stipulating that Congress cannot spend more than total tax re

> Some individuals see national defense spending as benefiting special interests—in particular, the defense industry. Others see it as directly benefiting not only the defense industry but the general public as well. Does this same difference between viewp

> Some observers maintain that not all politicians move toward the middle of the political spectrum in order to obtain votes. They often cite Barry Goldwater in the 1964 presidential election and George McGovern in the 1972 presidential election as example

> It has been suggested that non-activists are not concerned with the level of Real GDP and unemployment because most (if not all) non-activist monetary proposals set stabilization of the price level as their immediate objective. Discuss.

> The shape of the aggregate supply curve matters to one’s view of the ability of government to change Real GDP by way of demand-side fiscal policy and monetary policy. Do you agree or disagree? Explain your answer.

> Something is referred to as a “double-edged sword” if it can have both favorable and unfavorable consequences. In what way might government bailouts of failing companies or financial institutions be a double-edged sword? Explain your answer.

> Outline the details of the debate between economists who favor a rules-based monetary policy and those who favor a discretionary monetary policy.

> Some economists argue that if the economy currently needs to be stimulated to remove it from a recessionary gap, how government spends more money (on X or Y) matters less than the fact that it spends more money. Do all economists agree? If not, what do t

> Whether an economist argues in favor of a rise in government spending (as an expansionary fiscal policy measure) could have something to do with the degree of crowding out he expects as a result of the measure. Do you agree or disagree? Explain your answ

> Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with how he views the current size and scope of government in relationship to his optimal size a

> Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with whether she views the government spending multiplier as greater or less than the tax multip

> How an economist thinks the economy works—is it self-regulating or not?—influences his opinion of the role government should play in trying to stabilize the economy. Do you agree or disagree? Explain your answer.

> There is little doubt that if income tax rates are cut, the size of the budget deficit will increase. Do you agree or disagree? Explain your answer.

> What do the values of the government spending and tax multipliers have to do with getting the biggest bang for the buck?

> Explain how the monetarist transmission mechanism works.

> Can tax revenue rise and the budget deficit decline as a result of an income tax rate cut? Explain your answer.

> Some property rights structures provide more and stronger incentives to produce goods and services than other such structures do. Do you agree or disagree with this statement? Explain your answer.

> What is an institution? Why might institutions matter to how much economic growth a country experiences?

> What is the difference between business cycle macroeconomics and economic growth macroeconomics?

> How does discovering and implementing new ideas cause economic growth?

> What is new about new growth theory?

> What do interest rates and the tax treatment of the returns to capital have to do with economic growth?

> What does it mean to say that “a change in labor moves us along a given production function”?

> Why might special-interest groups favor transfer-promoting policies over growth-promoting policies?

> Why might per-capita real economic growth be a more useful measurement than absolute real economic growth?

> Explain how the Keynesian transmission mechanism works.

> What evidence can you point to which suggests that individuals form their expectations adaptively? What evidence can you point to which suggests that individuals form their expectations rationally?

> New Keynesian theory holds that wages are not completely flexible because of such things as long-term labor contracts. New classical economists often respond that experience teaches labor leaders to develop and bargain for contracts that allow for wage a

> Assume a current short-run tradeoff between inflation and unemployment, as well as a change in technology that permits the wider dispersion of economic policy news. How would the change affect the trade-off? Explain your answer.

> Suppose a permanent downward-sloping Phillips curve existed and offered a menu of choices of different combinations of inflation and unemployment rates to policymakers. How do you think society would go about deciding which point on the Phillips curve it

> Why is the new classical theory associated with the word “classical”? Why has it been said that classical theory failed where new classical theory succeeds—because the former could not explain the business cycle (the ups and downs of the economy), but th

> “The policy ineffectiveness proposition (connected with new classical theory) does not eliminate policymakers’ ability to reduce unemployment through aggregate demand-increasing policies, because they can always increase aggregate demand by more than the

> What is a major difference between adaptive and rational expectations? Give an example of each.

> According to Friedman, how do we know when the economy is in long-run equilibrium?

> The expected inflation rate is 5 percent and the actual inflation rate is 7 percent. According to Friedman, is the economy in long-term equilibrium? Explain your answer.

> In the real business cycle theory, why can’t the change in the money supply prompted by a series of events catalyzed by an adverse supply shock be considered the cause of the business cycle?

> Fed actions affect the money market but not the bond market. Do you agree or disagree with this statement? Explain your answer.

> “Even if some people do not form their expectations rationally, the new classical theory is not necessarily of no value.” Discuss this statement.

> Explain both the short- and long-run movements of the Friedman natural rate theory, assuming that expectations are formed adaptively.

> Suppose the government undertakes an expansionary fiscal policy measure that raises aggregate demand, but individuals incorrectly anticipate the measure (bias upward). What will the short- and long-run changes be in the price level and Real GDP?

> What does it mean to say that the Phillips curve presents policymakers with a menu of choices?

> Suppose the objective of the Fed is to increase Real GDP. To this end, it increases the money supply. Can anything offset the increase in the money supply so that Real GDP does not rise? Explain your answer.

> According to monetarism, an increase in the money supply will lead to a rise in Real GDP in the long run. Do you agree or disagree with this statement? Explain your answer.

> In monetarism, how will each of the following affect the price level in the short run? (a) An increase in velocity (b) A decrease in velocity (c) An increase in the money supply (d) A decrease in the money supply

> In the simple quantity theory of money, what will lead to an increase in aggregate demand? In monetarism, what will lead to an increase in aggregate demand?

> In the simple quantity theory of money, the AS curve is vertical. Explain why.

> Identify the state of the bond market (equilibrium, shortage, surplus), given each of the following: (a) Shortage in the money market (b) Surplus in the money market (c) Equilibrium in the money market

> Can the money supply support a GDP level greater than itself? Explain your answer.

> What does inflation look like in a country that imposes and maintains price ceilings on goods and services?

> Suppose the money supply increased 30 days ago. Whether the nominal interest rate is higher, lower, or the same today as it was 30 days ago depends on what? Explain your answer.

> Suppose the money supply rises on Tuesday and by Thursday the interest rate has risen also. Is the rise in the interest rate more likely the result of the income effect or of the expectations effect? Explain your answer.

> To a potential borrower, which would be more important, the nominal interest rate or the real interest rate? Explain your answer.

> What is the difference between buying stocks and buying bonds?

> Why can’t a firm that issues a bond set the coupon rate at any rate it wants?

> What is the difference between an inflation-indexed Treasury bond and a non-indexed Treasury bond?

> How does a futures contract work?

> Special-interest groups may be in a prisoner’s dilemma setting when it comes to seeking transfers. Explain.

> Why might a special-interest group favor a transfer policy over an economic growth policy?

> Part of the economic case against government is that it sometimes acts as a transfer mechanism. Explain.

> Part of the economic case for government intervention in the economy is that government can remove individuals from a prisoner’s dilemma setting. Explain.

> The advocates of flexible exchange rates often argue that it is better for a nation to adopt policies to meet domestic economic goals than to sacrifice domestic economic goals to maintain a fixed exchange rate. Explain.

> Diagrammatically represent an overvalued currency.

> Suppose the money supply rises. Is the interest rate guaranteed to decline initially? Why or why not?

> Give a numerical example to explain the purchasing power parity (PPP) theory.

> Under a flexible exchange rate system, a difference in income growth rates between countries can affect the exchange rate. Do you agree or disagree? Explain.

> On the foreign exchange market, the demand for one currency is closely connected to the supply of another. Do you agree or disagree? Explain.

> What is the infant industry argument for protectionism? How might this argument be abused?

> Diagrammatically represent the revenue received due to a tariff.

> Diagrammatically represent the decline in consumers’ surplus due to a tariff.

> Diagrammatically represent both consumers’ surplus and producers’ surplus.

> Country A can produce either 10X and 0Y or 0x and 20Y. Country B can produce either 30X and 0Y or 0X and 40Y. Identify the opportunity cost of producing each good for each country. Identify the comparative advantage of each country. A B  10X 0Y 30X

> People can pay for good weather, good school districts, and good views indirectly as opposed to directly. Do you agree or disagree? Explain your answer.

> There is a limit to how many gifts a gift giver will give to a gift recipient. Do you agree or disagree? Explain and diagrammatically represent your answer.

> With respect to the interest rate; (a) What is the liquidity effect? (b) What is the price-level effect? (c) What is the expectations effect?

> The larger the shortage of students at a university, the greater is the freedom that instructors have to teach their courses the way they want to teach them. Do you agree or disagree? Explain your answer. S Tuition ($)4 9,000 8,000 5,000 Di D2 Do 50

> The size of the town in which you live can affect how you behave. Explain.

> No theory is perfectly descriptive of reality. Explain.

> From the individual’s perspective, can rent seeking be rational? Explain your answer.

> Identify two reasons that a good deal of legislation is likely to be special-interest legislation.

> Is a voter more likely to be rationally ignorant in an election in which she is one of 100 voters or one of 10 million voters? Explain your answer.

> Outline the details of the median voter model.

> Give a numerical example to show that a simple-majority decision rule can lead to a project being undertaken for which the costs are greater than the benefits. Voters Benefits Taxes Vote  A $50 25 Yes  B $30 25 Yes  C $26 25 Yes  D 

> Not all economists are agreed as to whether government should bail out companies in financial problems. Explain.

> What does the size of the government spending multiplier relative to the size of the tax multiplier have to do with the effectiveness of fiscal policy at changing Real GDP?

> In recent years, economists have argued about the true value of the real interest rate at any one time and over time. Given that the Nominal interest rate = Real interest rate + Expected inflation rate, it follows that the Real interest rate = Nominal in

> Outline the details of the debate between economists who say the economy is self-regulating and those who say it is not. SRAS, Price LRAS SRAS, AD, Real GDP

> What does crowding out have to do with the effectiveness of fiscal policy at changing Real GDP? SRAS Price LRAS AD2 AD, Real GDP

> What is the relationship between the shape of the aggregate supply curve and the effectiveness of monetary policy at changing Real GDP? Price AS SRAS AD2 AD, Real GDP

> Represent the production function “Real GDP = T(L,K) diagrammatically, and then identify the movement and shift factors.

> If country A has a growth rate of 2 percent and country B has a growth rate of 5 percent, in how many fewer years will it take country B to double its Real GDP than it will take country A?

> Does a rise in Real GDP lead to a rise in per-capita Real GDP? Why or why not?

> Explain how a rise in the technology coefficient can lead to a rightward shift in the LRAS curve.

> Explain how an increase in labor can lead to a rightward shift in the LRAS curve.

> What does stagflation look like in a diagram with the unemployment rate on the horizontal axis and the inflation rate on the vertical axis?

> Explain the details of the Friedman natural rate theory.