Assuming the economy is operating below its potential output, what is the impact of an increase in net exports on real GDP? Why is it difficult, if not impossible, for a country to boost its net exports by increasing its tariffs during a global recession?
> If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: a. MR < MC. b. MR = MC. c. MR > MC. d. none of the above.
> A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which: a. TR and TC are equal. b. TR exceeds TC by as much as possible. c. TC exceeds TR by as much as possible. d. None of the above.
> Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time of the market values of various total outputs? How is t
> Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales: a. What can you conclude about the structure of the industry in which this firm is operating? Explain. b. Graph the demand, total-revenue
> If the inflation premium is 2 percent and the nominal interest rate is 1 percent, what is the real interest rate? What if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent?
> Suppose that the nominal rate of inflation is 4 percent and the inflation premium is 2 percent. What is the real interest rate? Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflati
> If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in so
> How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
> If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year’s rate of inflation? What term do economists use to describe this second
> Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that
> Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? Wh
> Suppose that a country’s annual growth rates were 5, 3, 4, -1, -2, 2, 3, 4, 6, and 3 in yearly sequence over a 10-year period. What was the country’s trend rate of growth over this period? Which set of years most clearly demonstrates an expansionary phas
> Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is: a. A horizontal line at 2 cents per paper clip. b. A ve
> In what ways are national income statistics useful?
> Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will ______________ and Jermaine will _______________ cucumbers for lettuce. LO4 a. Fall; substitute b. Rise; substitute c. Fall; supply
> Using Big Data to set personalized prices cannot be done with 100 percent precision. What would happen if personalized prices were set higher than customers' reservation prices? Would this possibility reduce the incentive to set the highest possible per
> It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly.
> Explain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal-cost) pricing and (b) fair-return (average-total-cost) pricing. What is the “dilemma
> Would you expect a country with a total fertility rate of 2.7 to have a growing or a shrinking population over the long run? What about a country with a total fertility rate of 1.2? In 20 years, will America have more or fewer workers per retiree than it
> What, if any, are the benefits and costs of economic growth, particularly as measured by real GDP per capita?
> Relate each of the following to the 1995 to 2010 increase in the trend rate of productivity growth: a. Information technology b. Increasing returns c. Network effects d. Global competition
> Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage.
> True or False: If false, explain why. a. Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future. b. Many public capital goods are complementary to private
> What is growth accounting? To what extent have increases in U.S. real GDP resulted from more labor inputs? From greater labor productivity? Rearrange the following contributors to the growth of productivity in order of their quantitative importance: econ
> True or False. Because price stickiness only matters in the short run, economists are comfortable using just one macroeconomic model for all situations.
> Suppose that Alpha and Omega have identically sized working-age populations but that total annual hours of work are much greater in Alpha than in Omega. Provide two possible reasons for the difference.
> What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.
> Why are some countries today much poorer than other countries? Are today’s poor countries destined to always be poorer than today’s rich countries? If so, explain why. If not, explain how today’s poor countries can catch or even pass today’s rich countri
> When and where did modern economic growth first happen? What are the major institutional factors that form the foundation for modern economic growth? What do they have in common?
> What is Say’s Law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use production possibilities analysis to demonstrate Keynes’ view on t
> What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? How does the idea of a liquidity trap relate to cyclical asymmetry? Why is this possibility of a liquidity trap significant to policymakers?
> Explain the links between changes in the nation’s money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
> Suppose that you are a member of the Board of Governors of the Federal Reserve System. The post-2008 economy is experiencing a sharp rise in the inflation rate. What change in the federal funds rate would you recommend? How would your recommended change
> Distinguish between how the Fed would have to undertake restrictive monetary policy today versus before the mortgage-debt crisis. What actions would it need to take in each case?
> Distinguish between the federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
> If the demand for a firm’s output unexpectedly decreases, you would expect that its inventory would: LO4 a. Increase. b. Decrease. c. Remain the same. d. Increase or remain the same, depending on whether prices are sticky.
> How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies possibly less efficient than firms?
> What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
> What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determ
> By what chain of causation does the ECB think negative interest rates will stimulate the economy? If the Fed manages to raise interest rates up to historical levels before the next recession, will it have to consider negative interest rates as a first co
> Refer to the accompanying table for Moola to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap)
> Suppose that inflation is 2 percent, the Federal funds rate is 4 percent, and real GDP falls 2 percent below potential GDP. According to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate?
> Suppose that the target range for the federal funds rate is 1.5 to 2.0 percent but that the equilibrium federal funds rate is currently 1.70 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo
> Refer to Table 36.2 and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Fin
> In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed.
> Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. In the table provided, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond pri
> Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasi
> If an economy has fully flexible prices and demand unexpectedly increases, you would expect that the economy’s real GDP would tend to: LO4 a. Increase. b. Decrease. c. Remain the same.
> What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap?
> Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the decline in the aggregate expenditures
> Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in the private closed economy? a. A decline in the real interest rate. b. An overall decrease in the expected rate of return on inv
> Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP
> Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed eco
> What is an investment schedule and how does it differ from an investment demand curve?
> How is economic growth measured? Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades?
> U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing re
> Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text? Explain.
> If an economy has sticky prices and demand unexpectedly increases, you would expect the economy’s real GDP to: LO4 a. Increase. b. Decrease. c. Remain the same.
> Suppose that for years East Confetti’s short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 2 percentage point decline in its inflation rate. Then, during several recent years the short ru
> Suppose that over a 30-year period Buskerville’s price level increased from 72 to 138 while its real GDP rose from $1.2 trillion to $2.1 trillion. Did economic growth occur in Buskerville? If so, by what average yearly rate? Did Buskerville experience in
> Suppose that the equation for a particular short-run AS curve is P = 20 + .5Q, where P is the price level and Q is real output in dollar terms. What is Q if the price level is 120? Suppose that the Q in your answer is the full-employment level of output.
> Use the accompanying figure to answer the follow questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (or full-employment) level of output.
> Critically evaluate and explain each statement: a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay. b. The pure monopolist seeks the output that will
> Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to (a) price, (b) output, (c) profits, (d) allocation of resources, and (e) impact on income transfers. Since both monopolists and c
> How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist’s demand curve not perfectly inelastic?
> Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?
> “No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist.” Do you agree? Explain. How might you use Chapter 6’s concept of cross elasticity of demand to judge whether a monopol
> How do the entry and exit of firms in a purely competitive industry affect resource flows and long-run profits and losses?
> True or False. The term economic investment includes purchasing stocks, bonds, and real estate.
> Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced. a. If this firm kept on in
> A new production technology for making vitamins is invented by a college professor who decides not to patent it. Thus, it is available for anybody to copy and put into use. The TC per bottle for production up to 100,000 bottles per day is given in the fo
> Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a norma
> Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers. The first group described by the demand and revenue data that you developed for problem 1. The demand and revenue data for the second group of buyers is
> Suppose a pure monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in problem 4 at the end of Chapter 10. Calculate the missing total-revenue and marginal-revenue amounts, and determine th
> Relate opportunity costs to why profits encourage entry into purely competitive industries and how losses encourage exit from purely competitive industries.
> The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price: a. May be so low that the regulated monopoly can’t break even. b. May cause the regulated monopoly to engage in price discrimination. c.
> The socially optimal price (P = MC) is socially optimal because: a. It reduces the monopolist’s profit. b. It yields a normal profit. c. It minimizes ATC. d. It achieves allocative efficiency.
> Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has: a. The higher elasticity of demand
> How often do perfectly competitive firms engage in price discrimination? a. Never. b. Rarely. c. Often. d. Always.
> True or False. Larger MPCs imply larger multipliers.
> Use the demand schedule below to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal-revenue curves, and explain the relationships between them. Explain why the marginal revenue of the fourth unit o
> The MR curve of perfectly competitive firm is horizontal. The MR curve of monopoly firm is: a. Horizontal, too. b. Upsloping. c. Downsloping. d. It depends.
> Which of the following could explain why a firm is a monopoly? Select one or more answers from the choices shown. a. Patents b. Economies of scale. c. Inelastic demand. d. Government licenses. e. Downsloping market demand.
> If total spending is just sufficient to purchase an economy’s output, then the economy is: a. In equilibrium. b. In recession. c. In debt. d. In expansion.
> If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by ________ taxes or ________ government expenditures. a. Increasing; increasing. b. Increasing; decreasing
> The economy’s current level of equilibrium GDP is $780 billion. The full employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that the economy faces ________ expenditure gap of ________. a. An inflationary; $5 billio
> True or False: The aggregate expenditures model assumes flexible prices.
> A depression abroad will tend to ________ our exports, which in turn will _________ net exports, which in turn will ________ equilibrium real GDP. a. Reduce; reduce; reduce. b. Increase; increase; increase. c. Reduce; increase; increase. d. Increase; re
> If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by: a. $2 billion. b. $3 billion. c. $8 billion. d. $15 billion. e. None of the above.
> If inventories unexpectedly rise, then production ________ sales and firms will respond by ________ output. a. Trails; expanding. b. Trails; reducing. c. Exceeds; expanding. d. Exceeds; reducing.
> If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier? a. 1.0. b. 2.5. c. 4.0. d. 5.0.
> True or False: If spending exceeds output, real GDP will decline as firms cut back on production.
> Suppose that the price level is constant and that investment decreases sharply. How would you show this decrease in the aggregate expenditures model? What would be the outcome for real GDP? How would you show this fall in investment in the aggregate dema
> Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not the aggregate demand curve.”
> Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively: a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real outpu
> Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) The
> An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusted back to producing at full employment, the price level would ___________. a. Increase. b. Decrease. c.
> If the money supply fell by 10 percent, a monetarist would expect nominal GDP to _________. a. Rise. b. Fall. c. Stay the same.
> Suppose that the money supply is $1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be: a. $1 trillion. b. $4 trillion. c. $5 trillion. d. $8 trillion.
> First, imagine that both input and output prices are fixed in the economy. What does the aggregate supply curve look like? If AD decreases in this situation, what will happen to equilibrium output and the price level? Next, imagine that input prices are
