Question: Economists agree that inflation reduces real

> Explain: “Politicians would make more rational economic decisions if they weren’t running for reelection every few years.”

> You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Tab

> Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense,

> Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?

> State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?

> Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate?

> Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.

> How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?

> What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?

> According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream ec

> Real GDP equals _________ times _________. LO4 a. Average hours of work; quantity of capital. b. Average hours of work; allocative efficiency. c. Labor input; labor productivity. d. Natural resources; improvements in technology.

> Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion,

> Suppose that the equation for the SLM is Y = 0.05 + 0.04X, where Y is the average expected rate of return, 0.05 is the vertical intercept, 0.04 is the slope, and X is the risk level as measured by beta. What is the risk-free interest rate for this SML? W

> Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. a. What are the rates of return of assets A and B at their current

> Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chan

> Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investm

> Suppose that you desire to get a lump sum payment of $100,000 two years from now. Rounded to full dollars, how many current dollars will you have to invest today at a 10 percent interest to accomplish your goal?

> Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 4 years from now?

> Identify each of the following situations as something that either promotes growth or retards growth. a. Increasing corruption allows government officials to steal people’s homes. b. A nation introduces patent laws for the first time. c. A court order s

> True or False: Countries that currently have low real GDPs per capita are destined to always have lower living standards than countries that currently have high real GDPs per capita.

> In 1820 living standards in various places around the globe were _________ they are today. a. More widely varying than. b. Just as widely varying as. c. Less widely varying than.

> If real GDP grows at 7 percent per year, then real GDP will double in approximately _________ years. a. 70. b. 14. c. 10. d. 7.

> A mathematical approximation called the rule of 70 tells us that the number of years that it will take something that is growing to double in size is approximately equal to the number 70 divided by its percentage rate of growth. Thus, if Mexico’s real GD

> True or false. The law of diminishing marginal utility predicts the consumption behavior of addicts quite well.

> Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels. How many p

> Let MUA = z = 10 - x and MUB = z = 21 - 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. Ho

> You are choosing between two goods, X and Y, and your marginal utility from each is as shown in the table below. If your income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of each will you purchase to maximize utility? Wh

> Columns 1 through 4 in the table below show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of

> Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup, no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the th

> John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does John show diminishing marginal utility for Coke or does

> Mylie’s total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, -50 utils after five repetitions, and -200 utils after six

> In what way is criminal behavior similar to consumer behavior? Why do most people obtain goods via legal behavior as opposed to illegal behavior? What are society's main options for reducing illegal behavior?

> Rank each of the following three gift possibilities in terms of how much utility they are likely to bring and explain your reasoning.  A store-specific gift card worth $15, a $15 item from that specific store, and $15 of cash that can be spent anywh

> Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $100 million to $200 million between one year and the next. Assuming that the price of gold increased by 100 percent over the same period, by what numer

> A “mathematically fair bet” is one in which the amount won will on average equal the amount bet, for example when a gambler bets, say, $100 for a 10 percent chance to win $1,000 ($100 = .10 x $1,000). Assuming diminishing marginal utility of dollars, exp

> Answer the following questions, which relate to the aggregate expenditures model: LO8 a. If C is $100, Ig is $50, Xn is –$10, and G is $30, what is the economy’s equilibrium GDP? b. If real GDP in an economy is currently $200, C is $100, Ig is $50, Xn is

> Refer to the accompanying table in answering the questions that follow: a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By

> Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also

> Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does

> Assume that, without taxes, the consumption schedule of an economy is as follows: a. Graph this consumption schedule and determine the MPC. b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all level

> The data in columns 1 and 2 in the accompanying table are for a private closed economy: a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy. b. Now open up this economy to international trade by including the export an

> Suppose that a certain country has an MPC of .9 and a real GDP of $400 billion. If its investment spending decreases by $4 billion, what will be its new level of real GDP?

> By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?

> Using the consumption and saving data in problem 1 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and plann

> Suppose that the annual rates of growth of real GDP of Econoland over a five-year period were sequentially as follows: 3 percent, 1 percent, -2 percent, 4 percent, and 5 percent. What was the average of these growth rates in Econoland over these 5 years?

> Assuming the level of investment is $16 billion and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and

> Using the utility-maximization rule as your point of reference, explain the income and substitution effects of an increase in the price of product B, with no change in the price of product A.

> Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up

> In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as 7 Eleven, Kwik Shop, and Circle K), although their prices are generally much higher than prices in large supermarkets. What explains the success of t

> True or False: Lenders are helped by unanticipated inflation.

> Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would

> Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Jimmer’s real income change next year? a. -2 percent. b. 8 percent. c. 10 percent. d. 12 percent.

> Cost-push inflation occurs when there is __________________________. LO3 a. Excess inventory. b. A trade deficit. c. Rising per-unit production costs. d. Excess demand for goods and services.

> A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy’s negative GDP gap? a. 1 percent. b. 3 percent. c. 6 percent. d. 10 percent.

> What government agency compiles the U.S. NIPA tables? In what U.S. department is it located? Of the several specific sources of information, name one source for each of the four components of GDP: consumption, investment, government purchases, and net ex

> The unemployment rate that is consistent with full employment is known as _________________________. a. The natural rate of unemployment. b. The unnatural rate of unemployment. c. The status quo rate of unemployment. d. Cyclical unemployment. e. Okun’s

> Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus

> Suppose that an economy has 9 million people working full time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed.

> Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in ___________________. a. The level of total spending. b. The level of the stock market. c. The

> Place the phases of the business cycle in order. a. Recession b. Trough c. Peak d. Expansion

> Explain: a. Before economic growth, there were too few goods; after growth, there is too little time. b. It is irrational for an individual to take the time to be completely rational in economic decision making. c. Telling your spouse where you would li

> How can time be incorporated into the theory of consumer behavior? Explain the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”

> Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70

> Complete the following table and answer the questions below: a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? b. “A rational consumer will purchase only 1 unit of

> What information is contained in an indifference curve? Why are such curves (a) downsloping and (b) convex to the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? Why can’t indifference curv

> Why does gross output do a better job than GDP of measuring overall economic activity? How could you construct a new statistic that focused only on non-final economic activity? Given what you know about the behavior of GO and GDP during the Great Recessi

> What do you think of the ethics of using unconscious nudges to alter people’s behavior? Before you answer, consider the following argument made by economists Richard Thaler and Cass Sunstein, who favor the use of nudges. They argue that in most situation

> Evaluate the following statement. “We shouldn’t generalize from what people do in the ultimatum game because $10 is a trivial amount of money. When larger amounts of money are on the line, people will act differently.”

> Do people playing the dictator game show only self-interested behavior? How much divergence is there in the splits given by dictators to the other player?

> What does behavioral economics have to say about each of the following statements? a. “Nobody is truly charitable-they just give money to show off.” b. “America has a ruthless capitalist system. Considerations of fairness are totally ignored.” c. “Self

> In the early 1990’s, New Jersey and Pennsylvania both reformed their automobile insurance systems so that citizens could opt for either a less-expensive policy that did not allow people to sue if they got into accidents or a more-expensive policy that di

> You just accepted a campus job helping to raise money for your school’s athletic program. You are told to draft a fund-raising letter. The bottom of the letter asks recipients to write down a donation amount. If you want to raise as much money as possibl

> Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike

> “There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic.

> Economist Gerd Gigerenzer characterizes heuristics as “fast and frugal” ways of reaching decisions. Are there any costs to heuristics being “fast and frugal”? Explain and give an example of how a fast and frugal method for doing something in everyday l

> Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental proc

> Which of the following are included or excluded in this year’s GDP? Explain your answer in each case. a. Interest received on an AT&T corporate bond. b. Social Security payments received by a retired factory worker. c. Unpaid services of a family member

> True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

> True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

> If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________bonds. a. Buy. b. Sell.

> Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. a. The Fed raises the discount rate from 5 percent to 6 percent. b. The Fed raises the reserve ratio from 10 percent to 11 percent. c. The

> A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent and the Fed is currently mandating a reserve ratio of 10 percent.

> A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ___________ in money-creating potential. If the reserve ratio is 14 percent, the bank has ___________ in money-creating p

> Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves: a. Federal Reserve Banks purchase securities from banks. b. Commercial banks borrow from Federal Res

> A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply: a. Increases by $100,000. b. Decreases by $100,000. c. Is unaffected by the transaction.

> When bond prices go up, interest rates go_______ . a. Up. b. Down. c. Nowhere.

> Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?

> Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index and what is its role in differentiating nominal GDP and real GDP

> Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’ dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will

> Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates?

> What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?

> In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued

> If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?

> Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore diversifiable risk?

> Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the compa

> What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?

> How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes b

> What is compound interest? How does it relate to the formula: X dollars today = (1 + i ) tX dollars in t years? What is present value? How does it relate to the formula: X/(1 + i)t dollars today = X dollars in t years?

> Define net exports. Explain how U.S. exports and imports each affects domestic production. How are net exports determined? Explain how net exports might be a negative amount.

> Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first sta