Question: If an earthquake destroys some of the

> Which of the following events would strengthen the argument for the use of discretionary policy, and which would strengthen the argument for rules? a. Structural changes make the economy’s self-correcting mechanism work more quickly and reliably than bef

> During the financial crisis and recovery, stock market prices first fell by about 55 percent and then rose by about 65 percent. Did investors therefore come out ahead? Explain why not.

> Create your own numerical example to illustrate how leverage magnifies returns both on the upside and on the downside.

> If the expected default rate on a particular mortgage-backed security is 4 percent per year, and the corresponding Treasury security carries a 3 percent annual interest rate, what should be the interest rate on the mortgage-backed security? What happens

> Consider an economy in which government purchases, taxes, and net exports are all zero. The consumption function is C = 300 + 0.75Y and investment spending (I) depends on the rate of interest (r) in the following way: I = 1,000 – 100r Find the equilibriu

> Explain how your answers to Test Yourself Question 5 would differ if each of the assumptions changed. Specifically, what sorts of changes in the assumptions would weaken the effects of monetary policy?

> Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions: a. Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage point. b. Each 1 percentage point decline in interest rat

> Treasury bills have a fixed face value (say, $1,000) and pay interest by selling at a discount. For example, if a one-year bill with a $1,000 face value sells today for $950, it will pay $1,000 – $950 = $50 in interest over its life. The interest rate on

> Suppose the Fed purchases $5 billion worth of government bonds from Bill Gates, who banks at the Bank of America in San Francisco. Show the effects on the balance sheets of the Fed, the Bank of America, and Gates. (Hint: Where will the Fed get the $5 bil

> Fredonia has the following consumption function: C = 100 + 0.8DI Firms in Fredonia always invest $700 and net exports are zero, initially. The government budget is balanced with spending and taxes both equal to $500. a. Find the equilibrium level of GDP.

> Which of the following is considered a fixed tax and which a variable tax? a. The gasoline tax b. The corporate income tax c. The estate tax d. The payroll tax

> Suppose there is $120 billion of cash and that half of this cash is held in bank vaults as reserves, all of which are required (that is, banks hold no excess reserves). How large will the money supply be if the required reserve ratio is 10 percent? 121⁄2

> For each of the transactions listed in Test Yourself Question 3, what will be the ultimate effect on the money supply if the required reserve ratio is one-eighth (12.5 percent)? Assume that the oversimplified money multiplier formula applies. Question 3

> Now put yourself in charge of the economy in Test Yourself Question 2, and suppose that full employment comes at a GDP of $1,840. How can you push income up to that level?

> Suppose you are put in charge of fiscal policy for the economy described in Test Yourself Question 1. There is an inflationary gap, and you want to reduce income by $120. What specific actions can you take to achieve this goal?

> Return to the hypothetical economy in Test Yourself Question 1, and now suppose that both taxes and government purchases are increased by $120. Find the new equilibrium under the assumption that consumer spending continues to be exactly three-quarters of

> Consider an economy similar to that in the preceding question in which investment is also $200, government purchases are also $500, net exports are also $30, and the price level is also fixed. But taxes now vary with income, and as a result, the consumpt

> Use an aggregate supply-and-demand diagram to show that multiplier effects are smaller when the aggregate supply curve is steeper. Which case gives rise to more inflation—the steep aggregate supply curve or the flat one? What happens to the multiplier if

> Add the following aggregate supply-and-demand schedules to the example in Test Yourself Question 1 of Chapter 9 to see how inflation affects the multiplier. a. Draw these schedules on a piece of graph paper. b. Notice that the difference between columns

> Suppose a worker receives a wage of $20 per hour. Compute the real wage (money wage deflated by the price index) corresponding to each of the following possible price levels: 85, 95, 100, 110, 120. What do you notice about the relationship between the re

> Use both numerical and graphical methods to find the multiplier effect of the following shift in the consumption function in an economy in which investment is always $220, government purchases are always $100, and net exports are always -$40. (Hint: What

> Imagine an economy in which consumer expenditure is represented by the following equation: C = 50 + 0.75DI Imagine also that investors want to spend $500 at every level of income (I = $500), net exports are zero (X – IM = 0), government purchases are $30

> An economy has the following consumption function: C = 200 + 0.8DI The government budget is balanced, with government purchases and taxes both fixed at $1,000. Net exports are $100. Investment is $600. Find equilibrium GDP. What is the multiplier for thi

> Keep everything the same as in Test Yourself Question 4 except change investment to I = $1,100. Use the equilibrium condition Y = C + I + G + (X – IM) to find the equilibrium level of GDP on the demand side. (In working out the answer, assume the price l

> Consider an economy in which the consumption function takes the following simple algebraic form: C = 300 + 0.75DI and in which investment (I) is always $900 and net exports are always –$100. Government purchases are fixed at $1,300 and taxes are fixed at

> From the following data, construct an expenditure schedule on a piece of graph paper. Then use the income-expenditure (45° line) diagram to determine the equilibrium level of GDP. Compare your answer with your answer to the previous question.

> From the following data, construct an expenditure schedule on a piece of graph paper. Then use the income-expenditure (45° line) diagram to determine the equilibrium level of GDP. Now suppose investment spending rises to $260, and the price le

> Which of the following acts constitute investment according to the economist’s definition of that term? a. Pfizer builds a new factory in the United States to manufacture pharmaceuticals. b. You buy 100 shares of Pfizer stock. c. A small drugmaker goes b

> Show on a graph how capital formation shifts the production function. Use this graph to show that capital formation increases labor productivity. Explain in words why labor is more productive when the capital stock is larger.

> Which of the following prices would you expect to rise rapidly over long periods of time? Why? a. Cable television rates b. Football tickets c. Internet access d. Household cleaning services e. Driving lessons

> Imagine that new inventions in the computer industry affect the growth rate of productivity as follows: Would such a pattern help explain U.S. productivity performance since the mid-1970s? Why?

> The following table shows real GDP per hour of work in four imaginary countries in the years 2008 and 2018. By what percentage did labor productivity grow in each country? Is it true that productivity growth was highest where the initial level of product

> Below you will find nominal GDP and the GDP deflator (based on 2012 = 100) for the years 1996, 2006, and 2016. a. Compute real GDP for each year. b. Compute the percentage change in nominal and real GDP from 1996 to 2006, and from 2006 to 2016. c. Comput

> Country A and Country B have identical population growth rates of 1 percent per annum, and everyone in each country always works 40 hours per week. Labor productivity grows at a rate of 2 percent in Country A and a rate of 2.5 percent in Country B. What

> Most economists believe that from 2010 to 2017, actual GDP in the United States grew slightly faster than potential GDP. What, then, should have happened to the unemployment rate over those three years? Before that, from 2006 to 2010, actual GDP grew slo

> Two countries start with equal GDPs. The economy of Country A grows at an annual rate of 3 percent, whereas the economy of Country B grows at an annual rate of 4 percent. After 25 years, how much larger is Country B’s economy than Country A’s economy? Wh

> Which of the following transactions are included in gross domestic product, and by how much does each raise GDP? a. Smith pays a carpenter $50,000 to build a garage. b. Smith purchases $10,000 worth of materials and builds himself a garage, which is wort

> The following table summarizes information about the market for principles of economics textbooks: a. What is the market equilibrium price and quantity of textbooks? b. To quell outrage over tuition increases, the college places a $55 limit on the price

> The following are the assumed supply and demand schedules for hamburgers in Collegetown: a. Plot the supply and demand curves and indicate the equilibrium price and quantity. b. What effect would a decrease in the price of beef (a hamburger input) have o

> The demand and supply curves for T-shirts in Touristtown, U.S.A., are given by the following equations: Q = 24,000 − 500P Q = 6,000 + 1,000P where P is measured in dollars and Q is the number of T-shirts sold per year. a. Find the equilibrium price and q

> Consider the market for beef discussed in this chapter (Tables 1 through 3 and Figures 1 and 8). Suppose that the government decides to fight cholesterol by levying a tax of 50 cents per pound on sales of beef. Follow these steps to analyze the effects o

> The two accompanying diagrams show supply and demand curves for two substitute commodities: regular cell phones and smartphones. a. On the right-hand diagram, show what happens when rising raw material prices make it costlier to produce regular cell phon

> What shapes would you expect for the following demand curves? a. A medicine that means life or death for a patient b. French fries in a food court with kiosks offering many types of food

> Now complicate Trivialand in the following ways and answer the same questions. In addition, calculate national income and disposable income. a. The government bought 50 cars, leaving only 150 cars for export. In addition, the government spent $800,000 o

> How are the following demand curves likely to shift in response to the indicated changes? a. The effect of a drought on the demand curve for umbrellas b. The effect of higher popcorn prices on the demand curve for movie tickets c. The effect on the deman

> Comment on the following: “Sharp changes in the volume of investment in the United States help explain both the productivity slowdown in 1973 and the productivity speed-up in 1995.”

> Explain why economic growth might be higher in a country with well-established property rights and a stable political system compared with a country where property rights are uncertain and the government is unstable.

> The United States is one of the world’s wealthiest countries. Think of a recent case in which the decisions of the U.S. government were severely constrained by scarcity. Describe the trade-offs that were involved. What were the opportunity costs of the d

> Roughly speaking, what fraction of U.S. labor works in factories? In service businesses? In government?

> A bottle of wine you bought 15 years ago for $20 now has a market value of $1,500. Would you sell your bottle at that price or keep it for an important occasion? Would you purchase another bottle of such old wine at that high price?

> Which is the biggest national economy on earth? Why has it remained bigger than other countries with much larger labor forces or those with higher per capita incomes?

> Explain why national income and gross domestic product would be essentially equal if there were no depreciation.

> When the income-tax rate declines, as it did in the United States in the early 2000s, does the multiplier go up or down? Explain why.

> The following outline provides a complete description of all economic activity in Trivialand for 2018. Draw up versions of Tables 3 and 4 for Trivialand showing GDP computed in two different ways. There are thousands of farmers but only two big business

> You are probably covered by your parents’ health insurance policy. Where do they get health insurance?

> How much student debt do you expect to have on graduation day? Could you have attended your college without incurring this debt?

> Do you think it is “fair” that gig workers have no minimum wage, no health insurance, and no pension? Is it efficient?

> What platform markets do you participate in? Do network effects there seem important to you? Why or why not? If you pay to participate in a platform, would you still participate if the price was doubled?

> One member of the Federal Open Market Committee says, “With the unemployment rate below 4 percent, inflation is bound to rise.” A second member objects: “There is very little reason to believe that.” Comment on their dispute.

> You probably bank online, rather than go to the bank. When your parents went to college, hardly anyone did that. What jobs did online banking destroy? What jobs did it create? How might artificial intelligence change the banking business?

> In 2017, Congress passed the series of tax cuts that President Trump advocated. What effect did this policy likely have on the U.S. trade deficit? Why?

> Explain why a currency depreciation leads to an improvement in a country’s trade balance.

> If inflation is lower in Germany than in Italy, and the exchange rate between the two countries is fixed (as it is, because of the monetary union), what is likely to happen to the balance of trade between the two countries?

> Suppose you want to reserve a hotel room in London for the coming summer but are worried that the value of the pound may rise between now and then, making the room too expensive for your budget. Explain how a speculator could relieve you of this worry. (

> The example in the appendix showed that the Student Price Index (SPI) rose by 42 percent from 1987 to 2017. You can understand the meaning of this better if you do the following: a. Use Table 5 to compute the fraction of total spending accounted for by e

> Under the old gold standard, what do you think happened to world prices when a huge gold strike occurred in California in 1849? What do you think happened when the world went without any important new gold strikes for 20 years or so?

> During the first half of the 1980s, inflation in (West) Germany was consistently lower than that in the United States. What, then, does the purchasing-power parity theory predict should have happened to the exchange rate between the mark and the dollar b

> Country A has a cold climate with a short growing season, but a highly skilled labor force (think of Finland). What sorts of products do you think it is likely to produce? What are the characteristics of the countries with which you would expect it to tr

> Given the current state of the economy, what sort of fiscal-monetary policy mix seems most appropriate to you now?

> Newspaper reports frequently suggest that the administration (regardless of who is president) wants the Fed to lower interest rates. In view of your answer to Test Yourself Question 3, why do you think that might be the case?

> In December 2008, the Fed reduced the federal funds rate to approximately zero. What should it have done then? Why? What did it actually do?

> Given the behavior of velocity shown in Figure 1, would it make more sense for the Federal Reserve to formulate targets for M1 or M2?

> What factors do you think bankers normally use to distinguish “prime” borrowers from “subprime” borrowers?

> Since 2017, the federal government’s budget deficit has been rising because of tax cuts and increased spending. If the Federal Reserve wanted to maintain the same level of aggregate demand in the face of large increases in the budget deficit, what should

> What are some reasons behind the worldwide trend toward greater central bank independence? Are there arguments on the other side?

> Average hourly earnings in the U.S. economy during several past years were as follows: Use the CPI numbers provided on the inside back cover of this book to calculate the real wage (in 1982–1984 dollars) for each of these years. Which d

> Each year during the Christmas shopping season, consumers and stores increase their holdings of cash. Explain how this development could lead to a multiple contraction of the money supply. (As a matter of fact, the authorities prevent this contraction fr

> Which of the proposed supply-side tax cuts appeals to you most? Draw up a list of arguments for and against enacting such a cut right now.

> If the government decides that aggregate demand is excessive and is causing inflation, what options are open to it? What if the government decides that aggregate demand is too weak instead?

> Explain in words why rising prices reduce the multiplier effect of an autonomous increase in aggregate demand.

> Explain why a decrease in the price of foreign oil shifts the aggregate supply curve outward to the right. What are the consequences of such a shift?

> Try to remember where you last spent a dollar. Explain how this dollar will lead to a multiplier chain of increased income and spending. (Who received the dollar? What will he or she do with it?)

> Does the economy this year seem to have an inflationary gap or a recessionary gap?

> Look back at the income-expenditure diagram in Figure 3 and explain why some level of real GDP other than $6,000 (say, $5,000 or $7,000) is not an equilibrium on the demand side of the economy. Do not give a mechanical answer to this question. Explain th

> What is a consumption function, and why is it a useful device for government economists planning a tax cut?

> What would the circular flow diagram (Figure 1) look like in an economy with no government? Draw one for yourself.

> Use the following data to compute the College Price Index for 2017 using the base 1987 = 100.

> Explain the logic behind the finding that variable imports reduce the numerical value of the multiplier?

> Explain the basic logic behind the multiplier in words. Why does it require b, the marginal propensity to consume, to be between 0 and 1?

> What would happen to the multiplier analysis if b = 0? If b = 1?

> Explain the difference between government spending and government purchases of goods and services (G). Which is larger?

> Explain the difference between final goods and intermediate goods. Why is it sometimes difficult to apply this distinction in practice? In this regard, why is the concept of value added useful?

> Discuss the pros and cons of having a higher or lower multiplier.

> What is meant by a “factor of production”? Have you ever sold any on a market?

> Explain why a government policy maker cannot afford to ignore economic theory.

> Relate the process of abstraction to the way you take notes in a lecture. Why do you not try to transcribe every word uttered by the lecturer? Why don’t you write down just the title of the lecture and stop there? How do you decide, roughly speaking, on

> Think about a way you would construct a model of how your college is governed. Which officers and administrators would you include and exclude from your model if the objective were one of the following: a. To explain how decisions on financial aid are ma

> Fill in the blanks in the following table of GDP statistics:

> Why is it so difficult to define full employment? What unemployment rate should the government be shooting for today?

> “Unemployment is no longer a social problem because unemployed workers receive unemployment benefits and other benefits that make up for most of their lost wages.” Comment.