Question: If inventories unexpectedly rise, then production

> 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?

> 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

> 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 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

> If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _________ curve will shift ____________. a. AD; right. b. AD; left. c. AS; right. d. AS; left.

> True or False: Real GDP is more volatile (variable) than gross investment.

> Explain how the long run differs from the short run in pure competition.

> Refer to Figure 2 in the Appendix and assume that Q1 is $400 and Q2 is $500, the price level is stuck at P1, and the slopes of the AE lines in Figure 2a are .75 and equal to the MPC. In what direction and by how much does the aggregate expenditures sched

> Refer to Figure 1a and 1b in the Appendix. Assume that Q1 is 300, Q2 is 200, Q3 is 100, P3 is 120, P2 is 100, and P1 is 80. If the price level increases from P1 to P3 in graph (b), in what direction and by how much will real GDP change? If the slopes of

> What would you expect to happen to the proportion of big chain restaurants relative to mom and pop restaurants in a town that lowered its minimum wage? Will the proportion change due to exits or entrances? Which type of restaurant will see more in the wa

> If the government decreases expenditures, the AE curve will shift _______ and the AD curve will shift _______. a. Down; left. b. Down; right. c. Up; left. d. Up; right.

> True or False: A higher price level increases aggregate expenditures.

> Critically evaluate and explain: a. In monopolistically competitive industries, economic profits are competed away in the long run; hence, there is no valid reason to criticize the performance and efficiency of such industries. b. In the long run, monop

> What were the monetary and fiscal policy responses to the Great Recession? What were some of the reasons suggested for why those policy responses didn’t seem to have as large an effect as anticipated on unemployment and GDP growth?

> In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.

> Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in house p

> Which of the following scenarios will shift the investment demand curve right? a. Business taxes increase. b. The expected return on capital increases. c. Firms have a lot of unused production capacity. d. Firms are planning on increasing their inventor

> Explain: “Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.” In each case, specify the price-level outcomes.

> Why does a reduction in aggregate demand in the actual economy reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?

> Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.

> What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run aggregate supply curve relatively

> Distinguish between “real-balances effect” and “wealth effect,” as the terms are used in this chapter. How does each relate to the aggregate demand curve?

> Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?

> “Competition in quality and service may be just as effective as price competition in giving buyers more for their money.” Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice competition to price competition.

> Refer to the data in the table that accompanies Problem 2. Suppose that the present equilibrium price level and level of real GDP are 100 and $225, and that data set B represents the relevant aggregate supply schedule for the economy. a. What must be th

> Suppose that the table below shows an economy’s relationship between real output and the inputs needed to produce that output: a. What is productivity in this economy? b. What is the per-unit cost of production if the price of each in

> Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below: a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium

> Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed w

> Answer the following questions on the basis of the three sets of data for the country of North Vaudeville: a. Which set of data illustrates aggregate supply in the immediate short run in North Vaudeville? The short run? The long run? b. Assuming no cha

> Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the econom

> “Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point.” Explain.

> True or False: If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

> Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of r

> True or False: Decreases in AD normally lead to decreases in both output and the price level.

> What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level

> At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is: a. Above equilibrium. b. At equilibrium. c. Below equilibrium. d. More informati

> Which of the following will shift the aggregate supply curve to the right? a. A new networking technology increases productivity all over the economy. b. The price of oil rises substantially. c. Business taxes fall. d. The government passes a law doubli

> Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve. a. A vertical line. b. The price level is fixed. c. Output prices are flexi

> In what direction will each of the following occurrences shift the consumption and saving schedules, other things equal? a. A large decrease in real estate values, including private homes. b. A sharp, sustained increase in stock prices. c. A 5-year incr

> Which of the following will shift the aggregate demand curve to the left? a. The government reduces personal income taxes. b. Interest rates rise. c. The government raises corporate profit taxes. d. There is an economic boom overseas that raises the inc

> Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers. What happened to the money supply? a. Increased. b. Decreased. c. Stayed the same.

> Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system? a. $0. b. $200 million. c.

> Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of twenty percent. In which country would $100 of initial excess reserves be able to cause a l

> The two conflicting goals facing commercial banks are: a. Profit and liquidity. b. Profit and loss. c. Deposits and withdrawals. d. Assets and liabilities.

> A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan _________________. a. Total reserves. b. Excess reserves. c. Total deposits. d. Excess deposits.