Question: If the MPS rises, then the MPC

> 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.

> The actual reason that banks must hold required reserves is: a. To enhance liquidity and deter bank runs. b. To help fund the Federal Deposit Insurance Corporation, which insures bank deposits. c. To give the Fed control over the lending ability of comm

> A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves? a. $100 million. b. $88 million. c. $12 million. d. $2 million.

> A goldsmith has $2 million of gold in his vaults. He issues $5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued? a. 1/10. b. 1/5. c. 2/5. d. 5/5.

> Which of the following help to explain why the aggregate demand curve slopes downward? a. When the domestic price level rises, our goods and services become more expensive to foreigners. b. When government spending rises, the price level falls. c. There

> What is rent seeking and how does it differ from the kinds of profit maximization and profit seeking that we discussed in previous chapters? Provide an actual or hypothetical example of rent seeking by firms in an industry. By a union. By a professional

> Compare the elasticity of a monopolistic competitor’s demand with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and outputs that would result in the long run under pure competition and

> What do economists mean when they say Social Security and Medicare are "pay-as-you-go" plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security

> Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the stock of capital, and economic growth. How might investment in public capital and complementarities betw

> Why might economists be quite concerned if the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP?

> True or false? If false, explain why. a. The total public debt is more relevant to an economy than the public debt as a percentage of GDP. b. An internally held public debt is like a debt of the left hand owed to the right hand. c. The Federal Reserve a

> How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public debt differ from an externally

> Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is

> Define the cyclically-adjusted budget, explain its significance, and state why it may differ from the actual budget. Suppose the full-employment, noninflationary level of real output is GDP3 (not GDP2) in the economy depicted in Figure 33.3. If the econo

> Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy’s built-in stability?

> Some politicians have suggested that the United States enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contract

> In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a $500 raise so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam’s MPC out of his $500 raise? a. 0.50. b. 0.75. c. 0.80. d. 1.00.

> (For students who were assigned Chapter 29) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 29.7). Explain how equal-size increases

> What are government’s fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large?

> What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university affiliations of the present members of the CEA.

> How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a mo

> Suppose that the investment demand curve in a certain economy is such that investment declines by $100 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billio

> Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 1, a budget deficit of $20 billion in year 2, a budget surplus of $10 billion in year 3, and a budget deficit of $2 billion in year 4. What is the

> Refer to the table for Waxwania in problem 4. Suppose that Waxwania is producing $600 of real GDP, whereas the potential real GDP (or full-employment real GDP) is $700. How large is its budget deficit? Its cyclically adjusted budget deficit? Its cyclical

> Refer to the accompanying table for Waxwania: a. What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, regressive? b. Suppose Waxwania is producing $600 of real GDP,

> (For students who were assigned Chapter 29) Assume that, without taxes, the consumption schedule for an economy is as shown below: a. Graph this consumption schedule. What is the size of the MPC? b. Assume that a lump-sum (regressive) tax of $10 billio

> Refer back to the table in Figure 30.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level. By what percent will the price level increase? Will this inflati

> What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? What is the fundamental reason that

> Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the sam

> Suppose GDP is $5.0 trillion, resource extraction is $0.5 trillion, production is $1.5 trillion, and distribution is $1.0 trillion. a. How big is GO? b. How big is GO minus GDP?

> On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax incre

> Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?

> What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?

> What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.

> Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to exp

> Which of the following statements are true? Which are false? Explain why the false statements are untrue. a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output. b. The long-run aggregat

> Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?

> In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. A

> An increase in _______ GDP guarantees that more goods and services are being produced by an economy. a. Nominal. b. Real.

> If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

> Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent. a. What is the amount of excess reserves in this commercial bank

> The balance sheet at the top of the next page is for Big Bucks Bank. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank’s b

> Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in re

> The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank no

> Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?

> Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?

> Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, or operational lag. a. To fight a recession, Congress has passed a bill to increase

> Last year, while an economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have b

> During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers? a. Yes. b. No

> When discussing pure competition, the term long run refers to a period of time long enough to allow: a. Firms already in an industry to either expand or contract their capacities. b. New firms to enter or existing firms to leave. c. Both a and b. d. Non

> The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxe

> Which of the following would help a government reduce an inflationary output gap? a. Raising taxes. b. Lowering taxes. c. Increasing government spending. d. Decreasing government spending.

> Which of the following items will be included in official U.S. GDP statistics? Select one or more answers from the choices shown. a. Revenue generated by illegal marijuana growers in Oregon. b. Money spent to clean up a local toxic waste site in Ohio. c

> What are the major categories of firms that make up the U.S. financial services industry? Are there more or fewer banks today than before the start of the financial crisis of 2007-2008? Why are the lines between the categories of financial firms even mor

> What is TARP and how was it funded? What is meant by the term “lender of last resort” and how does it relate to the financial crisis of 2007-2008? How do government and Federal Reserve emergency loans relate to the concept of moral hazard?

> How do each of the following relate to the financial crisis of 2007-2008: declines in real estate values, subprime mortgage loans, mortgage backed securities, AIG.