Question: If the nominal interest rate is 8

> To a potential borrower, which would be more important, the nominal interest rate or the real interest rate? Explain your answer.

> What is the difference between buying stocks and buying bonds?

> Why can’t a firm that issues a bond set the coupon rate at any rate it wants?

> What is the difference between an inflation-indexed Treasury bond and a non-indexed Treasury bond?

> How does a futures contract work?

> Special-interest groups may be in a prisoner’s dilemma setting when it comes to seeking transfers. Explain.

> Why might a special-interest group favor a transfer policy over an economic growth policy?

> Part of the economic case against government is that it sometimes acts as a transfer mechanism. Explain.

> Part of the economic case for government intervention in the economy is that government can remove individuals from a prisoner’s dilemma setting. Explain.

> The advocates of flexible exchange rates often argue that it is better for a nation to adopt policies to meet domestic economic goals than to sacrifice domestic economic goals to maintain a fixed exchange rate. Explain.

> Diagrammatically represent an overvalued currency.

> Suppose the money supply rises. Is the interest rate guaranteed to decline initially? Why or why not?

> Give a numerical example to explain the purchasing power parity (PPP) theory.

> Under a flexible exchange rate system, a difference in income growth rates between countries can affect the exchange rate. Do you agree or disagree? Explain.

> On the foreign exchange market, the demand for one currency is closely connected to the supply of another. Do you agree or disagree? Explain.

> What is the infant industry argument for protectionism? How might this argument be abused?

> Diagrammatically represent the revenue received due to a tariff.

> Diagrammatically represent the decline in consumers’ surplus due to a tariff.

> Diagrammatically represent both consumers’ surplus and producers’ surplus.

> Country A can produce either 10X and 0Y or 0x and 20Y. Country B can produce either 30X and 0Y or 0X and 40Y. Identify the opportunity cost of producing each good for each country. Identify the comparative advantage of each country. A B  10X 0Y 30X

> People can pay for good weather, good school districts, and good views indirectly as opposed to directly. Do you agree or disagree? Explain your answer.

> There is a limit to how many gifts a gift giver will give to a gift recipient. Do you agree or disagree? Explain and diagrammatically represent your answer.

> With respect to the interest rate; (a) What is the liquidity effect? (b) What is the price-level effect? (c) What is the expectations effect?

> The larger the shortage of students at a university, the greater is the freedom that instructors have to teach their courses the way they want to teach them. Do you agree or disagree? Explain your answer. S Tuition ($)4 9,000 8,000 5,000 Di D2 Do 50

> The size of the town in which you live can affect how you behave. Explain.

> No theory is perfectly descriptive of reality. Explain.

> From the individual’s perspective, can rent seeking be rational? Explain your answer.

> Identify two reasons that a good deal of legislation is likely to be special-interest legislation.

> Is a voter more likely to be rationally ignorant in an election in which she is one of 100 voters or one of 10 million voters? Explain your answer.

> Outline the details of the median voter model.

> Give a numerical example to show that a simple-majority decision rule can lead to a project being undertaken for which the costs are greater than the benefits. Voters Benefits Taxes Vote  A $50 25 Yes  B $30 25 Yes  C $26 25 Yes  D 

> Not all economists are agreed as to whether government should bail out companies in financial problems. Explain.

> What does the size of the government spending multiplier relative to the size of the tax multiplier have to do with the effectiveness of fiscal policy at changing Real GDP?

> In recent years, economists have argued about the true value of the real interest rate at any one time and over time. Given that the Nominal interest rate = Real interest rate + Expected inflation rate, it follows that the Real interest rate = Nominal in

> Outline the details of the debate between economists who say the economy is self-regulating and those who say it is not. SRAS, Price LRAS SRAS, AD, Real GDP

> What does crowding out have to do with the effectiveness of fiscal policy at changing Real GDP? SRAS Price LRAS AD2 AD, Real GDP

> What is the relationship between the shape of the aggregate supply curve and the effectiveness of monetary policy at changing Real GDP? Price AS SRAS AD2 AD, Real GDP

> Represent the production function “Real GDP = T(L,K) diagrammatically, and then identify the movement and shift factors.

> If country A has a growth rate of 2 percent and country B has a growth rate of 5 percent, in how many fewer years will it take country B to double its Real GDP than it will take country A?

> Does a rise in Real GDP lead to a rise in per-capita Real GDP? Why or why not?

> Explain how a rise in the technology coefficient can lead to a rightward shift in the LRAS curve.

> Explain how an increase in labor can lead to a rightward shift in the LRAS curve.

> What does stagflation look like in a diagram with the unemployment rate on the horizontal axis and the inflation rate on the vertical axis?

> Explain the details of the Friedman natural rate theory.

> Explain how demand-induced, one-shot inflation may seem like supply-induced, one-shot inflation.

> Explain the relationship between the expected price level and the SRAS curve.

> Explain the real business cycle theory.

> Under what condition(s) does the policy ineffectiveness proposition (PIP) hold?

> In the simple quantity theory of money, changes in the money supply affect the price level but not Real GDP. Do you agree or disagree with this statement? Explain your answer.

> Explain and diagrammatically represent the difference between one-shot supply-induced inflation and one-shot demand-induced inflation.

> Starting with long-run equilibrium, use the monetarist model to explain changes in the price level and Real GDP in the short run and long run due to a decline in velocity. Price LRAS SRAS, Level SRAS, P, P2 P3 2. 3 AD, AD2 Q1 QN Real GDP

> Use the equation of exchange to explain changes in the price level.

> What does it mean to say that investment is “interest insensitive”? D Sensitive Insensitive Investment Investment (a) (b) Interest rate Interest rate

> Saying that individuals are holding an “excess supply of money” is absurd because no one ever has enough money. Do you agree or disagree? Explain your answer. Interest Rate S2 excess supply of money Quantity of M

> “One-shot inflation may be a demand-side (of the economy) or a supply-side phenomenon, but continued inflation is likely to be a demand-side phenomenon.” Do you agree or disagree with this statement? Explain your answer.

> Draw both the money market and bond market in equilibrium. Next, explain, and show diagrammatically, show what happens to the interest rate and the price of bonds as a result of the Fed’s decreasing the money supply.

> Explain how monetary policy may destabilize the economy. LRAS SRAS, 1' SRAS, 2. AD, AD, JO, Real GDP Recessionary Gap Inflationary Gap Price Laval

> Explain how, under certain conditions, monetary policy can remove an economy from a recessionary gap. LRAS SRAS 2 AD2 AD, Real GDP

> Explain and diagrammatically represent the Keynesian transmission mechanism.

> A person buys a bond that matures in 10 years and pays a coupon rate of 10 percent. The face value of the bond is $10,000. How much money will the bondholder receive in the tenth year?

> The face value of a bond is $10,000 and the annual coupon payment is $850. What is the coupon rate?

> The closing price of the stock is $66.40, and the net earnings per share are $2.50. What is the stock’s P/E ratio?

> The closing price of a stock is$90.25, and the dividend is $3.50. What is the yield of the stock?

> You own 1,250 shares of stock X, and you read in the newspaper that the dividend for the stock is 3.88. How much did you earn in dividends?

> Special-interest group A receives a 1/100 slice of the economic pie. The group spends $100 to lobby for a policy that transfers $1,000 to it but that also reduces the size of the economic pie by $50,000. What are the net benefits to group A of the polic

> Using Exhibit 3, explain the logic of how both group A and group B are likely to end up in box 4, even though both prefer box 1.

> What are the assumptions and predictions of the simple quantity theory of money? Does the simple quantity theory of money predict well?

> Special-interest group A receives a 1/1,000 slice of the economic pie (Real GDP). The group can lobby for one of two different policies, and in each case the lobbying costs are $100. The first policy will increase the size of the economic pie by $10 m

> How much time a person will devote to producing and stealing depends on the ratio of marginal benefits to marginal costs of each activity. Give a numerical example to illustrate this point.

> If the exchange rate is 0.08 = 1 MXN, what is the cost in dollars of a Mexican table priced at 500 pesos?

> If $1 equals 31 rubles, what does 1 ruble equal?

> If $1 equals 7.7 krone (Danish), what does 1 krone equal?

> If $1 equals ¥0.0093, what does ¥1 equal?

> Use the following information to answer (a) – (c): U.S. Dollar Currency Per Equivalent U.S. Dollar Thursday Friday Thursday Friday Russia (ruble) 0.0318 0.0317 31.41

> In the accompanying figure, PW is the world price and PW + T is the world price plus a tariff. Identify the following: (a) The level of imports at PW (b) The level of imports at PW + T (c) The loss in consumers’ surplus as a result o

> Using the data in the accompanying table, answer the following questions: (a) For which good does Canada have a comparative advantage? (b) For which good does Italy have a comparative advantage? (c) What might be a set of favorable terms of trade for

> Diagrammatically represent what happens to the efficient number of gifts a gift-giver wants to give to a gift recipient as the marginal benefits of giving gifts decline.

> Explain how a gold standard, as monetary policy, would work?

> Diagrammatically represent what happens to the efficient number of gifts that a gift giver wants to give to a gift recipient as the marginal cost of giving gifts declines.

> In part (a) of the accompanying figure, the distribution of voters is skewed to the left; in part (b), the distribution is skewed neither left nor right; and in part (c), it is skewed right. Assuming a two-person race for each distribution, will the cand

> Suppose that the net benefits and net costs for each person are known a week before election day and that it is legal to buy and sell votes. Furthermore, suppose that neither buying nor selling votes has any conscience cost (i.e., one does not feel guilt

> Suppose that three major candidates—A, B, and C—are running for president of the United States and that the distribution of voters is that shown in Exhibit 1. Two of the candidates—A and B─ are currently viewed as right of the median voter, and C is view

> What would the aggregate supply curve look like if a rise in aggregate demand led to a rise in Real GDP but to no change in the price level?

> If the tax base is $100 billion and tax revenues are $15 billion, what is the average tax rate?

> A rise in aggregate demand raises Real GDP and the price level. Draw the aggregate supply curve that is consistent with this statement. Next, a rise in aggregate demand raises the price level but leaves Real GDP unchanged. Draw the aggregate supply curve

> A $40 reduction in taxes increases Real GDP by $100, and a $50 increase in government spending increases Real GDP by $120. What is the tax multiplier? What is the government spending multiplier?

> Let labor be the variable shown on the horizontal axis and Real GDP on the vertical axis. Suppose there is an increase in physical capital. Does the increase lead to a movement along the production function or to a shift in the production function? Expla

> Let labor be the variable shown on the horizontal axis and Real GDP on the vertical axis. Suppose there is a rise in labor. Does this lead to a movement along the production function or to a shift in the production function? Explain your answer. Next, dr

> Does the monetary policy of the market monetarists take into account changes in velocity? Explain your answer.

> Explain numerically how an advance in technology can lead to more output or Real GDP.

> The economy of country X is currently growing at 2 percent a year. How many years will it take to double the Real GDP of country X?

> In each of the following figures (a-d) that follow, the starting point is point 1. Which part (a, b, c, or d) illustrates each of the following? (a) Friedman natural rate theory (short run) (b) New classical theory (unanticipated policy, short run) (c)

> Illustrate graphically what would happen to the price level and Real GDP level if individuals hold rational expectations, prices and wages are flexible, and individuals correctly anticipate a rise in aggregate demand.

> Illustrate graphically what would happen in the short run and in the long run to the price level and Real GDP if individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the rise in aggregate demand (bias upward

> Illustrate graphically what would happen in the short run and in the long run to the price level and Real GDP level if individuals hold rational expectations, prices and wages are flexible, and individuals underestimate the decrease in aggregate demand (

> What does the real interest rate equal, given the following: (a) Nominal interest rate = 8 percent; expected inflation rate = 2 percent (b) Nominal interest rate = 4 percent; expected inflation rate = -4 percent (c) Nominal interest rate = 4 percent; ex

> Use the accompanying figure to answer questions a and b. (a) Suppose the economy is self-regulating and is at point A when there is a one-shot demand-induced inflation. If there are no other changes in the economy, at what point will the eco

> According to the Taylor Rule, if inflation is 8 percent and the GDP gap is 3 percent, what is the recommendation for the federal funds rate target?

> How will things change in the AD-AS framework if a change in the money supply is completely offset by a change in velocity?

> According to market monetarists, what problems might arise from a sharp decline in Nominal GDP?