Question: If the tax rate is 40 percent,

> Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of

> For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. a. The stock market declines sharply, reducing consumers’ wealth. b. The federal government increases spendi

> Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregatedemand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy. a. Households decide to

> The economy begins in long-run equilibrium. Then one day, the president appoints a new chairman of the Fed. This new chairman is well known for her view that inflation is not a major problem for an economy. a. How would this news affect the price level t

> For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following: a. how the economy recovers from a recession andreturns to its long-run equilibrium without any policy intervention b. what dete

> Explain why the following statements are false. a. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.” b. “The long-run aggregate-supply curve is vertical because economic forces do not

> In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Explain what President R

> Suppose that Americans decided to spend a smaller fraction of their incomes. What would be the effect on saving, investment, interest rates, the real exchange rate, and the trade balance?

> In the model of the open economy just developed, two markets determine two relative prices. What are the markets? What are the two relative prices?

> You consume only soda and pizza. One day, the price of soda goes up, the price of pizza goes down, and you are just as happy as you were before the price changes. a. Illustrate this situation on a graph. b. How does your consumption of the two goods chan

> Describe the sources of supply and demand in the market for loanable funds and the market for foreign-currency exchange.

> Describe supply and demand in the market for loanable funds and the market for foreign-currency exchange. How are these markets linked?

> Suppose that a textile workers’ union encourages people to buy only American-made clothes What would this policy do to the trade balance and the real exchange rate? What is the impact on the textile industry? What is the impact on the auto industry?

> Why are budget deficits and trade deficits sometimes called the twin deficits?

> Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance? b.

> Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers agai

> Suppose that Americans decide to increase their saving. a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, willthis increase in private saving have a large or small effect on U.S. domestic investment? b.

> Suppose that real interest rates increase across Europe. Explain how this development will affect U.S. net capital outflow. Then explain how it will affect U.S. net exports by using a formula from the chapter and by drawing a diagram. What will happen to

> Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a threepanel diagram, show what happens to national saving

> A senator renounces his past support for protectionism: “The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness.” Using

> Compare the following two pairs of goods: • Coke and Pepsi • Skis and ski bindings a. In which case are the two goods complements? In which case are they substitutes? b. In which case do you expect the indifference curves to be fairly straight? In which

> Suppose the French suddenly develop a strong taste for California wines. Answer the following questions in words and with a diagram. a. What happens to the demand for dollars in the market for foreign-currency exchange? b. What happens to the value of do

> An economist discussing trade policy in The New Republic wrote: “One of the benefits of the United States removing its trade restrictions [is] the gain to U.S. industries that produce goods for export. Export industries would find it easier to sell their

> The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quali

> Define nominal exchange rate and real exchange rate, and explain how they are related. If the nominal exchange rate goes from 100 to 120 yen per dollar, has the dollar appreciated or depreciated?

> If the Fed started printing large quantities of U.S. dollars, what would happen to the number of Japanese yen a dollar could buy? Why?

> If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100 yen, what are the nominal and real exchange rates?

> Define net exports and net capital outflow. Explain how and why they are related.

> Describe the difference between foreign direct investment and foreign portfolio investment. Who is more likely to engage in foreign direct investment—a corporation or an individual investor? Who is more likely to engage in foreign portfolio investment?

> Would each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or a decrease in that variable. a. An American buys a Sony TV. b. An American buys a share of Sony stock. c.

> How would the following transactions affect U.S. exports, imports, and net exports? a. An American art professor spends the summer touring museums in Europe. b. Students in Paris flock to see the latest movie from Hollywood. c. Your uncle buys a new Volv

> Jennifer divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States. a. Show the effect of the frost on Jennifer’s budget constraint. b.

> Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. a. In 2000 a can of Spam costs 2 dollars in Ectenia and 6 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos?

> A case study in the chapter analyzed purchasingpower parity for several countries using the price of Big Macs. Here are data for a few more countries: a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Reca

> Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar. a. Explain how you could make a profit from this situation. What would be your profit per bushel of ri

> What is happening to the U.S. real exchange rate in each of the following situations? Explain. a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad. b. The U.S. nominal exchange rate is unchanged, but pr

> Would each of the following groups be happy or unhappy if the U.S. dollar appreciated? Explain. a. Dutch pension funds holding U.S. government bonds b. U.S. manufacturing industries c. Australian tourists planning a trip to the United States d. an Americ

> How would the following transactions affect U.S. net capital outflow? Also, state whether each involves direct investment or portfolio investment. a. An American cellular phone company establishes an office in the Czech Republic. b. Harrods of London sel

> List and describe six costs of inflation.

> The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. What happens to prices? What happens to nominal interest rates? Why might the government be doing this?

> What are the costs of inflation? Which of these costs do you think are most important for the U.S. economy?

> Explain the difference between nominal and real variables and give two examples of each. According to the principle of monetary neutrality, which variables are affected by changes in the quantity of money?

> A current debate in education is whether teachers should be paid on a standard pay scale based solely upon their years of training and teaching experience, or whether part of their salary should be based upon their performance (called “merit pay”). a. Wh

> Suppose that a country’s inflation rate increases sharply. What happens to the inflation tax on the holders of money? Why is wealth that is held in savings accounts not subject to a change in the inflation tax? Can you think of any way holders of savings

> Suppose that changes in bank regulations expand the availability of credit cards so that people need to hold less cash. a. How does this event affect the demand for money? b. If the Fed does not respond to this event, what will happen to the price level?

> Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. a. What is the price level? What is the velocity of money? b. Suppose that velocity is constant and the economy’s output of goods and service

> Explain whether the following statements are true, false, or uncertain. a. “Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.” b. “If prices change in a way that leaves the overall price level unchanged, t

> Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by 5 percent. Describe how this unexpectedly high inflation rate would help or hurt the following: a. the government b. a homeowner with a fixed-rate mortgage c. a union wo

> Recall that money serves three functions in the economy. What are those functions? How does inflation affect the ability of money to serve each of these functions?

> Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2013, the price of beans was $1 and the price of rice was

> List and describe the three functions of money

> Describe how banks create money. • If the Fed wanted to use all of its policy tools to decrease the money supply, what would it do?

> Why is it hard to establish whether a group of workers is being discriminated against? Explain how profit-maximizing firms tend to eliminate discriminatory wage differentials. How might a discriminatory wage differential persist?

> What are the primary responsibilities of the Federal Reserve? If the Fed wants to increase the supply of money, how does it usually do so?

> What is commodity money? What is fiat money? Which kind do we use?

> Why can’t the Fed control the money supply perfectly?

> Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which bank shows a larger change in bank capital? Does either bank remain solv

> Why don’t banks hold 100 percent reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates?

> Who is responsible for setting monetary policy in the United States? How is this group chosen?

> The Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.

> Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans. a. Show the balance sheet of Happy Bank. b. What is Happy Bank’s leve

> You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the bank

> Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio of 10 percent. a. Show a T-account for BSB. b. Now suppose that BSB’s largest depositor withdraws $10 million in cash from her account. If BSB decides to restore it

> Five consumers have the following marginal utility ofapples and pears: The price of an apple is $1, and the price of a pear is $2. Which, if any, of these consumers are optimizing over their choice of fruit? For those who are not, how should they chang

> Your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check from his TNB checking account. Use T-accounts to show the effect of this transaction on your uncle and on TNB. Has your uncle’s wealth changed? Explain.

> Which of the following are considered money in the U.S. economy? Which are not? Explain your answers by discussing each of the three functions of money. a. a U.S. penny b. a Mexican peso c. a Picasso painting d. a plastic credit card

> The economy of Elmendyn contains 2,000 $1 bills. a. If people hold all money as currency, what is the quantity of money? b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money? c. If people h

> Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply by $40 million. a. If the Fed is using open-market ope

> Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier? What is the

> Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells $1 million of government bonds, what is the effect on the economy’s reserves and money supply? b. Now suppose the

> Assume that the reserve requirement is 5 percent. All other things being equal, will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that she had been hiding in her cookie jar? If one creates mor

> How is the unemployment rate measured? How might the unemployment rate overstate the amount of joblessness? How might it understate the amount of joblessness?

> Give four explanations for why firms might find it profitable to pay wages above the level that balances quantity of labor supplied and quantity of labor demanded.

> How does a union in the auto industry affect wages and employment at General Motors and Ford? How does it affect wages and employment in other industries?

> You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the situation: • If both of you work hard, you

> Draw the supply curve and the demand curve for a labor market in which the wage is fixed above the equilibrium level. Show the quantity of labor supplied, the quantity demanded, and the amount of unemployment.

> How would an increase in the world price of oil affect the amount of frictional unemployment? Is this unemployment undesirable? What public policies might affect the amount of unemployment caused by this price change?

> What are the three categories into which the Bureau of Labor Statistics divides everyone? How does the BLS compute the labor force, the unemployment rate, and the labor-force participation rate?

> How do unions affect the natural rate of unemployment?

> Why is frictional unemployment inevitable? How might the government reduce the amount of frictional unemployment?

> Are the following workers more likely to experience short-term or long-term unemployment? Explain. a. a construction worker laid off because of bad weather b. a manufacturing worker who loses his job at a plant in an isolated area c. a stagecoach-industr

> Economists use labor-market data to evaluate how well an economy is using its most valuable resource— its people. Two closely watched statistics are the unemployment rate and the employment–population ratio (calculated as the percentage of the adult popu

> Between January 2010 and January 2013, U.S. employment increased by 4.9 million workers, but the number of unemployed workers declined by only 2.7 million. How are these numbers consistent with each other? Why might one expect a reduction in the number o

> The Bureau of Labor Statistics announced that in January 2013, of all adult Americans, 143,322,000 were employed, 12,332,000 were unemployed, and 89,008,000 were not in the labor force. Use this information to calculate: a. the adult population b. the la

> Suppose that Congress passes a law requiring employers to provide employees some benefit (such as healthcare) that raises the cost of an employee by $4 per hour. a. What effect does this employer mandate have on the demand for labor? (In answering this a

> Consider two communities. In one community, ten families have incomes of $100,000 each and ten families have incomes of $20,000 each. In the other community, ten families have incomes of $200,000 each and ten families have incomes of $22,000 each. a. In

> Structural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufactur

> Consider an economy with two labor markets—one for manufacturing workers and one for service workers. Suppose initially that neither is unionized. a. If manufacturing workers formed a union, what impact would you predict on the wages and employment in ma

> Using a diagram of the labor market, show the effect of an increase in the minimum wage on the wage paid to workers, the number of workers supplied, the number of workers demanded, and the amount of unemployment.

> What benefit do people get from the market for insurance? What two problems impede the insurance market from working perfectly?

> The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years.

> Explain the view of those economists who are skeptical of the efficient markets hypothesis.

> Describe the efficient markets hypothesis and give a piece of evidence consistent with this hypothesis.

> Your bank account pays an interest rate of 8 percent. You are considering buying a share of stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good inves

> Bond A pays $8,000 in 20 years. Bond B pays $8,000 in 40 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.) a. If the interest rate is 3.5 percent, what is the value of

> A company has an investment project that would cost $10 million today and yield a payoff of $15 million in 4 years. a. Should the firm undertake the project if the interest rate is 11 percent? 10 percent? 9 percent? 8 percent? b. Can you figure out the e

> Consider a couple’s decision about how many children to have. Assume that over a lifetime a couple has 200,000 hours of time to either work or raise children. The wage is $10 per hour. Raising a child takes 20,000 hours of time. a. Draw the budget constr

> Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a gameshow, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that p

> When company executives buy and sell stock based on private information they obtain as part of their jobs, they are engaged in insider trading. a. Give an example of inside information that might be useful for buying or selling stock. b. Those who trade

> Which kind of stock would you expect to pay the higher average return: stock in an industry that is very sensitive to economic conditions (such as an automaker) or stock in an industry that is relatively insensitive to economic conditions (such as a wate