Question: On the accompanying graph, draw the consumption
On the accompanying graph, draw the consumption function C = $200 + 0.75YD.
(a) At what level of income do households begin to save? Designate that point on the graph with the letter A.
(b) By how much does consumption increase when income rises $200 beyond point A? Designate this new level of consumption with point B.
(c) Illustrate the impact on consumption of the change in consumer confidence described in the News on page 187.
Transcribed Image Text:
$1,000 LC 900 800 700 600 500 400 300 200 100 45°. $100 200 300 400 500 600 700 800 900 1,000 DISPOSABLE INCOME ($ billions per year) CONSUMPTION (S billions per year) IN THE NEWS Consumer Confidence Index at All-Time Low NEW YORK (CNNMoney.com)-A key measure of consumer confidence fell to an all-time low in December amid a dismal job market and uncertain outlook for the new year. The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index fell to 38 in December from the downwardly revised 44.7 in November.... Job Market Concerns Perhaps most unsettling for Americans is the deteriorating job market. Layoffs and income cuts were widespread this year. The number of Americans filing for first-time unemployment benefits rose to a 26-year high for the week ended Dec. 20. Nearly 2 million jobs were lost in 2008, and the slumped stock market means some nest eggs have shrunk considerably.... 2009 Outlook Consumers anticipating business conditions to worsen over the next six months increased to 32.8 percent from 28.3 percent in November, the report said. ... The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. -Julianne Pepitone Source: CNNMoney.com, December 30, 2008. © 2008 Time Inc. Used under license. Analysis: When consumer confidence declines, autonomous spending drops and the consumption function shifts downward (as in Figure 9.5). This causes a leftward shift of the AD curve (as in Figure 9.6).
> Illustrate the effects on investment of (a) An interest rate hike (point A). (b) An interest rate hike accompanied by increased sales expectations (point B).
> According to Bernanke’s policy guide (p. 320), what was the fiscal policy equivalent of China’s 2010 interest rate hike? (See World View, p. 321) (a) Initially? (b) Cumulatively?
> Suppose home owners owe $5 trillion in mortgage loans. (a) If the mortgage interest rate is 7 percent, approximately how much are home owners paying in annual mortgage interest? (b) If the interest rate drops to 6 percent, by how much will annu
> Use the data on the end covers of this text to determine for 2007 and 2010 (a) The interest rate on 10-year Treasury bonds. (b) The U.S. inflation rate. (c) The real rate of interest.
> Use the accompanying graphs to show what happens in the economy when M increases from $300 billion to $400 billion. (a) By how much does PQ change if V is constant? (b) If aggregate supply were fixed (vertical) at the initial output level, what
> The following data describe market conditions. (a) At what rate of interest does the liquidity trap emerge? (b) At what rate of interest does investment demand become totally inelastic? Money supply (in billions) $100 $200 $300 $400 $ 500 $ 6
> Suppose a $1,000 bond pays $50 per year in interest. (a) What is the contractual interest rate (“coupon rate”) on the bond? (b) If market interest rates rise to 8 percent, what price will the bond sell for?
> Assume that a $1,000 bond issued in 2012 pays $100 in interest each year. What is the current yield on the bond if it can be purchased for (a) $1,200? (b) $1,000? (c) $800?
> Assume the banking system contains the following amounts: Total reserves $80 billion Transactions deposits $800 billion Cash held by public $100 billion Reserve requirement 0.10 (a) Are the banks fully utilizing their le
> Where and when will those Las Vegas carpenters (see News, p. 122) find jobs?
> On the accompanying graph, illustrate for each year (A) the nominal interest rate (use the prime rate of interest), (B) the CPI inflation rate, and (C) the real interest rate (adjusted for same-year CPI inflation). The required data appear on the ins
> According to the “In the News” on page 300 and “World View” on page 309, what was the money multiplier in (a) The United States? (b) China?
> In Problem 3, suppose the Fed wanted to stop further lending activity. To do this, what reserve requirement should the Fed impose?
> Assume that the following data describe the condition of the banking system: Total reserves $200 billion Transactions deposits $800 billion Cash held by public $400 billion Reserve requirement 0.20 (a) How large is th
> In Table 14.1, what would the following values be if the required reserve ratio fell from 0.20 to 0.10? (a) Total deposits (b) Total reserves (c) Required reserves (d) Excess reserves (e) Money multiplier (f) Unused lending capacity Requlred Re
> Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover
> What is the money multiplier when the reserve requirement is: (a) 0.125? (b) 0.111?
> Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 20 percent, no loans, and no excess reserves in the banking system prior to this deposit. (a) Us
> (a) When the reserve requirement changes, which of the following will change for an individual bank? (A = change, B = no change.) Transactions deposits Total reserves Required reserves Excess reserves Lending capacity
> In December 1994 a man in Ohio decided to deposit all of the 8 million pennies he’d been saving for nearly 65 years. (His deposit weighed over 48,000 pounds!) With a reserve requirement of 10 percent, what will be the cumulative change for the banking sy
> Suppose a bank’s balance sheet looks as follows: and banks are required to hold reserves equal to 10 percent of deposits. (a) How much excess reserves does the bank hold? (b) How much more can this bank lend? Assets Llabi
> Is the Index of Social Health, discussed in the News on page 109, a better barometer of well-being than GDP? What are its relative advantages or disadvantages? IN THE NE WS Material Wealth vs. Social Health National income accounts are regularly repo
> 1. If you cash a $50 traveler’s check at a bank, by how much do(es) (a) M1 change? (b) M2 change? (c) Bank reserves change? If you deposit the traveler’s check in your bank account, by how much do(es) (d) M1 change? (e) M2 change? (f) Bank reserves chan
> In Figure 12.5, what is the opportunity cost of increasing government spending from g1 to g2 if (a) No external financing is available? (b) Complete external financing is available?
> (a) According to the News on page 258, how much fiscal restraint occurred between 1931 and 1933? (b) By how much did this policy reduce aggregate demand if the MPC was 0.75?
> Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion worth of taxes. (a) What will be the government’s deficit? (b) If the government finances the deficit by issuing bonds, what a
> Use Table 12.3 to determine how much fiscal stimulus or restraint occurred between (a) 2007 and 2008. (b) 2008 and 2009. Flscal Year Budget Balance Cycllcal Component + Structural Component +236 +128 2000 +138 +98 2001 +79 +49 2002 -158 -21 -137 20
> What would happen to the budget deficit if the (a) GDP growth rate jumped from 2 percent to 5 percent? (b) Inflation rate increased by two percentage points?
> Use the accompanying graph to illustrate changes in the structural and total deficits for fiscal years 2002–2010 (a) In how many years do the two deficits change in different directions? (b) In how many years was the government pursuin
> (a) What percentage of U.S. debt do foreigners hold? (b) If the interest rate on U.S. Treasury debt is 4 percent, how much interest do foreigners collect each year from the U.S. Treasury? (Assume a total debt of $16 trillion.) Foderal Govemment Fede
> From 2008 to 2010, by how much did each of the following change? (a) Tax revenue. (b) Government spending. (c) Budget deficit. Budget Total (In Billions of Dollars) 2006 2007 2008 2009 2010 2011 2012 Revenues 2,524 2,105 2,407 -2,655 -2,729 -2,983 -
> According to the News on page 234, how much of a cumulative impact on spending could be expected from President Obama’s (a) Increase in government spending? (b) Tax cuts? Assume an MPC of 0.75.
> Why is it important to know how much output is being produced? Who uses such information?
> According to the World View on page 235, (a) How large was China’s 2008 fiscal stimulus? (b) How much faster was GDP expected to grow as a result? (c) According to the News on page 234 and Table 11.2, how large was President Obamaâ
> (a) According to the News on page 238, how much more did the average household spend on appliances, electronics, and furniture when it received the 2008 tax rebate? (b) If all 110 million households did so, how much did aggregate consumption increase? (c
> If the AD shortfall is $600 billion and the MPC is 0.9, (a) How large is the desired fiscal stimulus? (b) How large an income tax cut is needed? (c) Alternatively, how much more government spending would achieve the target?
> On the accompanying graph, identify and label (a) Macro equilibrium. (b) The real GDP gap. (c) The AD excess or AD shortfall. (d) The new equilibrium that would occur with appropriate fiscal policy.
> Suppose the consumption function is C = $400 billion + 0.8Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with (a) A $50 billion increase in government
> Use the following data to answer the following questions: (a) What is the rate of equilibrium GDP? (b) If full employment occurs at a real output rate of $880, how large is the real GDP gap? (c) If AD increases enough to restore full employment, what w
> If the marginal propensity to consume was 0.9, how large would each of the following need to be in order to restore a full-employment equilibrium in Figure 11.6? (a) A tax increase. (b) A government spending cut. (c) A cut in income transfers. AS AD
> Illustrate in the following graph the impact of a sudden decline in consumer confidence that reduces autonomous consumption by $50 billion at the price level PF. Assume MPC = 0.8. (a) What is the new equilibrium level of real output? (Donâ€&#
> Suppose that investment demand increases by $200 billion in a closed and private economy (no government or foreign trade). Assume further that households have a marginal propensity to consume of 75 percent. (a) Compute four rounds of multiplier effects.
> The accompanying graph depicts a macro equilibrium. Answer the questions based on the information in the graph. (a) What is the equilibrium rate of GDP? (b) If full-employment real GDP is $1,200, what problem does this economy have? (c) How large is the
> Can we increase consumption in a given year without cutting back on either investment or government services? Under what conditions?
> From 1960 to 2010, in how many years did (a) Real consumption decline? (b) Real investment decline? (c) Real government spending increase at least $100 billion?
> On the following graph, draw the AD and AS curves with these data: Price level 140 130 120 110 100 90 80 70 60 50 Real output Demanded 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 Supplied 1,200 1,150
> Complete the following table: Real Output Demanded (in $ billions) by Price Level Consumers + Investors + Government + Net Exports = Aggregate Demand Aggregate Supply 120 80 15 20 10 125 320 110 92 16 20
> llustrate on the following graphs the impact of Panasonic’s changed investment plans. INVESTMENT REAL OUTPUT INTEREST RATE PRICE LE VEL
> Illustrate on the following two graphs the wealth effect from declining home prices. C= a + bY 45" DISPOSABLE INCOME (OUTPUT) AS AD REAL OUTPUT PRICE LEVEL CONSUMPTION
> From the information on pages 181–83, in 2010 what was (a) The APC? (b) The APS? (c) The MPC? (d) The MPS?
> Assume that the accompanying graph depicts aggregate supply and demand conditions in an economy. Full employment occurs when $6 trillion of real output is produced. (a) What is the equilibrium rate of output? (b) How far short of full employment is the e
> If the AD curve shifts to the right, what happens (“increases” or “decreases”) to (a) The equilibrium rate of output? (b) The equilibrium price level?
> If the AS curve shifts to the right, what happens (“increases” or “decreases”) to (a) The equilibrium rate of output? (b) The equilibrium price level?
> The manuscript for this book was typed for free by a friend. Had I hired a secretary to do the same job, GDP would have been higher, even though the amount of output would have been identical. Why is this? Does this make sense?
> According to the News on page 162, (a) By what percentage did GDP decline in the fourth quarter of 2008? (b) At that rate, how much output would have been lost in the $14 trillion economy of 2008? (c) How much income did this represent for each of the 30
> Use the following information to draw aggregate demand (AD) and aggregate supply (AS) curves on the following graph. Both curves are assumed to be straight lines. (a) At what price level does equilibrium occur? (b) What curve (AD or AS) would have shifte
> (a) How much output is unsold at the price level P1 in Figure 8.7? (b) At what price level is all output produced sold? Aggregate supply PE Macro equilibrium Aggregate demand QE S, D1 REAL OUTPUT (quantity per year) PRICE LEVEL (average price) Lu
> Use the item weights in Figure 7.2 to determine the percentage change in the CPI that would result from a (a) 10 percent increase in entertainment prices. (b) 6 percent decrease in transportation costs. (c) Doubling of clothing prices. Figure 7.2: Tr
> Suppose the prices listed in the table for Problem 5 changed from one year to the next, as shown here. Use the rest of the table to compute the average inflation rate.
> Assuming that the following table describes a typical consumer’s complete budget, compute the item weights for each product. Item Quantity Unit Price Item Welght 20 pounds 1 year 150 pizzas 75 days 1 week Coffee $ 5 Tuition 4,000 P
> Suppose you borrow $100 of principal that must be repaid at the end of two years, along with interest of 5 percent a year. If the annual inflation rate turns out to be 10 percent, (a) What is the real rate of interest on the loan? (b) What is the real va
> Suppose you’ll have an annual nominal income of $20,000 for each of the next three years, and the inflation rate is 5 percent per year. (a) Find the real value of your $20,000 salary for each of the next three years. (b) If you have a COLA in your contra
> Based on the data in the previous problem, what happens (“up” or “down”) to each of the following numbers in Year 2 when 1 million jobseekers become “discouraged wo
> Suppose the following data describe a nation’s population: (a) How many people are unemployed in each year? (b) How many people are employed in each year? (c) Compute the employment rate (i.e., number employed ÷ popula
> Which taxes hit the poor hardest—those of local, state, or federal governments?
> According to Okun’s Law, how much output (real GDP) was lost in 2010 when the nation’s unemployment rate increased from 9.3 percent to 9.6 percent?
> (a) What was the unemployment rate in 2010? (b) How many jobs were needed to bring the unemployment rate down to the 5 percent full-employment threshold? (c) Using Okun’s Law, how more much would total output (GDP) have had to grow to create that many jo
> On the accompanying graph, illustrate both the unemployment rate and the real GDP growth rate for each year. (The data required for this exercise are on the inside cover of this book.) (a) In how many years was “full employment” achieved? (Use the curren
> According to the data in Table 5.3, what is (a) Real GDP in 2008, at prices of 2007? (b) Real GDP in 2007, at prices of 2008? Table 5.3: 2007 2008 1. Nominal GDP (in billions) 2. Change in nominal GDP $14,062 $14,369 +$307 Inflation adjustment: 3. C
> (a) Compute real GDP for 2010 using average prices of 2000 as the base year. (On the inside covers of this book you’ll find data for GDP and the GDP “price deflator” used to measure inflation.) (b) By how much did real GDP increase between 2000 and
> Based on the following figures, Consumption ………………….. $200 billion Depreciation ………………….. 20 Retained earnings ….…………….12 Gross investment ………………….30 Imports ……………………………… 40 Exports ……………………………….50 Net foreign factor income………10 Government purchases…
> If real GDP increases by 2 percent next year and the price level goes up by 4 percent, what will happen to nominal GDP?
> 1. Using the following data, what is the value of (a) total output (GDP)? (b) total income? Consumer goods and services $10,000 Wages and salaries 9,000 Corporate profits 1,000 Investment in plants, equipment, and inventory 2,500 Proprietor'
> Suppose that furniture production encompasses the following stages: Stage 1: Trees are sold to lumber company. $ 8,000 Stage 2: Lumber is sold to furniture company. $17,000 Stage 3: Furniture company sells furniture to retail store. $28,000 Stag
> Assume the market demand for cigarettes is Price per pack $10 $9 $8 $7 $6 $5 $4 $3 Quantity demanded 2 4 6 8 10 12 14 16 (million packs pe
> What government actions might cause failures like points G1, G2, and G3 in Figure 4.6? Can you give examples? Figure 4.6: Government intervention Production may worsen outcomes. possibilities G2 X (Optimal mix) G4 M (Market mix) G3 ALL OTHER GOODS (u
> Suppose the following data represent the market demand for college education: Tuition (per year) $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Enrollment demanded 8 7 6 5 4 3 2 1 (in millions per year) (a
> (a) Assuming a 10 percent sales tax levied on all consumption, complete the following table: (b) Is the sales tax (A) progressive or (B) regressive? Sales Percentage of Income Pald In Taxes Income Consumption Таx $11,000 $10,000 20,000 20,000 40,00
> If the average adult produces $90,000 of output per year, how much output is lost as a result of adult deaths from secondhand smoke, according to the News on page 74? WORLD VIE W Secondhand Smoke Kills 600,000 People a Year: Study Sekondhand smoke gl
> Assume that the product depicted below generates external costs in consumption of $4 per unit. (a) What is the market price (market value) of the product? (b) Draw the social demand curve. (c) What is the socially optimal output? (d) By how much doe
> According to the News on page 82, what percentage of income is spent on lottery tickets by (a) A poor family with income of $18,000 per year? (b) An affluent family with income of $40,000 per year? IN THE NE WS Perpetuating Poverty: Lotteries Prey o
> In Figure 4.2 (p. 73), by how much is the market (a) Overproducing private goods? (b) Underproducing public goods? B (Market mix) A (Optimal mix) W Production possibilities R S PUBLIC GOODS (units per time period) FIGURE 4.2 Underproduction of Public
> According to Figure 3.8, (a) How many organs are supplied at a zero price? (b) If the News on page 66 is correct, how many organs would be supplied at positive prices? Figure 3.8:
> According to Figure 3.8, (a) How many people die in the market-driven economy? (b) How many people die in the government-regulated economy? Figure 3.8:
> As a result of the BP oil spill (News, p. 58), which of the following changed in the shrimp market (answer yes or no): (a) Demand? (b) Quantity demanded? (c) Price? IN THE N EWS Seafood Prices Rise on BP Oil Spill Original supply WASHINGTON-Diners Sh
> Given the following data on gasoline supply and demand, (a) What is the equilibrium price? (b) How large a market shortage would exist if the government set a price ceiling of $2 per gallon? Price per gallon $5.00 $4.00 $3.00 $2.00 $1.00 Quantity dema
> The government now spends over $700 billion a year on Social Security benefits. Why don’t we leave it to individuals to save for their own retirement?
> According to the News on page 61 (a) What was the initial price of a Final Four ticket? (b) At that price was there (A) an equilibrium, (B) a shortage, or (C) a surplus? IN THE NEWS: Students Struggle to Find Final Four Tickets When midnight struck Su
> According to Figures 3.5 and 3.6, what would the new equilibrium price of tutoring services be if Ann decided to stop tutoring? Figures 3.5: Figure 3.6: (a) Ann's supply curve (b) Bob's supply curve (c) Cory's supply curve $50 45 40 35 30 25 20 15 10
> Use the following data to draw supply and demand curves on the accompanying graph. Price $8 7 6 5 4 3 2 1 Quantity demanded 2 3 4 5 6 7 8 9 Quantity supplied 10 9 8 7 6 5 4 3 (a) What is the equilibrium price? (b) If a minimum price (price floor)
> In Figure 3.8, when a price ceiling of zero is imposed on the organ market, by how much does (a) The quantity of organs demanded increase? (b) The demand increase? (c) The quantity of organs supplied decrease? (d) The supply decrease? Figure 3.8: Mar
> According to Figure 3.3, at what price would Tom buy 12 hours of web tutoring? (a) Without a lottery win. (b) With a lottery win. Figure 3.3: $50 Demand shifts when 45 tastes, income, other goods, or expectations change. 40 Shift in demand 35 D2: inc
> How much more output (income) per year will have to be produced in the world just to provide the 2.7 billion “severely” poor population with $1 more output per day?
> Using the data in Figure 2.3, (a) Compute the average income of U.S. households. (b) If all incomes were equalized by government taxes and transfer payments, how much would the average household in each income quintile gain (via transfers) or lose (via
> U.S. real gross domestic product increased from $10 trillion in 2000 to $15 trillion in 2010. During that same decade the share of manufactured goods (e.g., cars, appliances) fell from 16 percent to 12 percent. What was the dollar value of manufactured o
> According to Table 2.1 (p. 34), how fast does total output (GDP) have to grow in order to raise per capita GDP in (a) China? (b) Ethiopia? Table 2.1: Average Growth Rate (2000–2009) of GDP Populatlon Per Caplta GDP High-income countries United State
> (a) How much more output does the $15 trillion U.S. economy produce when GDP increases by 1.0 percent? (b) By how much does this increase the average (per capita) income if the population is 300 million?
> If smoking generates external costs, should smoking simply be outlawed? How about cars that pollute?
> Using data from the endpapers, illustrate on the graph below (a) The federal government’s share of the total output. (b) The state/local government’s share of total output. 15 14 13 12 11 10 4 2 1930 1940 1950 196
> Using data from Table 2.1 (p. 34), illustrate on the following graphs real GDP and population growth since 2000 (in the manner of Figure 2.1) for the nations indicated. Table 2.1: Figure 2.1:
