Question: On the foreign exchange market, the demand

> What is an institution? Why might institutions matter to how much economic growth a country experiences?

> What is the difference between business cycle macroeconomics and economic growth macroeconomics?

> How does discovering and implementing new ideas cause economic growth?

> What is new about new growth theory?

> What do interest rates and the tax treatment of the returns to capital have to do with economic growth?

> What does it mean to say that “a change in labor moves us along a given production function”?

> Why might special-interest groups favor transfer-promoting policies over growth-promoting policies?

> Why might per-capita real economic growth be a more useful measurement than absolute real economic growth?

> Explain how the Keynesian transmission mechanism works.

> What evidence can you point to which suggests that individuals form their expectations adaptively? What evidence can you point to which suggests that individuals form their expectations rationally?

> New Keynesian theory holds that wages are not completely flexible because of such things as long-term labor contracts. New classical economists often respond that experience teaches labor leaders to develop and bargain for contracts that allow for wage a

> Assume a current short-run tradeoff between inflation and unemployment, as well as a change in technology that permits the wider dispersion of economic policy news. How would the change affect the trade-off? Explain your answer.

> Suppose a permanent downward-sloping Phillips curve existed and offered a menu of choices of different combinations of inflation and unemployment rates to policymakers. How do you think society would go about deciding which point on the Phillips curve it

> Why is the new classical theory associated with the word “classical”? Why has it been said that classical theory failed where new classical theory succeeds—because the former could not explain the business cycle (the ups and downs of the economy), but th

> “The policy ineffectiveness proposition (connected with new classical theory) does not eliminate policymakers’ ability to reduce unemployment through aggregate demand-increasing policies, because they can always increase aggregate demand by more than the

> What is a major difference between adaptive and rational expectations? Give an example of each.

> According to Friedman, how do we know when the economy is in long-run equilibrium?

> The expected inflation rate is 5 percent and the actual inflation rate is 7 percent. According to Friedman, is the economy in long-term equilibrium? Explain your answer.

> In the real business cycle theory, why can’t the change in the money supply prompted by a series of events catalyzed by an adverse supply shock be considered the cause of the business cycle?

> Fed actions affect the money market but not the bond market. Do you agree or disagree with this statement? Explain your answer.

> “Even if some people do not form their expectations rationally, the new classical theory is not necessarily of no value.” Discuss this statement.

> Explain both the short- and long-run movements of the Friedman natural rate theory, assuming that expectations are formed adaptively.

> Suppose the government undertakes an expansionary fiscal policy measure that raises aggregate demand, but individuals incorrectly anticipate the measure (bias upward). What will the short- and long-run changes be in the price level and Real GDP?

> What does it mean to say that the Phillips curve presents policymakers with a menu of choices?

> Suppose the objective of the Fed is to increase Real GDP. To this end, it increases the money supply. Can anything offset the increase in the money supply so that Real GDP does not rise? Explain your answer.

> According to monetarism, an increase in the money supply will lead to a rise in Real GDP in the long run. Do you agree or disagree with this statement? Explain your answer.

> In monetarism, how will each of the following affect the price level in the short run? (a) An increase in velocity (b) A decrease in velocity (c) An increase in the money supply (d) A decrease in the money supply

> According to the simple quantity of money, what will happen to Real GDP and the price level as the money supply rises? Explain your answer.

> In the simple quantity theory of money, what will lead to an increase in aggregate demand? In monetarism, what will lead to an increase in aggregate demand?

> In the simple quantity theory of money, the AS curve is vertical. Explain why.

> Identify the state of the bond market (equilibrium, shortage, surplus), given each of the following: (a) Shortage in the money market (b) Surplus in the money market (c) Equilibrium in the money market

> Can the money supply support a GDP level greater than itself? Explain your answer.

> What does inflation look like in a country that imposes and maintains price ceilings on goods and services?

> Suppose the money supply increased 30 days ago. Whether the nominal interest rate is higher, lower, or the same today as it was 30 days ago depends on what? Explain your answer.

> Suppose the money supply rises on Tuesday and by Thursday the interest rate has risen also. Is the rise in the interest rate more likely the result of the income effect or of the expectations effect? Explain your answer.

> 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.

> 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.

> If the nominal interest rate is 8 percent and the expected inflation rate is 2 percent, what percentage does the real interest rate equal?

> 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