Question: Suppose an economy is characterized by the

> Should military spending be subject to macroeconomic constraints? What programs should be expanded or contracted to bring about needed changes in the budget? Is this feasible?

> Why did Fed Chairman Bernanke expect there would be no recession in 2008? Why was he wrong?

> Why were banks reluctant to use their lending capacity in 2008? (See News, p. 322.) What did they do with their increased reserves?

> Why might China’s monetary restraint (World View, p. 321) not have worked?

> Why might the Fed want to decrease the money supply?

> Why did China raise reserve requirements in 2011? How did they expect consumers and businesses to respond?

> What are the current price and yield of 10-year U.S. Treasury bonds? Of General Motors bonds? (Check the financial section of your daily newspaper.) What accounts for the difference?

> What are the economic risks of aggressive Fed open market purchases?

> If all banks heeded Shakespeare's admonition "Neither a borrower nor a lender be,” what would happen to the circular flow?

> Who gained and who lost from the price changes in Table 7.2? Table 7.2: Prices That Rose (%) Prices That Fell (%) Gasoline +18.4% Bananas - 5.7% Used cars Cigarettes Air fares +12.7 -7.2 Computers Televisions -24.7 +10.5 +7.8 Textbooks +5.4 +5.2 Av

> Why do banks pay higher interest rates for longer-term certificates of deposit?

> In what respects are modern forms of money superior to the colonial use of wampum as money?

> If inflation raises U.S. prices by 3 percent and the U.S. dollar appreciates by 5 percent, by how much does the foreign price of U.S. exports change?

> Between 1980 and 2003, by how much did the dollar appreciate (Figure 20.3)? 130 125 120 115 110 8 105 1980 1985 1990 1995 2000 2005 2010 YEAR GLOBAL VALUE OF U.S. DOLLAR (broad, trade-weighted index) 1997 = 100 Dollar appreciation Dollar depreciation

> If a PlayStation 3 costs 20,000 yen in Japan, how much will it cost in U.S. dollars if the exchange rate is (a) 120 yen = $1? (b) 1 yen = $0.00833? (c) 100 yen = $1?

> If a pound of U.S. pork cost 40 rupiah in Indonesia before the Asian crisis, how much did it cost when the dollar value of the rupiah fell by 80 percent?

> The following exchange rates were taken from ExchangeRate.com. On July 21, by how much did the dollar appreciate or depreciate against the (a) Chinese yuan? (b) Canadian dollar? Currency Rates per 1.00 U.S. Dollar July 20 July 21 Chinese yuan (CNY)

> As shown in Table 20.1, in 2010 the United States was running a current account deficit. How would each of the following events affect the size of the current account deficit? (a) U.S. companies, the largest investors in Switzerland, see even more promis

> According to the World View on page 442, which nation had (a) The cheapest currency? (b) The most expensive currency?

> Suppose the following table reflects the domestic supply and demand for compact discs (CDs): (a) Graph these market conditions and identify (i) The equilibrium price. (ii) The equilibrium quantity. (b) Now suppose that foreigners enter the ma

> Why do people expect inflation to heat up when the unemployment rate approaches 4 percent?

> Suppose the two islands in Problem 4 agree that the terms of trade will be one for one and exchange 10 pearls for 10 pineapples. (a) If Alpha produced 6 pearls and 15 pineapples while Beta produced 30 pearls and 8 pineapples before they decided to trad

> (a) How much more are U.S. consumers paying for the 20 billion pounds of sugar they consume each year as a result of the quotas on sugar imports? (b) How much sales revenue are foreign sugar producers losing as a result of those same quotas?

> Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls and pineapples. The following production possibilities schedules describe their potential output in tons per year: (a) Graph the production possibilities confronting each is

> If it takes 24 farmworkers to harvest 1 ton of strawberries and 8 farmworkers to harvest 1 ton of wheat, what is the opportunity cost of 5 tons of strawberries?

> Suppose a country can produce a maximum of 20,000 jumbo airliners or 2,000 aircraft carriers. (a) What is the opportunity cost of an aircraft carrier? (b) If another country offers to trade six planes for one aircraft carrier, should the offer be acc

> Complete the following chart by summarizing the policy prescriptions of various economic theories: Policy Prescription for Policy Approach Recession Inflation Fiscal Classical Keynesian Monetarist Monetary Keynesian Monetarist Supply side

> The following table displays Congressional Budget Office forecasts of federal budget balances for the following fiscal years. Compare these forecasts with actual surplus and deficits for those same years. (a) In how many years was the CBO too optimist

> According to the World View on page 394, (a) Which country had the greatest macro misery in the 2000s? (b) Which country had the fastest growth?

> If the unemployment rate stays two percentage points above full employment for an entire year, (a) How many jobs will be lost in a labor force of 155 million? (b) If the average worker produces $105,000 of output, how much output will be lost?

> What is the annual rate of productivity advance implied by Moore’s Law?

> Why frictional unemployment is deemed desirable?

> The real (inflation-adjusted) value of U.S. manufacturing output and related manufacturing employment was (a) How many manufacturing jobs were lost between 2000 and 2010? (b) How much did output increase? (c) What was average manufacturing

> If output per worker is now $100,000 per year, how much will the average worker produce 10 years from now if productivity improves by (a) 2.0 percent per year? (b) 3.0 percent per year?

> In 2011 approximately 59 percent of the adult population (230 million) was employed. If the employment rate increased to 62 percent, (a) How many more people would be working? (b) By how much would output increase if per worker GDP were $105,00

> According to Figure 17.3, in how many years since 1970 has GDP grown (a) Faster than the population (1.1 percent growth)? (b) Slower than the population? 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 -1.0 -2.0 -3.0 -4.0 1970 1972 1974 1976 1978 1980 1982

> How much more output will the average American (U.S. population = 310 million) have a year from now if the $15 trillion GDP grows by (a) 0 percent? (b) 1 percent? (c) 3.5 percent?

> According to the Rule of 72 (Table 17.1) and recent growth rates (World View, p. 373) how long will it be before GDP doubles in (a) The United States? (b) China? (c) Ivory Coast? Net Growth Rate (%) Doubling Time (Years) 0.0% Ne

> Using data from the endpapers of this book, graph real GDP and population growth since 2000, setting 2000 values to an index base of 100.

> Suppose that every additional five percentage points in the investment rate (I ÷ GDP) boost economic growth by one percentage point. Assume also that all investment must be financed with consumer saving. The economy is now assumed to be fully employed at

> According to the Rule of 72 (Table 17.1), how many years will it take for GDP to double if the economy is growing at (a) 1.5 percent a year? (b) 2.8 percent a year? Net Growth Rate (%) Doubling Time (Years) 0.0% Never 0.5 144 years 1.0

> If the tax elasticity of labor supply is 0.15, by what percentage will the quantity of labor supplied increase in response to (a) A $500 per person income tax rebate? (b) A 4 percent reduction in marginal tax rates?

> When the GE lightbulb plant in Virginia closed (p. 113), how was the local economy affected?

> On the following graph, plot the unemployment and inflation rates for the years 2000–2010 using the data from this book’s end covers. Is there any evidence of a Phillips curve trade-off? 4.5 4.0 3.5 3.0 2.5 2.0 1

> According to Figure 16.6, what inflation rate would occur if the unemployment rate rose to 6 percent, with (a) PC1? (b) PC2? PC, PC2 Rightward AS shifts cause leftward Phillips curve shifts. a 1 5 6 2 3 4 UNEMPLOYMENT RATE (percent) 7 8

> By how much did the disposable income of rich people increase as a result of the 2001–2004 reduction in the top marginal tax rate from 39.6 to 35 percent? Assume they have $2 trillion of gross income in the highest bracket.

> Suppose households supply 520 billion hours of labor per year and have a tax elasticity of supply of 0.20. If the tax rate is increased by 10 percent, by how many hours will the supply of labor decline?

> Suppose taxpayers are required to pay a base tax of $50 plus 30 percent of any income over $100, as in the initial tax system B in Table 16.1. Suppose further that the taxing authority wishes to raise by $40 the taxes of people with incomes of $200.

> The Economy Tomorrow section provides estimates of time spent in traffic delays. If the average worker produces $90 of output per hour, what is the opportunity cost of (a) Current traffic delays? (b) Estimated delays in 10 years?

> On the following graph, draw the (A) Keynesian, (B) monetarist, and (C) hybrid AS curves, all intersecting AD at point E. If AD shifts rightward, which AS curve (A, B, or C) generates (a) The biggest increase in output? (b) The biggest incr

> Suppose the Fed decided to purchase $50 billion worth of government securities in the open market. What impact would this action have on the economy? Specifically, answer the following questions: (a) How will M1 be affected initially? (b) By ho

> Suppose that an economy is characterized by M = $2 trillion V = 2.5 P = 1.0 (a) What is the real value of output (Q)? Now assume that the Fed increases the money supply by 10 percent and velocity remains unchanged. (b) If th

> Should the government replace the wages of anyone who is unemployed? How might this affect output and unemployment?

> How much would the Fed have to reduce interest rates to get the same stimulus as President Obama’s $800 billion fiscal stimulus?

> 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 Obama&acirc

> (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