Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. a. Is the real interest rate on this loan higher or lower than expected? b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose? c. Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?
> 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
> For each of the following kinds of insurance, give an example of behavior that can be called moral hazard and another example of behavior that can be called adverse selection. a. health insurance b. car insurance
> What is stock? What is a bond? How are they different? How are they similar?
> If more Americans adopted a “live for today” approach to life, how would this affect saving, investment, and the interest rate?
> Define private saving, public saving, national saving, and investment. How are they related?
> What is national saving? What is private saving? What is public saving? How are these three variables related?
> Why is it important for people who own stocks and bonds to diversify their holdings? What type of financial institution makes diversification easier?
> What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.
> Draw the indifference curve for someone deciding how to allocate time between work and leisure. Suppose the wage increases. Is it possible that the person’s consumption would fall? Is this plausible? Discuss.
> Explain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment? Saving? Explain. a. Your family takes out a mortgage and buys a new house. b. You use your $200 paycheck to buy s
> Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?
> For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain. a. a bond of the U.S. government or a bond of an Eastern European government b. a bond that repays the principal in year 2020 or a bond that repays the p
> This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit. a. Why is it difficult to implement both of these policies at the same time? b. What would you need to know abo
> Suppose the government borrows $20 billion more next year than this year. a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? b. What happens to investment? To private saving? To public saving? To national savi
> Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students’ investment projects: Harry …………….5 percent Ron …………...….8 percent Hermione …….20 percent
> Suppose that Intel is considering building a new chipmaking factory. a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory? b. If Intel has enou
> Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y =10,000 C =6,000 T =1,500 G =1,700 The economists also estimate that the investment function is: I=3,300 - 100r, where r is t
> Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.
> What has been the approximate long-run growth rate of real GDP per person in the United States? Name a country that has had faster growth and a country that has had slower growth.
> During the 1980s, 1990s, and the first decade of the 21st century, the United States experienced a significant inflow of capital from abroad. For example, Toyota, BMW, and other foreign car companies built auto plants in the United States. a. Using a dia
> Describe three ways a government policymaker can try to raise the growth in living standards in a society. Are there any drawbacks to these policies?
> List and describe four determinants of a country’s productivity
> What does the level of a nation’s GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate?
> Does a higher rate of saving lead to higher growth temporarily or indefinitely?
> Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving?
> List and describe four determinants of productivity
> Suppose that society decided to reduce consumption and increase investment. a. How would this change affect economic growth? b. What groups in society would benefit from this change? What groups might be hurt?
> Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itsel
> The great 18th-century economist Adam Smith wrote, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about b
> International data show a positive correlation between income per person and the health of the population. a. Explain how higher income might cause better health outcomes. b. Explain how better health outcomes might cause higher income. c. How might the
> Sarah is awake for 100 hours per week. Using one diagram, show Sarah’s budget constraints if she earns $6 per hour, $8 per hour, and $10 per hour. Now draw indifference curves such that Sarah’s labor-supply curve is upward sloping when the wage is betwee
> In many developing nations, young women have lower enrollment rates in secondary school than do young men. Describe several ways in which greater educational opportunities for young women could lead to faster economic growth in these countries.
> In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China made significant direct and portfolio investments in the United States. At the time, many Americans were unhappy that this investment was occurring. a.
> What is the opportunity cost of investing in capital? Do you think a country can “overinvest” in capital? What is the opportunity cost of investing in human capital? Do you think a country can “overinvest” in human capital? Explain.
> Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending. a. Describe some forms of private spending that represen
> Explain briefly what the CPI measures and how it is constructed. Identify one reason why the CPI is an imperfect measure of the cost of living
> If the price of imported French wine rises, is the consumer price index or the GDP deflator affected more? Why?
> Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
> The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2013, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for 500 carrots. In 2014, they spend a total of $225 for 7
> The chapter explains that Social Security benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that theCPI overstates actual inflation. a. If the elderly consume the same market basket as other pe
> Consider your decision about how many hours to work. a. Draw your budget constraint assuming that you pay no taxes on your income. On the same diagram, draw another budget constraint assuming that you pay 15 percent tax. b. Show how the tax might lead to
> A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts: a. Using a method similar to the consumer price index, compute the percentage change in the overall pr
> Suppose that people consume only three goods, as shown in this table: a. What is the percentage change in the price of each of the three goods? b. Using a method similar to the consumer price index, compute the percentage change in the overall price le
> What two things does GDP measure? How can it measure two things at once?
> Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?
> Which contributes more to GDP—the production of a pound of hamburger or the production of a pound of caviar? Why?
> List the four components of GDP. Give an example of each.
> Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.
> In the year 2013, the economy produces 100 loaves of bread that sell for $2 each. In the year 2014, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2013 as the base
> Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
> As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?
> A college student has two options for meals: eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. Her weekly food budget is $60. a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ S
> Give an example of a monetary policy rule. Why might your rule be better than discretionary policy? Why might it be worse?
> Explain why monetary and fiscal policy work with a lag. Why do these lags matter in the choice between active and passive policy?
> Give three examples of how our society discourages saving. What are the drawbacks of eliminating these disincentives?
> Explain how reducing a government budget deficit makes future generations better off. What fiscal policy might improve the lives of future generations more than reducing a government budget deficit?
> Explain what is meant by a good being “excludable.” Explain what is meant by a good being “rival in consumption.” Is a slice of pizza excludable? Is it rival in consumption?
> Define and give an example of a common resource. Without government intervention, will people use this good too much or too little? Why?
> What is cost–benefit analysis of public goods? Why is it important? Why is it hard?
> Define and give an example of a public good. Can the private market provide this good on its own? Explain.
> Wireless, high-speed Internet is provided for free in the airport of the city of Communityville. a. At first, only a few people use the service. What type of a good is this and why? b. Eventually, as more people find out about the service and start using
> Charlie loves watching Downton Abbey on his local public TV station, but he never sends any money to support the station during its fund-raising drives. a. What name do economists have for people like Charlie? b. How can the government solve the problem
> Both public goods and common resources involve externalities. a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than th
> Think about the goods and services provided by your local government. a. Using the classification in Figure 1, explain which category each of the following goods falls into: • police protection • snow plowing • education • rural roads • city streets b. W
> High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think cost–benefit analysts should take this fact into account when evaluating pu
> Many transportation systems, such as the Washington, D.C., Metro (subway), charge higher fares during rush hours than during the rest of the day. Why might they do this?
> Sleek Sneakers Co. is one of many firms in the market for shoes. a. Assume that Sleek is currently earning short-run economic profit. On a correctly labeled diagram, show Sleek’s profit-maximizing output and price as well as the area representing profit.
> The nation of Wiknam has five million residents whose only activities are producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in one of the nation’s many la
> Some economists argue that private firms will not undertake the efficient amount of basic scientific research. a. Explain why this might be so. In your answer, classify basic research in one of the categories shown in Figure 1. b. What sort of policy has
> Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film: a. Within the dorm room, is the showing of a movie a public good? Why or w
> Give an example of a private solution to an externality. • What is the Coase theorem? • Why are private economic participants sometimes unable to solve the problems caused by an externality?
> A glue factory and a steel mill emit smoke containing a chemical that is harmful if inhaled in large amounts. Describe three ways the town government might respond to this externality. What are the pros and cons of each solution?
> Give an example of a negative externality and a positive externality. Explain why market outcomes are inefficient in the presence of these externalities.
> In what way does the patent system help society solve an externality problem?
> Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm’s production process.
> Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?
> What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?
> For each of the following pairs of firms, explain which firm would be more likely to engage in advertising. a. a family-owned farm or a family-owned restaurant b. a manufacturer of forklifts or a manufacturer of cars c. a company that invented a very com
> A local drama company proposes a new neighborhood theater in San Francisco. Before approving the building permit, the city planner completes a study of the theater’s impact on the surrounding community a. One finding of the study is that theaters attract
> Consider the market for fire extinguishers. a. Why might fire extinguishers exhibit positive externalities? b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social-value curve, the supply curve, and the social-cost cur
> Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car thief who has stolen it. Which of these typ
> There are three industrial firms in Happy Valley. The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits. a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Bri
> Suppose that the government decides to issue tradable permits for a certain form of pollution. a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not? b. If the government chooses to distribut
> Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in
> Ringo loves playing rock ‘n’ roll music at high volume. Luciano loves opera and hates rock ‘n’ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls. a. What is the externality here? b. What command-and-control
> The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment: First ………..bottle $5 Second…….. bottle 4 Third ………..bottle 3 Fourth ……….bottle 2 Fifth ………...bottle 1 Further ……….
> Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms? b. Command-and-control a
> Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive. a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost
> The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are identical. Thereafter, the market becomes perfectly comp
> The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make. Give a response to each of these arguments.
