Suppose that a country’s annual growth rates were 5, 3, 4, -1, -2, 2, 3, 4, 6, and 3 in yearly sequence over a 10-year period. What was the country’s trend rate of growth over this period? Which set of years most clearly demonstrates an expansionary phase of the business cycle? Which set of years best illustrates a recessionary phase of the business cycle?
> Imagine you have some workers and some hand-held computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers can togethe
> Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that
> Explain graphically how indifference analysis can be used to derive a demand curve.
> Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure. What plant size will the firm choose in producing (a) 50, (b) 130, (c) 160, and (d) 250 units of output? Draw the firmâ&
> True or false. The U shape of the long-run ATC curve is the result of diminishing returns.
> Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift. a.
> A firm has fixed costs of $60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to problem 4 at the end of Chapter 10. a. Graph total fixed cost, total variable cost, an
> Explain why an economy’s output, in essence, is also its income.
> Which of the following are short-run and which are long-run adjustments? a. Wendy’s builds a new restaurant. b. Harley-Davidson Corporation hires 200 more production workers. c. A farmer increases the amount of fertilizer used on his corn crop. d. An Al
> Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients and the bottles and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Lin
> Assume that the data in the following table give an indifference curve for Mr. Chen. Graph this curve, putting A on the vertical axis and B on the horizontal axis. Assuming that the prices of A and B are $1.50 and $1, respectively, and that Mr. Chen has
> If a firm's current revenues are less than its current variable costs, when should it shut down? If it decides to shut down, should we expect that decision to be final? Explain using an example that is not in the book.
> “That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and words.
> Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. If GDP and consumption both rise by $6 billion in the second round of the process, what is the MPC in this econom
> What will the multiplier be when the MPS is 0, .4, .6, and 1? What will it be when the MPC is 1, .90, .67, .50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is .80? If the MPC instea
> Refer to the table in Figure 30.5 in the book and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that that the expected rate of return declines by 2 percentage points at each prospective level of investment.
> Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yield
> Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year’s net revenue. What is the expected rate of return? If the real interest rate at which fu
> Why do economists include only final goods and services in measuring GDP for a particular year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they include the value of the used furniture bought and sold?
> Use your completed table for problem 1 to solve this problem. Suppose the wealth effect is such that $10 changes in wealth produce $1 changes in consumption at each level of income. If real estate prices tumble such that wealth declines by $80, what will
> Linear equations for the consumption and saving schedules take the general form C = a + bY and S= -a + (1-b)Y where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents
> Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d)
> Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion and saving goes up by $2
> Refer to the incomplete table below. a. Fill in the missing numbers in the table. b. What is the break-even level of income in the table? What is the term that economists use for the saving situation shown at the $240 level of income? c. For each of th
> Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.
> Consider a firm that has no fixed costs and that is currently losing money. Are there any situations in which it would want to stay open for business in the short run? If a firm has no fixed costs, is it sensible to speak of the firm distinguishing betwe
> “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)?
> Strictly speaking, pure competition is relatively rare. Then why study it?
> Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? (a) a supermarket in your hometown; (b) the
> Which of the following goods are usually intermediate goods and which are usually final goods: running shoes; cotton fibers; watches; textbooks; coal; sunscreen lotion; lumber?
> Using Figure 4, explain why the point of tangency of the budget line with an indifference curve is the consumer’s equilibrium position. Explain why any point where the budget line intersects an indifference curve is not equilibrium. Explain: “The consume
> Assume the following cost data are for a purely competitive producer: a. At a product price of $56, will this firm produce in the short run? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic pro
> Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second
> A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the seco
> A purely competitive firm finds that the market price for its product is $20. It has a fixed cost of $100 and a variable cost of $10 per unit for the first 50 units and then $25 per unit for all successive units. Does price exceed average variable cost f
> Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is as though her income __________________. a. increases b. decreases c. stays the same
> Consider a profit-maximizing firm in a competitive industry. For each of the following situations, indicate whether the firm should shut down production or produce where MR = MC. a. P < minimum AVC. b. P > minimum ATC. c. Minimum AVC < P < minimum ATC.
> A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a
> If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which: a. MR < MC. b. MR = MC. c. MR > MC. d. none of the above.
> A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which: a. TR and TC are equal. b. TR exceeds TC by as much as possible. c. TC exceeds TR by as much as possible. d. None of the above.
> Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time of the market values of various total outputs? How is t
> Use the following demand schedule to determine total revenue and marginal revenue for each possible level of sales: a. What can you conclude about the structure of the industry in which this firm is operating? Explain. b. Graph the demand, total-revenue
> If the inflation premium is 2 percent and the nominal interest rate is 1 percent, what is the real interest rate? What if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent?
> Suppose that the nominal rate of inflation is 4 percent and the inflation premium is 2 percent. What is the real interest rate? Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflati
> If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in so
> How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
> If the CPI was 110 last year and is 121 this year, what is this year’s rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year’s rate of inflation? What term do economists use to describe this second
> Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that
> Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? Wh
> Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is: a. A horizontal line at 2 cents per paper clip. b. A ve
> In what ways are national income statistics useful?
> Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will ______________ and Jermaine will _______________ cucumbers for lettuce. LO4 a. Fall; substitute b. Rise; substitute c. Fall; supply
> Using Big Data to set personalized prices cannot be done with 100 percent precision. What would happen if personalized prices were set higher than customers' reservation prices? Would this possibility reduce the incentive to set the highest possible per
> It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly.
> Explain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal-cost) pricing and (b) fair-return (average-total-cost) pricing. What is the “dilemma
> Would you expect a country with a total fertility rate of 2.7 to have a growing or a shrinking population over the long run? What about a country with a total fertility rate of 1.2? In 20 years, will America have more or fewer workers per retiree than it
> What, if any, are the benefits and costs of economic growth, particularly as measured by real GDP per capita?
> Relate each of the following to the 1995 to 2010 increase in the trend rate of productivity growth: a. Information technology b. Increasing returns c. Network effects d. Global competition
> Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage.
> True or False: If false, explain why. a. Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future. b. Many public capital goods are complementary to private
> What is growth accounting? To what extent have increases in U.S. real GDP resulted from more labor inputs? From greater labor productivity? Rearrange the following contributors to the growth of productivity in order of their quantitative importance: econ
> True or False. Because price stickiness only matters in the short run, economists are comfortable using just one macroeconomic model for all situations.
> Suppose that Alpha and Omega have identically sized working-age populations but that total annual hours of work are much greater in Alpha than in Omega. Provide two possible reasons for the difference.
> What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.
> Why are some countries today much poorer than other countries? Are today’s poor countries destined to always be poorer than today’s rich countries? If so, explain why. If not, explain how today’s poor countries can catch or even pass today’s rich countri
> When and where did modern economic growth first happen? What are the major institutional factors that form the foundation for modern economic growth? What do they have in common?
> What is Say’s Law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use production possibilities analysis to demonstrate Keynes’ view on t
> What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? How does the idea of a liquidity trap relate to cyclical asymmetry? Why is this possibility of a liquidity trap significant to policymakers?
> Explain the links between changes in the nation’s money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
> Suppose that you are a member of the Board of Governors of the Federal Reserve System. The post-2008 economy is experiencing a sharp rise in the inflation rate. What change in the federal funds rate would you recommend? How would your recommended change
> Distinguish between how the Fed would have to undertake restrictive monetary policy today versus before the mortgage-debt crisis. What actions would it need to take in each case?
> Distinguish between the federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
> If the demand for a firm’s output unexpectedly decreases, you would expect that its inventory would: LO4 a. Increase. b. Decrease. c. Remain the same. d. Increase or remain the same, depending on whether prices are sticky.
> How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies possibly less efficient than firms?
> What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
> What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determ
> By what chain of causation does the ECB think negative interest rates will stimulate the economy? If the Fed manages to raise interest rates up to historical levels before the next recession, will it have to consider negative interest rates as a first co
> Refer to the accompanying table for Moola to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap)
> Suppose that inflation is 2 percent, the Federal funds rate is 4 percent, and real GDP falls 2 percent below potential GDP. According to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate?
> Suppose that the target range for the federal funds rate is 1.5 to 2.0 percent but that the equilibrium federal funds rate is currently 1.70 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $120 billion in repo
> Refer to Table 36.2 and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Fin
> In the accompanying tables you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to c is completed.
> Suppose a bond with no expiration date has a face value of $10,000 and annually pays a fixed amount of interest of $800. In the table provided, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond pri
> Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasi
> If an economy has fully flexible prices and demand unexpectedly increases, you would expect that the economy’s real GDP would tend to: LO4 a. Increase. b. Decrease. c. Remain the same.
> What is a recessionary expenditure gap? An inflationary expenditure gap? Which is associated with a positive GDP gap? A negative GDP gap?
> Assuming the economy is operating below its potential output, what is the impact of an increase in net exports on real GDP? Why is it difficult, if not impossible, for a country to boost its net exports by increasing its tariffs during a global recession
> Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the decline in the aggregate expenditures
> Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in the private closed economy? a. A decline in the real interest rate. b. An overall decrease in the expected rate of return on inv
> Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP
> Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed eco
> What is an investment schedule and how does it differ from an investment demand curve?
> How is economic growth measured? Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades?
> U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing re
> Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text? Explain.
> If an economy has sticky prices and demand unexpectedly increases, you would expect the economy’s real GDP to: LO4 a. Increase. b. Decrease. c. Remain the same.
> Suppose that for years East Confetti’s short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 2 percentage point decline in its inflation rate. Then, during several recent years the short ru
> Suppose that over a 30-year period Buskerville’s price level increased from 72 to 138 while its real GDP rose from $1.2 trillion to $2.1 trillion. Did economic growth occur in Buskerville? If so, by what average yearly rate? Did Buskerville experience in
> Suppose that the equation for a particular short-run AS curve is P = 20 + .5Q, where P is the price level and Q is real output in dollar terms. What is Q if the price level is 120? Suppose that the Q in your answer is the full-employment level of output.
> Use the accompanying figure to answer the follow questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (or full-employment) level of output.
