Question: There are two goods, X and Y.

> A hypothetical society has three income earners, and all three must pay income taxes. The taxable income of Smith is $40,000, the taxable income of Jones is $100,000 and the taxable income of Brown is $200,000. (a) How much tax revenue is raised under a

> What is the average tax rate of someone with a taxable income of $13,766?

> What is the marginal tax rate on the 10,001st dollar? What is the marginal tax rate on the 10,000th dollar? Taxable Income Taxes  $1,000-$5,000 10% of taxable income  $5,001-$10,000 $500 + 12% of everything over $5,000  $10,001-$15,000 $1,100

> If a person’s income is $14,000, how much does she pay in taxes? Taxable Income Taxes  $1,000-$5,000 10% of taxable income  $5,001-$10,000 $500 + 12% of everything over $5,000  $10,001-$15,000 $1,100 + 15% of everything over $10,000  

> If a person’s income is $6,000, how much does he pay in taxes? Taxable Income Taxes  $1,000-$5,000 10% of taxable income  $5,001-$10,000 $500 + 12% of everything over $5,000  $10,001-$15,000 $1,100 + 15% of everything over $10,000  

> In the accompanying figure, if Natural Real GDP is Q2, in what state is the economy at point A? 45° Line B. TE = C +1+ G A E Q3 Q2 Real GDP

> In the accompanying figure, explain what happens if: a. The economy is at Q1 b. The economy is at Q2 45° Line B. TE = C + I+ G A E Q3 Q2 Real GDP ТР, ТЕ

> In Exhibit 11(d), what does the vertical distance between the origin and the point at which the TE curve cuts the vertical axis represent?

> What kind of information does price transmit?

> The TE curve in Exhibit 11(d) is upward-sloping because the consumption function is upward-sloping. Explain.

> Use the accompanying figure to explain the following two statements: (a) According to Keynes, aggregate demand may be insufficient to bring about the full-employment output level (or Natural Real GDP). (b) A decrease in consumption (due to increased s

> Economist Smith believes that changes in aggregate demand affect only the price level and economist Jones believes that changes in aggregate demand affect only Real GDP. What do the AD and AS curves look like for each economist?

> Write an investment function (equation) that specifies two components: (a) Autonomous investment spending (b) Induced investment spending

> Compute the multiplier in each of the following cases: (a) MPC = 0.60 (b) MPC = 0.80 (c) MPC = 0.50

> Diagrammatically represent an economy in a recessionary gap. Next, identify where the economy in a recessionary gap lies in terms of both the institutional and physical PPFs.

> Diagrammatically show what happens when the institutional constraints in the economy become less effective.

> Economist Jones believes that there is always sufficient (aggregate) demand in the economy to buy all the goods and services supplied at full employment. Diagrammatically represent what the economy looks like for Jones.

> Represent the following situations diagrammatically: (a) An economy in which AD increases as the economy is self-regulating out of a recessionary gap, (b) An economy in which AD decreases as the economy is self-regulating out of an inflationary gap.

> Which of the following figures, (a)-(c), is consistent with or representative of: (a) The economy operating at the natural unemployment rate, (b) A surplus in the labor market, (c) A recessionary gap, and (d) A cyclical unemployment rate of zero.

> If the absolute price of good X is $10 and the absolute price of good Y is $14, then what is; (a) The relative price of good X in terms of good Y (b) The relative price of good Y in terms of good X?

> In the following figure, which point is representative of: (a) The economy on its LRAS curve, (b) The economy in a recessionary gap, and (c) The economy in an inflationary gap? E Physical PPF D Institutional PPF Good X All Other Goods

> In the following figure, which part is representative of each of the following: (a) A decrease in wage rates, (b) An increase in the price level, (c) A beneficial supply shock, and (d) An increase in the price of non-labor inputs.

> Diagrammatically represent the following and identify the effect on Real GDP and the price level in the short run: (a) An increase in SRAS that is greater than the increase in AD; (b) A decrease in AD that is greater than the increase in SRAS; and (c)

> Diagrammatically represent the effect on the price level and Real GDP in the short-run of each of the following: (a) An increase in wealth, (b) An increase in wage rates, and (c) An increase in labor productivity.

> Suppose that at a price index of 154, the quantity demanded of U.S. Real GDP is $10.0 trillion worth of goods. Do these data represent aggregate demand or a point on an aggregate demand curve? Explain your answer.

> The following figure shows a business cycle. Identify each of the following as a phase of the business cycle: (a) Point A (b) Between points A and B (c) Point B (d) Between points B and C (e) Point D B Time Real GDP

> If Real GDP is $487 billion in year 1 and $498 billion in year 2, what is the economic growth rate equal to?

> Consumption spending flows into U.S. product markets but import spending does not. But U.S. households buy imported goods in U.S. markets, don’t they? Explain.

> Nondurable goods spending = $400 million, durable goods spending = $300 million, new residential housing spending = $200 million, and spending on services = $500 million. What does consumption equal?

> In year 1, the prices of goods X, Y, and Z are $2, $4, and $6 per unit, respectively. In year 2, the prices of good X, Y, and Z are $3, $4, and $7, respectively. In year 2, twice as many units of each good are produced as in year 1. In year 1, 20 units

> “If price were outlawed as the rationing device (used in markets), there would be no need for another rationing device to take its place. We would have reached utopia.” Discuss.

> Inventory investment is $62 billion and total investment is $1.122 trillion. What does fixed investment equal?

> Consumption spending is $3.708 trillion, spending on nondurable goods is $1.215 trillion, and spending on services is $2.041 trillion. What does spending on durable goods equal?

> Net exports are –$114 billion and exports are $857 billion. What are imports?

> Using the following data, compute (a) the unemployment rate, (b) the employment rate, and (c) the labor force participation rate. The civilian noninstitutional population = 200 million, number of employed persons = 126 million, and number of unemployed p

> A house cost $10,000 in 1976. What is this equivalent to in 2001 dollars? (Use Exhibit 2 to find the CPI in the years mentioned.)

> Jim earned an annual salary of $15,000 in 1965. What is this equivalent to in 2005 dollars? (Use Exhibit 2 to find the CPI in the years mentioned.)

> Change the current year prices in Exhibit 1 to $1 for pens, $28 for shirts, and $32 for a pair of shoes. What is the CPI for the current year based on these prices?

> Suppose 100 million people are in the civilian labor force and 90 million people are employed. How many people are unemployed? What is the unemployment rate?

> Suppose, 60 million people are employed, 10 million unemployed, and 30 million not in the labor force. What does the civilian noninstitutional population equal?

> As price declines, quantity demanded rises and quantity supplied falls. Draw the supply and demand curves that represent this state of affairs.

> What is wrong with this statement: As the price of a good falls, the supply of that good falls, ceteris paribus.

> As price declines, quantity demanded rises but quantity supplied does not change. Draw the supply and demand curves that represent this state of affairs.

> Marijuana is legalized and the price of marijuana falls. Draw the demand and supply curves for marijuana before and after it is legalized.

> Think of two types of books, A and B. Book A can be purchased new by someone and resold as a used book. Book B can only be purchased new by someone (it cannot be resold as a used book). All other things being equal between the two books, draw the demand

> For the taping of television show X, the show’s producers have to pay people. Draw the supply and demand curves for the taping of this show and identify the equilibrium point.

> Smith has been trying to sell his house for six months, but so far, he has had no buyers. Draw the market for Smith’s house.

> Diagrammatically show and explain why there is a shortage of classroom space for some college classes and a surplus for others.

> The price to drive on a freeway is $0 at all times of the day. This price establishes equilibrium at 3 a.m., but is too low to establish equilibrium at 5 p.m. There is a shortage of freeway space at 5 p.m. (a) Graphically show and explain how carpoolin

> The absolute prices of goods X, Y, and Z, respectively, are $23, $42, and $56. What is the relative price of X in terms of Y? What is the relative price of Y in terms of Z? What is the relative price of Z in terms of X?

> Draw a market in equilibrium and identify the area of consumers’ surplus and producers’ surplus. Now place a price ceiling in the market and identify the rise and fall in consumers’ surplus. Finally, identify the decline in producers’ surplus.

> What does a sale on shirts have to do with the law of demand (as applied to shirts)?

> In the preceding diagram, what areas represent consumers’ surplus at the equilibrium price of PE? At PC? (Keep in mind that, at PC, the equilibrium quantity is neither produced nor sold.)

> In the diagram, what areas represent the deadweight loss due to the price ceiling (PC)? PM PE 4 7 8 Pc 6 Q Q2 2.

> Suppose the demand curve is downward sloping, the supply curve is upward sloping, and the equilibrium quantity is 50 units. Show on a graph that the difference between the maximum buying price and minimum selling price is greater at 25 units than at 33 u

> In the figure that follows, can the movement from point 1 to point 2 be explained by a combination of an increase in the price of a substitute and a decrease in the price of non-labor resources? Explain your answer. S2 D2 D1 Q

> At what quantity in the preceding figure is the maximum buying price equal to the minimum selling price?

> At equilibrium in the following figure, what area(s) represent consumers’ surplus? producers’ surplus? P S GIHII iJ 10 20 30 40 50 Q

> Draw a diagram that shows a smaller increase in supply than the increase in demand.

> Using the data in Problem 8, prove that both Tina and David can be made better off through specialization and trade. Data from Problem 8: Tina can produce any of the following combinations of goods X and Y: (a) 100X and 0Y (b) 50X and 25Y (c) 0X and 5

> Tina can produce any of the following combinations of goods X and Y: (a) 100X and 0Y (b) 50X and 25Y (c) 0X and 50Y. David can produce any of the following combinations of goods X and Y: (a) 50X and 0Y (b) 25X and 40Y (c) 0X and 80Y Who has a compa

> If PPF1 in the preceding figure is the relevant production possibilities frontier, then which point(s) represent efficiency? Explain your answer. Y Y х о х о х о (1) (2) (3) (4)

> With respect to each of the following changes, identify whether the demand curve will shift rightward or leftward: a. An increase in income (the good under consideration is a normal good) b. A rise in the price of a substitute good c. A fall in the price

> If PPF2 in the following graph is the relevant production possibilities frontier, then which points are unattainable? Explain your answer. Y Y х о х о х о (1) (2) (3) (4)

> In the preceding figure, which graph depicts a change in the PPF that is likely as a consequence of war? Y Y х о х о х о (1) (2) (3) (4)

> In the following figure, which graph depicts a technological breakthrough in the production of good X only? Y Y х о х о х о (1) (2) (3) (4)

> Draw a PPF that represents the production possibilities for goods X and Y if there are constant opportunity costs. Next, represent an advance in technology that makes it possible to produce more of X, but not more of Y. Finally, represent an advance in t

> Using numbers, explain how a market demand curve is derived from two individual demand curves.

> Suppose the price is $10, the quantity supplied is 50 units, and the quantity demanded is 100 units. For every $1 rise in price, the quantity supplied rises by 5 units and the quantity demanded falls by 5 units. What is the equilibrium price and quantity

> Describe how each of the following will affect the supply of personal computers: (a) A rise in wage rates (b) An increase in the number of sellers of computers (c) A tax placed on production of computers (d) A subsidy placed on the production of compu

> Describe how each of the following will affect the demand for personal computers: (a) A rise in incomes (assuming computers are a normal good) (b) A lower expected price for computers (c) Cheaper software (d) Computers that are simple to operate

> A Dell computer is a substitute for a HP* computer. What happens to the demand for HP computers and the quantity demanded of Dell computers as the price of a Dell falls?

> Many movie theaters charge a lower admission price for the first show on weekday afternoons than for a weeknight or weekend show. Explain why.

> “The price of T-shirts keeps rising and rising, and people keep buying more and more. T-shirts must have an upward-sloping demand curve.” Identify the error.

> There is a decrease in government purchases. The price level will _______________ and Real GDP will _______________.

> Must consumers’ surplus equal producers’ surplus at equilibrium price? Explain your answer.

> At equilibrium in a market, the maximum price buyers would be willing to pay for the good is equal to the minimum price sellers need to receive before they are willing to sell the good. Do you agree or disagree with this statement? Explain your answer.

> Compare the ratings for television shows with prices for goods. How are ratings like prices? How are ratings different from prices?

> Predict what happens to the equilibrium price of marijuana if it is legalized.

> What exactly allows individuals to consume more if they specialize and trade than if they don’t?

> Use the PPF framework to explain something in your everyday life that was not mentioned in the chapter.

> Can a technological advancement in sector X of the economy affect the number of people who work in sector Y of the economy? Explain your answer.

> Suppose a nation’s PPF shifts inward as its population grows. What happens, on average, to the material standard of living of the people? Explain your answer.

> If the slope of the PPF is the same between any two points, what does this imply about costs? Explain your answer.

> Explain how to derive a production possibilities frontier. For instance, how is the extreme point on the vertical axis identified? How is the extreme point on the horizontal axis identified?

> Some goods are bought largely because they have “snob appeal.” For example, the residents of Beverly Hills gain prestige by buying expensive items. In fact, they won’t buy some items unless they are expensive. The law of demand, which holds that people b

> Within a PPF framework, explain each of the following: (a) A disagreement between a person who favors more domestic welfare spending and one who favors more national defense spending (b) An increase in the population (c) A technological change that

> Why are most production possibilities frontiers for goods bowed outward (concave downward)?

> Give an example to illustrate each of the following: (a) Constant opportunity costs (b) Increasing opportunity costs

> What condition must hold for the production possibilities frontier to be bowed outward (concave downward)? To be a straight line?

> Explain how the following can be represented in a PPF framework: (a) The finiteness of resources implicit in the scarcity condition; (b) Choice; (c) Opportunity cost; (d) Productive efficiency; (e) Unemployed resources.

> Describe how each of the following would affect the U.S. PPF: (a) An increase in the number of illegal immigrants entering the country, (b) A war that takes place on U.S. soil, (c) The discovery of a new oil field (d) A decrease in the unemployment ra

> Explain the similarities and differences between an open market purchase and quantitative easing.

> Suppose you read in the newspaper that all last week the Fed conducted open market purchases and that on Tuesday of last week it lowered the discount rate. What would you say the Fed is trying to do?

> Explain how a decrease in the required reserve ratio increases the money supply.

> Suppose bank A borrows reserves from bank B. Now that bank A has more reserves than previously, will the money supply increase? Explain your answer.

> “The price of a bushel of wheat, which was $3.00 last month, is $3.70 today. The demand curve for wheat must have shifted rightward between last month and today.” Discuss.

> Suppose the Fed raises the required reserve ratio, a move that is normally thought to reduce the money supply. However, banks find themselves with a reserve deficiency after the required reserve ratio is increased and are likely to react by requesting a

> Explain how an open market sale decreases the money supply.

> Explain how an open market purchase increases the money supply.