Questions For Review Ykk
1. Draw the short-run trade-off between inflatkw and unemployment. How might the Fed move the economy from one point on this curve to another 2. Draw the long-run trade-off between inflatkw and unemployment. Explain how the short-run and long-run trade-offsare related. 3. What is natural about the natural rate of unemployment Why might the natural rate of unemployment differ across countries ply shock, such as an increase in world oil prkvs, gives policymakers a less favorable trade-off between...
Problems And Applications Bex
1. What components of GDP if any would each of the following transactions affect Lxplain. a. A family buys a new refrigerator. c. Ford sells a Mustang from its inventory. f. Your parents buy a bottle of French wine. g. Honda expands its factory in Marysville. Ohio. 2. The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of CDP, explain why transfer payments are excluded. 3. As the chapter states, GDPd x'S...
Problems And Applications Gmz
1. Each of the following situations involves moral hazard. In cach ease, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard a. Landlords require tenants to pay security deposits. b. Firms compensate top executives with options to buy company stock at a given price in the future. c. Car insurance companies offer discounts to customers who install antitheft devices in their cars. 2. Suppose that...
What i r Make of Rising Inequality
An economist offers his perspective on the rise in U.S. income iooquafrty. Incomes and Inequality What the Numbers Don't Tell Us Dw grating regualty m wvdth and Income has led many propfc to gwtOon sOKti the contemporary American econ orny is rigged m Uwoi ot the rich. Able there Is I tile cbubt thit the gap between ihe wakhy and e er gt t fy el has widened in recent years. The siuatton net as unfair as some ol the numbers seemtoirrpy Much of the measured growth in irenme meqwlry has resuted...
Problems And Applicatio Nsm
1. 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 itself. Can you reconcile these two facts 2. 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...
Would Banning Negext Increase Or Decrease Welfare
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 Briefly explain why the sellers ami buyers are each willing to do so. What is the total cost of pollution reduction in this situation b. How much higher would tlx costs of pollution reduction be if the permits could not be traded 13. The market for a particular chemical, called Negext. is described by...
questions for review Ipl
1. Why are coal miners paid more than other workers with similar amounts of education 2. In what sense is education a type of capital 3. How might education raise a worker's wage without raising the worker's productivity 4. What conditions lead to economic superstars Would you expect to see superstars in dentistry In music Explain. 5. Give three reasons a worker's wage might be above the level that balances supply and demand. A. What difficulties arise in dividing whether a group of workers has...
Info Lsa
a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2009 as the base year, and fix the basket at 1 karaoke machine and b. Using a method similar to the GDP deflator, compute the percentage change of the overall price level. Also use 2009 as the base year. c. Is the inflation rate in 2010 the same using the two methods Explain why or why not. 5. Beginning in 1994, environmental regulations have required that gasoline contain a new...
Problems And Applicatio Nef
1. Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and car-nits. In 2008, they buy 100 heads of cauliflower for 200,50 bunches of broccoli for 75, and 500 carrots for 50. In 2lXW, they buy 75 heads of cauliflower for 225,80 bunches of broccoli for 120, and 500 carrots for 100. a. Calculate the price of each vegetable in each year. b. Using 21108 as the base year, calculate the CPI for each year. c. What is the inflation rate in 2009 2. Go to the website...
Problems And Applicatio Dgl
1. There are two ways to protect your car from theft. The Club makes it difficult for a car thief to take your car. Lojack makes it easier for the police to catch the rar thief who has stolen it. Which of these types of protection conveys a negative externality on other car owners Which conveys a positive externality Di gt you think there are any policy implications of your analysis 2. Do you agree with the following statements Why or why not a. The benefits of corrective taxes asa way to...
problems and applicatio Dpz
1. College students sometimes work as summer interns for private firms or the government. Many of these positions pay little or nothing. a. What is the opportunity cost of taking such a job b. Explain why students are willing to take these jobs. c. If you were to compare the earnings later in life of workers who had worked as interns and those who had taken summer jobs that paid more, what would you expect to find 2. As explained in Chapter 6, a minimum-wage law distorts the market for low-wage...
Problems And Appucatio
1. Among monopoly, oligopoly, monopolistic competition, and perfect competition, how would you cL.iv.ily the markets for each of the following drinks 2. Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers. 3. For each of Ihe following characteristics, say whether it describes a perfectly competitive firm,a monopolistically competitive firm, both, or neither. a. Sells a product differentiated from that of its...
Cost and the Willingness to Sell
Imagine now that you are a homeowner and you want to get your house painted. You turn to four sellers of painting services Mary, Frida, Georgia, and Grandma, Each painter is willing to do the work for you if the price is righl. You decide to take bids from the four painters and auction off the job to the painter who will do the work for the lowest price- Each painter is willing to take the job if the price she would receive exceeds her cost of doing Ihe work. Here the term cost should be...
Problems And Applicatio Hjc
1. In a published source or on the Internet, find out whether the U.S. federal government had a budget deficit or surplus last year. What do policymakers expect to happen over the next few years Hint T he website of the Congressional Budget Office is http www.cbo.gov. 2. The information in many of the tables in this chapter can be found in the Economic Ke n gt rt of ihe President, which appears annually. Using a recent issue of the report at your library or on the Internet, answer the following...
Info Ntc
a. What is the percentage change in the price of each of the three goods b. Using a method similar to tlie consumer price index,compute the percentage change in the overall price level. c. If you were to learn that a bottle of Gatorade increased in size from 2009 to 2010, should that information affect your calculation of the inflation rate If so, how d. If you were to learn llut Gatorade introduced new flavors in 2010, should that information affect your calculation of the inflation rate If...
Problems And Applicatio Wsa
1. A large share of the world supply of diamonds Comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at 1,00 per diamond, and the demand for diamonds is described by the following schedule Price Gusnt y 3X00 10. COO O30 11.COO 1050 12.COO a. If there were many suppliers of diamonds, what would be the price and quantity L gt . If there were only one supplier of diamonds, what would be the price anil quantity c. If Russia and South Africa formed a...
s
a. In what kind of market structure does the firm sell its output How can you tdl b. In what kind of market structure does the firm rent robots How can you tell C- Calculate the marginal product and the value of the marginal product for each additional robot. d. How many robots should the firm rent Explain. 5. Your enterprising uncle opens a sandwich shop that employs 7 people. The employees are paid S6 per hour, and a sandwich sells for M. If your undo is maximizing his profit, what is the...
Info Wnh
the marginal cost pet dozen pizzas using the information on variable cost. What is the relationship between these sets of numbers Comment. 7. You are thinking about setting up a lemonade stand. The stand itself costs S2CO. The ingredients for each cup of lemonade cost 0.50. a. What is your fixed cost of doin gt business What is your variable cost per cup b. Construct a table showing your total cost, average total cost, and marginal cost for output levels varying from 0 to 111 gallons- Hint...
Co
a. To maximize profit, what price would you charge tor an adult ticket For a child's ticket How much profit do you make b. The city council passes a law prohibiting you from charging different prices to different customers. What price do you set for a ticket now How much profit do you make c. Who is worse off because of the law prohibiting price discrimination Who is better off If you can, quantify the changes in welfare. d. If tile fixed cost of the play were 2,5ft gt rather than 2,000. how...
Info Xhh
a. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold b. Assume thai all other banks hold only the required amount of reserves- If First National decides to reduce its reserves to only the required amount, by how much would the economy's money supply increase 10- Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells 1 million of...
Questions For Review Ysd
1. Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rise during a recession. 2. Draw a diagram with aggregate demand, short-run aggregate supply, and long-run aggregate supply. Be careful to label the axes correctly. 3. List and explain the three reasons the aggregate-demand curve is downward sloping. 4. Explain why the long-run aggregate-supply curve is vertical. 5. List and explain the three theories for why the...
Info Vsg
Oiir third and final step is to compare the old and new equilibria. Panel a shows the impact of a US. budget deficit on the US. market for loanable funds. With fewer funds available for borrowers in US. financial markets, the interest rate rises from r, to r, to balance supply and demand. Faced with a higher interest rate, borrowers in the market for loanable funds choose to borrow less. This change is represented in the figure as the movement from point A to point B along the demand curve for...
Problems And Applicatio Qxq
1. Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. Illustrate your answers with diagrams. a. The Fed's bond traders buy bonds in open-market operations. b. An increase in credit-card availability reduces the cash people hold. c. The Federal Reserve reduces banks' reserve requirements. d. Households decide to hold more money to use for holiday shopping. e. A wave of optimism boosts business investment and expands...
The Downward Slope of the AggregateDemand Curve
Having seen how the theory of Ikjtiidity preference explains the economy's equilibrium interest rate, we now consider the theory's implications for the aggregate demand for goods and services. As a warm-up exercise, let's begin by using the theory to reexamine a topic we already understand the interest-rate effect and Ihe downward slope of the aggregate-demand curve. In particular, suppose that the overall level of prices in the economy rises. What happens to the interest rate that balances the...
Problems And Applications Dgx
1. Suppose the economy is in a long-run a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply. b. Now suppose that a stock-market crash causes aggregate demand to fall. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in...
questions for review Fyc
1. What happens to consumer and producer surplus when the sale of a good is taxed How does the change in consumer and producer surplus compare to the tax revenue Explain. 2. Draw a supply-and-demand diagram with a tax on the sale of the good. Show tin deadweight loss. Show the tax revenue. 3. How do the elasticities of supply and demand affect the deadweight loss of a tax Why do they have this effect 4. Why do experts disagree about whether labor taxes have small or large deadweight losses 5....
The Volcker Disinflation
As we have seen, when Paul Volcker faced the prospect of reducing inflation from its peak of about 10 percent, the economics profession offered two conflicting predictions. One group of economists offered estimates of the sacrifke ratio and concluded that reducing inflation would have great cost in terms of lost output and high unemployment. Another group offered the theory of rational expeclatums and concluded that reducing inflation could be much less costly and, perhaps, could even have no...
Five Debates over Macroeconomic Policy
It is hard to open up the newspaper without finding some politician or editorial writer advocating a change in economic policy. The president should raise taxes to reduce the budget deficit, or he should stop worrying about the budget deficit. I he Federal Reserve should cut interest rates to stimulate a flagging economy, or it should avoid such moves in order not to risk higher inflation, Congress should reform the tax system to promote faster economic growth, or it should reform the tax...
The Theory Of Efficiency Wages
A fourth reason economies always experience some unemployment in addition to job search, minimum-wage laws, and unions is suggested by the theory of efficiency wages According to this theory, firms operate more efficiently if wages are above the equilibrium level. Therefore, it may be profitable for firms to keep wages high even in the presence of a surplus of labor. In some ways, the unemployment that arises from efficiency wages is similar to the unemployment that arises from minimum-wage...
Identifying Unemployment
Let's start by examining more precisely what the term unemployment means- Measuring unemployment is the job of the Bureau of Labor Statistics BLS . which is part of the Department of Labor. Every month, the BLS produces data on unemployment and on other aspects of the labor market, including types of employment, length of the average workweek, and the duration of unemployment. These data come from a regular survey of about 60 XX households, called the Current Population Survey. Based on the...
The Classical Theory Of Inflation
We begin our study of inflation by developing the quantity theory of money. This theory is often called 'classical because it was developed by some of the earliest economic thinkers. Most economists today rely on this theory to explain the long-run determinants of the price level and the inflatk gt n rate. The Level of Prices and the Value or Money Suppose we observe over some period of time the price of an ice-cream cone rising from a nickel to a dollar. What conclusion should we draw from the...
Questions For Review Onb
1. Cive an example of a price ceiling and an example of a price floor. 2. Which causes a shortage of a good a price ceiling or a price fl lt x gt r Justify your answer with a graph. 3. What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium 4. Explain why economists usually oppose controls on prices. 5. Suppose the government removes a tax on buyers of a good and levies a tax of the same siik on sellers of the good. How does this...
The ShortRun Tradeoff between Inflation and Unemployment
wo closely watched indicators of economic performance are inflation and unemployment When the Bureau of Labor Statistics releases data on these variables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate anil the unemployment rate to produce a misery index, which purports to measure the health of the economy. How an- these two measures of economic performance related to each other liarlier in the book, we discusscd the long-run...
Igure 2 1
rali in the United States since 1MW . The figure shows that the economy always has some unemployment and that the amount changes from year to year, The normal rate of unemployment around which the unemployment rate fluctuates is called the natural rate of unemployment, anil the deviation of unemployment from its natural rate is called cyclical unemployment, The natural rate of unemployment shown in the figure is a series estimated by economists at the Congressional Budget Office. For 2007, they...
Problems And Applicatio Ace
1. Think about the goods and services provided by your local government, a. Using the classification in Figure 1, explain which category each of live following gtxxJs falls into b. Why do you think the government provides items that are not public goods 2 Both public goods and common resources involve externalities. a. Arc 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...
Financial Institutions In The Us Economy
At the broadest level, the financial system moves the economy's scarce resources from savers people who spend less than they earn to borrowers people who spend more than they earn . Savers save for various reasons to put a child through college in several years or to retire comfortably in several decades Similarly, borrowers borrow for various reasons to buy a house in which to live or to start a business with which to make a living. Savers supply their money to the financial system with the...
Two Causes Of Economic Fluctuations
Now that we have introduced the model of aggregate demand and aggregate supply. we have the basic tools we need to analyze fluctuations in economic activity. In particular, we can use what we have learned about aggregate demand and aggregate supply to examine the two basic causes of short-run fluctuations shifts in aggregate demand and shifts in aggregate supply. To keep things simple, we assume the economy begins in long-run equilibrium, .1 shown in Figure 7. Output and the price level are...
Why Is Gasoline Taxed So Heavily
In many nations, gasoline is among the most heavily taxed goods The gas lax can be viewed as a corrective tax aimed at three negative externalities associated with driving CiHtges jiw 'f you have ever been stuck in bumper-to-bumper traffic, you have probably wished that there were fewer cars on lite road. A gasoline tax keeps congestion down by encouraging people to take public transportation, carpool more often, and live closer to work. Accidents Whenever people buy large cars or sport-utility...
Con The Central Bank Should Not Aim for Zero Inflation
Price stability may be desirable, but the benefits of zero inflation compared to moderate inflation are small, whereas the costs of reaching zero inflation are large. Estimates of the sacrifice ratio suggest that reducing inflation by 1 percentage point requires giving up about 5 percent of one year's output. Reducing inflation from, say, 4 percent to zero requires a loss of 20 percent of a year's output. People might dislike inflation of 4 percent, but it is not at all clear that they would or...
M36m
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Questions For Review Usm
1. What are the three categories into which the Bureau of Labor Statistics divides everyone How does the BLS compute the labor force, the unemployment rate, and the labor-force participation rate 2. Is unemployment typically short-term or long-term Explain. 3. Why is frktional unemployment inevitable How might the government reduce the amount of frktional unemployment I. Are minimum-wage laws a better explanation lor structural unemployment among teenagers or among college graduates Why 5. How...
Questions For Review Hpl
1. Explain what is meant by a good being excludable. Explain what is meant by a good being rival in consumptionIs a slice of pizza excludable Is it rival in consumption 2. Define and give an example of a public good. Can the private market provide this good on its own Explain. 3. What is cost-benefit analysis of public goods Why is it important Why is it hard 4. Define and give an example of a common resource. Without government intervention, will people use this gocxl too much or too little...
questions for review Gmh
1. Explain how a firm's productkm function is related to its marginal product of labor, how a firm's marginal product of labeur is related to the value of its marginal product, and how a firm's value of marginal product is related to its demand for labor. 2. Give two examples of events that could shift the demand for labor, and explain why they do so. 3. Give two examples of events that could shift the supply of labor, and explain why they do so. respond to an increase in the wage by working...
Problems And Applicatio Okd
1. Suppose the natural rate of unemployment is 6 percent. On oik- graph, draw two Phillips curves that describe the four situations listed here. Label the point that shim s the position of the economy in each case- a. Actual inflation is 5 percent and expected inflation is 3 percent. b. Actual inflation is 3 percent and expected inflation is 5 percent. c. Actual inflation is 5 percent and expected inflation is 5 percent. d. Actual inflation is 3 percent and expected inflation is 3 percent. 2....
Questions For Review Hgo
1. Define net exports and net capital outflow. Explain how and why they are related. 2. Explain the relationship among saving, investment, and net capital outflow. 3. If a Japanese car costs 500,0ft yen, a similar American car costs 10,000, and a dollar ran buy 100 yen, what are the nominal and real exchange rates 4, Describe the economic logic behind the theory of purchasing-power parity. 5. If the Fed started printing large quantities of US. dollars, what would happen to the number of...
Summary Gym
The overall level of prices in an economy adjusts tu bring money supply and money demand into balance- When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation. The principle of monetary neutrality asserts that changes in the quantity of money influence nominal variables but not real variables. Most economists believe that monetary neutrality approximately describes the behavior of...
Questions For Review Hsr
1. Describe supply and demand in the market for loanable funds and the market for foreign-currency exchange. How are these markets linked ' 2. Why are budget deficits and trade deficits some-limes called the twin deficits 3. Suppose that a textile workers' union encourages people to buy only American-made clothes. What would this policy do to the trade balance and the real exchange rale What is the impact on the textile industry What is the impact on the auto industry 4. What is capital flight...
Questions For Review Qlh
1. 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. 2. What benefit do people get from the market for insurance What two problems impede the insurance company from working perfectly 3. What is diversification Does a stockholder get more diversification going from 1 to 10 stocks or going from 10t gt to 120 stocks 4. Comparing stocks and government bonds, which has more risk Which pays a higher average...
Questions For Review Utc
1. A consumer has income of 3,000. Wine costs W per glass, and cheese costs S6 per pound. Draw the consumer's budget constraint. What is the slope of this budget constraint 2. Draw a consumer's indifference curves for wine and cheese. Describe and explain four properties of these indifference curves. 3. Pick a point on an indifference curve for wine and cheese and show the marginal rate of sub stitution. What does the marginal rate of substitution tell us I. Show a consumer's budget constraint...
Con Thf Tax Laws Should Not Be Reformed to Encourage Saving
Increasing saving may be desirable, but it is not the only goal of tax policy. Policymakers also must be sure to distribute the tax burden fairly. The problem with proposals to increase the incentive to save is that they increase the tax burden on tho who can least afford it. It is undeniable that high-income households save a greater fraction of their income than low-income households. As a result, any tax change that favors people who save will also tend to favor people with high income....