Question: A commercial bank sells a Treasury bond

> Refer to the accompanying table in answering the questions that follow: a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By

> Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also

> Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does

> Assume that, without taxes, the consumption schedule of an economy is as follows: a. Graph this consumption schedule and determine the MPC. b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all level

> The data in columns 1 and 2 in the accompanying table are for a private closed economy: a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy. b. Now open up this economy to international trade by including the export an

> Suppose that a certain country has an MPC of .9 and a real GDP of $400 billion. If its investment spending decreases by $4 billion, what will be its new level of real GDP?

> By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?

> Using the consumption and saving data in problem 1 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and plann

> Suppose that the annual rates of growth of real GDP of Econoland over a five-year period were sequentially as follows: 3 percent, 1 percent, -2 percent, 4 percent, and 5 percent. What was the average of these growth rates in Econoland over these 5 years?

> Assuming the level of investment is $16 billion and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and

> Using the utility-maximization rule as your point of reference, explain the income and substitution effects of an increase in the price of product B, with no change in the price of product A.

> Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up

> In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as 7 Eleven, Kwik Shop, and Circle K), although their prices are generally much higher than prices in large supermarkets. What explains the success of t

> Economists agree that inflation reduces real output. a. Cost-push. b. Demand-pull.

> True or False: Lenders are helped by unanticipated inflation.

> Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would

> Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Jimmer’s real income change next year? a. -2 percent. b. 8 percent. c. 10 percent. d. 12 percent.

> Cost-push inflation occurs when there is __________________________. LO3 a. Excess inventory. b. A trade deficit. c. Rising per-unit production costs. d. Excess demand for goods and services.

> A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy’s negative GDP gap? a. 1 percent. b. 3 percent. c. 6 percent. d. 10 percent.

> What government agency compiles the U.S. NIPA tables? In what U.S. department is it located? Of the several specific sources of information, name one source for each of the four components of GDP: consumption, investment, government purchases, and net ex

> The unemployment rate that is consistent with full employment is known as _________________________. a. The natural rate of unemployment. b. The unnatural rate of unemployment. c. The status quo rate of unemployment. d. Cyclical unemployment. e. Okun’s

> Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus

> Suppose that an economy has 9 million people working full time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed.

> Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in ___________________. a. The level of total spending. b. The level of the stock market. c. The

> Place the phases of the business cycle in order. a. Recession b. Trough c. Peak d. Expansion

> Explain: a. Before economic growth, there were too few goods; after growth, there is too little time. b. It is irrational for an individual to take the time to be completely rational in economic decision making. c. Telling your spouse where you would li

> How can time be incorporated into the theory of consumer behavior? Explain the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”

> Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70

> Complete the following table and answer the questions below: a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? b. “A rational consumer will purchase only 1 unit of

> What information is contained in an indifference curve? Why are such curves (a) downsloping and (b) convex to the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? Why can’t indifference curv

> Why does gross output do a better job than GDP of measuring overall economic activity? How could you construct a new statistic that focused only on non-final economic activity? Given what you know about the behavior of GO and GDP during the Great Recessi

> What do you think of the ethics of using unconscious nudges to alter people’s behavior? Before you answer, consider the following argument made by economists Richard Thaler and Cass Sunstein, who favor the use of nudges. They argue that in most situation

> Evaluate the following statement. “We shouldn’t generalize from what people do in the ultimatum game because $10 is a trivial amount of money. When larger amounts of money are on the line, people will act differently.”

> Do people playing the dictator game show only self-interested behavior? How much divergence is there in the splits given by dictators to the other player?

> What does behavioral economics have to say about each of the following statements? a. “Nobody is truly charitable-they just give money to show off.” b. “America has a ruthless capitalist system. Considerations of fairness are totally ignored.” c. “Self

> In the early 1990’s, New Jersey and Pennsylvania both reformed their automobile insurance systems so that citizens could opt for either a less-expensive policy that did not allow people to sue if they got into accidents or a more-expensive policy that di

> You just accepted a campus job helping to raise money for your school’s athletic program. You are told to draft a fund-raising letter. The bottom of the letter asks recipients to write down a donation amount. If you want to raise as much money as possibl

> Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike

> “There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic.

> Economist Gerd Gigerenzer characterizes heuristics as “fast and frugal” ways of reaching decisions. Are there any costs to heuristics being “fast and frugal”? Explain and give an example of how a fast and frugal method for doing something in everyday l

> Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental proc

> Which of the following are included or excluded in this year’s GDP? Explain your answer in each case. a. Interest received on an AT&T corporate bond. b. Social Security payments received by a retired factory worker. c. Unpaid services of a family member

> True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

> True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

> If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________bonds. a. Buy. b. Sell.

> Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. a. The Fed raises the discount rate from 5 percent to 6 percent. b. The Fed raises the reserve ratio from 10 percent to 11 percent. c. The

> A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent and the Fed is currently mandating a reserve ratio of 10 percent.

> A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ___________ in money-creating potential. If the reserve ratio is 14 percent, the bank has ___________ in money-creating p

> Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves: a. Federal Reserve Banks purchase securities from banks. b. Commercial banks borrow from Federal Res

> When bond prices go up, interest rates go_______ . a. Up. b. Down. c. Nowhere.

> Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?

> Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index and what is its role in differentiating nominal GDP and real GDP

> Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’ dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will

> Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates?

> What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?

> In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued

> If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?

> Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore diversifiable risk?

> Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the compa

> What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?

> How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes b

> What is compound interest? How does it relate to the formula: X dollars today = (1 + i ) tX dollars in t years? What is present value? How does it relate to the formula: X/(1 + i)t dollars today = X dollars in t years?

> Define net exports. Explain how U.S. exports and imports each affects domestic production. How are net exports determined? Explain how net exports might be a negative amount.

> Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first sta

> Suppose that Joe enjoys and repeatedly does stupid things like getting heavily into debt and insulting police officers. Do these actions constitute systematic errors? If he gets what he wants each time, are his stupid actions even considered to be erro

> What information is embodied in a budget line? What shifts occur in the budget line when money income (a) increases and (b) decreases? What shifts occur in the budget line when the price of the product shown on the vertical axis (c) increases and (d

> Ted has always had difficulty saving money. So on June 1st, Ted enrolls in a Christmas savings program at his local bank and deposits $750. That money is totally locked away until December 1st so that Ted can be certain that he will still have it once

> In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for x represents remaining at the status quo. The so-called value function, v(

> Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. A

> The coffee shop near the local college normally sells 10 ounces of roasted coffee beans for $10. But the shop sometimes puts the beans on sale. During some sales, it offer “33 percent more for free”. Other weeks, it takes “33 percent off” the normal p

> Anne is a bargain-minded shopper. Normally, her favorite toothpaste costs the same at both of her local supermarkets, but the stores are having competing sales this week. At one store, there is a bonus offer: buy 2, get 1 free. At the other store, to

> One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a

> Bill spends his money on flowers and cookies so as to maximize his total utility. Both flowers and cookies start off costing $2 each. At that price, Bill buys three flowers and two cookies. When the price of flowers is lowered to $1, Bill buys eight flow

> Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. Explain: “Though net investment can be positive, negative, or zero, it is impossible

> Discuss the political incentives that helped motivate federal politicians to approve budget deficits in all but five years between 1960 and 2015.

> Many proposers in the ultimatum game offer half to the responder with whom they are paired. This behavior could be motivated by (select as many as might apply): a. Fear that an unequal split might be rejected by a fair-minded responder. b. A desire to

> Erik wants to save more, but whenever a paycheck arrives, he ends up spending everything. One way to help him overcome this tendency would be to: LO4 a. Teach him about time inconsistency. b. Tell him that self-control problems are common. c. Have him e

> Label each of the following behaviors with the correct bias or heuristic. a. Your uncle says that he knew all along that the stock market was going to crash in 2008. b. When Fred does well at work, he credits his intelligence. When anything goes wrong,

> Identify each statement as being associated with neoclassical economics or behavioral economics. a. People are eager and accurate calculators. b. People are often selfless and generous. c. People have no trouble resisting temptation. d. People place ins

> Which of the following are systematic errors? a. A colorblind person who repeatedly runs red lights. b. An accountant whose occasional math errors are sometimes on the high side and sometimes on the low side. c. The tendency many people have to see face

> Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of coffee and three chocolate bars. If the first bundle gives Ted a t

> Does additive manufacturing rely on economies of scale to deliver low costs? What are two ways in which additive manufacturing lowers costs? Besides what's written in the book, might there be another reason to expect 3-D blueprints to be inexpensive? (H

> Use the concepts of economies and diseconomies of scale to explain the shape of a firm’s long-run ATC curve. What is the concept of minimum efficient scale? What bearing can the shape of the long-run ATC curve have on the structure of an industry?

> List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs—fixed, variable, or both—would you take into accou

> Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, re

> What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appro

> Complete the table directly below by calculating marginal product and average product. Plot the total, marginal, and average products and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then dec

> Suppose that firms were expecting inflation to be 3 percent, but then it actually turned out to be 7 percent. Other things equal, firm profits will be: a. Smaller than expected. b. Larger than expected.

> Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes? a. 3 percent. b. 6 percent. c. 9 percen

> Aggregate supply shocks can cause ________ rates of inflation that are accompanied by ________ rates of unemployment. a. Higher; higher. b. Higher; lower. c. Lower; higher. d. Lower; lower.

> Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for -several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of u

> Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand–aggregate supply model to illustrate these outcomes graphically.

> Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are even

> Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. a. Real GDP is below the full-employment level and prices have risen recently. b. Real GDP is above the full-employment level and prices have

> Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of: a. The AD curve shif

> Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be __________ . a. Higher than it is now. b. Lower than it is no

> Why are changes in inventories included as part of investment spending? Suppose inventories declined by $1 billion during 2014. How would this affect the size of gross private domestic investment and gross domestic product in 2014? Explain.

> Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: a. What will be the level of real

> The per-unit cost of an item is its average total cost (= total cost/quantity). Suppose that a new cell phone application costs $100,000 to develop and only $.50 per unit to deliver to each cell phone customer. What will be the per-unit cost of the appli

> Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked. What is New Zombie’s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10 per hour, what is New Zombie’s rate of economic growth?