Question: Consider an economy with two labor markets—

> The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. What happens to prices? What happens to nominal interest rates? Why might the government be doing this?

> What are the costs of inflation? Which of these costs do you think are most important for the U.S. economy?

> Explain the difference between nominal and real variables and give two examples of each. According to the principle of monetary neutrality, which variables are affected by changes in the quantity of money?

> A current debate in education is whether teachers should be paid on a standard pay scale based solely upon their years of training and teaching experience, or whether part of their salary should be based upon their performance (called “merit pay”). a. Wh

> Suppose that a country’s inflation rate increases sharply. What happens to the inflation tax on the holders of money? Why is wealth that is held in savings accounts not subject to a change in the inflation tax? Can you think of any way holders of savings

> Suppose that changes in bank regulations expand the availability of credit cards so that people need to hold less cash. a. How does this event affect the demand for money? b. If the Fed does not respond to this event, what will happen to the price level?

> Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. a. What is the price level? What is the velocity of money? b. Suppose that velocity is constant and the economy’s output of goods and service

> Explain whether the following statements are true, false, or uncertain. a. “Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.” b. “If prices change in a way that leaves the overall price level unchanged, t

> Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by 5 percent. Describe how this unexpectedly high inflation rate would help or hurt the following: a. the government b. a homeowner with a fixed-rate mortgage c. a union wo

> Recall that money serves three functions in the economy. What are those functions? How does inflation affect the ability of money to serve each of these functions?

> If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases. a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent. b. The nominal interest rate is

> Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2013, the price of beans was $1 and the price of rice was

> List and describe the three functions of money

> Describe how banks create money. • If the Fed wanted to use all of its policy tools to decrease the money supply, what would it do?

> Why is it hard to establish whether a group of workers is being discriminated against? Explain how profit-maximizing firms tend to eliminate discriminatory wage differentials. How might a discriminatory wage differential persist?

> What are the primary responsibilities of the Federal Reserve? If the Fed wants to increase the supply of money, how does it usually do so?

> What is commodity money? What is fiat money? Which kind do we use?

> Why can’t the Fed control the money supply perfectly?

> Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which bank shows a larger change in bank capital? Does either bank remain solv

> Why don’t banks hold 100 percent reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates?

> Who is responsible for setting monetary policy in the United States? How is this group chosen?

> The Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain.

> Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (1/8th) of deposits in reserve. It uses the rest of its assets to make bank loans. a. Show the balance sheet of Happy Bank. b. What is Happy Bank’s leve

> You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the bank

> Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio of 10 percent. a. Show a T-account for BSB. b. Now suppose that BSB’s largest depositor withdraws $10 million in cash from her account. If BSB decides to restore it

> Five consumers have the following marginal utility ofapples and pears: The price of an apple is $1, and the price of a pear is $2. Which, if any, of these consumers are optimizing over their choice of fruit? For those who are not, how should they chang

> Your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check from his TNB checking account. Use T-accounts to show the effect of this transaction on your uncle and on TNB. Has your uncle’s wealth changed? Explain.

> Which of the following are considered money in the U.S. economy? Which are not? Explain your answers by discussing each of the three functions of money. a. a U.S. penny b. a Mexican peso c. a Picasso painting d. a plastic credit card

> The economy of Elmendyn contains 2,000 $1 bills. a. If people hold all money as currency, what is the quantity of money? b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money? c. If people h

> Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply by $40 million. a. If the Fed is using open-market ope

> Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier? What is the

> 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 government bonds, what is the effect on the economy’s reserves and money supply? b. Now suppose the

> Assume that the reserve requirement is 5 percent. All other things being equal, will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposits in a bank $2,000 that she had been hiding in her cookie jar? If one creates mor

> How is the unemployment rate measured? How might the unemployment rate overstate the amount of joblessness? How might it understate the amount of joblessness?

> Give four explanations for why firms might find it profitable to pay wages above the level that balances quantity of labor supplied and quantity of labor demanded.

> How does a union in the auto industry affect wages and employment at General Motors and Ford? How does it affect wages and employment in other industries?

> You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the situation: • If both of you work hard, you

> Draw the supply curve and the demand curve for a labor market in which the wage is fixed above the equilibrium level. Show the quantity of labor supplied, the quantity demanded, and the amount of unemployment.

> How would an increase in the world price of oil affect the amount of frictional unemployment? Is this unemployment undesirable? What public policies might affect the amount of unemployment caused by this price change?

> 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?

> How do unions affect the natural rate of unemployment?

> Why is frictional unemployment inevitable? How might the government reduce the amount of frictional unemployment?

> Are the following workers more likely to experience short-term or long-term unemployment? Explain. a. a construction worker laid off because of bad weather b. a manufacturing worker who loses his job at a plant in an isolated area c. a stagecoach-industr

> Economists use labor-market data to evaluate how well an economy is using its most valuable resource— its people. Two closely watched statistics are the unemployment rate and the employment–population ratio (calculated as the percentage of the adult popu

> Between January 2010 and January 2013, U.S. employment increased by 4.9 million workers, but the number of unemployed workers declined by only 2.7 million. How are these numbers consistent with each other? Why might one expect a reduction in the number o

> The Bureau of Labor Statistics announced that in January 2013, of all adult Americans, 143,322,000 were employed, 12,332,000 were unemployed, and 89,008,000 were not in the labor force. Use this information to calculate: a. the adult population b. the la

> Suppose that Congress passes a law requiring employers to provide employees some benefit (such as healthcare) that raises the cost of an employee by $4 per hour. a. What effect does this employer mandate have on the demand for labor? (In answering this a

> Consider two communities. In one community, ten families have incomes of $100,000 each and ten families have incomes of $20,000 each. In the other community, ten families have incomes of $200,000 each and ten families have incomes of $22,000 each. a. In

> Structural unemployment is sometimes said to result from a mismatch between the job skills that employers want and the job skills that workers have. To explore this idea, consider an economy with two industries: auto manufacturing and aircraft manufactur

> Using a diagram of the labor market, show the effect of an increase in the minimum wage on the wage paid to workers, the number of workers supplied, the number of workers demanded, and the amount of unemployment.

> 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

> 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