Question: Explain two ways in which a government

> Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain.

> For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. a. The stock market declines sharply, reducing consumers’ wealth. b. The federal government increases spendi

> Suppose that Americans decide to increase their saving. a. If the elasticity of U.S. net capital outflow with respect to the real interest rate is very high, will this increase in private saving have a large or small effect on U.S. domestic investment? b

> Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. a. In 2015, a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos

> 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, th

> What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?

> What are reserve requirements? What happens to the money supply when the Fed raises reserve requirements?

> Between January 2010 and January 2016, U.S. employment increased by 12.1 million workers, but the number of unemployed workers declined by only 7.3 million. How are these numbers consistent with each other? Why might one expect a reduction in the number

> 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

> 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

> Jamal has a utility function U = W 1/2, 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 game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that

> 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

> Some economists say that the government can continue running a budget deficit forever. How is that possible?

> What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?

> As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. a. Starting from a long-run equilibri

> An economy is operating with output that is $400 billion below its natural level, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding

> Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate- demand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy. a. Households decide

> 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-c

> In a competitive labor market, when the government increases the minimum wage, the result is a(n) __________ in the quantity of labor supplied and a(n) __________ in the quantity of labor demanded. a. increase, increase b. increase, decrease c. decrease,

> Suppose that real interest rates increase across Europe. Explain how this development will affect U.S. net capital outflow. Then explain how it will affect U.S. net exports by using a formula from the chapter and by drawing a diagram. What will happen to

> A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries: a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Reca

> 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

> What is the discount rate? What happens to the money supply when the Fed raises the discount rate?

> 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

> Consider an economy with two labor markets—one for manufacturing workers and one for service workers. Suppose initially that neither is unionized. a. If manufacturing workers formed a union, what impact would you predict on the wages and employment in ma

> 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

> 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 a. If borrowing and

> What are two situations in which most economists view a budget deficit as justifiable?

> Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old or from old to young? a. an increase in the budget deficit b. more generous subsidies for education loans c. greater investments i

> Comparing stocks and government bonds, which type of asset has more risk? Which pays a higher average return?

> If the central bank wants to expand aggregate demand, it can ________ the money supply, which would ________ the interest rate. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

> Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. Would the following conditions make the ensuing recession more or less severe? Explain. a. Wage contracts have short durations. b. The

> Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion. a. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensi

> What might shift the aggregate-supply curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level.

> The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy. a. How would this news affect the pric

> Suppose the United States decides to subsidize the export of U.S. agricultural products, but it does not increase taxes or decrease any other government spending to offset this expenditure. Using a three- panel diagram, show what happens to national savi

> A can of soda costs $1.25 in the United States and 25 pesos in Mexico. What is the peso–dollar exchange rate (measured in pesos per dollar) if purchasing- power parity holds? If a monetary expansion caused all prices in Mexico to double, so that soda ros

> If inflation is less than expected, who benefits— debtors or creditors? Explain.

> 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?

> 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

> 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

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

> List and discuss three key facts about economic fluctuations.

> Explain four ways in which a firm might increase its profits by raising the wages it pays.

> 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.

> Explain the view of those economists who are skeptical of the efficient markets hypothesis.

> A company faces two kinds of risk. A firm-specific risk is that a competitor might enter its market and take some of its customers. A market risk is that the economy might enter a recession, reducing sales. Which of these two risks would more likely caus

> From 2008 to 2012, the ratio of government debt to GDP in the United States a. increased markedly. b. decreased markedly. c. was stable at a historically high level. d. was stable at a historically low level.

> Give three examples of how our society discourages saving. What are the drawbacks of eliminating these disincentives?

> Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are mai

> The ability of insurance to spread risk is limited by a. risk aversion and moral hazard. b. risk aversion and adverse selection. c. moral hazard and adverse selection. d. risk aversion only.

> Advocates of taxing consumption rather than income argue that a. a consumption tax is a better automatic stabilizer. b. taxing consumption does not cause any deadweight losses. c. the rich consume a higher fraction of income than the poor. d. the curren

> Suppose the Federal Reserve’s policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is 4 percent when the actual natural rate is 5 percent. If the Fed b

> Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.

> From one year to the next, inflation rises from 4 to 5 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change? a. The central bank increases the growth rate of the money supply. b. The g

> In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously. a. If we define money to include checking deposits, what effect did this legislation have on money demand? Explain. b. If the Fede

> Which of the following is an example of an automatic stabilizer? When the economy goes into a recession, a. more people become eligible for unemployment insurance benefits. b. stock prices decline, particularly for firms in cyclical industries. c. Congre

> What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level.

> For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following: a. how the economy recovers from a recession and returns to its long-run equilibrium without any policy intervention b. what det

> The idea that economic downturns result from an inadequate aggregate demand for goods and services is derived from the work of which economist? a. Adam Smith b. David Hume c. David Ricardo d. John Maynard Keynes

> A senator renounces his past support for protectionism: “The U.S. trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize U.S. exports instead, we can reduce the deficit by increasing our competitiveness.” Using

> What is investment? How is it related to national saving in a closed economy?

> If business leaders in Great Britain become more confident in their economy, their optimism will induce them to increase investment, causing the British pound to ________ and pushing the British trade balance toward ________. a. appreciate, deficit b. ap

> What is happening to the U.S. real exchange rate in each of the following situations? Explain. a. The U.S. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad. b. The U.S. nominal exchange rate is unchanged, but pr

> The theory of purchasing-power parity says that higher inflation in a nation causes the nation’s currency to ________, leaving the ________ exchange rate unchanged. a. appreciate, nominal b. appreciate, real c. depreciate, nominal d. depreciate, real

> Suppose the economy is in a long-run equilibrium. 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 aggre

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

> 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

> If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer? a. shoeleather costs from reduced holdings of money b. menu costs from more frequent price adjustment c. distortions from the taxatio

> 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?

> Happy Bank starts with $200 in bank capital. It then accepts $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 lever

> In a system of fractional-reserve banking, even with-out any action by the central bank, the money supply declines if households choose to hold ________ currency or if banks choose to hold ________ excess reserves. a. more, more b. more, less c. less, mo

> 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.

> Suppose that a fall in consumer spending causes a recession. a. Illustrate the immediate change in the economy using both an aggregate-supply/aggregate- demand diagram and a Phillips-curve diagram. On both graphs, label the initial long-run equilibrium a

> 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?

> Explain the three reasons the aggregate-demand curve slopes downward. Give an example of an event that would shift the aggregate-demand curve. In which direction would this event shift the curve?

> List and explain the three reasons the aggregate-demand curve slopes downward.

> Suppose an economy is in long-run equilibrium. a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. b. The central bank raises

> A change in the expected price level shifts a. the aggregate-demand curve. b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve. c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve. d. bot

> Suppose that Americans decided to spend a smaller fraction of their incomes. What would be the effect on saving, investment, interest rates, the real exchange rate, and the trade balance?

> 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 rate? What is the impact on the textile industry? What is the impact on the auto industry?

> The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quali

> The government in an open economy cuts spending to reduce the budget deficit. As a result, the interest rate ________, leading to a capital ________ and a real exchange rate ________. a. falls, outflow, appreciation b. falls, outflow, depreciation c. fal

> Over the past 20 years, Mexico has had high inflation and Japan has had low inflation. What do you predict has happened to the number of Mexican pesos a person can buy with a Japanese yen?

> If a Japanese car costs 1,500,000 yen, a similar American car costs $30,000, and a dollar can buy 100 yen, what are the nominal and real exchange rates?

> Explain how an increase in the price level affects the real value of money.

> In June 2009, at the trough of the Great Recession, the Bureau of Labor Statistics announced that of all adult Americans, 140,196,000 were employed, 14,729,000 were unemployed, and 80,729,000 were not in the labor force. Use this information to calculate

> Define an internal transaction and provide an example.

> Define depreciation as it relates to a van you bought for your business.

> Why is it necessary to make an adjustment if wages for work performed for the pay period Monday through Friday are paid on Friday and the accounting period ends on a Wednesday?

> In which column of the work sheet—Income Statement (IS) or Balance Sheet (BS)—would the adjusted balances of the following accounts appear? Account IS or BS? Account IS or BS? a. Prepaid Insurance e. Accumulated D

> What is a mixed account? A contra account? Give an example of each.

> Although you printed the trial balance and financial statements to get an idea of how All About You Spa is doing financially, some accounts are not accurate. You need to make adjusting entries to provide a clearer picture of how the spa is doing. HOW TO

> Determine on which financial statement each account listed below is reported. Use the following abbreviations: Income Statement (IS), Statement of Owner’s Equity (OE), and Balance Sheet (BS). a. M. James, Capital b. Cash c. Rent Expense d. Accumulated De

> Why is it necessary to journalize and post adjusting entries?

> Your supervisor just finished a work sheet for the month of June, but all of the columns except those shown below were left unreadable because of a spilled latte. You have been asked to journalize the adjusting entries using the surviving partial work sh

> You are the bookkeeper for a small but thriving business. You have asked the owner for the information you need to make adjusting entries for depreciation, supplies, insurance, and wages. He says that he’s really busy and that what you’ve done so far is

> Your client is preparing financial statements to show the bank. You know that he has incurred a refrigeration repair expense during the month, but you see no such expense on the books. When you question the client, he tells you that he has not yet paid t

> Ride the Ducks of Seattle may seem like an unlikely name for a thriving business—but it is the name of a real business! The year-round Seattle tour company uses vehicles that can be providing a road tour one minute and plying the waters of Elliott Bay th

> The trial balance of The New Decors for the month ended September 30 is as follows: Data for the adjustments are as follows: a. Expired or used-up insurance, $425. b. Depreciation expense on equipment, $2,750. c. Wages accrued or earned since the last