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Chapter: 9 -Problem: 6 >> If the price of a company’s stock constitutes a random walk, next year its price will equal today’s price plus what?
Answer Preview: With a random walk pricing mod…

, Chapter: 26 -Problem: 9 >> Look back at the income-expenditure diagram in Figure 3 and explain why some level of real GDP other than $6,000 (say, $5,000 or $7,000) is not an equilibrium on the demand side of the economy. Do not give a mechanical answer to this question. Explain the economic mechanism involved.
Answer Preview: At any level of GDP other than the sing…

, Chapter: 19 -Problem: 21 >> What are some of the U.S. laws and other rules that played a critical role in the attainment of leadership in per capita income and innovation?
Answer Preview: Strong intellectual proper…

, Chapter: 22 -Problem: 1 >> Which of the following problems are likely to be studied by a microeconomist and which by a macroeconomist?a. The rapid growth of Twitterb. Why unemployment in the United States fell from 2010 to 2014c. Why Japan’s economy grew faster than the U.S. economy in the 1980s, but slower in the 2000sd. Why the growth of health-care costs slowed down in recent years
Answer Preview: Microeconomis…

, Chapter: 21 -Problem: 4 >> What is the cost disease of the personal services and how does it affect expenditures on education and health care in the United States (and other wealthy nations)?
Answer Preview: The cost disease of the personal services is the tendency of the costs and the prices of these se…

, Chapter: 6 -Problem: 7 >> Which of the following product pairs would you expect to be substitutes, and which would you expect to be complements?a. Shoes and sneakersb. Gasoline and sport-utility vehiclesc. Bread and butterd. Compact discs and digital music files
Answer Preview: Complements…

, Chapter: 28 -Problem: 6 >> The federal government spending (relative to the size of the economy) was cut back in several dimensions after the gigantic budget deficits of 2009 and 2010. How would GDP in the United States have been affected if this lower spending led to a. Smaller budget deficits?b. More spending elsewhere in the budget, so that total government purchases remained the same?
Answer Preview: (a) If the decreases in government is not accompanied by cuts in taxes, then this dec…

, Chapter: 30 -Problem: 15 >> From 2003 to 2011, the federal government’s budget deficit rose sharply because of tax cuts and increased spending. If the Federal Reserve wanted to maintain the same level of aggregate demand in the face of large increases in the budget deficit, what should it have done? What would you expect to happen to interest rates?
Answer Preview: An increase in the federal deficit could in…

, Chapter: 16 -Problem: 4 >> With the tax described in Test Yourself Question 2, how much pollution will be emitted?
Answer Preview: There a…

, Chapter: 30 -Problem: 7 >> Explain how your answers to Test Yourself Question 5 would differ if banks decided to hold onto the $5 billion in new reserves as excess reserves.Data From Test Yourself Question 5 Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions:a. Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage point.b. Each 1 percent
Answer Preview: (a) If the demand for reserves were very sensitive to changes in the interest ra…

, Chapter: 23 -Problem: 17 >> The example in the appendix showed that the Student Price Index (SPI) rose by 42 percent from 1983 to 2013. You can understand the meaning of this better if you do the following:a. Use Table 5 to compute the fraction of total spending accounted for by each of the three items in 1983. Call these values the “expenditure weights.”b. Compute the weighted average of the percentage increases of the thre
Answer Preview: (a) Expenditure weights: Hamburgers: 56% Jeans: 24% Movie tickets: …

, Chapter: 21 -Problem: 7 >> Discuss how education funding in the United States differs from many other developed nations and explain how this affects U.S. students’ scores on international achievement tests.
Answer Preview: Education is predominately funded in the United Sta…

, Chapter: 37 -Problem: 5 >> If inflation is lower in Germany than in Italy, and the exchange rate between the two countries is fixed (as it is, because of the monetary union), what is likely to happen to the balance of trade between the two countries? Exchange Rate The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Doll
Answer Preview: With fixed exchange rates, and inflation lower in Ger…

, Chapter: 14 -Problem: 6 >> We have said that the economy’s three coordination tasks are output selection, production planning, and product distribution. Which of these is done badly in the cases described in Discussion Questions 2a, 2b, and 2c?
Answer Preview: Question 2(a) is a case of the ineff…

, Chapter: 36 -Problem: 12 >> In 2011 and 2012, market forces raised the international value of the Japanese yen. Why do you think the government of Japan was unhappy about this currency appreciation? If they wanted to stop the yen’s appreciation, what actions might the Bank of Japan (Japan’s central bank) have taken? Ask your instructor what the Bank of Japan subsequently did in 2013 and 2014.
Answer Preview: The Japanese government was unhappy about the appreciation of the yen because this makes Japanese ex…

, Chapter: 5 -Problem: 3 >> Which of the following items are likely to be normal goods for a typical consumer? Which are likely to be inferior goods?a. Expensive perfumeb. Paper platesc. Secondhand clothingd. Overseas trips
Answer Preview: Normal: …

, Chapter: 2 -Problem: 4 >> Roughly speaking, what fraction of U.S. labor works in factories? In service businesses? In government?
Answer Preview: Roughly 14 percent produce g…

, Chapter: 3 -Problem: 2 >> Graphically show the production possibilities frontier for the nation of Stromboli, using the data given in the following table. Does the principle of increasing cost hold in Stromboli?Stromboli’s 2018 Production PossibilitiesPizzas per Year                                              Pizza Ovens per Year75,000,000          …………………………………………..                    060,000,000          ……………………………………
Answer Preview: Figure 1 shows the production possibilities frontier. The principle of …

, Chapter: 16 -Problem: 1 >> Production of Commodity X creates 10 pounds of emissions for every unit of X produced. The demand and supply curves for X are described by the following table: What is the equilibrium price and quantity, and how much pollution will be emitted? Transcribed Image Text: Quantity Price Quantity $10 80 1
Answer Preview: At equilibrium, the pr…

, Chapter: 21 -Problem: 5 >> The trade deficit is sometimes cited as a prime example of American decline. Explain why this notion is not accurate.
Answer Preview: This notion is not accurate because trade is inevitabl…

, Chapter: 5 -Problem: 13 >> You have $20,000 to invest in the stock market, which has been rising rapidly for the past 18 months. What course of action seems rational?
Answer Preview: Perhaps you should invest in the stock m…

, Chapter: 25 -Problem: 7 >> The marginal propensity to consume (MPC) for the United States as a whole is roughly 0.90. Explain in words what this means. What is your personal MPC at this stage in your life? How might that change by the time you are your parents’ age?
Answer Preview: When disposable income, that is, the sum of everyones …

, Chapter: 1 -Problem: 4 >> Portray the following hypothetical data on a two variable diagram:Academic YearTotal EnrollmentEnrollment inEconomics Courses2008–20093,0003002009–20103,1003252010–20113,2003502011–20123,3003752012–20133,400400 Measure the slope of the resulting line, and explain what this number means
Answer Preview: Slope is 100 interpreted as 100 new students each academic year. Slo…

, Given the current state of the economy, what sort of fiscal-monetary policy mix seems most appropriate to you now?
Answer Preview: Fiscal policy deals with public revenue, public expenditure and …

, Chapter: 5 -Problem: 4 >> Emily buys an air conditioner that costs $700. Because the air in her home is cleaner, its use saves her $250 in curtain cleaning costs over the lifetime of the air conditioner. In money terms, what is the opportunity cost of the air conditioner? Opportunity Cost Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers
Answer Preview: Since the $700 air condi…

, Chapter: 9 -Problem: 2 >> Suppose that in the economy described in Test Yourself Question 1, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?Data From question 1Suppose that interest rates are 6 percent in the economy and a safe bond promises to pay $3 per year in interest forever.
Answer Preview: In this case, the …

, Chapter: 9 -Problem: 3 >> For whom are stocks riskier than bonds? For whom are bonds riskier than stocks? Stocks Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...
Answer Preview: For corporations, bon…

, Chapter: 16 -Problem: 5 >> Compare your answers to Test Yourself Questions 1 and 3 and show how large a reduction in pollution emissions occurs because of the $2 tax on the polluting output.
Answer Preview: The $2 t…

, Chapter: 7 -Problem: 6 >> A firm hires two workers and rents 15 acres of land for a season. It produces 150,000 bushels of crop. If it had doubled its land and labor, production would have been 325,000 bushels. Does it have constant, decreasing, or increasing returns to scale?
Answer Preview: Increasing ret…

, Chapter: 36 -Problem: 3 >> Suppose each of the transactions listed in Test Yourself Question 2 was done by many Americans. Indicate how each would affect the international value of the dollar if exchange rates were floating.Data from Test Yourself Question 2For each of the following transactions, indicate how it would affect the U.S. balance of payments if exchange rates were fixed:a. You spent the summer traveling in Europ
Answer Preview: Items (a) and (c) would lead to a deprecia…

, Chapter: 33 -Problem: 4 >> Explain how the U.S. government managed to accumulate a debt of more than $18 trillion. To whom does it owe this debt? Is the debt a burden on future generations?
Answer Preview: Until 1980, the United States had accumulated a national debt of just under $1 trillion, most of it …

, Chapter: 36 -Problem: 7 >> During the first half of the 1980s, inflation in (West) Germany was consistently lower than that in the United States. What, then, does the purchasing-power parity theory predict should have happened to the exchange rate between the mark and the dollar between 1980 and 1985? Exchange Rate The value of one currency for the purpose of conversion to another. Exchange Rate me
Answer Preview: The purchasing-power parity theory predicts that …

, Chapter: 10 -Problem: 5 >> If the market price in a competitive industry were above its equilibrium level, what would you expect to happen?
Answer Preview: If the market price is above equili…

, Chapter: 11 -Problem: 9 >> General Motors declared bankruptcy in 2009 but exited bankruptcy just 40 days later, after streamlining its operations and selling the U.S. government a majority stake in the company. If GM had gone out of business altogether, why might that not have reduced the competition facing rival automaker Ford?
Answer Preview: If General Motors went out of business, its assets would be of…

, Chapter: 1 -Problem: 5 >> From Figure 5, calculate the slope of the curve at point M. Transcribed Image Text: Figure 5 How to Measure Slope at a Polnt on a Curved Graph 8 7 D 6 4 A B 2 3 4 5 6 7 8 9 10 1. 00 3. 2.
Answer Preview: The following is figure which shoes the curved graph. One can calculat…

, Chapter: 35 -Problem: 10 >> The following table presents the demand and supply curves for laptop computers in Japan and the United States. a. Draw the demand and supply curves for the United States on one diagram and those for Japan on another one.b. If the United States and Japan do not trade, what are the equilibrium price and quantity in the laptop market in the United States? In Japan?c. Now suppose trade is opened up be
Answer Preview: (a) (b) If there is no trade, in the United States the equilibrium price is $1,000 and the equilibri…

, Chapter: 21 -Problem: 1 >> In what ways is the United States still an economic leader in the world? In what ways has it fallen behind other nations?
Answer Preview: The United States still leads the world in productivity but is …

, Chapter: 26 -Problem: 8 >> For more than 30 years, imports have consistently exceeded exports in the U.S. economy. Many people consider this imbalance to be a major problem. Does this chapter give you any hints about why?
Answer Preview: Some problems are created by the trade deficit. Sinc…

, Chapter: 26 -Problem: 10 >> Does the economy this year seem to have an inflationary gap or a recessionary gap? (If you do not know the answer from news reports, ask your instructor.)
Answer Preview: The answer depends upon the cu…

, Chapter: 37 -Problem: 9 >> In 2001, 2002, and 2003, Congress passed the series of tax cuts that President Bush had requested. What effect did this policy likely have on the U.S. trade deficit? Why?
Answer Preview: A tax cut is an expansionary fiscal …

, Chapter: 21 -Problem: 8 >> In recent decades, how have poverty and inequality changed in the United States? Discuss how these trends might affect future economic growth.
Answer Preview: Poverty and inequality have worsened rather significantly in rece…

, Chapter: 19 -Problem: 18 >> If you were the youngest son of an English nobleman in the Middle Ages, what could you do to make your fortune? What kinds of innovation would be appreciated by people in power?
Answer Preview: Innovation appreciated by tho…

, Chapter: 31 -Problem: 3 >> Why do we say that deposits are “liabilities” of banks?
Answer Preview: Deposits are liabil…

, Chapter: 29 -Problem: 8 >> After 2007, a rash of bank failures occurred in the United States. Explain why these failures did not lead to runs on banks.
Answer Preview: As of July 21 st , 2010 the standard maximum deposi…

, Chapter: 18 -Problem: 5 >> Distinguish between investment and capital.
Answer Preview: Capital is means of …

, Chapter: 20 -Problem: 4 >> Suppose you were to design a negative income tax system for the United States. Pick a guaranteed income level and a tax rate that seem reasonable to you. What break-even level of income is implied by these choices? Construct a version of Table 4 for the plan you have just devised.
Answer Preview: There can be many choices. If t…

, Chapter: 20 -Problem: 2 >> Since the official poverty line was set at $3,000 in 1964, prices have risen by about a factor of 7.5. If the poverty line was adjusted only for inflation, what would it be now? How does that compare with the actual poverty line?
Answer Preview: If prices have risen by a factor of seven, …

, Chapter: 21 -Problem: 6 >> Explain how innovative entrepreneurs have contributed to the exceptional growth in the U.S. economy.
Answer Preview: Innovative entrepreneurs have been an indispensab…

, Chapter: 29 -Problem: 1 >> Suppose banks keep no excess reserves and no individuals or firms hold on to cash. If someone suddenly discovers $12 million in buried treasure and deposits it in a bank, explain what will happen to the money supply if the required reserve ratio is 10 percent.
Answer Preview: Under those conditions, the mon…

, Chapter: 12 -Problem: 4 >> You are given a payoff matrix for a zero-sum game. You see that for one pair of strategy choices by the two firms, A’s payoff is 9 and B’s payoff is 6. For a second set of strategy choices, A’s payoff is 7. What is B’s payoff?
Answer Preview: Since it is a zero-sum g…

, Chapter: 21 -Problem: 2 >> What factors—both recent and past—have contributed to the U.S. national debt?
Answer Preview: The national debt is the accumulated sum of past fi…

, Chapter: 20 -Problem: 1 >> Define the poverty rate. Does it rise or fall during recessions?
Answer Preview: The poverty rate is the pe…

, Chapter: 6 -Problem: 13 >> Name some events that will cause a demand curve to shift.
Answer Preview: Changes in tastes, Inco…

, Chapter: 32 -Problem: 2 >> The following table provides data on nominal gross domestic product and the money supply (M1 definition) in recent selected years. Compute velocity for each year. Do you see any trend? How does it compare with the trend that prevailed from about 1996 to about 2006?YearEnd-of-Year Money Supply (M1)Nominal GDP2010 $1,836$14,958 2011 2,16015,534 2012 2,44716,245 2013 2,64816,798
Answer Preview: Year Velocity 2010 8 15 2011 7 19 2012 6 64 2013 6 34 The …

, Chapter: 26 -Problem: 11 >> Try to remember where you last spent a dollar. Explain how this dollar will lead to a multiplier chain of increased income and spending.
Answer Preview: Most probably spent their last dollar at a …

, Chapter: 23 -Problem: 2 >> If output rises by 35 percent while hours of work increase by 40 percent, has productivity increased or decreased? By how much?
Answer Preview: If output has not kept pace with t…

, Chapter: 34 -Problem: 2 >> Long-term government bonds now pay approximately 3 percent nominal interest. Would you prefer to trade yours in for an indexed bond that paid a 1 percent real rate of interest? What if the real interest rate offered were zeroed? What if it were negative 1 percent? What do your answers to these questions reveal about your personal beliefs about future inflation?
Answer Preview: At a nominal interest rate of 3 percent, the real interest rate depends upon …

, Chapter: 34 -Problem: 11 >> The year 2014 closed with the unemployment rate around 6 percent, real GDP growing at roughly 3 percent, inflation just below 2 percent and apparently rising a bit, and the federal budget showing a deficit around 3 percent of GDP.a. Give one or more arguments for engaging in expansionary monetary or fiscal policies under these circumstances.b. Give one or more arguments for engaging in contraction
Answer Preview: (a) Expansionary fiscal policy would reduce unemplo…

, Chapter: 25 -Problem: 12 >> Between 2008 and 2009, real disposable income (in 2009 dollars) declined slightly (by $51 billion), owing to a recession. Use the data on real consumption expenditures given on the inside back cover of the textbook to compare the change in C to this $51 billion decline in DI. Explain why dividing the two does not give a good estimate of the marginal propensity to consume.
Answer Preview: The actual change in real consumption between 2008 and 2009 giv…

, Chapter: 36 -Problem: 10 >> Under the old gold standard, what do you think happened to world prices when a huge gold strike occurred in California in 1849? What do you think happened when the world went without any important new gold strikes for 20 years or so?
Answer Preview: Under the gold standard, the gold …

, Chapter: 33 -Problem: 6 >> Newspaper reports frequently suggest that the administration (regardless of who is president) wants the Fed to lower interest rates. In view of your answer to Test Yourself Question 3, why do you think that might be the case?
Answer Preview: Faster monetary growth would rai…

, Chapter: 2 -Problem: 3 >> Why do you think per capita income in Connecticut is nearly double that in New Mexico?
Answer Preview: There are several possible answers to this question x the question is designed to get students to …

, Chapter: 8 -Problem: 4 >> A firm’s marginal revenue is $133 and its marginal cost is $90. What amount of profit does the firm fail to pick up by refusing to increase output by one unit?
Answer Preview: $43 …

, Chapter: 3 -Problem: 3 >> Consider two alternatives for Stromboli is 2018. In one case (a) its inhabitants eat 60 million pizzas and build 6,000 pizza ovens. In case (b), the population eats 15million pizzas but builds 18,000 ovens. Which case will lead to a more generous production possibilities frontier for Stomboli in 2018?
Answer Preview: In case (b), the production possibil…

, Chapter: 36 -Problem: 11 >> Suppose you want to reserve a hotel room in London for the coming summer but are worried that the value of the pound may rise between now and then, making the room too expensive for your budget. Explain how a speculator could relieve you of this worry.
Answer Preview: In return for a fee, a speculator w…

, Chapter: 21 -Problem: 3 >> What factors have helped to spur the exceptional economic growth in America since the Industrial Revolution?
Answer Preview: Investments in our labor force through investments i…

, Chapter: 23 -Problem: 3 >> Most economists believe that from 2010 to 2013, actual GDP in the United States grew slightly faster than potential GDP. What, then, should have happened to the unemployment rate over those three years? Before that, from 2006 to 2010, actual GDP grew slower than potential GDP, even contracting for several quarters. What should have happened to the unemployment rate over those three years?
Answer Preview: If actual GDP grew faster than potential GDP from 2010 to 2013, u…

, Chapter: 24 -Problem: 1 >> The following table shows real GDP per hour of work in four imaginary countries in the years 2004 and 2014. By what percentage did labor productivity grow in each country? Is it true that productivity growth was highest where the initial level of productivity was the lowest? For which countries? Output per Hour 20042014  Country A $40$48Country B 2535Country C 23Country D 0.50 0.60
Answer Preview: The productivity growth for each country is shown in the fourth co…

, Chapter: 25 -Problem: 1 >> What are the four main components of aggregate demand? Which is the largest? Which is the smallest?
Answer Preview: Consumption (largest), …

, Chapter: 32 -Problem: 1 >> How much money by the M1 definition (cash plus checking account balances) do you typically have at any particular moment? Divide this amount into your total income over the past 12 months to obtain your own personal velocity. Are you typical of the nation as a whole?
Answer Preview: Based on recent d…

, Chapter: 37 -Problem: 10 >> In 2010 and 2011, the international value of the dollar fell. This development was viewed with alarm in Japan. Why?
Answer Preview: Since the Japanese economy continued to be in recession, the increase in the v…

, Chapter: 25 -Problem: 14 >> The following outline provides a complete description of all economic activity in Trivialand for 2014. Draw up versions of Tables 3 and 4 for Trivialand showing GDP computed in two different ways. i. There are thousands of farmers but only two big business firms in Trivialand: Specific Motors (an auto company) and Super Duper (a chain of food markets). There is no government and no depreciation.ii
Answer Preview: GDP as the Sum of Final Demands (all figures in millions) Source Specific Super Motors Duper Total C …

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4 Reviews for Economics Principles and Policy Textbook Questions And Answers