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Chapter: 39 -Problem: 23 >> In Panama, a dollarized country, a Big Mac is about 30% cheaper than in the United States. Why?
Answer Preview: Labor and (probably) land are c…

, Chapter: 39 -Problem: 27 >> Let’s look at the U.S. to U.K. foreign exchange rate using the FRED economic database (https://fred.stlouisfed.org). Search for US/UK Foreign Exchange Rate then change the beginning date to Jan 1, 2016. a. On June 23, 2016, how many dollars did it take to buy one British pound? b. On June 27, 2016, how many dollars did it take to buy one British pound?c. Over the time period, did the British pound
Answer Preview: a. On June 23, 2016 it took approximately 1 48 USD to buy one British Pound. b. On June 27, …

, Chapter: 18 -Problem: 22 >> Using the FRED Economic database (https://fred.stlouisfed.org/) find the median weekly earnings of high school graduates (no college) who are 25 years of age or over. Click Edit Graph then Add Line and add the median weekly earnings of people with a bachelor’s degree or higher who are 25 years of age or older.a. In the first quarter of 2019, what were the weekly earnings of high school graduates w
Answer Preview: a. $739; $1367. b. College graduates have more human capital than high school graduates and that hum…

, Chapter: 20 -Problem: 21 >> In the 1998 Minnesota gubernatorial election, there were three main candidates: Norm Coleman (the Republican), Jesse “The Body” Ventura (an Independent), and Hubert Humphrey III (the Democrat). Although we can’t know for certain, the vot­ers probably ranked the candidates in a way similar to that found in the following table. The table tells us, for example, that 35% of the voters ranked Coleman f
Answer Preview: a. Jesse The Body Ventura wins with 37% of the vote, followed by Coleman with 35%, and Humphrey with …

, Chapter: 39 -Problem: 6 >> According to the purchasing power parity theorem, what must be approximately equal across countries: the nominal exchange rate or the real exchange rate?
Answer Preview: The …

, Chapter: 36 -Problem: 17 >> Let’s take a look at one aspect of the U.S. tax system over the past 100 years. Using the FRED economic database (https://fred.stlouisfed.org/), look for “U.S Individual Income Tax: Tax Rates for Regular Tax: Highest Bracket.”a. When the income tax was first introduced, what was the rate on the highest bracket?b. The rate on the highest tax bracket shot up shortly after the income tax was introduc
Answer Preview: a. The highest tax bracket when the income tax was first introduced in 1913 was 7%. b. The tax rate …

, Chapter: 30 -Problem: 23 >> Using the FRED economic database (https://fred.stlouisfed.org/), find the “Youth Unemployment Rate in the United States” then click Edit Graph and Add Line and find the “Youth Unemployment Rate for France.”a. In 2006 what was the youth unemployment rate in the United States and what was the rate in France?b. As discussed in the text, give two possible reasons why the youth unemployment rate in Fra
Answer Preview: a. In 2006 the youth unemployment rate in the United States was 10 7% and in France it was 21 3…

, Chapter: 39 -Problem: 21 >> Consider two equally wealthy families: one family lives in a relatively poor country and the other lives in a relatively rich country. Which family is more likely to own a mechanical dishwasher? Why? Remember: the families are equally wealthy.
Answer Preview: Services tend to be cheaper in poorer countries. This …

, Chapter: 39 -Problem: 28 >> We have said that services are likely to be cheaper in poorer countries, but is this true for all kinds of services? Can you think of some services that are more likely to sell for similar prices everywhere? What kinds of services?
Answer Preview: We said that tradable goods tend to sell for the same price everywhere. For the …

, Chapter: 19 -Problem: 17 >> If greenhouse gas emissions are not cut, climate change could have very large future costs. Let’s assume that there are 100 equally sized countries in the world and that cutting greenhouse gas emissions will cost each country 10 but will create much larger world benefits of 500. Since the benefits of cutting greenhouse gas emissions far exceed the costs, why isn't climate change in this scenario a
Answer Preview: a. 10 b. 5 c. Greater t…

, Chapter: 28 -Problem: 10 >> Which three countries on the list are good examples of “conditional convergence?”ChinaIrelandArgentinaNorth KoreaGreece
Answer Preview: China , Ireland , and Greece . Explanation Conditional con…

, Chapter: 29 -Problem: 22 >> One type of debt that you may be familiar with is student loan debt. Using the FRED economic database (https://fred.stlouisfed.org/), search for student loans, then click on “Student Loans Owned and Securitized, Outstanding.” a. In 2019 approximately how much student debt was owed?b. What has happened to the amount of student debt outstanding since 2006?
Answer Preview: a. In 2019, approximately 1 6 trillion in student loan debt was outstanding. b. The amount of studen…

, Chapter: 27 -Problem: 14 >> Using the FRED economic database (https://fred.stlouisfed.org/), let’s compare the GDP of the state of California with that of some countries, in this case, France and Canada. Because France’s GDP is in euros and Canada’s is in Canadian dollars, we will need to convert currencies. In addition, we would like to compare GDP over a similar basket of goods. Comparisons like this are called purchasing
Answer Preview: a. In 2014, France had a GDP of approximately $2,600,000 million ($2 6 trillion), California had a G…

, Chapter: 39 -Problem: 16 >> Now that we’ve built up some intuition about exchange rates, let’s apply the principles more thoroughly. In this question, we discuss the U.S.–China exchange rate. Officially, the Chinese government fixed this exchange rate for years at a time, but in this question, we treat it as a market rate that can change every day.a. In the following figure, shift the appropriate curves to illustrate the eff
Answer Preview: a. This is a fall in yuan demand: T…

, Chapter: 39 -Problem: 4 >> In the chapter, two stories about the deficit are told: “the great place to invest” story and the “foolishly saving too little” story. In the following examples, which is more like the “great place to invest” story and which is more like the “foolishly saving too little” story? a. Goofus uses his student loan money to buy a nice flat-screen TV and can’t afford most of his textbooks. Gallant uses h
Answer Preview: a. Goofus: Foolish; Ga…

, Chapter: 6 -Problem: 4 >> In Figure, what is the total revenue raised by the tax, in dollars? What is the deadweight loss from the tax, in dollars?
Answer Preview: Tax revenue: 500 $1 …

, Chapter: 30 -Problem: 7 >> Let’s look at how the unemployment rate changes during and after a typical reces­sion. Does the unemployment rate tend to reach its peak during the recession, or does it usually reach its peak after the recession?
Answer Preview: Unemploymen…

, Chapter: 39 -Problem: 13 >> Let’s translate “Americans are foolishly saving too little” into a simple GDP story. Recall that GDP = C + I + G + Net exports. GDP is fixed and equal to 100 throughout the story: After all, it’s pinned down by the production function of our chapter on Saving, Investment, and the Financial System. Thus, the size of the pie is fixed: The only question is how the pie is sliced into C, I, G, and Net
Answer Preview: a. Net exports = 10, a tra…

, Chapter: 39 -Problem: 14 >> Let’s translate “The United States is a great place to invest” into a simple GDP story. Recall that GDP = C + I + G + Net exports. In this story, foreigners build up the U.S. capital stock by pushing investment (I) above its normal level. Thus, GDP equals 100 in the “now” period but equals 110 in the “later” period. To keep it simple, assume that C + G = 80 throughout. a. The “great place to inves
Answer Preview: a. Net exports = 15. This is a trade def…

, Chapter: 29 -Problem: 21 >> Let’s take a look at financial intermediation and the financial crisis of 2007–2009. Using the FRED economic database (https://fred.stlouisfed.org/), search for “all sectors total loans”; you should find a series, All Sectors; Total Loans; Liability. This series is all the lending in the U.S. economy from banks and all other financial intermediaries. When you graph the series you will see that it
Answer Preview: a. In the third quarter of 2008, 24 2 trillion dollars was lent …

, Chapter: 32 -Problem: 9 >> In the following cases, will real growth rise, fall, or remain unchanged?Expected inflation = 5%Actual inflation = 7%Expected inflation = 3%Actual inflation = 1%Expected inflation = 6%Actual inflation = 6%Expected inflation = 7%Actual inflation = ?10%Expected inflation = ?1%Actual inflation = 0%
Answer Preview: When actual inflation is greater than exp…

, Chapter: 23 -Problem: 12 >> How easy is it to spot a bubble? Go to the FRED economic database (https://fred.stlouisfed.org/) and search for NASDAQ. You should find the NASDAQ Composite Index. Graph it and click Max to show all the data available. a. What happened to the index between November of 1998 and February of 2000? Then what happened? b. What happened to the index between October of 2009 and October of 2014? Then what
Answer Preview: a. Between November of 1998 and February of 2000 the NA…

, Chapter: 37 -Problem: 5 >> Imagine you live in the land of Ricardia, where every citizen is a Ricardian and thus “Ricardian equivalence” is 100% true. Government spending never changes in Ricardia: It’s a fixed amount every year. Thus, when the Ricardian government cuts taxes, it has to pay for the government spending by borrowing more money and raising future taxes to repay the debt. a. When Ricardian income taxes are cut,
Answer Preview: In both cases, Ricard…

, Chapter: 34 -Problem: 15 >> Does the House of Representatives get to vote on who becomes the chairperson of the Federal Reserve Board? If not, who does get to vote?
Answer Preview: No, the House of Representatives does not get to vote on who becomes the chairperson …

, Chapter: 39 -Problem: 5 >> a. According to Table 1, how many Japanese yen could you get for 1 dollar in May 2017? Use the currency converter on Yahoo! Finance to find out how many yen you could buy for a dollar today. b. Given your answer to the previous question, did the dollar gain or lose buying power, in terms of Japanese goods, over this period?c. Repeat parts a and b for one other currency
Answer Preview: a. In May 2017, you could get 113 2560 yen per dollar. Todays excha…

, Chapter: 32 -Problem: 2 >> Let’s sum up some basic facts about the link between unem­ployment rates and recessions. Notice that the shaded bars indicate periods of recession, and wider bars mean longer recessions. a. How many recessions have there been since World War II?b. Since World War II, how many recessions had unemployment rates of over 10%?c. Often, the unemployment rate seems to peak after the recession ends: The e
Answer Preview: a. 11 b. 1 c. Sevenbu…

, Chapter: 39 -Problem: 11 >> Practice with the current account: Which of the following tend to raise the value of Country X’s current account? a. Country X sends cash to aid war victims in Country Y. b. Investors living in Country X receive more dividend payments than usual from businesses operating in Country Y. c. Investors living in Country Y receive more interest payments than usual from businesses operating in Country X.
Answer Preview: Only option b …

, Chapter: 30 -Problem: 1 >> If we count “discouraged workers” as unemployed when calculating the unemployment rate, does the rate more than double, less than double, or remain unchanged?
Answer Preview: A person o…

, Chapter: 29 -Problem: 28 >> Let’s compare 10-year corporate bonds and 10-year government bonds (called Treasuries). Go to the FRED economic database (https://fred.stlouisfed.org/) and search for “10 year corporate bond high quality”; you should find the series “10-Year High Quality Market (HQM) Corporate Bond Par Yield.” Click Edit Graph and then Add Line. Now search for “10-Year Treasury” and use the monthly series to match
Answer Preview: a. The corporate bond almost always offers a higher rate than the 10-Year Treasury because even thou…

, Chapter: 30 -Problem: 30 >> Using the FRED economic database (https://fred.stlouisfed.org/), let’s compare employment in manufacturing and construction. First, find manufacturing employment and then click Edit Graph and Add Line to add in construction employment. Graph the data from 1990 to the present. a. What is the long-term trend in manufacturing employment? What would you guess are the reasons for the trend?b. What is t
Answer Preview: a. There is a downward trend in manufacturing employment that is primarily caused by increased produ…

, Chapter: 37 -Problem: 1 >> Assume that the economy is growing steadily and hasn’t had a recent recession. A new administration increases spending on the military by $200 billion, a significant amount.a. What is your estimate of the multiplier in this situation and what do you predict will be the impact on GDP?b. How would your answer change if the economy were in recession?
Answer Preview: a. Since the economy is at or near full employment the increased military spending is no…

, Chapter: 28 -Problem: 1 >> Which countries are likely to grow faster: Countries doing “cutting-edge” growth or those doing “catch-up” growth?
Answer Preview: Catch up: Its of…

, Chapter: 33 -Problem: 2 >> Let’s sum up some basic facts about the link between unem­ployment rates and recessions. Notice that the shaded bars indicate periods of recession, and wider bars mean longer recessions. a. How many recessions have there been since World War II?b. Since World War II, how many recessions had unemployment rates of over 10%?c. Often, the unemployment rate seems to peak after the recession ends: The e
Answer Preview: a. 11 b. 1 c. Sevenbu…

, Chapter: 35 -Problem: 20 >> Practice with the best case: You are the central banker, and you have to decide how fast the money supply should grow. Your economy gets hit by the following AD shocks and your job is simply to neutralize them: Just push money growth in the opposite direction of the shock.In all of the following cases, assume that there’s no change whatsoever to the potential growth rate, and assume that before th
Answer Preview: Raise money gro…

, Chapter: 15 -Problem: 16 >> In our chapter on Competition and the Invisible Hand, we quoted the Austrian economist Joseph Schumpeter who said that in the textbooks the most important fact about competition was that price was pushed down to marginal cost. However, Schumpeter goes on to say:.....in capitalist reality as distinguished from its textbook picture, it is not this competition which counts but the competition from th
Answer Preview: (a) In the standard textbook models, monopoly and oligopoly are inefficient because price is not pus…

, Chapter: 33 -Problem: 9 >> In the following cases, will real growth rise, fall, or remain unchanged?Expected inflation = 5%Actual inflation = 7%Expected inflation = 3%Actual inflation = 1%Expected inflation = 6%Actual inflation = 6%Expected inflation = 7%Actual inflation = ?10%Expected inflation = ?1%Actual inflation = 0%
Answer Preview: When actual inflation is greater than exp…

, Chapter: 39 -Problem: 19 >> At Christmas, five-year-old Gwen runs a massive trade deficit with her parents: She “exports” only a wrapped candy cane to her parents, but she “imports” a massive number of video games, dolls, and pairs of socks.a. Is this trade deficit a good thing for Gwen? b. When Gwen turns 25, her parents insist on being repaid for all those years of Christmas presents—that is, they require her to run a “tra
Answer Preview: a. This trade deficit is one of the best things that will e…

, Chapter: 27 -Problem: 22 >> In the Soviet Union, especially in the early decades under Lenin and Stalin, the official doctrine was Communism, and the use of incentives was considered a form of treason. One important exception was the military equipment sector, where bonuses were common for engineers who designed and manufactured jets, nuclear missiles, tanks, and rifles. Why was this an exception?
Answer Preview: The leaders knew that incentives matter…

, Chapter: 28 -Problem: 6 >> What is more important for explaining the standard of living in the rich countries: capital or ideas?
Answer Preview: We have more capital than …

, Chapter: 35 -Problem: 12 >> Let’s reenact a simplified version of the 1981–1982 Volcker disinflation. Expected inflation and actual inflation are both 10%, real growth is 3%, and to keep it simple, velocity growth is zero. Thus, we haveAD: Money growth = Inflation + Real growthLet’s define a simple SRAS curve:SRAS: Inflation = Expected inflation + 1 × (Real growth rate – Potential growth rate)Notice that this equation gives
Answer Preview: a. 13% money growt…

, Chapter: 36 -Problem: 4 >> a. Do most federal government transfers of cash go to the elderly or to the poor?b. Do most federal government purchases of health care go to the elderly or to the poor?
Answer Preview: a. Most federal transf…

, Chapter: 32 -Problem: 4 >> Are “real shocks” negative shocks, by definition?
Answer Preview: No. Real shocks can …

, Chapter: 39 -Problem: 10 >> a. When the Japanese government slows the rate of money growth, will that tend to strengthen the yen against the dollar or weaken the yen against the dollar? b. When the Japanese government slows the rate of money growth, will the dollar tend to appreciate against the yen or will the dollar tend to depreciate against the yen? c. When Americans increase their demand for Japanese-made cars, will tha
Answer Preview: a. Slower money growth reduces the supply of yen, which pushes up the price of the yen in …

, Chapter: 7 -Problem: 8 >> If investors in the Hollywood Stock Market were too optimistic on average, would the dots tend to cluster above the red diagonal line or below it? How can you tell?
Answer Preview: Below it. If they are optimistic, then pre…

, Chapter: 2 -Problem: 7 >> Fit each of the following examples into one of these reasons for trade: division of knowledge or comparative advantage.a. Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of surviving: Good grooming reduces the risk of disease and para­sites. Each cat could go it alone, focusing a
Answer Preview: a. Divisi…

, Chapter: 28 -Problem: 31 >> Change the production function used in the chapter to reflect the contribution of labor in the production process. As with capital, labor also has diminishing returns, so let Y =  Now suppose that immigration reform leads to an increase in this country’s labor force. a. Begin with a country in a steady-state condition at YSS =  and let KSS equal 400 and L = 100. What is the steady-state level of o
Answer Preview: a. The steady-state level of output is YSS = b. In the short run, the increase in the labor force le…

, Chapter: 34 -Problem: 2 >> Define the following:a. The monetary base, MBb. M1c. M2
Answer Preview: a. The monetary base (MB): Currency and …

, Chapter: 37 -Problem: 2 >> What shifts AD to the left: A rise in taxes or a cut in taxes? Does this push ?v up or push it down?
Answer Preview: A tax increas…

, Chapter: 27 -Problem: 1 >> About how many babies die before the age of 5 in Nigeria versus Argentina? What is the difference in GDP per person in those two countries?
Answer Preview: About 200 babies die per 1,000 …

, Chapter: 30 -Problem: 12 >> Let’s see how many jobs have to be destroyed for one net job to be created. As noted in the text, millions of jobs are created and destroyed every month. Suppose that 5 million jobs are destroyed every month and about 5.25 million jobs are created. What is net job creation? What is total job destruction divided by net job creation? So how many total jobs are destroyed for every net job created?
Answer Preview: Net job creation is 0 25 …

, Chapter: 3 -Problem: 3 >> Your roommate just bought a TomTom Spark GDP fitness watch for $130. She would have been willing to pay $250 for a device that could improve her morning runs by measuring the speed, distance, and duration of the runs, and calculating the calories she burns. How much consumer surplus does your roommate enjoy from the watch?
Answer Preview: Your roommate enjoys $120 of co…

, Chapter: 39 -Problem: 15 >> The market for foreign currencies is a lot like the market for apples or cars or fish, so we can use the same intuition—as long as we keep reminding ourselves which way is “up” and which is “down.” Consider the market for something called “euros” (maybe it’s a new breakfast cereal) and measure the price in dollars. Discuss the following cases: a. The people who make “euros” decide to produce many
Answer Preview: a. This is a rise in supply. It pushes down the price of euros, and thus strengthens the …

, Chapter: 37 -Problem: 3 >> Let’s see what the “three difficulties with using fiscal policy” look like in real life. Categorize each of the following three stories as either (1) crowding out, (2) magnitude, or (3) a matter of timing.a. During a recession, the State of New York hires 1,000 new trash collectors. The state legislature in Albany takes six months to pass a law to hire the new trash collectors, and because of gove
Answer Preview: a. 3: A matt…

, Chapter: 37 -Problem: 10 >> If the U.S.-debt-to-GDP ratio were 100% and if the interest rate on the debt were 5% (not far from the truth at present), then what fraction of U.S. GDP would go toward paying interest on the debt?
Answer Preview: 5% of GD…

, Chapter: 27 -Problem: 10 >> India and China come up a lot in this chapter. You might wonder why so much time is spent talking about just two countries out of more than 180 on the planet. But what fraction of humans live in India and China together?
Answer Preview: Roughly one…

, Chapter: 28 -Problem: 8 >> What is a patent?
Answer Preview: A patent is a temporary, government-crea…

, Chapter: 30 -Problem: 9 >> About how big is the difference in labor force participation rates between countries with the highest implicit tax rate on older men compared to countries with the lowest implicit tax rate? Round to the nearest 10%.
Answer Preview: The difference in labor force participation rates between countries with the highest implici…

, Chapter: 9 -Problem: 16 >> a. This would raise productivity, since they are currently (by assumption) just redis­tributing income, not producing output. b. They would probably earn less, not more. c. Lobbyists in Washington, D.C., are paid to shift revenue from some people (most­ly consumers) to other people (mostly firms): Although this can be profitable to the lobbyists, it doesn’t increase output. If the lobbyists found
Answer Preview: a. This would raise productivity, since they are currently (by assu…

, Chapter: 37 -Problem: 17 >> Which of the following government policies are “automatic stabilizers” for the economy?Unemployment insuranceTemporary tax cuts that Congress passes when bad economic news hitsTemporary spending increases that Congress passes when bad economic news hits
Answer Preview: Unemployment insurance is an automatic stabilize…

, Chapter: 13 -Problem: 19 >> The lure of spices during the medieval period wasn’t driven merely by the desire to improve the taste of food (Europe produced saffron, thyme, bay leaves, oregano, and other spices for that). The lure of nutmeg, mace, and cloves came from their mystique. Spices became a symbol of prestige (just as Louis Vuitton and Ferrari are today). Most Europeans didn’t even know that they grew in the tiny chai
Answer Preview: The lure of spices during the medieval period wasnt driven merely by the desire to improve the taste …

, Chapter: 9 -Problem: 14 >> Calculate the values of these areas in dollars. How much of the deadweight loss is due to the overproduction of steel by higher-cost U.S. steel producers, and how much is due to the underconsumption of steel by U.S. steel consumers?
Answer Preview: $650,250,000 $841,500,000 $14…

, Chapter: 5 -Problem: 10 >> Guess whether the demand for cigarettes is elastic or inelastic. Explain your reasoning.
Answer Preview: A good guess is that the demand for cigarettes is inel…

, Chapter: 36 -Problem: 16 >> Using the FRED economic database (https://fred.stlouisfed.org/), create a series showing federal expenditures as a share of GDP. First find Federal Government current expenditures. Then Edit Graph and, under Customize Data, add Gross Domestic Product (since expenditures are in billions, look for GDP in billions, not real GDP). After adding GDP, go down to the Formula field and use a/b*100. a. Appr
Answer Preview: a. 22% b. Federal spending as a share of GDP increased with t…

, Chapter: 39 -Problem: 22 >> In our basic model, a rise in money growth causes currency depreciation: We also know from our chapter on Business Fluctuations and the chapter on Monetary Policy that a rise in money growth normally raises aggregate demand and boosts short-run real growth. But in the 2001 Argentine crisis and the 1997 Asian financial crisis, a currency depreciation seemed to cause a massive fall in short-run outp
Answer Preview: a. A rapid fall in foreign investment is the likely culprit. When these currencies depreciated, many …

, Chapter: 7 -Problem: 20 >> This chapter emphasized the ability of an orderly system to emerge without some­one explicitly designing the entire system. How does the evolution of language illustrate a type of spontaneous order?
Answer Preview: Like markets, no one wrote out all the …

, Chapter: 27 -Problem: 11 >> Let’s convert into words. Institutions create _______, which in turn affect the amount of _______, _______, and _______ in a country, which, combined with the right kind of _______ gener­ates a level of _______ per person.
Answer Preview: Institutions create incentives, which in tu…

, Chapter: 32 -Problem: 12 >> Complete the following sentences: With a real shock, when real growth is worse than usual, inflation is _______________ than usual. With an aggregate demand shock, when real growth is worse than usual, inflation is _______________ than usual.
Answer Preview: In the first ca…

, Chapter: 30 -Problem: 29 >> Overall, labor force participation rates have been declining in the U.S. economy but not for every demographic. Let’s examine the labor force participation rates of teenagers and older people. Using the FRED economic database (https://fred.stlouisfed.org/), search for “Labor force participation rate 16 to 19 years.” Graph the seasonally adjusted rate since we are interested in long-term trends. Th
Answer Preview: a. Since the 1990s, the labor force participation rate of teenagers has decreased while the labor …

, Chapter: 39 -Problem: 24 >> A supply and demand model can illustrate the difficulty of keeping a fixed exchange rate: It’s much the same as any other price floor. Consider the following fixed exchange rate. Sparta uses a currency called the spartonian, Athenians use the aton; the Spartans have chosen a fixed exchange rate of two atons per spartonian:a. In a typical supply and demand model, what would you call the gap that ex
Answer Preview: a. This would be called a surplus of spartonians. But remember that the suppliers of spartonians wan…

, Chapter: 33 -Problem: 12 >> Complete the following sentences: With a real shock, when real growth is worse than usual, inflation is _______________ than usual. With an aggregate demand shock, when real growth is worse than usual, inflation is _______________ than usual.
Answer Preview: In the first ca…

, Chapter: 29 -Problem: 4 >> Consider three countries: Jovenia (average age: 25), Mittelaltistan (average age: 45), and Decrepetia (average age: 75). Based on the lifecycle theory, which of these countries will probably have:    a. High savings rates? b. High rates of borrowing? c. High rates of dissaving? (That’s spending your past savings).
Answer Preview: Jovenia will probably have a hig…

, Chapter: 33 -Problem: 4 >> Are “real shocks” negative shocks, by definition?
Answer Preview: No. Real shocks can …

, Chapter: 33 -Problem: 8 >> a. What does a negative real shock do to inflation: Does it rise, fall, or remain unchanged?b. What does a negative real shock do to spending growth: Does it rise, fall, or remain unchanged?c. What does a fall in spending growth, that is, a shift inward of the AD curve, do to real growth: Does it rise, fall, or remain unchanged?
Answer Preview: a. A negative real shock raises inflation. b. A negativ…

, Chapter: 28 -Problem: 7 >> According to Thomas Jefferson, how are ideas like flames?
Answer Preview: Ideas are like flames …

, Chapter: 30 -Problem: 5 >> Let’s connect the minimum wage model back to the supply and demand model of the chapter on Price Ceilings and Price Floors. Is a minimum wage a price ceiling or a price floor? Does it create a surplus or a shortage in the labor market?
Answer Preview: The minimum wage is a pric…

, Chapter: 8 -Problem: 40 >> In our Uber example, we said that after a spike in demand around Madison Square Garden, the number of Uber rides increased by more than 75% in the surrounding area, but when it starts to rain, Uber rides increase by the still substantial but lesser amount of 25%. Can you suggest one reason why the supply response is different in the two situations?
Answer Preview: The elasticity of supply is probably larger for a surge in a local area than it …

, Chapter: 32 -Problem: 21 >> During the Great Depression, which of the following were mostly aggregate de­mand shocks and which were mostly negative real shocks? The fall in the growth rate of moneyThe fall in farm productivityThe Smoot–Hawley Tariff Act
Answer Preview: The last two are mo…

, Chapter: 32 -Problem: 3 >> When inflation rises, does the Solow growth rate rise, fall, or remain unchanged?
Answer Preview: It r…

, Chapter: 9 -Problem: 11 >> Many people will tell you that, whenever possible, you should always buy U.S.-made goods. Some will go further and tell you to spend your money on goods produced in your own state whenever possible. (Just do a simple Google search for “Buy [any state]” and you’ll find a Web site encouraging this kind of thinking.) The idea is that if you spend money in your state, you help the economy of your stat
Answer Preview: Taken to its extreme, this thinking will lead us to consume on…

, Chapter: 16 -Problem: 14 >> Suppose that Uber created a way to advertise to riders. For example, riders might watch an advertisement as their car approaches. What do you predict would be the impact on the price of an Uber ride. Why?
Answer Preview: Uber rides would likely fall in price even if we assume t…

, Chapter: 13 -Problem: 18 >> This chapter told the story of how the 2000 California energy shortage was aggravated by price deregulation. a. Suppose you are an entrepreneur who is interested in building a power plant to take advantage of the high prices for energy. Seeing rising energy costs, would price deregulation make it more or less likely you would build a new power plant? Why?b. It’s very difficult to build and operate
Answer Preview: a. It would make it more likely, because the potential profits are higher. b. It increases …

, Chapter: 35 -Problem: 10 >> Central banks and voters a like usually want higher real growth and lower inflation. What kind of shock makes that happen?
Answer Preview: A positive Solow …

, Chapter: 5 -Problem: 27 >> Using the FRED economic database (https://fred.stlouisfed.org/) let’s compare expenditures on cell phones with the price of phones. Unfortunately, as is often the case, it’s difficult to find data on exactly what we want but if you search for “real expenditures telephone” you will find a series for expenditure on telephone and facsimile equipment (faxes—maybe you have heard of them?). Then click E
Answer Preview: a. Between 2001 and 2015, expenditures increased from an index of 100 to 900a massive increas…

, Chapter: 39 -Problem: 2 >> Let’s examine the U.S. balance of trade (Exports-Imports) as we did in Problem 1, but this time we will do so as a percent of GDP. Using the FRED economic database (https://fred.stlouisfed.org/), search for U.S. Exports. Again, find the series EXPGS (use this series rather than the series for real exports). Click Edit Graph and Modify Frequency to change to an annual rate (use the average method).
Answer Preview: a. In 2005, the trade deficit was 5 5% of GDP. b. In 2009, the trade deficit was smaller, 2 7% of GD…

, Chapter: 8 -Problem: 33 >> The city of Mumbai in India imposed rent controls on apartments in 1947. Despite inflation and changes in land value, allowable rents have hardly increased since that time! Use what you know about rent controls to speculate about the quality of rent-controlled buildings in Mumbai.
Answer Preview: Rents in Mumbai are far below market levels. Millions of people pay …

, Chapter: 32 -Problem: 22 >> Recall that Y = C + I + G + NX. a. If government spending increases then we model that as an increase in:i. v.ii. M.iii. Q.iv. T.b. An increase in G shifts the AD curve:i. inwards.ii. outwards.iii. doesn’t move the AD curve.iv. shifts the LRAS curve.c. A shift outward in the AD curve will tend to:i. increase inflation, reduce growth.ii. decrease inflation, increase growth.iii. decrease inflation,
Answer Preview: a. i: v. b. i…

, Chapter: 13 -Problem: 10 >> a. When a monopoly is maximizing its profits, price is greater than marginal cost. b. For a monopoly producing a certain amount of output, price is less than marginal revenue. c. When a monopoly is maximizing its profits, marginal revenue equals marginal cost. d. Ironically, if a government regulator sets a fixed price for a monopoly lower than the unregulated price, it is typically raising the ma
Answer Preview: a. True: For a monopoly, P > MR, and if its behaving optimally, MR = MC, so P > MC. b. False: P > MR …

, Chapter: 33 -Problem: 3 >> When inflation rises, does the Solow growth rate rise, fall, or remain unchanged?
Answer Preview: It r…

, Chapter: 7 -Problem: 1 >> a. Suppose you’d like to do five different things, each of which requires exactly one orange. Complete the following table, ranking your highest-valued orange-related activity (1) to your lowest-valued activity (5). b. Suppose the price per orange is high enough that you buy only four. What activity do you not do?c. How low would the price of oranges have to fall for you to purchase five or­anges?
Answer Preview: a. Any order is fine, though watch out for the student that prio…

, Chapter: 35 -Problem: 21 >> Milton Friedman famously said that changes in money growth affect the economy with “long and variable lags.” That means that if the government increases growth in the monetary base this month, the money multiplier takes a few months to turn this into growth in checking and savings deposits, and it takes a few months more before businesses and consumers actually spend this money to purchase goods a
Answer Preview: Based on the given information, if the monetary lag is shorter than the shock duration, a shift in AD will be stabilizing. This is because the Fed will have enough time to take action to counteract the effects of the velocity shock on the economy. In this case, the Fed can increase or decrease the money supply as needed to stabilize the economy. On the other hand, if the shock duration …

, Chapter: 13 -Problem: 20 >> China developed gunpowder, paper, the compass, water-driven spinning machines, and many other inventions long before their European counterparts. Yet they did not adopt cannons, industrialization, and many other applications until after the West did.a. Suppose you are an inventor in ancient China and suddenly realize that the fire­works used for celebration could be enlarged into a functioning wea
Answer Preview: a. Yes, because the benefits are high and the patent system secures those rewards. b. If all you cou…

, Chapter: 39 -Problem: 8 >> Which international financial institution focuses on the long-run health of developing countries: the IMF or the World Bank? Which one focuses on short-run financial crises in developing countries?
Answer Preview: The World Ban…

, Chapter: 13 -Problem: 13 >> When a sports team hires an expensive new player or builds a new stadium, you often hear claims that ticket prices have to rise to cover the new, higher cost. Let’s see what monopoly theory says about that. It’s safe to treat these new expenses as fixed costs: something that doesn’t change if the number of customers rises or falls. You have to pay Miguel Cabrera the same salary whether people show
Answer Preview: a. This has no effect on …

, Chapter: 2 -Problem: 13 >> In the chapter, you saw how to create a production possibilities frontier for the United States and Mexico. Let’s take a look at how to combine these PPFs to make one PPF for the U.S.–Mexico trade alliance. You’ll use the same set of axes that was used in the chapter: computers on the vertical axis and shirts on the horizontal axis. a. First, you need to plot the endpoints of the PPF by figuring o
Answer Preview: The United States could produce 24 computers or 24 shirts. Mexico could produce two computers or 12 shirts. a. If both countries devote all of their r…

, Chapter: 35 -Problem: 22 >> One of the reasons it’s difficult to be a monetary policymaker is because it’s so hard to tell what’s actually going on in the economy. It’s a lot like being a doctor in a world before X-rays, MRIs, and inexpensive blood tests: When the patient complains about a stomachache, you don’t know if it’s caused by food poisoning or by a tumor the size of a grapefruit. In each of the cases from the first
Answer Preview: Based on the given information, the Fed should consider doing nothing in response to news abou…

, Chapter: 8 -Problem: 1 >> How does a free market eliminate a shortage?
Answer Preview: By letting the price ri…

, Chapter: 35 -Problem: 18 >> a. Suppose that the central bank follows a fixed 3% annual monetary growth rule, as Milton Friedman sometimes recommended. In the short run, what will the velocity shock do to real growth and to inflation?b. In the long run, what will this velocity shock do to real growth and to inflation?c. If voters are concerned only about real growth in the long run, will they favor rules, will they favor disc
Answer Preview: a. Velocity shock lowers inflation and real growth. b. In …

, Chapter: 39 -Problem: 9 >> Let’s translate between newspaper jargon about exchange rates and the economic reality of exchange rates. a. Last week, the currency of Frobia was trading one for one with the currency of Bozzum. This week, one unit of Frobian currency buys two units of Bozzumian currency. Which currency “rose”? Which currency became “stronger”? Which currency “appreciated”? b. The currency in the nation of Malvol
Answer Preview: a. The Frobian currency rose, became stronger, and appreciated. …

, Chapter: 5 -Problem: 11 >> Suppose that 200,000 Uber trips are taken every day in New York City and suppose that the elasticity of demand for an Uber trip is –0.5. If the price increased by 10% how many Uber trips would be taken in a day?
Answer Preview: We know that E d = 0 5 and that % P is …

, Chapter: 29 -Problem: 3 >> The typical savings supply curve has a positive slope. If a nation’s saving supply curve had a perfectly vertical slope, what would that mean?a. People in this country save the same amount no matter what the interest rate is.b. People in this country are extremely sensitive to interest rates when deciding how much to save.
Answer Preview: The answer is a. A perfe…

, Chapter: 10 -Problem: 5 >> In the following cases, the markets are in equilibrium, but there are externalities. In each case, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. Fill out the table that follows with your answers.a. In the market for automobiles, the private benefit of one more small SUV is
Answer Preview: See the following table: Bonus for part b: Fashion is a …

, Chapter: 34 -Problem: 20 >> Using the FRED economic database (https://fred.stlouisfed.org/), graph the Effective Federal Funds rate from 2007 to the present. Now click Edit Graph and then Add Line. Add the Unemployment rate. Click Format and change the Y-axis position of line 2 (unemployment) to the right—this will give you one axis for the Federal Funds rate on the left and one axis for the Unemployment rate on the right.a.
Answer Preview: a. As the unemployment rate increased, the Fed reduced the Federal Funds Rate from about 1 5%% to cl…

, Chapter: 29 -Problem: 5 >> Sometimes, in supply and demand models, it’s not clear who “supplies” and who “demands.” For instance, in the labor market, it is individual workers (not firms) who supply labor. In the loanable funds market, who is usually the supplier and who is usually the demander? Choose the correct answer.a. Entrepreneurs supply loanable funds and savers demand loanable funds.b. Entrepreneurs supply loanable
Answer Preview: d. Entrepreneur…

, Chapter: 27 -Problem: 5 >> About what percentage of the world’s population lives in coun­tries richer than Italy? What percentage lives in countries poorer than India?
Answer Preview: There was li…

, Chapter: 36 -Problem: 23 >> There are many ways to help poor people in foreign countries. You can find charities, for example, that will buy a cow or shoes for people in poverty or help to dig a well in a low-income village. Which of these programs do you think is the best way to help the poor? What are the pros and cons of simply giving cash?
Answer Preview: Many good answers are possible. Here is one. Its not obvious what the best way to help people (poor …

, Chapter: 37 -Problem: 4 >> When people “buy government bonds,” are they borrowing money or saving money?
Answer Preview: Bonds are bought to save money, so the buyers are saving. It is the gove…

, Chapter: 37 -Problem: 21 >> We discussed three situations where fiscal policy is most likely to matter (though fiscal policy is best when all three are true):1. When the economy needs a short-run boost2. When the problem is low AD, not low LRAS3. When many machines and workers are unemployedLet’s fit each of the following news stories into one (or more) of the above categories.a. World War II ends, and millions of U.S. soldi
Answer Preview: a. When many machines and wo…

, Chapter: 5 -Problem: 12 >> A movie theatre owner runs an experiment. She decreases prices 2% and discovers that ticket sales increased by 5%. Also, she increases prices by 1% and discovers that sales decrease by 2%. What should the owner do to maximize revenue?
Answer Preview: Perhaps the easiest way to solve this problem is to substitute some numbers. Suppose that sales are …

, Chapter: 28 -Problem: 3 >> Many people say that if people save too much, the economy will be hurt. They often refer to the fact that consumer spending is two-thirds of GDP to make this point. This is sometimes called the “paradox of thrift.”a. In the Solow model, is there a paradox of thrift? In other words, is a high savings rate good or bad for a country’s long-run economic performance?b. What about in the real world?
Answer Preview: a. No, there is no paradox of thrift in the …

, Chapter: 10 -Problem: 19 >> At 5PM there are 1,000 cars on a highway slowly moving towards home. Adding another car to the highway slows everyone down slightly, increasing the time it takes each person/car to get home by four seconds. How much should the additional car be charged to enter the highway? Assume that people value their time at $15 per hour.
Answer Preview: The additional car slows 1,000 people down by 4 seconds each or 4,000 seconds or 1 11 hours i…

, Chapter: 13 -Problem: 17 >> In the early part of the twentieth century, it was cheaper to travel by rail from New York to San Francisco than it was to travel from New York to Denver, even though the train to San Francisco would stop in Denver on the way.a. Denver is a city in the mountains. Suggest alternate ways to get there from New York without taking the train.b. San Francisco is a city on the Pacific Ocean. Suggest alte
Answer Preview: a. Taking a car, plane, or horse. b. …

, Chapter: 3 -Problem: 5 >> When the price of Apple MacBooks goes down, what probably happens to the demand for laptops featuring Microsoft Windows?
Answer Preview: The demand for laptops featuring Microsoft Windows probably fallsremember that this means the …

, Chapter: 13 -Problem: 5 >> a. What’s the rule: Monopolists charge a higher markup when demand is highly elastic or when it’s highly inelastic?b. What’s the rule: Monopolists charge a higher markup when customers have many good substitutes or when they have few good substitutes?c. For the following pairs of goods, which producer is more likely to charge a bigger markup? Why?i. Someone selling new trendy shoes, or someone sel
Answer Preview: a. As we stated in the chapter, inelastic demand causes higher markups. b. Inelastic de…

, Chapter: 10 -Problem: 22 >> It's common to think that reducing pollution is necessarily costly because to reduce pollution we need to tax firms who will then produce less. But can you think of ways in which pollution might not only be unpleasant but might actually reduce production?
Answer Preview: A number of studies have shown that pollution can reduce worker …

, Chapter: 13 -Problem: 6 >> In 1996, the X Prize Foundation created what became known as the Ansari X Prize—a $10 million prize for the first nongovernment group to send a reusable manned spacecraft into space twice within two weeks. In 2004, it was won by the Tier One project, financed by Microsoft cofounder Paul Allen.a. An answer you can find on the Internet: How high did SpaceShipOne fly when it won the Ansari X Prize?b.
Answer Preview: a. In its two flights, it flew 103 km and 112 km above the earth. Those on board coul…

, Chapter: 3 -Problem: 33 >> The Federal Reserve Economic Data (FRED) database is available at https://fred.stlouisfed.org/. Go to FRED and search for data on crude oil prices. You will find several series; click on one of them, such as the Global price of WTI Crude. Adjust the dates to focus in on the 2006–2010 period. The 2008–2009 recessions is shown by the shaded area. a. Print the graph.b. What happened to crude oil pric
Answer Preview: a. b. Crude oil prices were rising before the recession, but they fell quickly as the r…

, Chapter: 30 -Problem: 20 >> Let’s examine the labor force participation rates of teenagers. Using the FRED economic database (https://fred.stlouisfed.org/), search for “Labor force participation rate 16 to 19 years.” Graph the rate that is Not Seasonally Adjusted and click on 5Y to get the rate for the last 5 years.a. Why is the rate so choppy?b. In the peak month, approximately what percentage of teenagers are in the labor
Answer Preview: a. The rate is choppy because many teenagers enter the labor force …

, Chapter: 28 -Problem: 16 >> After World War II, a lot of France’s capital stock was destroyed, but it had educated workers and a market-oriented economy. Do you think the war’s destruction increased or decreased the marginal product of capital?
Answer Preview: The war probably increased the …

, Chapter: 8 -Problem: 20 >> A “black market” is a place where people make illegal trades in goods and services. For instance, during the Soviet era, it was common for American tourists to take a few extra pairs of Levi’s jeans when visiting the Soviet Union: They would sell the extra pairs at high prices on the illegal black market. Consider the following claim: “Price-controlled markets tend to create black markets.” Let’s
Answer Preview: The total gains from trade if trade is allowed are $35; these ga…

, Chapter: 30 -Problem: 13 >> If you have to pick a country to lose your job in, and you know you’re going to be out of work for one year, which country offers the highest one-year average replacement rate? Which offers the highest two-year average replacement rate? If you’re going to be out of work for three years, which country offers the highest average rate of wage replacement?
Answer Preview: 1 year: …

, Chapter: 8 -Problem: 15 >> Go to the FRED economic database (https://fred.stlouisfed.org/) and search for “percent hourly paid minimum wage.”a. In 2015, what percent of hourly workers were paid the minimum wage or less?b. Hourly wage workers are about three-fifths of total workers (the remainder work on salary). Almost all salaried workers earn above the minimum wage. So what percent of all workers earn the minimum wage or
Answer Preview: (a) 3 3% (b) Since 3/5 3 3% = 1 98%, less than 2% of all workers earn the minimum wage or less. …

, Chapter: 39 -Problem: 12 >> Practice with the capital account: Which of the three categories of the capital account does each belong in? Which of the following tend to raise the value of Country X’s capital account? a. A corporation in Country Y pays for a new factory to be built in Country X. b. A corporation in Country Y sells all of its stock in a corporation located in Country X to a citizen of Country X. c. A citizen of
Answer Preview: Options a and d are FDI. O…

, Chapter: 37 -Problem: 15 >> Consider the following figure. Suppose that there’s a rise in ?v due to business optimism—what Keynes called the “animal spirits” of investors. This pushes us to AD(2). If the government’s goal is to keep output close to the long-run aggregate supply rate, and if fiscal policy is the tool that the government wants to use, what should it do? Choose one of a, b, c, or d. a. A rise in taxes OR a rise
Answer Preview: b. A rise …

, Chapter: 13 -Problem: 12 >> a. Sometimes, our discussion of marginal cost and marginal revenue unintention­ally hides the real issue: the entrepreneur’s quest to maximize total profits. Here is information on a firm:Demand: P = 50 ? Q. Fixed cost = 100, marginal cost = 10.Using this information, calculate total profit for each of the values in the follow­ing table, and then plot total profit in the figure below. Clearly labe
Answer Preview: a. b. A rise in fixed costs would only shift the curve downit would …

, Chapter: 37 -Problem: 27 >> In this question we will look at one of the automatic stabilizers, unemployment insurance. Using the FRED economic database (https://fred.stlouisfed.org/), search for unemployment insurance. You should find a series like “Personal current transfer receipts: Government social benefits to persons: Unemployment insurance.” Graph the annual series.a. How much did the government spend on unemployment i
Answer Preview: a. In 2010, the government spent $138 9 billion on unemployment insuranc…

, Chapter: 30 -Problem: 17 >> Goldin and Katz looked for the link between birth control and women’s labor force participation by examining the difference between states that acted early to make birth control legal and states that waited until later. Which states do you think had the biggest jump in women joining the labor force: states that legalized birth control earlier or those that legalized it later?
Answer Preview: States that legalized …

, Chapter: 39 -Problem: 18 >> Corey, a young entrepreneur, notices that cigarette lighters sell for only $0.50 each in Utah but they sell for $1.00 each in Nevada.a. If Corey wants to make money by buying and selling lighters, where should he buy the lighters and where should he sell them?b. If many other people imitate Corey’s behavior, what will happen to the supply of lighters in Utah (rise, fall, unchanged)? What will happ
Answer Preview: a. He should buy them in Utah and sell in Nevada: Buy low, se…

, Chapter: 13 -Problem: 16 >> Common sense might say that a monopolist would produce more output than a competitive firm facing the same marginal costs. After all, if you’re making a profit, you want to sell as much as you can, don’t you? What’s wrong with this line of reasoning? Why do monopolistic industries sell less than competitive industries?
Answer Preview: If a monopolist tried to sell more, he would push down the p…

, Chapter: 13 -Problem: 4 >> a. When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. Let’s think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal revenue equal at a firm like this?b. All firms are trying to maximize their profits (TR – TC). The rule fr
Answer Preview: a. For monopolies, as elsewhere in life, youre doing your …

, Chapter: 6 -Problem: 15 >> Go to the FRED Economic Database (https://fred.stlouisfed.org/) and find tobacco taxes in Texas. In what year (1991–2016) would you guess Texas raised the sales tax on tobacco?
Answer Preview: The sales tax very likely increased in 2007 (2006 would also be an acceptable answer, but 2007 is …

, Chapter: 13 -Problem: 8 >> a. Draw the graph of a monopoly, showing demand, marginal revenue, and marginal cost. Show what happens when the monopolist finds a way to lower marginal cost. Indicate on the graph the new equilibrium price and quantity.b. Draw a graph of a perfectly competitive industry and show on it a decrease in costs. What happens to equilibrium price and quantity for this industry?
Answer Preview: a. Some of the reduction in costs gets passed along in lo…

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