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All Textbook Solutions for Principles of Economics 2e
Based on the theory of rational ignorance, what should we expect to happen to voter turnout as the internet makes information easier to obtain?What is the cost of voting in an election?What is the main factor preventing a large community from influencing policy in the same way as a special interest group?Why might legislators vote to impose a tariff an Egyptian cotton, when consumers in their districts would benefit from its availability?True or false: Majority rule can fail to produce a single preferred outcome when there are more than two choices.Anastasia, Emma, and Greta are deciding what to do on a weekend getaway. They each suggest a first, second, and third choice and then vote on the options. Table 18.2 shows their first, second, and third choice preferences. Explain why they will have a hard time teaching a decision. Does the group prefer mountain biking to canoeing? What about canoeing compared to the beach? What about the beach compared to the original choice of mountain biking?Suppose there is an election for Soft Drink Commissioner. The field consists of one candidate hunt the Pepsi petty and four from the Coca-Cola party. This would seem to indicate a strong preference for Coca-Cola among the voting population, but the Pepsi candidate ends up winning in a landslide. Why does this happen?How does rational ignorance discourage voting?How can a small special interest group win in a situation of majority voting when the benefits it seeks flow only to a small group?How can pork-barrel spending occur in a situation of majority voting when it benefits only a small group?Why do legislators vote for spending projects in districts that are not their own?Why does a voting cycle make it impossible to decide on a majority-approved choice?How does a government agency raise revenue differently from a private company, and how does that affect the way government makes decisions compared to business decisions?What are some reasons people might find acquiring information about politics and voting rational, in contrast to rational ignorance theory?What are some possible ways to encourage voter participation and overcome rational ignorance?Given that rational ignorance discourages some people from becoming informed about elections, is it necessarily a good idea to encourage greater voter turnout? Why or why not?When Microsoft was founded, the company devoted very few resources to lobbying activities. After a high-profile antitrust case against it, however, the company began to lobby heavily. Why does it make financial sense for companies to invest in lobbyists?Representatives of competing firms often comprise special interest groups. Why are competitors sometimes willing to cooperate in Older to form lobbying associations?Special interests do not oppose regulations in all cases. The Marketplace Fairness Act of 2013 would require online merchants to collect sales taxes from their customers in other states. Why might a large online retailer like Amazon.com support such a measure?To ensure safety and efficacy, the Food and Drug Administration regulates the medicines that pharmacies are allowed to sell in the United States. Sometimes this means a company must test a drug for years before it can reach the market. We can easily identify the winners. in this system as those who are protected from unsafe drugs that might otherwise harm them. Who ate the more anonymous losers who suffer from strict medical regulations?How is it possible to bear a cost without realizing it? What are some examples of policies that affect people in ways of which they may not even be aware?Is pork-barrel spending always a bad thing? Can you think of some examples of pork-barrel projects, perhaps from your own district, that have had positive results?The United States currently uses a voting system called first past the post in elections, meaning that the candidate with the most votes wins. What are some of the problems with a first past the post system?What are some alternatives to a first past the past system that might reduce the problem of voting cycles?AT10 million dollar. Lobbying Congress to block entry of competitors into the telephone market in 1978. Why do you think it efforts failed?Occupy Wall Street was a national (and later global) organized protest against the greed, bank profits, and financial corruption that led to the 20082009 recession. The group popularized slogans like We me the 99, meaning it represented the majority against the wealth of the top 1. Dues the fact that the protests had little to no effect on legislative changes support or contradict the chapter?Say that the government is considering a ban on smoking in restaurants in Tobaccoville. There are 1 million people living there, and each would benefit by 200 from this smoking ban. However, there are two large tobacco companies in Tobaccoville and the ban would cost them $5 million each. What are the proposed policys total costs and benefits? Do you think it will pass?Country A has export sales of 20 billion, government purchases of 1,000 billion, business investment is 50 billion, imports are 40 billion, and consumption spending is 2,000 billion. What is the dollar value of GDP?Which of the following are included in GDP, and which are not? The cost of hospital stays The rise in life expectancy over time Child care provided by a licensed day care center Child care provided by a grandmother A used car sale A new car sale The greater variety of cheese available in supermarkets The iron that goes into the steel that goes into a refrigerator bought by a consumer.Using data from Table 19.5 how much of the nominal GDP growth from 1980 to 1990 was real GDP and how much was inflation?Without looking at Table 19.7, return to Figure 19.10. If we define a recession as a significant decline in national output, can you identify any post-1960 recessions in addition to the 20082009 recession? (This requires a judgment call.)According to Table 19.7, how often have recessions occurred since the end of World War II (1945)?According to Table 19.7, how long has the average recession lasted since the end of World War II?According to Table 19.7, how long has the average expansion lasted since the end of World War II?Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capital of Central African Republic.Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. The environment becomes dirtier The crime rate declines A greater variety of goods become available to consumers Infant mortality declinesWhat are the main components of measuring GDP with what is demanded?What are the main components of measuring GDP with what is produced?Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse?Why must you avoid double counting when measuring GDP?What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms?How do you convert a series of nominal economic data over time to real terms?What are typical GDP patterns for a high-income economy like the United States in the long run and the short run?What are the two main difficulties that arise in comparing different comparing GDP?List some of the reasons why economists should not consider GDP an effective measure of the standard of living in a county.U.S. macroeconomic data are among the best in the world. Given what you learned in the Clear It Up 'How do statisticians measure GDP?', does this surprise you, or does this simply reflect the complexity of a modern economy?What does GDP not tell us about the economy?Should people typically pay more attention to their real income or their nominal income? If you Choose the latter, why would that make sense in todays world? Would your answer he the same for the 1970s?Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?Why might per capita GDP be only an imperfect measure of a countrys standard of living?How might you measure a green GDP?Last year, a small nation with abundant forests cut down 200 worth of trees. It then turned 100 worth of trees into 150 worth of lumber. It used 100 worth of that lumber to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in producing trees, lumber, and bookshelves, what is this nations GDP? In other words, what is the value of the final goods the nation produced including trees, lumber and bookshelves?The prime interest rate is the rate that banks charge their best customers. Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years would it have been best to be a lender? Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years given would it have been best to be a borrower?A mortgage 105m is a loan that a person makes to purchase a house. Table 19.11 provides a list of the mortgage interest rate for several different years and the rate of inflation for each of those years. In which years would it have been better to be a person borrowing money from a bank to buy a home? In which years would it have been better to be a bank lending money?Ethiopia has a GDP of 8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of 9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.In 1980, Denmark had a GDP of 70 billion (measured in U.S. dollars} and a population of 5.1 million. In 2000, Denmark had 3 GDP of 160 billion (measured in U.S. dollars} and a population of 5.3 million. By what percentage did Denmarks GDP per capita rise between 1980 and 2000?The Czech Republic has 3 GDP of 1,800 billion koruny. The exchange rate is 25 koruny/U.S. dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in U.S. dollars?Explain what the Industrial Revolution was and where it began.Explain the difference between property rights and contractual rights. Why do they matter to economic growth?Are there other ways in which we can measure productivity besides the amount produced per hour of work?Assume there are two countries: South Korea and the United States. South Korea grows at 4 and the United States grows at 1. For the sake of simplicity, assume they both start from the same fictional income level, 10,000. What will the incomes of the United States and South Korea he in 20 years? By how many multiples will each countrys income grow in 20 years?What do the growth accounting studies conclude are the determinants of growth? Which is more important, the determinants or how they am combined?What policies can the government of a free-market economy implement to stimulate economic growth?List the areas where government policy can help economic growth.Use an example to explain why, after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.Would the following events usually lead to capital deepening? Why or why not? A weak economy in which businesses become reluctant to make long-term investments in physical capital. A rise in international trade. A trend in which many more adults participate in continuing education courses through their employers and at colleges and universities.What are the advantages of backwardness for economic growth?Would you expect capital deepening to result in diminished1etmns? Why or why not? Would you expect improvements in technology to result in diminished returns? Why or why not?Why dues productivity growth in high-income economies not slow down as it runs into diminishing returns from additional investments in physical capital and human capital? Does this show one area where the theory of diminishing returns fails to apply? Why or why not?How did the Industrial Revolution increase the economic growth rate and income levels in the United States?How much should a nation be concerned if its rate of economic growth is just 2 slower than other nations?How is GDP per capita calculated differently from labor productivity?How do gains in labor productivity lead to gains in GDP per capita?What is an aggregate production function?What is capital deepening?What do economists mean when they refer to improvements in technology?For a high-income economy like the United States, what aggregate production function elements are most important in bringing about growth in GDP per capita? What about a middle-income country such as Brazil? A low-income country such as Niger?List some arguments for and against the likelihood of convergence.Over the past 50 years, many countries have experienced an annual growth rate in real GDP per capita greater than that of the United States. Some examples are China, Japan, South Korea, and Taiwan. Does that mean the United States is regressing relative to other countries? Does that mean these countries will eventually overtake the United States in terms of the growth rate of real GDP per capita? Explain.Labor Productivity and Economic Growth outlined the logic of how increased productivity is associated with increased wages. Detail a situation where this is not the case and explain why it is not.Change in labor productivity is one of the most watched international statistics of growth. Visit the St. Louis Federal Reserve website and find the data section (http://research.stlouisfed.org). Find international comparisons of labor productivity, listed under the FRED Economic database (Growth Rate of Total Labor Productivity), and compare two countries in the recent past. State what you think the reasons for differences in labor productivity could be.Refer back to the Work It Out about Comparing the Economies of Two Countries and examine the data for the two countries you chose. How are they similar? How are they different?Education seems to be important for human capital deepening. As people become better educated and more knowledgeable, are there limits to how much additional benefit more education can provide? Why or why not?Describe some of the political and social tradeoffs that might occur when a less developed country adopts a strategy to promote labor force participation and economic growth via investment in girls education.Why is investing in girls education beneficial for growth?How is the concept of technology, as defined with the aggregate production function, different from our everyday use of the word?What sorts of policies can governments implement to encourage convergence?As technological change makes us more sedentary and food costs increase, obesity is likely. What factors do you think may limit obesity?An economy starts off with a GDP per capita of 5,000. How large will the GDP per capita be if it grows at an annual rate of 2 for 20 years? 2 for 40 years? 4 for 40 years? 6 for 40 years?An economy starts off with a GDP per capital of 12,000 euros. How large will the GDP per capita be if it grows at an annual rate of 3 for 10 years? 3 for 30 years? 6 for 30 years?Say that the average worker in Canada has a productivity level of 30 per hour while the average worker in the United Kingdom has a productivity level of 25 per hour (both measured in U.S. dollars). Over the next five years, say that worker productivity in Canada grows at 1 per year while worker productivity in the UK grows 3 per year. After five years, whiz) will have the higher productivity level, and by how much?Say that the average worker in the U.S. economy is eight times as productive as an average worker in Mexico. If the productivity of U.S. workers grows at 2 for 25 years and the productivity of Mexicos workers grows at 6 for 25 years, which country will have higher worker productivity at that point?Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are not in the labor force? What are the proportions of employed, unemployed and nut in the labor force in the population? Hint: Proportions ate percentages.Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the February 2015 unemployment rate computed earlier?Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level?Whose unemployment rates are commonly higher in the U.S. economy: Whites or nonwhites? The young or the middle-aged? College graduates or high school graduates?Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation?Is the increase in labor force participation rates among women better thought of as causing an increase in cyclical unemployment or an increase in the natural rate of unemployment? Why?Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?What is the difference between being unemployed and being out of the labor force?How do you calculate the unemployment rate? How do you calculate the labor force participation rate?Are all adults who do not hold jobs counted as unemployed?If you an? out of school but working part time, are you considered employed or unemployed in U.S. labor statistics? If you are a full time student and working 12 hours a week at the college cafeteria are you considered employed or not in the labor force? If you are a senior citizen who is collecting social security and a pension and working as a greater at Wal-Mart are you considered employed or not in the labor force?What happens to the unemployment rate when unemployed workers are reclassified as discouraged workers?What happens to the labor force participation rate when employed individuals are reclassified as unemployed? What happens when they are reclassified as discouraged workers?What are some of the problems with using the unemployment rate as an accurate measure of overall joblessness?What criteria do the BLS use to count someone as employed? As unemployed?Assess whether the following would be counted as unemployed in the Current Employment Statistics survey. A husband willingly stays home with children while his wife works. A manufacturing worker whose factory just closed down. A college student doing an unpaid summer internship. A retiree. Someone who has been out of work for two years but keeps looking for a job. Someone who has been out of work for two months but isnt looking for a job. Someone who hates her present job and is actively looking for another one. Someone who decides to take a part time job because she could not find a full time position.Are U.S. unemployment rates typically higher, lower, or about the same as unemployment rates in other high-income countries?Are U.S. unemployment rates distributed evenly across the population?When would you expect cyclical unemployment to be rising? Falling?Why is there unemployment in a labor market with flexible wages?Name and explain some of the reasons why wages are likely to be sticky, especially in downward adjustments.What term describes the remaining level of unemployment that occurs even when the economy is healthy?What forces create the natural rate of unemployment for an economy?Would you expect the natural rate of unemployment to be roughly the same in different countries?Would you expect the natural rate of unemployment to remain the same within one country over the long run of several decades?What is frictional unemployment? Give examples of frictional unemployment.What is structural unemployment? Give examples of structural unemployment.After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why?What type of unemployment (cyclical, frictional, or structural) applies to each of the following: landscapers laid off in response to a drop in new housing construction during a recession. coal miners laid off due to EPA regulations that shut down coal fired power a financial analyst who quits his/her job in Chicago and is pursing similar work in Arizona printers laid off due to drop in demand for printed catalogues and flyers as firms go the internet to promote an advertise their products. factory workers in the U.S. laid off as the plants shut down and move to Mexico and Ireland.Using the definition of the unemployment rate, is an increase in the unemployment rate necessarily a bad thing for a nation?Is a decrease in the unemployment rate necessarily a good thing for a nation? Explain.If many workers become discouraged from looking for jobs, explain how the number of jobs could decline but the unemployment rate could fall at the same time.Would you expect hidden unemployment to be higher, lower, or about the same when the unemployment rate is high, say 10, versus low, say 4? Explain.Is the higher unemployment rates for minority workers necessarily an indication of discrimination? What could be some other reasons for the higher unemployment rate?While unemployment is highly negatively correlated with the level of economic activity, in the real world it responds with a lag. In other wands, firms do not immediately lay off workers in response to a sales decline. They wait a while before responding. Similarly, firms do not immediately hire workers when sales pick up. What do you think accounts for the lag in response time?Why do you think that unemployment rates are lower for individuals with more education?Do you think it is rational for workers to prefer sticky wages to wage cuts, when the consequence of sticky wages is unemployment for some workers? Why or why not? How do the reasons for sticky wages explained in this section apply to your argument?Under what condition would a decrease in unemployment be bad for the economy?Under what condition would an increase in the unemployment rate be a positive sign?As the baby boom generation retires, the ratio of retirees to workers will increase noticeably. How will this affect the Social Security program? How will this affect the standard of living of the average American?Unemployment rates have been higher in many European countries in recent decades than in the United States. Is the main reason for this long-term difference in unemployment rates more likely to be cyclical unemployment or the natural rate of unemployment? Explain briefly.Is it desirable to pursue a goal of zero unemployment? Why or W115r not?Is it desirable to eliminate natural unemployment? Why or why not? Hint: Think about what our economy would look like today and what assumptions would have to be met to have a zero rate of natural unemployment.The U.S. unemployment rate increased from 4.6 in July 2001 to 5.9 by June 2002. Without studying the subject in any detail, would you expect that a change of this kind is more likely to be due to cyclical unemployment or a change in the natural rate of unemployment? My?A country with a population of eight million adults has five million employed, 500,000 unemployed, and the rest 0f the adult population is out of the labor force. Whats the unemployment rate? What share of population is in the labor force? Sketch a pie chart that divides the adult population into these three groups.A government passes a family-friendly law that no companies can have evening, nighttime, or weekend hours, so that everyone can be home with their families during these times. Analyze the effect of this law using a demand and supply diagram for the labor market: first assuming that wages are flexible, and then assuming that wages are sticky downward.As the baby boomer generation retires, what should happen to wages and employment? Can you show this graphically?Table 22.4 shows the fruit prices that the typing college student purchased from 2001 to 2004. What is the amount spent each year on the basket of fruit with the quantities shown in column 2?Construct the price index for a fruit basket in each year using 2003 as the base year.Compute the inflation rate for fruit prices from 2001 to 2004.Edna is living in a retirement home where home where most of her needs are taken care of, but she has some discretionary spending. Based on the basket of goods in Table 22.5, by what percentage does Ednas cost of living increase between time 1 and time 2How to Measure Changes in the Cost of Living introduced a number of different price indices. Which price index would be best to use to adjust your paycheck for inflation?The Consumer Price Index is subject to the substitution bias and me quality/new goods bias. Are the Producer Price index and the GDP deflator also subject to these biases? Why or why not?Go to this website (http://www.measuringworth.com/ppowerus/) for the Purchasing Power Calculator at measuringWorth.com. How much money would it take today to purchase what one dollar would have bought in the year of your birth?If inflation rises unexpectedly by 5, would a state government that had recently borrowed money to pay for a new highway benefit or lose?How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3, what would likely happen to a homeowner with an adjustable-rate mortgage?How do economists use a basket of goods and services to measure the price level?Why do economists use index numbers to measure the price level rather than dollar value of goods?What is the difference between the price level and the tale of inflation?Why does substitution bias arise if we calculate the inflation rate based on a fixed basket of goods?Why does the quality/new goods bias arise if we calculate the inflation rate based on a fixed basket of goods?What has been a typical range of inflation in the U.S. economy in the last decade or so?Over the last century, during what periods was the U.S. inflation late highest and lowest?What is deflation?Identity several parties likely to he helped and hurt by inflation.What is indexing?Name several forms of indexing in the private and public sector.Inflation rates, like most statistics, are imperfect measures. Can you identify some ways that the inflation rate for fruit does not perfectly capture the rising price of fruit?Given the federal budget deficit in recent years, some economists have argued mat by adjusting Social Security payments for inflation using me CPI, Social Security is warming recipients. What is their argument, and do you agree or disagree with it?Why is the GDP deflator not an accurate measure of inflation as it impacts a household?Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this Change affect the amount of substitution bias and quality/new goods bias?Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate man using the GDP deflate:Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.Why do you mink the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?If, over time, wages and salaries on average rise at least as fast as inflation, why do people worry about how inflation affects incomes?Who in an economy is the big winner from inflation?If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bands?Do you think perfect indexing is possible? Why or why not?The index number representing the price level changes from 110 to 115 in one year and then from 115 to 120 the next year. Since the index number increases by five each year, is five inflation rate each year? Is the inflation rate the same each year? Explain your answer.The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.With in 1 or 2 percentage points, what has the U.S. inflation rate been during the last 20 years? Draw a graph to show the data.If inflation rises unexpectedly by 5, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: A union member with a COLA wage contract Someone with a large stash of cash in a safe deposit box A bank lending money at a fixed rate of interest A person who is not due to receive a pay raise for another 11 monthsRosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of 20,000. However, if the inflation rate is 6 per year, how much buying power will that 20,000 have when measured in todays dollars? Hint: Start by calculating the rise in the price level over the 16 years.If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?If the trade deficit of the United States increases, how is the current account balance affected?State whether each of the following events Involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: Mexico Imports sen4ces from Japan Mexico exports goods to Canada U.S. investors receive a return from past financial investments in MexicoIn what way does comparing a countrys exports to GDP reflect its degree of globalization?At one point Canadas GDP was 1,800 billion and its exports were 542 billion. What was Canadas export ratio at this time?The GDP for the United States is 18,036 billion and its current account balance is 484 billion. What percent of GDP is the current account balance?Why does the trade balance and the current account balance track so closely together over time?State whether each of the following events Involves a financial flow to the U.S. economy or away from the U.S. economy: Export sales to Germany Returns paid on past U.S. financial investments In Brazil Foreign aid from the U.S. government to Egypt Imported oil from the Russian Federation Japanese investors buying U.S. real estateHow does the bottom portion of Figure 23.3, showing the international flow of investments and capital, differ from the upper portion?Explain the relationship between a current account deficit or surplus and the flow of funds.Using the national savings and Investment identity, explain how each of the following changes (ceteris paribus) will Increase or decrease the trade balance: A lower domestic savings rate The government changes from running a budget surplus to running a budget deficit The rate of domestic Investment surgesIf a country is running a government budget surplus, why is (T - G) on the left side of the saving-investment identity?What determines the size of a countrys trade deficit?If domestic Investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?Why does a recession cause a trade deficit to increase?Both the United States and global economies are booming. Will U.S. imports and/or exports increase?For each of the following, indicate which type of government spending would justify a budget deficit and which would not. Increased federal spending on Medicare Increased spending on education Increased spending on the space program Increased spending on airports and air traffic controlHow did large trade deficits hurt the East Asian countries in the mid 1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is economy in an economy that performs poorly. What key factor or factors are making the difference in the outcome that results from a trade surplus?The United States exports 14 of GDP while Germany exports about 50 of its GDP. Explain stat that means.Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy. Living In an especially large country Having a domestic investment rate much higher than the domestic savings rate Having many other large economies geographically nearby Having an especially large budget deficit Having countries with a tradition of strong protectionist legislation shutting out importsIf imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?What is included in the current account balance?In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit?What are the two main sides of the national savings and investment identity?What are the main components of the national savings and investment identity?When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?Does a trade surplus help to guarantee strong economic growth?What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?What is the difference between trade deficits and balance of trade?Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.If a country is a big exporter, is it more exposed to global financial crises?If countries reduced trade barriers, would the international flows of money increase?Is it better for your country to be an international lender or borrower?Many think that the size of a trade deficit is due to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the countrys economy was in a period of recession or of rapid growth? Explain.Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Is this possible?What is more important, a countrys current account balance or GDP growth? Why?Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.In 2001, the United Kingdoms economy exported goods worth 192 billion and services worth another 77 billion. It imported goods worth 225 billion and services worth £66 billion. Receipts of income from abroad were 140 billion while income payments going abroad were 131 billion. Government transfers from the United Kingdom to the rest of the world were 23 billion, while various U.K government agencies received payments of 16 billion from the rest of the world. Calculate the U.K. merchandise trade deficit for 2001. Calculate the current account balance for 2001. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of 100 billion, total domestic savings of 1,500 billion, and total domestic physical capital investment of 1,600 billion. According to the national saving and Investment Identity, what will be the current account balance? What will be the current account balance if Investment rises by 50 billion, while the budget deficit and national savings remain the same?Table 23.7 provides some hypothetical data on macroeconomic accounts for three countries represented by A. B, and C and measured in billions of currency units. In Table 23.7, private household saving is SH, tax revenue is T, government spending is G, and investment spending is Calculate the trade balance and the net inflow of foreign saving for each country. State whether each one has a trade surplus or deficit (or balanced trade). State whether each is a net lender or borrower internationally and explain.Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?Describe the mechanism by which supply creates its osi1 demand.Describe the mechanism by which demand creates its own supply.The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the puce of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?In the AD/AS model, what prevents the economy from achieving equilibrium at potential output?Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the puce level.Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. Use the AD/AS model to determine the likely impact on our equilibrium GDP and price level.A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?Many financial analysts and economists eagerly await the press releases for the reports on the home price index and consumer confidence index. What would be the effects of a negative report on both of these? What about a positive report?What impact would a decrease in the size of the labor force have on GDP and the puce level according to the AD/AS model?Suppose, after five years of sluggish growth, the European Unions economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?Suppose the Federal Reserve begins to Increase the supply of money at an Increasing rate. What Impact would that have on GDP, unemployment, and inflation?If the economy is operating in the neoclassical zone of the SRAS curve and aggregate demand falls, what is likely to happen to teal GDP?If the economy is operating In the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?What is says law?What is Keynes; law?Do neoclassical economists believe in Keynes law or Says law?Does Says law apply more accurately in the long run or the short run? What about Keynes law?What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?What is the economic reason why the SRAS curve slopes up?What are the components of the aggregate demand (AD) curve?What are the economic reasons why the AD curve slopes down?Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.Briefly explain the reason for the near-vertical shape of the SRAS curve on its far right.What is potential GDP?Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?What is stagflation?Name some factors that could cause AD to shift, and say whether they would shift AD to the tight or to the left.Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?How is long-term growth illustrated in an AD/AS model?How is recession illustrated in an AD/AS model?How is cyclical unemployment illustrated in an AD/AS model?How is the natural rate of unemployment Illustrated in an AD/AS model?How is pressure for inflationary price increases shown in an AD/AS model?What are some of the ways in which exports and imports can affect the AD/AS model?What is the Keynesian zone of the SRAS curve? How much is the price level likely to change in the Keynesian zone?What is the neoclassical zone of the SRAS curve? How much is the output level likely to change in the neoclassical zone?What is the intermediate zone of the SRAS curve? Will a rise in output be accompanied by a rise or a fall in the price level in this zone?Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/AS diagram?During spring 2016 the Midwestern United States, which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?Hydraulic fracturing (tracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as tracking becomes more widely used?Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price-level?If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3 per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be?Explain why the short-run aggregate supply curve might be fairly flat in the Keynesian zone of the SRAS curve. How might we tell if we are In the Keynesian zone of the AS?Explain why the short-run aggregate supply curve might be vertical in the neoclassical zone of the SRAS curve. How might we tell if we are in the neoclassical zone of the AS?Why might it be important for policymakers to know which in zone of the SRAS curve the economy Is?In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economys aggregate supply curve?Are Says law and Keynes law necessarily mutually exclusive?Review the problem in the Work It Out titled Interpreting the AD/AS Model. Like the information provided in that feature, Table 24.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia. Plot the AD/AS diagram from the data. Identify the equilibrium. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 24.3 shows. Plot the AD/AS diagram. Identify the equilibrium. Would you expect unemployment in this economy to be relatively high or low? Would you expect concern about inflation in this economy to be relatively high or low? Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium. How will the shift in AD affect the original output, price level, and employment?Table 24.4 describes Santhers economy. Plot the AD/AS curves and identify the equilibrium. Would you expect unemployment in this economy to be relatively high or low? Would you expect prices to be a relatively large or small concern for this economy? Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium. How will the shift in AS affect the original output, price level, and employment?In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers. A large Increase In the price of the homes people own. Rapid growth in the economy of a major trading partner. The development of a major new technology offers profitable opportunities for business. The Interest rate rises. The good imported from a major trading partner become much less expensive.In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to Inflation? A tax Increase on consumer income. A surge in military spending. A reduction in (axes for businesses that Increase investment. A major Increase in what the U.S. government spends on healthcare.Use the AD/AS model to explain bow an inflationary gap occurs, beginning from the initial equilibrium in Figure 25.6.Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/AS model to analyze the likely impact on output and employment. Hint revisit Figure 25.6.How would a decrease in energy prices affect the Phillips curve?Does Keynesian economics require government to set controls on prices, wages, or interest rates?List three practical problems with the Keynesian perspective.Name some economic events not related to government policy that could cause aggregate demand to shift.Name some government policies that cod cause aggregate demand to shift.From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?Explain what economists mean by menu costs.What tradeoff does a Phillips curve show?Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?