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All Textbook Solutions for Principles of Economics 2e
What is the Keynesian prescription for recession? For inflation?How did the Keynesian perspective address the economic market failure of the Great Depression?In its recent report, The Conference Boards Global Economic Outlook 2015, updated November 2014 (http://www.conference-board.org/data/ globaloutlook.cfm), projects Chinas growth between 2015 and 2019 to be about 5.5%. International Business Times (http//www.ibtimes.com/us-exports-china-have rown-294-over-past-decade- 1338693) reports that China is the United States third largest export market, with exports to China growing 294 over the last ten years. Explain what impact China has on the U.S. economy.What may happen if growth in China continues or contracts?Does it make sense that wages would be sticky downwards but not upwards? Why or why not?Suppose the economy is operating at potential GDP when It experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?Do you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not?Return to the table from the Economic Report of the President in the earlier Work It Out feature titled The Phillips Curve for the United States. How would you expect government spending to have changed over the last six years?Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.Do rational expectations tend to look back at past experience while adaptive expectations look ahead to the future? Explain your answer.Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how bill this policy affect output and the price level in the short nm and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint revisit Figure 26.4.Would it make sense to argue that rational expectations economics is an extreme version of neoclassical economics? Explain.Summarize the Keynesian and Neoclassical models.Does neoclassical economics focus on the long term or the short term? Explain your answer.Does neoclassical economics view prices and wages as sticky or flexible? Why?What shape is the long-nm aggregate supply curve? Why does it have this shape?What is the difference between rational expectations and adaptive expectations?A neoclassical economist and a Keynesian economist are studying the economy of Vineland. It appeals that Vineland is beginning to experience a mild recession with a decrease in aggregate demand. Which of these two economists would likely advocate that the government of Vineland take active measures to reverse this decline in aggregate demand? Why?Do neoclassical economists tend to focus more on long term economic growth or on recessions? Explain briefly.Do neoclassical economists tend to focus more on cyclical unemployment or on inflation? Explain briefly.Do neoclassical economists see a value in tolerating a little more inflation if it brings additional economic output? Explain your answer.If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?When the economy is experiencing a recession, why would a neoclassical economist be unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment? Explain your answer.If the economy is suffering through a rampant inflationary period, would a Keynesian economist advocate for stabilization policy that involves higher taxes and higher interest rates? Explain your answer.If most people have rational expectations, how long will recessions last?Explain why the neoclassical economists believe that the government does not need to do much about unemployment. Do you agree or disagree? Explain.Economists from all theoretical persuasions criticized the American Recovery and Reinvestment Act. The Stimulus Package was arguably a Keynesian measure so why would a Keynesian economist be critical of it? Why would neoclassical economists be critical?Is it a logical contradiction to be a neoclassical Keynesian? Explain.Use Table 26.3 to answer the following questions. Sketch an aggregate supply and aggregate demand diagram. What is the equilibrium output and price level? If aggregate demand shifts right, what is equilibrium output? If aggregate demand shifts left, what is equilibrium output? In this scenario, would you suggest using aggregate demand to alter the level of output or to control any inflationary increases in the price level?In many casinos, a person buys chips to use for gambling. Within the casinos wafts, customers often can use these chips to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money?Can you name some item that is a store of value, but does not serve the other functions of money?If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.For the following list of items, indicate If they are in M1, M2, or neither: Your 5,000 line of credit on your Bank of America card 50 dollars worth of travelers checks you have not used yet 1 in quarters in your pocket 1200 in your checking account 2000 you have in a money market accountExplain why the money listed under assets on a bank balance sheet may not actually be in the bank?Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan If: The borrower has been late on a number of loan payments Interest rates In the economy as a whole have risen since the bank made the loan The borrower Is a firm that has just declared a high level of profits Interest rates in the economy as a whole have fallen since the bank made the loanWhat are the four functions that money serves?How does the existence of money simplify the process of buying and selling?What is the double-coincidence of wants?What components of money do we count as part of M1?What components of money do we count in M2?Why do we call a bank a financial intermediary?What does a balance sheet show?What are a banks assets? What are its liabilities?How do you calculate a banks net worth?How can a bank end up with negative net worth?What is the asset-liability time mismatch that all banks face?What is the risk if a bank does not diversify its loans?How do banks create money?What is the formula for the money multiplier?The Bring it Home Feature discusses the use of cowrie shells as money. Although we no longer use cowrie shells as money, do you think other forms of commodity monies are possible? What role might technology play in our definition of money?Imagine that you are a barber in a world without money. Explain why it would be tricky to obtain groceries, clothing, and a place to live.Explain why think the Federal Reserve Bank tracks M1 and M2.The total amount of U.S. currency in circulation divided by the U.S. population comes out to about S3,500 per person. That is more than most of us carry. Where is all the cash?Explain the difference between how you would characterize bank deposits and loans as assets and liabilities on your own personal balance sheet and how a bank would characterize deposits and loans as assets and liabilities on its balance sheet.Should banks have to hold 100 of their deposits? Why or why not?Explain what will happen to the money multiplier process if there is an increase in the reserve requirement?What do you think the Federal Reserve Bank did to the reserve requirement during the 20082009 Great Recession?If you take 100 out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change?A bank has deposits of 400. It holds reserves of 50. It has purchased government bonds worth 70. It has made loans of 500. Set up a T-account balance sheet for the bank, with assets and liabilities, and calculate the banks net worth.Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?Why is it important for the members of the Board of Governors of the Federal Reserve to have longer terms in office than elected officials, like the President?Given the danger of bank runs, why do banks not keep the majority of deposits on hand to meet the demands of depositors?Bank runs are often described as self-fulfilling prophecies. Why is this phrase appropriate to bank runs?If the central bank sells 500 in bonds to a bank that has issued 10,000 in loans and is exactly meeting the reserve requirement of 10, what will happen to the amount of loans and to the money supply in general?What would be the effect of increasing the banks reserve requirements on the money supply?Why does contractionary monetary policy cause interest rates to rise?Why does expansionary monetary policy causes interest rates to drop?Why might banks want to hold excess reserves in time of recession?Why might the velocity of money change unexpectedly?How is a central bank different from a typical commercial bank?List the three traditional tools that a central bank has for controlling the money supply.How is bank regulation linked to the conduct of monetary policy?What is a bank run?In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?In government programs of bank supervision, what is being supervised?What is the lender of last resort?Name and briefly describe the responsibilities of each of the following agencies: FDIC, NCUA, and OCC.Explain how to use an open market operation to expand the money supply.Explain how to use the reserve requirement to expand the money supply.Explain how to use the discount rate to expand the money supply.How do the expansionary and contractionary monetary policy affect the quantity of money?How do tight and loose monetary policy affect interest rates?How do expansionary, tight, contractionary, and loose monetary policy affect aggregate demand?Which kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why?Explain how to use quantitative easing to stimulate aggregate demand.Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?Define the velocity of the moneyWhat is the basic quantity equation of money?How does a monetary policy of inflation target work?Why do presidents typically reappoint Chairs of the Federal Reserve Board even when they were originally appointed by a president of a different political party?In what ways might monetary policy be superior to fiscal policy? In what ways might it be inferior?The term moral hazard describes increases in risky behavior resulting from efforts to make that behavior safer. How does the concept of moral hazard apply to deposit insurance and other bank regulations?Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9 to 10 of deposits. What would their options be to come up with the cash?A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short run tradeoff typically observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?Is it preferable for central banks to primarily target inflation or unemployment? Why?Suppose the Fed conducts an open market purchase by buying 10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets - reserves 30, bonds 50, and loans 50; Liabilities - deposits 300 and equity 30.Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. Sketch out the balance sheet changes that will occur as Acme restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for Acme Bank contains the following information: Assets - reserves 30, bonds 50, and loans 250; Liabilities - deposits 300 and equity 30.All other things being equal, by how much will nominal GDP expand if the central bank Increases the money supply by 100 billion, and the velocity of money is 3? (Use this information as necessary to answer the following 4 questions.)Suppose now that economists expect the velocity of money to increase by 50 as a result of the monetary stimulus. What will be the total Increase in nominal GDP?If GDP is 1,500 and the money supply is 400, what is velocity?If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?How will a stronger euro affect the following economic agents? A British exporter to Germany. A Dutch tourist visiting Chile. A Greek bank investing in a Canadian government bond. A French exporter to Germany.Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds. supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?Suppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say, euros?Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?This chapter has explained that one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system, if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because It decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom Is caused by economic investment expenditure?How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?What is the foreign exchange market?Describe some buyers and some sellers in the market for U.S. dollars.What is the difference between foreign direct investment and portfolio investment?What does it mean to hedge a financial transaction?What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?Does a higher rate of return in a nations economy, all other things being equal, affect the exchange rate of its currency? If so, how?Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?What is the purchasing power parity exchange rate?What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?How can an unexpected fall in exchange rates injure the financial health of a nations banks?What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?List some advantages and disadvantages of the different exchange rate policies.Why would a nation dollarize—that is, adopt another countrys currency instead of having its own?Can you think of any major disadvantages to dollarization? How would a central bank work in a country that has dollarized?If a countrys currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the Interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currencys demand and supply.Do you think that a country experiencing hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its trading partners?We learned that changes in exchange rates and the corresponding changes in the balance of trade amplify monetary policy. From the perspective of a nations central bank, is this a good thing or a bad thing?If a developing country needs foreign capital inflows, management expertise, and technology, how can it encourage foreign investors while at the same time protect itself against capital flight and banking system collapse, as happened during the Asian financial crisis?Many developing countries, like Mexico, have moderate to high rates of inflation. At the same time, international trade plays an Important role In their economies. What type of exchange rate regime would be best for such a countrys currency vis Ă´ vis the U.S. dollar?What would make a country decide to change from a common currency, like the euro, back to its own currency?A British pound cost 2.00 in U.S. dollars in 2008, but 1.27 in U.S. dollars in 2017. Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?When governments run budget deficits, how do they make up the differences between tax revenue and spending?When governments run budget surpluses, what is done with the extra funds?Is it possible for a nation to run budget deficits and still have its debt GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt GDP ratio rise? Explain your answer.Suppose that gifts were taxed at a rate of 10 for amounts up to 100,000 and 20 for anything over that amount. Would this tax be regressive or progressive?If an individual owns a corporation for which he is the only employee, which different types of federal tax will he have to pay?What taxes would an individual pay if he were self-employed and the business is not incorporated?The social security tax is 6.2 on employees income earned below 113,000. Is this tax progressive, regressive or proportional?Debt has a certain self-reinforcing quality to it. There is one category of government spending that automatically Increases along with the federal debt. What Is It?True or False: Federal spending has grown substantially in recent decades. By world standards, the U.S. government controls a relatively large share of the U.S. economy. A majority of the federal governments revenue Is collected through personal income taxes. Education spending is slightly larger at the federal level than at the state and local level. State and local government spending has not risen much in recent decades. Defense spending is higher now than ever. The share of the economy going to federal taxes has increased substantially over time. Foreign aid is a large portion, although less than half, of federal spending. Federal deficits have been very large for the last two decades. The accumulated federal debt as a share of GDP is near an all-time high.What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?What is the main reason for employing expansionary fiscal policy during a recession?In a recession, does the actual budget surplus or deficit fall above or below the standardized employment budget?What is the main advantage of automatic stabilizers over discretionary fiscal policy?Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy Is producing more than potential GDP.What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?What would happen if contractionary fiscal policy were implemented during an economic boom but, due to Lag, it did not take effect until the economy slipped into recession?Do you think the typical time lag for fiscal policy is likely to be longer or shorter than the time lag for monetary policy? Explain your answer?How would a balanced budget amendment affect a decision by Congress to grant a tax cut during a recession?How would a balanced budget amendment change the effect of automatic stabilizer programs?Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not.Have the spending and taxes of the U.S. federal government generally had an upward or a downward trend in the last few decades?What are the main categories of U.S. federal government spending?What is the difference between a budget deficit, a balanced budget, and a budget surplus?Have spending and taxes by state and local governments In the United States had a generally upward or downward trend in the last few decades?What are the main categories of U.S. federal government taxes?What is the difference between a progressive tax, a proportional tax, and a regressive tax?What has been the general pattern of U.S. budget deficits in recent decades?What is the difference between a budget deficit and the national debt?What is the difference between expansionary fiscal policy and contractionary fiscal policy?Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?What is the difference between discretionary fiscal policy and automatic stabilizers?Why do automatic stabilizers function automatically?What is the standardized employment budget?What are some practical weaknesses of discretionary fiscal policy?What are some of the arguments for and against a requirement that the federal government budget be balanced every year?Why is government spending typically measured as a percentage of GDP rather than in nominal dollars?Why are expenditures such as crime prevention and education typically done at the state and local level rather than at the federal level?Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?Excise taxes on tobacco and alcohol and state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of Income, why might this be so?What is the benefit of having state and local taxes on income instead of collecting all such taxes at the federal level?In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play?Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case?Is it possible for a nation to run budget deficits and still have its debt/GDP ratio fall? Explain your answer. Is it possible for a nation to run budget surpluses and still have its debt/GDP ratio rise? Explain your answer.How will cuts in state budget spending affect federal expansionary policy?Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.Is Medicaid (federal government aid to low-income families and individuals) an automatic stabilizer?What is a potential problem with a temporary tax increase designed to increase aggregate demand it people know that it is temporary?If the government gives a 300 tax cut to everyone in the country, explain the mechanism by which this will cause interest rates to rise.Do you agree or disagree with this statement: It is in the best interest of our economy for Congress and the President to run a balanced budget each year. Explain your answer.During the Great Recession of 20082009, what actions would have been required of Congress and the President had a balanced budget amendment to the Constitution been ratified? What impact would that have had on the unemployment rate?A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of 400 million. In year two, the government runs a deficit of 1 billion. In year three, the government runs a surplus of 200 million. What is the total debt of the government at the end of year three?If a government runs a budget deficit of 10 billion dollars each year for ten years, then a surplus of 1 billion for five years, and then a balanced budget for another ten years, what is the government debt?Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: A recession. A stock market collapse that hurts consumer and business confidence. Extremely rapid growth of exports. Rising inflation. A rise in the natural rate of unemployment. A rise in oil prices.In a country, private savings equals 600, the government budget surplus equals 200, and the trade surplus equals 100. What is the level of private Investment in this economy?Assume an economy has a budget surplus of 1,000, private savings of 4,000, and investment of 5,000. Write out a national saving and investment identity for this economy. What will be the balance of trade in this economy? If the budget surplus changes to a budget deficit of 1000k with private saving and investment unchanged, what Is the new balance of trade In this economy?In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving on/or investment must have changed in this economy?Imagine an economy in which Ricardian equivalence holds. This economy has a budget deficit of 50, a trade deficit of 20, private savings of 130, and investment of 100. If the budget deficit rises to 70, how are the other terms in the national saving and investment identity affected?Why have many education experts recently placed an emphasis on altering the incentives that U.S. schools face rather than on increasing their budgets? Without endorsing any of these proposals as especially good or bad, list some of the ways in which incentives for schools might be altered.What are some steps the government can take to encourage research and development?Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?How would you expect larger budget deficits to affect private sector investment in physical capital? Why?Under what conditions will a larger budget deficit cause a trade deficit?What is the theory of Ricardian equivalence?What does the concept of rationality have to do with Ricardian equivalence?What are some of the ways fiscal policy might encourage economic growth?What are some fiscal policies for improving a societys human capital?What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?Explain how cuts in funding for programs such as Head Start might affect the development of human capital in the United States.Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.The U.S. government has shut down a number of times In recent history Explain how a government shutdown will affect the variables In the national Investment and savings identity Could the shutdown affect the government budget deficit?Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: Well, a higher budget deficit (surplus) means that Im just going to owe more (less) taxes In the future to pay off all that government borrowing, so Ill start saving (spending) now. Why or why not?Explain why the government might prefer to provide incentives to private firms to do investment or research and development, rather than simply doing the spending itself?Under what condition would crowding out not inhibit long-run economic growth? Under what condition would crowding out impede long-run economic growth?What must take place for the government to run deficits without any crowding out?Sketch a diagram of how a budget deficit causes a trade deficit. (Hint: Begin with what will happen to the exchange rate when foreigners demand more U.S. government debt.)Sketch a diagram of how sustained budget deficits cause low economic growth.Assume that the newly independent government of Tanzania employed you in 1964. Now free from British rule, the Tanzanian parliament has decided that it will spend 10 million shillings on schools, roads, and healthcare for the year. You estimate that the net taxes for the year are eight million shillings. The government will finance the difference by selling 10-year government bonds at 12% interest per year. Parliament must add the interest on outstanding bonds to government expenditure each year. Assume that Parliament places additional taxes to finance this increase in government expenditure so the gap between government spending is always two million. If the school, road, and healthcare budget are unchanged, compute the value of the accumulated debt in 10 years.Illustrate the concept of Ricardian equivalence using the demand and supply of financial capital graph.During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by government in investment offsets the deficit demand.Using the data in Table 32.3, rank the seven regions of the world according to GDP and then according to GDP per capita.What are the drawbacks to analyzing the global economy on a regional basis?Create a table that identifies the macroeconomic policies for a high-income country, a middle-income country, and a low-income countryUse the data in the text to contrast the policy prescriptions of the high-income, middle-income, and low-income countries.What are the different policy tools for dealing with cyclical unemployment?Explain how the natural rate of unemployment may be higher in low-income countries.How does indexing wage contracts to inflation help workers?Use the AD/AS model to show how increases in government spending can lead to more inflation.Show, using the AD/AS model, how governments can use monetary policy to decrease the price level.What do international flows of capital have to do with trade imbalances?Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.What is the primary way which economists measure standards of living?What are some of the other ways of comparing the standard of living in countries around the world?What are the four other factors that determine the economic standard of living around the world?What other factors, aside from labor productivity, capital investment, and technology, impact the economic growth of a country? How?What strategies did the East Asian Tigers employ to stimulate economic growth?What are the two types of unemployment problems?In low-income countries, does it make sense to argue that most of the people without long-term jobs are unemployed?Is inflation likely to be a severe problem for at least some high-income economies in the near future?Is inflation likely to be a problem for at least some low- and middle-income economies in the near future?What are the major issues with regard to trade imbalances for the U.S. economy?What are the major issues with regard to trade imbalances for low- and middle-income countries?Demography can have important economic effects. The United States has an aging population. Explain one economic benefit and one economic cost of an aging population as well as of a population that is very young.Explain why is it difficult to set aside funds for investment when you are in poverty.Why do you think it is difficult for high-income countries to achieve high growth rates?Is it possible to protect workers from losing their jobs without distorting the labor market?Explain what will happen in a nation that tries to solve a structural unemployment problem using expansionary monetary and fiscal policy. Draw one AD/AS diagram, based on the Keynesian model, for what the nation hopes will happen. Then draw a second AD/AS diagram, based on the neoclassical model, for what is more likely to happen.Why are inflationary dangers lower in the high-income economies than in low-income and middle-income economies?Explain why converging economies may present a strong argument for limiting flows of capital but not for limiting trade.Retrieve the following data from The World Bank database (http //databank.worldbank. org/data/ home.aspx) for India, Spain, and South Africa for the most recent year available: • GDP in constant international dollars or PPP • Population • GOP per person in constant international dollars • Mortality rate, infant (per 1,000 live births) • Health expenditure per capita (current U.S. dollars) • Life expectancy at birth, total (years)Prepare a chart that compares India, Spain, and South Africa based on the data you find. Describe the key differences between the countries. Rank these as high-, medium-, and low-income countries, explain what is surprising or expected about this data.Use the Rule of 72 to estimate how long it will take for India, Spain, and South Africa to double their standards of living.Using the research skills you have acquired, retrieve the following data from The World Bank database (http://databank.worldbank.orgdata home.aspx) for India, Spain, and South Africa for 20102015, if available: • Telephone lines • Mobile cellular subscriptions • Secure Internet servers (per one million people) • Electricity production (kWh) Prepare a chart that compares these three countries. Describe the key differences between the countries.Retrieve the unemployment data from The World Bank database (http ://databank.worldbank.org/data/ home.aspx) for India, Spain, and South Africa for 20112015. Prepare a chart that compares India, Spain, and South Africa based on the data. Describe the key differences between the countries. Rank these countries as high-, medium-, and low-income countries. Explain what is surprising or expected about this data. How did the Great Recession impact these countries?Retrieve inflation data from The World Bank data base (http://databank.worldbank.org/data/home.aspx) for India, Spain, and South Africa for 20112015. Prepare a chart that compares India, Spain, and South Africa based on the data. Describe the key differences between the countries. Rank these countries as high-, medium-, and low-income. Explain what is surprising or expected about the data.True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. Explain.Brazil can produce 100 pounds of beef or 10 autos. In contrast the United States can produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in beef? Which country has the absolute advantage in producing autos? What is the opportunity cost of producing one pound of beef In Brazil? What is the opportunity cost of producing one pound of beef in the United States?In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?In Germany it takes three workers to make one television and four workers to make one video camera. In Poland It takes six workers to make one television and 12 workers to make one video camera. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell? Calculate the opportunity cost of producing one additional television set in Germany and In Poland. (Your calculation may involve fractions, which Is tine.) Which country has a comparative advantage in the production of televisions? Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras? In this example, is absolute advantage the same as comparative advantage, or not? In what product should Germany specialize? In what product should Poland specialize?How can there be any economic gains for a country from both importing and exporting the same good, like cars?Table 33.15 shows how the average costs of production for semiconductors (the chips In computer memories) change as the quantity of semiconductors built at that factory increases. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale? If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors? Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.If the removal of trade banters is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products?What is absolute advantage? What is comparative advantage?Under what conditions does comparative advantage lead to gains from trade?What factors does Paul Krugman identity that supported expanding international trade in the 1800s?Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.How does comparative advantage lead to gains from trade?What is intra-industry trade?What are the two main sources of economic gains from intra-industry trade?What is splitting up the value chain?Are the gains from international trade more likely to be relatively more important to large or small countries?Are differences in geography behind the differences in absolute advantages?Why does the United States not have an absolute advantage in coffee?Look at Exercise 33.2. Compute the opportunity costs of producing sweaters and wine in both France and Tunisia. Who has the lowest opportunity cost of producing sweaters and who has the lowest opportunity cost of producing wine? Explain what it means to have a lower opportunity cost.You just overheard your friend say the following: Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade. How would you respond?Look at Table 33.9. Is there a range of trades for which there will be no gains?You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70 faster at dishes and 10 faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade- related analogy to this problem?Does intra-industry trade contradict the theory of comparative advantage?Do consumers benefit from intra-industry trade?Why might intra-industry trade seem surprising from the point of view of comparative advantage?In World Trade Organization meetings, what do you think low-income countries lobby for?Why might a low-income country put up barriers to trade, such as tariffs on imports?Can a nations comparative advantage change over time? What factors would make it change?France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes. Identity which country has the comparative advantage. How much would France have to give up In terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios. Who has the absolute advantage in the production of rubber or radios? How can you tell? Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine,) Which country has a comparative advantage in the production of radios? Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber? In this example, does each country have an absolute advantage and a comparative advantage in the same good? In what product should Japan specialize? In what product should Malaysia specialize?Review the numbers for Canada and Venezuela from Table 33.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this ask as the relative price or trade price of lumber. Is the Canadian ask you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.In Exercise 33.31, is there an ask where Venezuelans may say no thank you to trading with Canada?From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of 10 per phone and South Korea can produce 50 million mobile phones at 5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?If trade increases world GDP by 1 per year, what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount the additional increase in global incomes due to trade and compare that number to Sri Lankas GDP.Explain how a tariff reduction causes an Increase in the equilibrium quantity of imports and a decrease in the equilibrium price. Hint: Consider the Work It Out Effects of Trade Barriers.Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar.Explain how trade barriers save jobs in protected industries, but only by costing jobs in other industries.Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.How does international trade affect working conditions of low-income countries?Do the jobs for workers in low-income countries that involve making products for export to high-income countries typically pay these workers more or less than their next-best alternative?How do trade barriers affect the average Income level in an economy?How does the cost of saving jobs in protected industries compare to the workers wages and salaries?Explain how predatory pricing could be a motivation for dumping.Why do low-income countries like Brazil, Egypt, or Vietnam have lower environmental standards than high-income countries like the Germany, Japan, or the United States?Explain the logic behind the race to the bottom argument and the likely reason it has not occurred.