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50. The following question has three parts, which are to be
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50. The following question has three parts, which are to be answered independently of each

 

other. Graphically show your response to the following shocks in the AD-AS model:

 

A) If a new round of consumer pessimism abounds, what would happen to the economy's

 

short-run growth rate?

 

B) If there is a positive, but temporary, monetary shock, what would happen to the economy's

 

short-run growth rate?

 

C) If a country's imports temporarily increase, but exports stay the same, what would happen to

 

the economy's short-run growth rate?

 

51. Imagine that an economy experiences a long-lasting banking crisis and that subsequently

 

consumption growth permanently falls. Using the AD-AS model, draw a diagram and explain the

 

effects of the permanent decline in consumption growth on the inflation rate and the real growth

 

rate in both the short run and the long run.

 

52. Using the AD-AS model, show and explain how real GDP growth and inflation would change

 

in both the short run and long run if the growth rate of the money supply increases

 

unexpectedly.

 

53. What types of shocks can be found in the AD-AS model? Why do these shocks not

 

disappear immediately but rather tend to spread across sectors of an economy?

 

54. Assume that a country's money velocity remains constant and that the rate of money growth

 

is 4%.

 

A) What is the rate of spending growth?

 

B) If money growth increases by 1.5 percentage points and consumption growth increases by

 

0.5 percentage points, what is the new rate of spending growth?

 

C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate

 

of 4%?

 

55. What assumptions about wage and price flexibility are possible in the AD-AS model? What

 

do these different assumptions imply about the slopes of the long-run and short-run aggregate

 

supply curves?

 

56. Why is the long-run aggregate supply curve vertical in the AD-AS model?

 

57. Compare two economies, one that is highly agricultural and another that is highly

 

manufacturing-based. Discuss what types of shocks might be relevant to each of these

 

economies.

 

58. Answer the following three questions about the Great Depression.

 

A) What were the four major shocks that contributed to the Great Depression? B) Using a graph, show how these shocks affected AD.

 

C) Did the monetary authorities have a hand in causing and/or exacerbating the Great

 

Depression? Explain.

 

59. Why do banks hold reserves?

 

60. How are credit cards related to the money supply?

 

61. What is the central bank in the United States, what is its primary function, and how does it

 

carry out this function?

 

62. Why are banks reluctant to borrow at the discount window?

 

63. Explain how an open market purchase of bonds by the Federal Reserve will increase the

 

money supply.

 

64. Describe the structure of the Federal Reserve System and its relationship to the federal

 

government.

 

65. Explain why the existence of the Federal Deposit Insurance Corporation may reduce bank

 

panics.

 

66. Explain how the Federal Reserve controls the money supply.

 

67. Why did the Federal Reserve begin to pay interest on reserves held by banks?

 

68. If the average reserve ratio in the banking system is 20% and the Federal Reserve

 

increases reserves by $50,000, what is the maximum amount the money supply can increase?

 

Will the money supply always increase by this maximum amount? If not, why not?

 

69. What is a ?disinflation? policy? What dilemma does it present for the Fed?

 

70. Explain what factors led to the 2006 decrease in housing prices causing a reduction in

 

aggregate demand.

 

71. Briefly explain why the Fed is not very effective when a negative real shock occurs

 

72. Explain carefully why monetary policy deals more successfully with aggregate demand

 

shocks than real shocks. 73.Explain the role of ?expectations? and ?credibility? in monetary policy when the policy goal is

 

fighting inflation and keeping it low.

 

74.During the late 1970s and first part of the 1980s, the Fed seemed to react in a

 

counterintuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy

 

decisions and the effect that they had on the economy.

 

75. What is the appropriate monetary policy in response to a positive demand shock that leaves

 

the economy operating above its long-run potential growth rate?

 

76. Suppose the spending habits of consumers suddenly change so that consumption growth

 

increases. What should the central bank do to restore the economy back to the old equilibrium

 

point? Explain your answer with the aid of an AD?AS diagram.

 

77. Monetary authorities in a country face the following situation: Consumers are not spending,

 

investment is low, and unemployment is relatively high. Explain how monetary policy could work

 

to improve this situation.

 

78. Explain why the Federal Reserve did not reduce the growth rate of the money supply in

 

response to rising oil prices in 2007 and 2008.

 

79.What is a ?disinflation? policy? What dilemma does it present for the Fed?

 

80. Explain what factors led to the 2006 decrease in housing prices causing a reduction in

 

aggregate demand.

 

81. Briefly explain why the Fed is not very effective when a negative real shock occurs

 

82. Explain carefully why monetary policy deals more successfully with aggregate demand

 

shocks than real shocks.

 

83. Explain the role of ?expectations? and ?credibility? in monetary policy when the policy goal is

 

fighting inflation and keeping it low.

 

84. During the late 1970s and first part of the 1980s, the Fed seemed to react in a

 

counterintuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy

 

decisions and the effect that they had on the economy.

 

85. What is the appropriate monetary policy in response to a positive demand shock that leaves

 

the economy operating above its long-run potential growth rate? 86. Suppose the spending habits of consumers suddenly change so that consumption growth

 

increases. What should the central bank do to restore the economy back to the old equilibrium

 

point? Explain your answer with the aid of an AD?AS diagram.

 

87. Monetary authorities in a country face the following situation: Consumers are not spending,

 

investment is low, and unemployment is relatively high. Explain how monetary policy could work

 

to improve this situation.

 

88. Explain why the Federal Reserve did not reduce the growth rate of the money supply in

 

response to rising oil prices in 2007 and 2008.

 

89. Proponents of the United States moving from its current progressive tax system to a flat tax

 

system argue that the efficiency gains associated with a flat tax system would mean that even

 

people who are paying a higher tax rate, with increased economic growth, would be better off.

 

Explain this argument.

 

90. In the beginning of 2007, the interest rate paid on the national debt was 5%. In 2010 it was

 

only 2%. Explain why the interest rate on the national debt fell so much between 2007 and 2010

 

even as the national debt increased dramatically. Do you expect it to continue to fall? Explain

 

why or why not.

 

91. Social Security operates on a ?pay as you go? basis. What does this mean?

 

92. What are the main causes of the increased federal government deficits since 2007?

 

93. A nation has $6 billion in revenue in year 1 and $7 billion in spending. In year 2, it has $8

 

billion in revenue and $10 billion in spending. In year 2, what is the national debt and what is the

 

deficit, assuming the nation can borrow at 0% interest without paying on the principle?

 

94. Suppose you see the following claim made in a local newspaper, ?The United States is a

 

welfare economy, where taxes are used to redistribute wealth to the poor.? Do you agree or

 

disagree with this sentence? Why or why not?

 

95. The Congressional Budget Office (CBO) estimates that if spending and taxes remain on

 

their current trajectories, the U.S. debt-to-GDP ratio will approach 500% in the next 50 years.

 

Discuss two of the main factors that are driving these CBO's predictions. 96. What is the difference between the deficit and national debt?

 

97. Using what you know about the U. S. tax code, answer the following questions. A) Why is the Social Security tax like a welfare system?

 

B) How do health-care advances affect the Social Security payments system?

 

C) On average why do you think women benefit more from Social Security than men?

 

D) How might corporate dividends be double-taxed?

 

E) Do people sometimes get double-taxed in areas other than corporate dividends?

 

98. ?Table: Marginal Tax Rates Income $0?$20,000 Tax rate 0% $20,000.01?$40,000 10% $40,000.01?$60,000 20% For a family earning $45,000, use the tax rates from the accompanying table and determine its

 

marginal tax rate, average tax rate, and total income tax payment. Is this a progressive,

 

regressive, or flat tax code? Explain.

 

99. Is fiscal policy effective in reducing both inflation and unemployment at the same time?

 

100. Briefly discuss the different paths that expansionary fiscal policy can follow and the level of

 

crowding out associated with each one.

 

101. Identify and explain the lags relevant to the use of fiscal policy.

 

102. Explain the difference between a tax cut and a tax rebate.

 

103. What, if any, timing challenges exist with the use of discretionary fiscal policy? If there are

 

any, compare and contrast them with the timing challenges of monetary policy.

 

104.Explain why a negative real shock followed by an increase in government spending will lead

 

to higher inflation.

 

105. Explain the dilemma policymakers face with respect to fiscal policy when government

 

deficits and the national debt reach burdensome levels. Many economists believe that the most harmful consequence of continuing to finance high

 

budget deficits through borrowing is the upward pressure placed on interest rates. Explain this

 

argument. (That is, explain why higher budget deficits may lead to higher interest rates and why

 

this may be detrimental to the economy in the long run.)

 

106. What conditions are important for fiscal policy to occur in the best-case scenario?

 

107. Explain the multiplier effect.

 

108. What are the arguments in favor of trade restrictions, and what are their

 

counterarguments? According to most economists, do these arguments really justify trade

 

restrictions? Explain.

 

109. During the recent economic slowdown, many jobs were lost in the Detroit area because of

 

high prices (and therefore low sales) of domestically produced cars. Domestic companies that

 

have succeeded in weathering the storm, such as Ford Motor Company, have done so by

 

cutting unprofitable car lines, moving production toward more fuel-efficient vehicles, and cutting

 

wasteful spending. Still, many workers lost their jobs. In economic terms, explain whether the

 

market is more or less efficient now than before the recession began.

 

110. Briefly describe a few activities that a typical student might do on any given day that reflect

 

the effects of globalization.

 

111. With the aid of demand and supply curves, compare the amounts of imports and the prices

 

of goods under (i) free trade, (ii) trade with a tariff, and (iii) a closed economy without trade.

 

112. Sugar production is highly protected in the United States. Sugar importers must pay such

 

high tariffs that it is hardly profitable for them to sell any sugar in the United States. Who are the

 

winners and losers from such protectionism? Is the resulting market economically efficient?

 

Why? If not, why would the government continue import restrictions that promote economic

 

inefficiency?

 

113. Briefly discuss any benefits of ?protectionism?.

 

114. What are the three major benefits of trade? Explain briefly.

 

115. What are the gains and losses of a trade restriction versus free trade? Explain carefully.

 

116. Explain how each of the following scenarios will affect the current account, capital account,

 

and official reserve accounts of each country. A) Walmart buys toys from a Chinese toymaker, and the toymaker uses the proceeds to

 

purchases shares of GE's stock in the United States.

 

B) Toyota exports cars to Malaysia and deposits the sales revenue in a Japanese bank.

 

C) An American tourist takes a vacation at a resort hotel in Italy, and the hotel uses the revenue

 

to purchase wines from California.

 

117. Explain how each of the following scenarios will affect the current account, capital account,

 

and official reserve accounts of each country.

 

A) Walmart buys toys from a Chinese toymaker, and the toymaker uses the proceeds to

 

purchases shares of GE's stock in the United States.

 

B) Toyota exports cars to Malaysia and deposits the sales revenue in a Japanese bank.

 

C) An American tourist takes a vacation at a resort hotel in Italy, and the hotel uses the revenue

 

to purchase wines from California.

 

118. Explain the law of one price.

 

119. What is the difference between a t? rade surplus and a c? apital surplus? Is it possible to have

 

both a trade surplus and a capital surplus at the same time?

 

120. In 2005, Federal Reserve governor Ben Bernanke said in a speech: ?Over the past decade

 

a combination of diverse forces has created a significant increase in the global supply of

 

saving?a global saving glut?which helps to explain the increase in the U.S. current account

 

deficit.? Is this statement consistent with the economic theory in this chapter? That is, would a

 

?global saving glut? be able to explain the growing U.S. current account? Explain.

 

121. Beginning in 1995, many European nations gave up their own currencies and adopted the

 

euro as a common currency under the supervision of the European Union. Explain one major

 

advantage and one major disadvantage to a group of countries adopting a common currency

 

and setting up a currency union.

 

122.What can explain the positive relationship between a country's high government budget

 

deficits and high trade deficits?

 

123.If the United States becomes a worse place to invest, what will happen to the current and

 

capital accounts?

 







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