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Economics - McConnell Flynn - 19 edition. Chapter 38. Textbook solutions
38.1 Do
all international financial transactions necessarily involve exchanging
one nation's distinct currency for another? Explain. Could a nation
that neither imports goods and services nor exports goods and services
still engage in international financial transactions?
Get solution
38.2 Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets;a.A U.S. airline firm purchases several Airbus planes assembled in France.b.A German automobile firm decides to build an assembly plant in South Carolina.c.A U.S. college student decides to spend a year studying at the Sorbonne in Paris.d.An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.e.The U.S. economy grows faster than the French economy.f.A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.g.It is widely expected that the euro will depreciate in the near future.
Get solution
38.3 What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account? U.S. purchases of assets abroad; U.S. services imports; foreign purchases of assets in the United States; U.S. good exports, U.S. net investment income. Why must the current account and the capital and financial account sum to zero?
Get solution
38.4 What are official reserves? How do net sales of official reserves to foreigners and net purchases of official reserves from foreigners relate to U.S. balance-of-payment deficits and surpluses? Explain why these deficits and surpluses are not actual deficits and surpluses in the overall balance-of-payments statement.
Get solution
38.5 Generally speaking, how is the dollar price of euros determined? Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros. Explain: "A rise in the dollar price of euros necessarily means a fall in the euro price of dollars." Illustrate and elaborate: "The dollar-euro exchange rate provides a direct link between the prices of goods and services produced in the Euro Zone and in the United States." Explain the purchasing-power-parity theory of exchange rates, using the euro-dollar exchange rate as an illustration.
Get solution
38.6 Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.
Get solution
38.7 Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate, other things equal:a. The United States unilaterally reduces tariffs on Mexican products.b. Mexico encounters severe inflation.c. Deteriorating political relations reduce American tourism in Mexico.d. The U.S. economy moves into a severe recession.e. The United States engages in a high-interest-rate monetary policy.f. Mexican products become more fashionable to U.S. consumers.g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.h. The rate of productivity growth in the United States diminishes sharply.
Get solution
38.8 Explain why you agree or disagree with the following statements. Assume other things equal.a. A country that grows faster than its major trading partners can expect the international value of its currency to depreciate.b. A nation whose interest rate is rising more rapidly than interest rates in other nations can expect the international value of its currency to appreciate.c. A country’s currency will appreciate if its inflation rate is less than that of the rest of the world.
Get solution
38.9 ”Exports pay for imports. Yet in 2009 the nations of the world exported about $379 billion more of goods and services to the United States than they imported from the United States.” Resolve the apparent inconsistency of these two statements.
Get solution
38.10 Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is $5 = Z1). Then show on your diagram a decline in the demand for zee.a. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $5 = Zl under a fixed-exchange-rate system.b. How would the U.S. balance-of-payments surplus that is caused by the decline in demand be resolved under a system of flexible exchange rates?
Get solution
38.11 Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Does it also necessarily have a balance-of-payments deficit? If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, will its official reserves of foreign currencies get larger or smaller? Would that outcome indicate a balance-of- payments deficit or a balance-of-payments surplus?
Get solution
38.12 What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: "A trade deficit means that a nation is receiving more goods and services from abroad than it is sending abroad." How can that be considered to be “unfavorable”?
Get solution
38.13 LAST WORD Suppose Super D’Hiver—a hypothetical French snowboard retailer—wants to order 5000 snowboards made in the United States. The price per board is $200, the present exchange rate is 1 euro = $1, and payment is due in dollars when the boards are delivered in 3 months. Use a numerical example to explain why exchange-rate risk might make the French retailer hesitant to place the order. How might speculators absorb some of Super D’Hiver’s risk?
Get solution
Get solution
38.2 Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets;a.A U.S. airline firm purchases several Airbus planes assembled in France.b.A German automobile firm decides to build an assembly plant in South Carolina.c.A U.S. college student decides to spend a year studying at the Sorbonne in Paris.d.An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.e.The U.S. economy grows faster than the French economy.f.A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.g.It is widely expected that the euro will depreciate in the near future.
Get solution
38.3 What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account? U.S. purchases of assets abroad; U.S. services imports; foreign purchases of assets in the United States; U.S. good exports, U.S. net investment income. Why must the current account and the capital and financial account sum to zero?
Get solution
38.4 What are official reserves? How do net sales of official reserves to foreigners and net purchases of official reserves from foreigners relate to U.S. balance-of-payment deficits and surpluses? Explain why these deficits and surpluses are not actual deficits and surpluses in the overall balance-of-payments statement.
Get solution
38.5 Generally speaking, how is the dollar price of euros determined? Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros. Explain: "A rise in the dollar price of euros necessarily means a fall in the euro price of dollars." Illustrate and elaborate: "The dollar-euro exchange rate provides a direct link between the prices of goods and services produced in the Euro Zone and in the United States." Explain the purchasing-power-parity theory of exchange rates, using the euro-dollar exchange rate as an illustration.
Get solution
38.6 Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.
Get solution
38.7 Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate, other things equal:a. The United States unilaterally reduces tariffs on Mexican products.b. Mexico encounters severe inflation.c. Deteriorating political relations reduce American tourism in Mexico.d. The U.S. economy moves into a severe recession.e. The United States engages in a high-interest-rate monetary policy.f. Mexican products become more fashionable to U.S. consumers.g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.h. The rate of productivity growth in the United States diminishes sharply.
Get solution
38.8 Explain why you agree or disagree with the following statements. Assume other things equal.a. A country that grows faster than its major trading partners can expect the international value of its currency to depreciate.b. A nation whose interest rate is rising more rapidly than interest rates in other nations can expect the international value of its currency to appreciate.c. A country’s currency will appreciate if its inflation rate is less than that of the rest of the world.
Get solution
38.9 ”Exports pay for imports. Yet in 2009 the nations of the world exported about $379 billion more of goods and services to the United States than they imported from the United States.” Resolve the apparent inconsistency of these two statements.
Get solution
38.10 Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is $5 = Z1). Then show on your diagram a decline in the demand for zee.a. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $5 = Zl under a fixed-exchange-rate system.b. How would the U.S. balance-of-payments surplus that is caused by the decline in demand be resolved under a system of flexible exchange rates?
Get solution
38.11 Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Does it also necessarily have a balance-of-payments deficit? If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, will its official reserves of foreign currencies get larger or smaller? Would that outcome indicate a balance-of- payments deficit or a balance-of-payments surplus?
Get solution
38.12 What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: "A trade deficit means that a nation is receiving more goods and services from abroad than it is sending abroad." How can that be considered to be “unfavorable”?
Get solution
38.13 LAST WORD Suppose Super D’Hiver—a hypothetical French snowboard retailer—wants to order 5000 snowboards made in the United States. The price per board is $200, the present exchange rate is 1 euro = $1, and payment is due in dollars when the boards are delivered in 3 months. Use a numerical example to explain why exchange-rate risk might make the French retailer hesitant to place the order. How might speculators absorb some of Super D’Hiver’s risk?
Get solution
Economics - McConnell Flynn - 19 edition. Chapter 37. Textbook solutions
37.1 Quantitatively,
how important is international trade to the United States relative to
the importance of trade to other nations? What country is the United
States’ most important trading partner, quantitatively? With what
country does the United States have the largest trade deficit?
Get solution
37.2 Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive products, unrelated to resource intensity, relate to international trade?
Get solution
37.3 Explain: “The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China” Relate your answer to the ideas of Adam Smith and David Ricardo.
Get solution
37.4 Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries? How would rising costs (rather than constant costs) affect the extent of specialization and trade between these two countries?
Get solution
37.5 What is an export demand curve? What is an import supply curve? How do such curves relate to the determination of the equilibrium world price of a tradable good?
Get solution
37.6 Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quotas for the world economy?
Get solution
37.7 Draw a domestic supply-and-demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b) domestic producers, and (c) foreign exporters? How would the effects of a quota that creates the same amount of imports differ?
Get solution
37.8 “The potentially valid arguments for tariff Protection –military self–sufficiency, infant industry protection, and diversification for stability–are also the most easily abused.” Why are these arguments susceptible to abuse?
Get solution
37.9 Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies reduce unemployment in one U.S. industry but increase it in another U.S. industry?
Get solution
37.10 In 2007, manufacturing workers in the United States earned average compensation of $30.56 per hour. That same year manufacturing workers in Mexico earned average compensation of $3.91 per hour. How can U.S. manufacturers possibly compete? Why isn't all manufacturing done in Mexico and other low-wage countries?
Get solution
37.11 How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what wav do foreign firms that “dump” their products onto the U.S. rnarker ineffect provide bargains to American consumers? How might the import competition leadto quality improvements and cost reductions by American firms?
Get solution
37.12 Identify and state the significance of each of the following trade-related entities: (a) the WTO; (b) the EU; (c) the Euro Zone, and (d) NAFTA.
Get solution
37.13 What form does trade adjustment assistance take in the United States? Howdoes such assistance promote political support for free-trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other changes in the economy, say, changes in patterns of government spending?
Get solution
37.14 what is offshoring of white-collar service jobs and how does that practice relate to international trade?Why has offshoring increased over the past few decades? Give an example (other than that in the textbook) of how offshoring can eliminate some American jobs while creating other American jobs.
Get solution
37.15 LASTWORD what was the central point that Bastiat was trying to make in his imaginary petition of the candlemakers?
Get solution
Get solution
37.2 Distinguish among land-, labor-, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade? How do distinctive products, unrelated to resource intensity, relate to international trade?
Get solution
37.3 Explain: “The United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China” Relate your answer to the ideas of Adam Smith and David Ricardo.
Get solution
37.4 Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries? How would rising costs (rather than constant costs) affect the extent of specialization and trade between these two countries?
Get solution
37.5 What is an export demand curve? What is an import supply curve? How do such curves relate to the determination of the equilibrium world price of a tradable good?
Get solution
37.6 Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quotas for the world economy?
Get solution
37.7 Draw a domestic supply-and-demand diagram for a product in which the United States does not have a comparative advantage. What impact do foreign imports have on domestic price and quantity? On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on (a) domestic consumers, (b) domestic producers, and (c) foreign exporters? How would the effects of a quota that creates the same amount of imports differ?
Get solution
37.8 “The potentially valid arguments for tariff Protection –military self–sufficiency, infant industry protection, and diversification for stability–are also the most easily abused.” Why are these arguments susceptible to abuse?
Get solution
37.9 Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies reduce unemployment in one U.S. industry but increase it in another U.S. industry?
Get solution
37.10 In 2007, manufacturing workers in the United States earned average compensation of $30.56 per hour. That same year manufacturing workers in Mexico earned average compensation of $3.91 per hour. How can U.S. manufacturers possibly compete? Why isn't all manufacturing done in Mexico and other low-wage countries?
Get solution
37.11 How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what wav do foreign firms that “dump” their products onto the U.S. rnarker ineffect provide bargains to American consumers? How might the import competition leadto quality improvements and cost reductions by American firms?
Get solution
37.12 Identify and state the significance of each of the following trade-related entities: (a) the WTO; (b) the EU; (c) the Euro Zone, and (d) NAFTA.
Get solution
37.13 What form does trade adjustment assistance take in the United States? Howdoes such assistance promote political support for free-trade agreements? Do you think workers who lose their jobs because of changes in trade laws deserve special treatment relative to workers who lose their jobs because of other changes in the economy, say, changes in patterns of government spending?
Get solution
37.14 what is offshoring of white-collar service jobs and how does that practice relate to international trade?Why has offshoring increased over the past few decades? Give an example (other than that in the textbook) of how offshoring can eliminate some American jobs while creating other American jobs.
Get solution
37.15 LASTWORD what was the central point that Bastiat was trying to make in his imaginary petition of the candlemakers?
Get solution
Economics - McConnell Flynn - 19 edition. Chapter 36. Textbook solutions
36.1 First,
imagine that both input and output prices are fixed in the economy.
What does the aggregate supply curve look like? If AD decreases in this
situation, what will happen to equilibrium output and the price
level? Next, imagine that input prices are fixed, but output prices are
flexible. What does the aggregate supply curve look like? In this case,
if AD decreases, what will happen to equilibrium output and the price
level? Finally, if both input and output prices are fully flexible, what
does the aggregate supply curve look like? In this case, if AD
decreases, what will happen to equilibrium output and the price level?
(To check your answers, review Figures 29.3, 29.4, and 29.5 in Chapter
29).
Get solution
36.2 According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?
Get solution
36.3 What is an efficiency-wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
Get solution
36.4 How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
Get solution
36.5 Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
Get solution
36.6 Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic instability?
Get solution
36.7 State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
Get solution
36.8 Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
Get solution
36.9 Use an AD-AS graph to demonstrate and explain the price- level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.
Get solution
36.10 Explain the difference between "active" discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense, require active fiscal policy—but in the wrong direction—as the economy slides into recession.”
Get solution
36.11 Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.d. Fiscal and monetary policies smooth out the business cycle.e. The Fed should increase the money supply at a fixed annual rate.
Get solution
36.12 You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Table 36.1 and your knowledge of macroeconomics, identify the views on macro theory and policy you would want your appointees to hold. Remember, the economic health of the entire nation— and your chances for reelection—may depend on your selections.
Get solution
36.13 LAST WORD Compare and contrast the Taylor rule for monetary policy with the older, simpler monetary rule advocated by Milton Friedman.
Get solution
Get solution
36.2 According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?
Get solution
36.3 What is an efficiency-wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
Get solution
36.4 How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
Get solution
36.5 Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
Get solution
36.6 Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic instability?
Get solution
36.7 State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
Get solution
36.8 Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
Get solution
36.9 Use an AD-AS graph to demonstrate and explain the price- level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.
Get solution
36.10 Explain the difference between "active" discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense, require active fiscal policy—but in the wrong direction—as the economy slides into recession.”
Get solution
36.11 Place “MON,” “RET,” or “MAIN” beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession.c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.d. Fiscal and monetary policies smooth out the business cycle.e. The Fed should increase the money supply at a fixed annual rate.
Get solution
36.12 You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Table 36.1 and your knowledge of macroeconomics, identify the views on macro theory and policy you would want your appointees to hold. Remember, the economic health of the entire nation— and your chances for reelection—may depend on your selections.
Get solution
36.13 LAST WORD Compare and contrast the Taylor rule for monetary policy with the older, simpler monetary rule advocated by Milton Friedman.
Get solution
Economics - McConnell Flynn - 19 edition. Chapter 35. Textbook solutions
35.1 Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?
Get solution
35.2 Which of the following statements are true? Which are false? Explain why the false statements are untrue.a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output.b. The long-run aggregate supply curve assumes that nominal wages are fixed.c. In the long run, an increase in the price level will result in an increase in nominal wages.
Get solution
35.3 Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: LO1...a. What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.
b. What will be the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.
c. Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.
Get solution
35.4 Use graphical analysis to show how each of the following would affect, the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy.a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward.b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending.c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
Get solution
35.5 Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand-aggregate supply model to illustrate these outcomes graphically.
Get solution
35.6 Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of unemployment, and vice versa. What is this inverse relationship called?
Get solution
35.7 Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to explain why these policies might at first succeed. Use the concept of the long-run Phillips Curve to explain the long-run outcome of these policies.
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35.8 What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.
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35.9 What is the Laffer Curve, and how does it relate to supply- side economics? Why is determining the economy's location on the curve so important in assessing tax policy?
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35.10 Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?
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35.11 LAST WORD On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax increase matter?
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Get solution
35.2 Which of the following statements are true? Which are false? Explain why the false statements are untrue.a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output.b. The long-run aggregate supply curve assumes that nominal wages are fixed.c. In the long run, an increase in the price level will result in an increase in nominal wages.
Get solution
35.3 Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: LO1...a. What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.
b. What will be the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.
c. Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.
Get solution
35.4 Use graphical analysis to show how each of the following would affect, the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy.a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward.b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending.c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
Get solution
35.5 Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand-aggregate supply model to illustrate these outcomes graphically.
Get solution
35.6 Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of unemployment, and vice versa. What is this inverse relationship called?
Get solution
35.7 Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to explain why these policies might at first succeed. Use the concept of the long-run Phillips Curve to explain the long-run outcome of these policies.
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35.8 What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.
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35.9 What is the Laffer Curve, and how does it relate to supply- side economics? Why is determining the economy's location on the curve so important in assessing tax policy?
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35.10 Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?
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35.11 LAST WORD On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax increase matter?
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Economics - McConnell Flynn - 19 edition. Chapter 34. Textbook solutions
34.1 Suppose
that the city of New York issues bonds to raise money to pay for a new
tunnel linking New Jersey and Manhattan. An investor named Susan buys
one of the bonds on the same day that the city of New York pays a
contractor for completing the first stage of construction. Is Susan
making an economic or a financial investment? What about the city of New
York?
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34.2 What is compound interest? How does it relate to the formula: X dollars today = (1 + i)t X dollars in t years? What is present value? How does it relate to the formula: X/(1 + i)t dollars today = x dollars in t years?
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34.3 How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes by the nickname “fixed income”?
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34.4 What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?
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34.5 Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the company will pay dividends of $2 per year on that share every year. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return by owning the stocks of other very similar fashion companies. If investors care only about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)
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34.6 Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore diversifiable risk?
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34.7 If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?
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34.8 In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which would you consider more likely, that longer- term U.S. government bonds have a higher interest rate than short-term U.S. government bonds, or vice versa? Explain.
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34.9 What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset's price if it initially plots onto a point above the SML?
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34.10 Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates?
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34.11 Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors' dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas? And will high-beta or low-beta investments show larger percentage changes in their prices?.
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34.12 LAST WORD Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?
Get solution
Get solution
34.2 What is compound interest? How does it relate to the formula: X dollars today = (1 + i)t X dollars in t years? What is present value? How does it relate to the formula: X/(1 + i)t dollars today = x dollars in t years?
Get solution
34.3 How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes by the nickname “fixed income”?
Get solution
34.4 What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?
Get solution
34.5 Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the company will pay dividends of $2 per year on that share every year. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return by owning the stocks of other very similar fashion companies. If investors care only about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)
Get solution
34.6 Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore diversifiable risk?
Get solution
34.7 If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?
Get solution
34.8 In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which would you consider more likely, that longer- term U.S. government bonds have a higher interest rate than short-term U.S. government bonds, or vice versa? Explain.
Get solution
34.9 What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset's price if it initially plots onto a point above the SML?
Get solution
34.10 Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates?
Get solution
34.11 Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors' dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas? And will high-beta or low-beta investments show larger percentage changes in their prices?.
Get solution
34.12 LAST WORD Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?
Get solution
Economics - McConnell Flynn - 19 edition. Chapter 33. Textbook solutions
33.1 What is the basic determinant of (a) the transactions demand and (b)
the asset demand for money? Explain how these two demands can be
combined graphically to determine total money demand. How is the
equilibrium interest rate in the money market determined? Use a graph to
show the effect of an increase in the total demand for money on the
equilibrium interest rate (no change in money supply), Use your general
knowledge of equilibrium prices to explain why the previous interest
rate is no longer sustainable.
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33.2 What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
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33.3 Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves:a. Federal Reserve Banks purchase securities from banks.b. Commercial banks borrow from Federal Reserve Banks at the discount rate.c. The Fed reduces the reserve ratio.d. Commercial banks borrow from Federal Reserve Banks after winning an auction held as part of the term auction facility.
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33.4 Distinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
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33.5 Why is a decrease in the supply of Federal funds shown as an upshift of the supply curve in Figure 33.3, whereas an increase in Federal funds is shown as a downshift of the supply curve?
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33.6 Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. What change in the Federal funds rate would you recommend? How would your recommended change get accomplished? What impact would the actions have on the lending ability of the banking system, the real interest rate, investment spending, aggregate demand, and inflation?
Get solution
33.7 Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
Get solution
33.8 What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? How does the idea of a liquidity trap relate to cyclical asymmetry? Why is this possibility of a liquidity trap significant to policymakers?
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33.9 LAST WORD What are the three main aggregate supply factors that determine a nation's potential (or full-employment) level of real output? What are the four main components of aggregate demand? Explain: "Aggregate supply factors determine a nation's potential GDP, whereas aggregate demand factors determine whether or not the nation achieves its full employment GDP." How does fiscal and monetary policy relate to aggregate demand?
Get solution
Get solution
33.2 What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
Get solution
33.3 Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves:a. Federal Reserve Banks purchase securities from banks.b. Commercial banks borrow from Federal Reserve Banks at the discount rate.c. The Fed reduces the reserve ratio.d. Commercial banks borrow from Federal Reserve Banks after winning an auction held as part of the term auction facility.
Get solution
33.4 Distinguish between the Federal funds rate and the prime interest rate. Why is one higher than the other? Why do changes in the two rates closely track one another?
Get solution
33.5 Why is a decrease in the supply of Federal funds shown as an upshift of the supply curve in Figure 33.3, whereas an increase in Federal funds is shown as a downshift of the supply curve?
Get solution
33.6 Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp rise in the inflation rate. What change in the Federal funds rate would you recommend? How would your recommended change get accomplished? What impact would the actions have on the lending ability of the banking system, the real interest rate, investment spending, aggregate demand, and inflation?
Get solution
33.7 Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
Get solution
33.8 What do economists mean when they say that monetary policy can exhibit cyclical asymmetry? How does the idea of a liquidity trap relate to cyclical asymmetry? Why is this possibility of a liquidity trap significant to policymakers?
Get solution
33.9 LAST WORD What are the three main aggregate supply factors that determine a nation's potential (or full-employment) level of real output? What are the four main components of aggregate demand? Explain: "Aggregate supply factors determine a nation's potential GDP, whereas aggregate demand factors determine whether or not the nation achieves its full employment GDP." How does fiscal and monetary policy relate to aggregate demand?
Get solution
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