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Answers to Selected Student Guide Problems* *Note to instructors: The answers to most of the data questions were taken from the 2009 Economic Report of the President.Some data for 2008 were taken from the Bureau of Economic Analysis and Department […]

Answers to Textbook Questions and Problems Questions for Review 1. Microeconomics is the study of how individual firms and households make decisions, and how they interact with one another. Microeconomic models of firms and households are based on principles of […]

Questions for Review 1. The Keynesian-cross model tells us that fiscal policy has a multiplied effect on income. The reason is that according to the consumption function, higher income causes higher consumption. For example, an increase in government purchases of […]

Questions for Review 1. The aggregate demand curve represents the negative relationship between the price level and the level of national income. In Chapter 9, we looked at a simplified theory of aggregate demand based on the quantity theory. In […]

108 Answers to Textbook Questions and Problems If investment does not depend on the interest rate, then nothing in the IS equa- tion depends on the interest rate; income must adjust to ensure that the quantity of goods produced, Y, […]

The final result is that income does not change, and the exchange rate appreciates from e1to e2. Net exports fall because of the appreciation of the currency. Thus, our answer is the same as that given in Table 12–1. b. […]

Questions for Review 1. In the Mundell–Fleming model, an increase in taxes shifts the IS* curve to the left. If the exchange rate floats freely, then the LM*curve is unaffected. As shown in Figure 12–1, the exchange rate falls while […]

Questions for Review 1. In this chapter we looked at two models of the short-run aggregate supply curve. Both models attempt to explain why, in the short run, output might deviate from its long-run “natural rate”—the level of output that […]

changes the nominal interest rate. The monetary policy rule specifies that the nominal interest rate will change by more than the inflation rate so that there is a change in the real interest rate, and hence the demand for goods […]

Questions for Review 1. The inside lag is the time it takes for policymakers to recognize that a shock has hit the economy and to put the appropriate policies into effect. Once a policy is in place, the outside lag […]

Questions for Review 1. What is unusual about U.S. fiscal policy since 1980 is that government debt increased sharply during a period of peace and prosperity. Over the course of U.S. history, the 2. Many economists project increasing budget deficits […]

Questions for Review 1. First, Keynes conjectured that the marginal propensity to consume—the amount con- sumed out of an additional dollar of income—is between zero and one. This means that if an individual’s income increases by a dollar, both consumption […]

Questions for Review 1. In the neoclassical model of business fixed investment, firms will find it profitable to 2. Tobin’s qis the ratio of the market value of installed capital to its replacement cost. Tobin reasoned that net investment should […]

Questions for Review 1. In a system of fractional-reserve banking, banks create money because they ordinarily keep only a fraction of their deposits in reserve. They use the rest of their deposits to make loans. The easiest way to see […]

Questions for Review 1. GDP measures the total income earned from the production of the new final goods and services in the economy, and it measures the total expenditures on the new final goods 2. The consumer price index measures […]

e. The government-purchases multiplier is 2.5. When Grises, the multiplier is smaller than 1/(1 – MPC) because any increase in income will be accompanied by an increase in taxes. Hence, the increase in disposable income in each round will be […]

Questions for Review 1. The factors of production and the production technology determine the amount of out- put an economy can produce. The factors of production are the inputs used to produce 2. When a firm decides how much of […]

Questions for Review 1. Money has three functions: it is a store of value, a unit of account, and a medium of exchange. As a store of value, money provides a way to transfer purchasing power from the present to […]

Chapter 5 The Open Economy 41 5–15. d. Given that our saving has not changed, the higher world interest rate means that our trade balance increases, as in Figure 5–16. S r Real interest rate I, S Investment, Saving I(r) […]

Questions for Review 1. By rewriting the national income accounts identity, we show in the text that S– I= NX. This form of the national income accounts identity shows the relationship between the international flow of funds for capital accumulation, […]

Questions for Review 1. The rates of job separation and job finding determine the natural rate of unemploy- ment. The rate of job separation is the fraction of people who lose their job each month. 2. Frictional unemployment is the […]

Questions for Review 1. In the Solow growth model, a high saving rate leads to a large steady-state capital stock and a high level of steady-state output. A low saving rate leads to a small steady- 2. It is reasonable […]

Questions for Review 1. In the Solow model, we find that only technological progress can affect the steady-state rate of growth in income per worker. Growth in the capital stock (through high saving) has no effect on the steady-state growth […]

Questions for Review 1. When GDP declines during a recession, growth in real consumption and investment spending both decline; unemployment rises sharply. 2. The price of a magazine is an example of a price that is sticky in the short […]