Economics Chapter 2 Homework This Will Increase The Sum Current And

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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 smaller than the increase in income. Alternatively, the slope of the planned

expenditure curve becomes MPC(1 – t), where tequals the income tax rate. Hence,

the multiplier becomes 1/[1 – MPC(1 – t)].

6. a. Planned investment might increase as Yrises (leading to the positively sloped line

below) if investment depends on profits or sales expectations (along with r) and

either or both of these rise along with Y.

212 Answers to Selected Student Guide Problems

PE PE

800

I‘

Data Questions

1. Table 10–7

(1) (2) (3) (4) (5) (6)

Nominal M2

in December % Change in GDP Deflator Real M2 % Change

Year ($ in billions) M2 (2000 = 100) M2/Pin M2/P

1979 1,473.7 49.5 2,977.2

8.6 –0.5

1980 1,599.8 54.0 2,962.6

The

curve implies that changes in the real money supply are the appropriate

measures of monetary conditions. Using this measure, the Fed pursued mildly

contractionary monetary policy between 1979 and 1980, neutral policy between

Problems

4. a. The deficit would fall. The IS curve would shift to the left.

Graph for Problem 4(a)

Chapter 10 Aggregate Demand I 213

CHAPTER 11 Aggregate Demand II

b. If expansionary monetary policy is pursued simultaneously, the interest rate and

the deficit will still fall and real income may actually rise.

Graph for Problem 4(b)

13. a. Graph for Problem 13(a)

14. If the money supply M increased as the interest rate increased, the money supply

curve would be upward sloping.

214 Answers to Selected Student Guide Problems

LM1

LM2

LM1(πe = 0)

LM2(πe = –10)

r1 + 10

Graph for Problem 14

Data Questions

1. a. Table 11–1

(1) (2) (3) (4) (5) (6) (7)

Real GDP % M1 GDP %

in billions of Change in in Dec. Deflator Real M1 Change in

Year 2000 dollars Real GDP ($ in billions) (2000 = 100) (= M1/P) Real M1

1979 5,173.4 381.8 49.5 771.3

2. a. Table 11–2

(1) (2) (3) (4)

Real GDP % Interest Rate

in billions of Change in on 10-Year U.S.

Year 2000 dollars Real GDP Treasury Securities

1960 2,501.8 4.12

Chapter 11 Aggregate Demand II 215

M/P

‹

(M/P)

‹

b. Since the interest rate remained relatively constant while real GDP rose, it may

be presumed that both the

and the

curves shifted to the right and that the

horizontal shift was the same for both curves. Consequently, the Federal Reserve

must have increased the money supply during this period.

Data Questions

1. a. and b.

Table 13–1

(1) (2) (3) (4) (5) (6)

Real GDP Actual Predicted

(billions % Civilian Change in Change in

of 2000 Change in Unemployment Unemployment Unemployment

Year dollars) Real GDP Rate (%) Rate Rate

2001 9,890.7 4.7

Problems

6. a. If capital gains taxes are reduced, the after-tax return to saving would increase.

This might increase total saving, which would spur additional investment in a

closed economy or a large open economy.

b. A capital gains tax reduction on past acquisitions will increase the after-tax

216 Answers to Selected Student Guide Problems

CHAPTER 13 Aggregate Supply and the Short-Run

Tradeoff Between Inflation and

Unemployment

CHAPTER 15 Stabilization Policy

Data Questions

1. a.

Table 15–1

(1) (2) (3) (4) (5)

Real Actual

GDP Real GDP Unemployment Actual

Growth Growth Rate Unemployment

Year Forecast (%) Rate (%) Forecast (%) Rate (%)

Problems

4. According to the traditional view, the future reduction in government spending would

have no effect on the sum of current and expected future income, current consumption,

or current private saving. According to the Ricardian view, a future reduction in gov-

ernment purchases will be accompanied by an expected future reduction in taxes. This

Data Questions

1. a. Table 16–3

(Data in billions of $)

(1) (2) (3) (4) (5)

Total Federal Total Federal Official Gross Federal

Fiscal Government Government Federal Budget Debt Held by

Year Receipts Outlays Surplus Public (end of year)

2003 1,782.5 2,160.1 –377.6 3,913.4

Chapter 16 Government Debt 217

CHAPTER 16 Government Debt

b. Table 16–4

(1) (2) (3) (4) (5)

Price Gross Federal Debt Approximate

Deflator for Held by Public (end “True” Federal

Calendar GDP Percentage of

preceding

fiscal year) Budget Surplus

Year (2000 = 100) Change ($ in billions) ($ in billions)

2004 109.5 3,913.4 –287.5

Problems

4. a. C1= 100; C2= 125; S= 20

b. C1= 93.33; C2= 140; S= 26.67

6. a. A country with a rapidly increasing population will have a higher saving rate (and

a lower aggregate APC) than a country with a steady population because each suc-

cessive generation of workers, who do the saving, will be larger than the preceding

10. After the legislation was passed, all the future tax cuts became expected. According to

this theory, people’s permanent incomes rose (and, hence, their consumption rose) only

in the first year, 1981, which would be the only year in which consumption changed as

a result of the tax changes unless people had borrowing constraints.

Data Questions

1. a. Table 17–5

(1) (2) (3) (4)

Real Real

Consumption Disposable Average

Expenditures Income Propensity to

Year ($ in billions) ($ in billions) Consume (APC)

218 Answers to Selected Student Guide Problems

CHAPTER 17 Consumption

b. Percentage change in real disposable income equals 249.1 percent; percentage

change in APC is 8.2 percent.

2. a. Table 17–6

(1) (2) (3) (4)

Consumption Disposable Average

Expenditures Income Propensity to

Year ($ in billions) ($ in billions) Consume (APC)

1967 507.8 575.3 0.883

Problems

9. a. An investment tax credit of 8 percent allows firms to deduct 8 percent of their

investment expenditures from their taxes.

b. The cost of capital declines at each real interest rate. Consequently, the IS curve

shifts to the right. The LM curve does not shift.

Chapter 18 Investment 219

CHAPTER 18 Investment

Data Questions

1. a. Table 18–3

(1) (2) (3) (4) (5)

Real

Real Nonresidential Real

Nonresidential Investment in Real Change in

Investment in Equipment Residential Business

Year Structures and Software Investment Inventories

($ in billions) ($ in billions) ($ in billions) ($ in billions)

1998 294.5 745.6 418.3 72.6

2. Some of the data were not yet available when this book went to press.

Table 18–14

(1) (2) (3) (4) (5) (6)

Average Percentage Real Percentage

Value of Change GDP Change

S&P in S&P Quarter (Billions of in Real

Month 500 Index 500 Index and Year 2000 $) GDP

August 2008 1,281.47 2008: Q4 11,522.1

–31.9 –1.6

November 2008 873.28 2009: Q1 11,340.9

________ ________

February 2008 ________ 2009: Q2 ________

220 Answers to Selected Student Guide Problems

Problems

Data Questions

1. a. and b.

Table 19–2

(1) (2) (3) (4) (5) (6)

Monetary Base M1M2

in Dec. in Dec. M1 Money in Dec. M2 Money

Year ($ in billions) ($ in billions) Multiplier ($ in billions) Multiplier

1987 239.8 750.2 3.13 2,831.3 11.81

c. If the Fed had preset targets for

1, it would have had to continually increase its

target for the monetary base after 1987 to offset the decline in the

1 money mul-

tiplier. If the Fed had preset targets for

2, it would have had to increase its tar-

get for the monetary base between 1987 and 1997 to offset the decrease in the

Chapter 19 Money Supply and Money Demand 221

CHAPTER 19 Money Supply, Money Demand,

and the Banking System