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STUDY QUESTIONS FOR INTRODUCTION TO ECONOMICS
Macroeconomics

  1. Why is the price of a bond inversely related to the interest rate on the bond?
  2. Assume you have been appointed to the Council of Economic Advisors to the President of the United States. The economy has just experienced two consecutive quarters of negative growth in gross domestic output. A recent survey of members of the board of directors of the Fortune 500 companies indicates growing pessimism about future profits. The International Chamber of Commerce recently released a report showing a decline in global income with the expectation that future numbers may be even worse. The Federal Reserve chairman has indicated that he believes the most important thing for the nation is to combat inflation. Consequently, he favors higher interest rates. The president calls you and asks your advice on formulating an economic strategy. What do you tell him?
  3. Are individuals who have stopped looking for work considered to be unemployed?
  4. If bond holders expect the rate of inflation will be higher in the future than it is today, how will this impact the prices of bonds?
  5. Derive an investment spending multiplier in the presence of income taxes and a marginal propensity to import. What would be the value of this multiplier if the marginal propensity to consume is 95%, the income tax rate is 10%, and the marginal propensity to import is 10.5%? How would the multiplier change if the marginal propensity to import increases?
  6. If the interest rate falls, does this automatically and always result in an increase in productive investment? Why or why not?
  7. Explain, in words, what the multiplier means. Why is the magnitude of the multiplier a function of the so-called leakages from the spending stream?
  8. Derive a balanced-budget multiplier.
  9. Derive a tax multiplier.
  10. Suppose you are the economic advisor to the president of a small export-dependent nation. Due to conditions outside of the country, exports have fallen by more than half. The president pleads for you to come up with a way to save the nation from a depression. What do you recommend? Why? (Use multiplier analysis in your response.)
  11. Are there ever conditions under which a government should run a budget deficit? Explain.
  12. What are automatic stabilizers? Give some examples from the United States.
  13. Explain why an economy that is going into a recession will be more likely to experience government budget deficits than one that is experiencing a boom.
  14. What are the policy instruments available to the above mentioned hawkish Federal Reserve chairman? What would he most likely do to attack future inflation?
  15. The text indicates that there are times when the discount rate is below the rate that banks charge for loans and below the rate offered on T-bills. Why don't banks just borrow as much as they can get from the Fed and then either issue new loans or buy relatively riskless T-bills? If they don't do this, does this indicate that the banks are not driven purely by profit maximization?
  16. If the required reserve ratio is 10%, then what is the value of the money multiplier?
  17. What are the major functions of the Federal Reserve? Could any of these functions (of this planning agency) be performed by private banks? Explain.
  18. What is the "crowding out effect?"
  19. Discuss the importance of "expectations and animal spirits" in driving an economy's performance. Is the role of moral suasion an important element in macreconomic management? Would it matter to economic success whether or not a nation's leader was "charismatic" or a good salesman?
  20. What is the role of exchange rates in determining the level of gross domestic output?

Stay Tuned --- more may come.

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