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Principles of Economics II – Macroeconomics
Homework: Ch 32~34
Book Questions (6th Edition only!)
Questions for Ch32: 1, 5, 6
Questions for Ch33: 1, 2, 6
Questions for Ch34: 1, 3, 11
Ch 32: 1, 5, 6
1. a.
If Congress passes an investment tax credit, it subsidizes domestic investment. The desire
to increase domestic investment leads firms to borrow more, increasing the demand for
loanable funds, as shown in Figure 5. This raises the real interest rate, thus reducing net
capital outflow. The decline in net capital outflow reduces the supply of dollars in the market
for foreign exchange, raising the real exchange rate. The trade balance also moves toward
deficit, because net capital outflow, hence net exports, is lower. The higher real interest rate
also increases the quantity of national saving. In summary, saving increases, domestic
investment increases, net capital outflow declines, the real interest rate increases, the real
exchange rate increases, and the trade balance moves toward deficit.
b. A rise in the real exchange rate reduces exports.
Figure 5
5. An export subsidy increases net exports at any given real exchange rate. This causes the demand for dollars to shift to
the right in the market for foreign exchange, as shown in Figure 8. The effect is a higher real exchange rate, but no
change in net exports. So the senator is wrong; an export subsidy will not reduce the trade deficit.
Figure 8
6. a. a. When the French develop a strong taste for California wines, the demand for dollars in the
foreign-currency market increases at any given real exchange rate, as shown in Figure 7.
b. The result of the increased demand for dollars is a rise in the real exchange rate.
c.
The quantity of net exports is unchanged.
Figure 7
Extra Practice Questions….
9. a. If the Chinese decided they no longer wanted to buy U.S. assets, U.S. net capital outflow
would increase, increasing the demand for loanable funds, as shown in Figure 11. The result
is a rise in U.S. interest rates, an increase in the quantity of U.S. saving (because of the
higher interest rate), and lower U.S. domestic investment.
b. In the market for foreign exchange, the real exchange rate declines and the balance of
trade moves toward surplus.
Figure 11
Questions for Ch33: 1, 2, 6
1. a.
When the United States experiences a wave of immigration, the labor force increases, so
long-run aggregate supply shifts to the right.
b. When Congress raises the minimum wage to $10 per hour, the natural rate of
unemployment rises, so the long-run aggregate-supply curve shifts to the left.
c.
When Intel invents a new and more powerful computer chip, productivity increases, so longrun aggregate supply increases because more output can be produced with the same inputs.
d. When a severe hurricane damages factories along the East Coast, the capital stock is
smaller, so long-run aggregate supply declines.
2. a.
The current state of the economy is shown in Figure 6. The aggregate-demand curve and
short-run aggregate-supply curve intersect at the same point on the long-run aggregatesupply curve.
b. A stock market crash leads to a leftward shift of aggregate demand. The equilibrium level of
output and the price level will fall. Because the quantity of output is less than the natural
rate of output, the unemployment rate will rise above the natural rate of unemployment.
c.
If nominal wages are unchanged as the price level falls, firms will be forced to cut back on
employment and production. Over time as expectations adjust, the short-run aggregatesupply curve will shift to the right, moving the economy back to the natural rate of output.
Figure 6
6. a.
The statement that "the aggregate-demand curve slopes downward because it is the
horizontal sum of the demand curves for individual goods" is false. The aggregate-demand
curve slopes downward because a fall in the price level raises the overall quantity of goods
and services demanded through the wealth effect, the interest-rate effect, and the
exchange-rate effect.
b. The statement that "the long-run aggregate-supply curve is vertical because economic
forces do not affect long-run aggregate supply" is false. Economic forces of various kinds
(such as population and productivity) do affect long-run aggregate supply. The long-run
aggregate-supply curve is vertical because the price level does not affect long-run aggregate
supply.
c.
The statement that "if firms adjusted their prices every day, then the short-run aggregatesupply curve would be horizontal" is false. If firms adjusted prices quickly and if sticky prices
were the only possible cause for the upward slope of the short-run aggregate-supply curve,
then the short-run aggregate-supply curve would be vertical, not horizontal. The short-run
aggregate supply curve would be horizontal only if prices were completely fixed.
d. The statement that "whenever the economy enters a recession, its long-run aggregatesupply curve shifts to the left" is false. An economy could enter a recession if either the
aggregate-demand curve or the short-run aggregate-supply curve shifts to the left.
Questions for Ch34: 1, 3, 11
1. a.
When the Fed’s bond traders buy bonds in open-market operations, the money-supply
curve shifts to the right from MS 1 to MS 2, as shown in Figure 1. The result is a decline in the
interest rate.
Figure 1
Figure 2
b. When an increase in credit card availability reduces the cash people hold, the moneydemand curve shifts to the left from MD 1 to MD 2, as shown in Figure 2. The result is a
decline in the interest rate.
c.
When the Federal Reserve reduces reserve requirements, the money supply increases, so
the money-supply curve shifts to the right from MS 1 to MS 2, as shown in Figure 1. The
result is a decline in the interest rate.
d. When households decide to hold more money to use for holiday shopping, the moneydemand curve shifts to the right from MD 1 to MD 2, as shown in Figure 3. The result is a rise
in the interest rate.
Figure 3
e. When a wave of optimism boosts business investment and expands aggregate demand,
money demand increases from MD 1 to MD 2 in Figure 3. The increase in money demand
increases the interest rate.
3. a.
The increase in the money supply will cause the equilibrium interest rate to decline, as
shown in Figure 4. Households will increase spending and will invest in more new housing. Firms
too will increase investment spending. This will cause the aggregate demand curve to shift to the
right as shown in Figure 5.
Figure 4
Figure 5
b. As shown in Figure 5, the increase in aggregate demand will cause an increase in both
output and the price level in the short run.
c.
When the economy makes the transition from its short-run equilibrium to its long-run
equilibrium, short-run aggregate supply will decline, causing the price level to rise even
further.
d. The increase in the price level will cause an increase in the demand for money, raising the
equilibrium interest rate.
e. Yes. While output initially rises because of the increase in aggregate demand, it will fall once
short-run aggregate supply declines. Thus, there is no long-run effect of the increase in the
money supply on real output.
11.
a. Tax revenue declines when the economy goes into a recession because taxes are closely related
to economic activity. In a recession, people's incomes and wages fall, as do firms' profits, so
taxes on these things decline.
b. Government spending rises when the economy goes into a recession because more people
get unemployment-insurance benefits, welfare benefits, and other forms of income support.
c.
If the government were to operate under a strict balanced-budget rule, it would have to
raise tax rates or cut government spending in a recession. Both would reduce aggregate
demand, making the recession more severe.