MACROECONOMICS

Questions for review

1. Explain why it is the case that the value of intermediate goods produced and sold
during the year is not included directly as part of GDP, but the value of intermediate
goods produced and not sold is included directly as part of GDP.
2. Since it is counted as investment, why doesn’t the purchase of earthmoving
equipment from China by a Vietnam corporation increase Vietnam GDP?
3. In a simple economy, people consume only 2 goods, food and clothing. The market
basket of goods used to compute the CPI has 50 units of food and 10 units of clothing.
food clothing
2002 price $4 $10
2003 price $6 $20
a. What are the percentage increases in the price of food and in the price of clothing?
b. What is the percentage increase in the CPI?
c. Do these price changes affect all consumers to the same extent? Explain.
4. Jay and Joyce meet George, the banker, to work out the details of a mortgage. They
all expect that inflation will be 2 percent over the term of the loan, and they agree on
a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over
the term of the loan.
a. What was the expected real interest rate?
b. What was the actual real interest rate?
c. Who benefited and who lost because of the unexpected inflation?
5. Given a two-goods economy.
2020 2021 2022
Q P Q P Q P
Rice (ton) 1,000 50 1,200 60 1,200 60
Car 400 300 400 400 600 350
Find the all the following values for 3 years, clearly show your work, 2021 as a base year.
Nominal GDP
(current price)
Real GDP
GDP Growth
Cost basket
CPI
Inflation (CPI)
Deflator
Inflation (deflator)

6. Consider how each of the following events is likely to affect real GDP. Do you think
the change in real GDP reflects a similar change in economic well-being?
a. A hurricane in Florida forces Disney World to shut down for a month.
b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests.
c. Increased hostility between unions and management sparks a rash of strikes.
d. Firms throughout the economy experience falling demand, causing them to lay off workers.
e. Congress passes new environmental laws that prohibit firms from using production methods
that emit large quantities of pollution.
f. More high-school students drop out of school to take jobs mowing lawns.
g. Fathers around the country reduce their workweeks to spend more time with their children.
7. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the
 wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour
to make bread and sells the bread to an engineer for $6.00.The engineer eats the
bread. What is the value added by each person? What is GDP?
8. Search the macroeconomic data for specific countries (GDP, GNP, Growth, inflation,
unemployment over time) give your comments regarding the macro indicators.
9. How do outward-oriented policies affect a nation’s productivity?
10. The catch-up effect says that countries with low income can grow faster than
countries with higher income. However, in statistical studies that include many
diverse countries we do not observe the catch-up-effect unless we control for other
variables that affect productivity. Considering the determinants of productivity, list
and explain some things that would tend to prohibit or limit a poor country’s ability
to catch up with the rich ones.
11. What are the basic differences between bonds and stocks?
12. Using a graph representing the market for loanable funds, show and explain what
happens to interest rates and investment if a government goes from a deficit to a
surplus.
13. Why might a favorable change to the economy such as technological change or a
decrease in the price of imported oil be associated with an increase in frictional
unemployment?
14. What is the difference between commodity money and fiat money? Why do people
accept fiat money in trade for goods and services?
15. What is the difference between money and wealth?
16. Explain how inflation affects savings.
17. What is the inflation tax, and how might it explain the creation of inflation by a central
bank?
18. Identify each of the following as nominal or real variables.
a. the physical output of goods and services
b. the overall price level
c. the dollar price of apples
d. the price of apples relative to the price of oranges
e. the unemployment rate
f. the amount that shows up on your paycheck after taxes
g. the amount of goods you can purchase with the wage you get each hour
h. the taxes that you pay the government

19. Using separate graphs, demonstrate what happens to the money supply, money
demand, the value of money, and the price level if:
a. the Fed increases the money supply.
b. people decide to demand less money at each value of money.
20. Explain the adjustment process in the money market that creates a change in the
price level when the money supply increases.
21. Suppose that a decrease in the demand for goods and services pushes the economy
into recession. What happens to the price level? If the government does nothing, what
ensures that the economy still eventually gets back to the natural rate of output?
22. Discuss what economists believe is different about the long and short run.
23. Explain how an increase in the price level changes interest rates. How does this
change in interest rates lead to changes in investment and net exports?

24. Some economists argue that simply and suddenly reducing money supply growth is
a costly way to reduce inflation and that it may not work. For example, if a government
 cuts money growth but makes no real reform so that people expect that the
government will soon start printing more money again to pay for its expenditures, the
promise to fight inflation will not be credible. Explain the importance of an inflation
reduction policy that is announced ahead of time and is credible.
25. Are the effects of an increase in aggregate demand in the aggregate demand and
aggregate supply model consistent with the Phillips curve? Explain.
26. Explain the connection between the vertical long-run aggregate supply curve and the
vertical long-run Phillips curve.
27. Suppose that the government increases expenditures by $150 billion while increasing
taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out
or accelerator effects. What is the combined effects of these changes? Why is the
combined change not equal to zero?
28. How does a reduction in the money supply by the Fed make owning stocks less
attractive?
29. Use the money market to explain the interest-rate effect and its relation to the slope
of the aggregate demand curve.
30. Suppose the Vietnam government institutes a “Buy Vietnamese” campaign, in order
to encourage spending on domestic goods. What effect will this have on the VN trade
balance?
31. Use the money market to explain why the aggregate demand curve slopes downward.
32. How does a reduction in the money supply by the Central Bank make owning stocks
less attractive?
33. Why and in what way are fiscal policy lags different from monetary policy lags?
34. An economy is operating with output 200 billion below its natural output, fiscal policy
makers want to close this gap. Central Bank also agrees to adjust money supply to
hold interest rate constant. Marginal propensity to consume is 0.60, the price is quite
rigid in the short-run. (15%)
a. What government would do to close this gap tax and/or spending., what are possible problems.
b. If the interest is not constant, what will happen?
c. If policy makers in this economy wanted to close this gap without increasing budget deficit, what they could do
to accomplish this goal
35. Describe and explain the items in the impossible trinity model and the its importance
for the open economy (5%)
36. Explain the Fiscal Policy and related issues (policy maker, policy tools, types of policy
and related problems) (5%)
37. Explain the Monetary Policy and related issues (policy maker, policy tools, types of
policy and related problems) (5%)
38. Given macroeconomic data of Thailand and Vietnam, give your comments regarding
the two economies. Show your understanding and insight about Public debt, National
debt, Current Account Balance. (10%)