Practice questions + Answers - Chapter 21-30 - Economics 2 for IBA
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Course
Economics 2 (30J114B3)
Institution
Tilburg University (UVT)
Book
Economics
[NL] Alle Check Your Understanding vragen + antwoorden uit het boek "Economics", Paul Krugman. Hoofdstuk 21 t/m 30.
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[EN] All Check Your Understanding questions + answers from the book 'Economics', Paul Krugman. Chapter 21 - 30.
Solution Manual for Economics 5th Edition By Paul Krugman, Robin Wells. A+
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Check your understanding – Economics 2
------------------------------------------------------------Chapter 21----------------------------------------------------------------
21-1
1. Micro- / Macroeconomics?
a. Why did consumers switch to smaller cars in 2008? Micro
b. Why did overall consumer spending slow down in 2008? Macro
c. Why did the standard of living rise more rapidly in the first generation after WWII than in the
second? Macro
d. Why have starting salaries for students with economics degrees rise sharply of late? Micro
e. What determines the choice between rail and road transportation? Micro
f. Why did laptops get much cheaper between 2000 and 2017? Micro
g. Why did inflation fall in the 2010s? Macro
2. In 2008, problems in the financial sector led to a drying up of credit around the country: home-buyers
were unable to get mortgages, students were unable to get student loans, car-buyers were unable to get
car loans, and so on.
a. Explain how the drying up of credit can lead to compounding effects throughout the economy
and result in an economic slump.
When people can’t get credit to finance their purchases, they will be unable to spend money. This
will weaken the economy, and as other see the economy weaken, they will also cut back on their
spending in order to save for future bad times. As a result, the credit shortfall will spark a
compounding effect through the economy as people cut back their spending, and so on.
b. If you believe the economy is self-regulating, what would you advocate that policy makers do?
If you believe the economy is self-regulating, then you would advocate doing nothing is response
to the slump.
c. If you believe Keynesian economics, what would you advocate that policy makers do?
If you believe in Keynesian economics, you would advocate that policy makers undertake
monetary and fiscal policies to stimulate spending in the economy.
21-2
1. Why do we talk about business cycles for the economy as a whole, rather than just talking about the ups
and downs of particular industries?
We talk about business cycles for the economy as a whole because recessions and expansions are not
confined to a few industries – they reflect downturns and upturns for the economy as a whole. In
downturns, almost every sector of the economy reduces output and the number of people employed.
Moreover, business cycles are an international phenomenon, sometimes moving in rough synchrony
across countries.
2. Describe who gets hurt in a recession, and how.
A recession can hurt people throughout society. They cause large numbers of workers to lose their jobs
and make it hard to find new jobs. Recessions hurt the standard of living of many families and are usually
associated with a rise in the number of people living below the poverty line, an increase in the umber of
people who lose their houses because they can’t afford their mortgage payments, and a fall in the
percentage of Americans with health insurance. Recessions also hurt the profits of firms.
,21-3
1. Many poor countries have high rates of population growth. What does this imply about the long-run
growth rates of overall output that they must achieve in order to generate a higher standard of living per
person?
Countries with high rates of population growth will have to maintain higher long-run growth rates of
overall output than countries with low rates of population growth in order to achieve an increased
standard of living per person because aggregate output will have to be divided among a larger number of
people.
2. Argentina used to be as rich as Canada; now it’s much poorer. Does this mean that Argentina is poorer
than it was in the past? Explain.
No, Argentina is not poorer than it was in the past. Both Argentina and Canada have experienced long-run
growth. However, after WWII, Argentina did not make as much progress as Canada, perhaps because of
political instability and bad macroeconomic policies. Also, Canada’s economy grew much faster than
Argentina’s. although Canada is now about three times as rich as Argentina, Argentina still experienced
long-run growth.
21-4
1. Which of these sound like inflation / deflation / ambiguous?
a. Gasoline prices are up 10%, food prices are down 20%, and the prices of most services are up 1-
2%. Ambiguous
b. Gas prices have doubled, food prices are up 50%, and most services seem to be up 5% or 10%.
Inflation
c. Gas prices haven’t changed, food prices are way down, and services have gotten cheaper, too.
Deflation
21-5
1. Which of the following reflect comparative advantage, and which macroeconomic forces?
a. Thanks to the development of huge oil sands in the province of Alberta, Canada has become an
exporter of oil and an importer of manufactured goods. Comparative advantage
b. Like many consumer goods, the Apple iPad is assembled in China, although many of the
components are made in other countries. Comparative advantage
c. Since 2002, German has been running huge trade surpluses, exporting much more, than it
imports. Macroeconomic forces
d. The US, which had roughly balances trade in the early 1990s, began running large trade deficits
later in the decade, as the technology boom took off. Macroeconomic forces
1. Explain why the three methods of calculating GDP produce the same estimate of GDP.
Let’s start by considering the relationship between the total value added of all domestically produced
final goods and services and aggregate spending on domestically produces final goods and services. These
two quantities are equal because every final good and service produced in the economy is either
produces by someone or added to inventories. And additions to inventories are counted as spending b
firms. Next, consider the relationship between aggregate spending on domestically produces final goods
and services and total factor income. These two quantities are equal because all spending that is
channelled to firms to pay for purchases of domestically produces final goods and services is revenue for
firms. Those revenues must be paid out by firms to their factors of production in the form of wages profit,
interest, and rent. Taken together, this means that all three methods of calculating GDP are equivalent.
2. What are the various sectors to which firms make sales? What are the various ways in which households
are linked with other sectors of the economy?
Firms make sales to other firms, households, the government, and the rest of the world. Households are
linked to firms through the sale of factors of production to firms, through purchases from firms of final
goods and services, and through lending funds to firms in the financial markets. Finally, households are
linked to the rest of the world through their purchases of imports and transactions with foreigners in
financial markets.
3. Consider the first row of Figure 22-2 and suppose you mistakenly believed that total value added was
$30.500, the sum of sales price of a car and a car’s worth of steel. What items would you be counting
twice?
You would be counting the value of the steel twice – once as it was sold by American Steel to American
Motors and once as part of the car sold by American Motors.
22-2
1. Assume there are only two goods in the economy, French fries and onion rings. In 2015, 1.000.000
servings of French fries were sold at $0.40 each and 800.000 servings of onion rings at $060 each. From
2015 to 2016 the price of French fries rose by 25% and the servings sold fell by 10%; the price of onion
rings fell by 15% and the servings sold rose by 5%.
a. Calculate nominal GDP in 2015 and 2016. Calculate real GDP in 2016 using 2015 prices.
Nominal GDP 2015: $880.000
Nominal GDP 2016: $878.400
Real GDP 2016: $864.000
b. Why would an assessment of growth using nominal GDP be misguided?
Calculation based on real GDP shows a drop ten times larger (1.8%) than a calculations based on
nominal GDP (0.18%). In this case, the calculations based on nominal GDP underestimates the
true magnitude of the change.
2. From 2010 to 2015, the price of electronics equipment fell dramatically and the price of housing rose
dramatically. What are the implications of this in deciding whether to use 2010 or 2015 as the base year
in calculating 2013 real GDP?
A price index based on 2010 prices will contain a relatively high price of electronics and a relatively low
price of housing compared to a price index based on 2015 prices. This means that a 2010 price index used
to calculate real GDP in 2013 will magnify the value of electronics production in the economy, but a 2015
price index will magnify the value of housing production in the economy.
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