Economics concepts and applications

Economics

In the short-run, an increase in spending will shift AD to the right representing an increase in demand. Prices will increase, moving the AD curve leftward and upward. Assuming full employment, producers will need to spend more on labor in order to increase supply. So in the long run, supply will increase, but so will price to compensate for the increased cost of labor. This brings the AS line to the right to meet demand but brings the price higher than at the P2 level.

a) If the Fed does nothing then the price will decline and the demand curve will shift to the right. AS will move to the new equilibrium but much of that supply will be from foreign producers.

b) If the Fed pursues an increase in GDP without a rise in P, this will mean stimulating demand so that sales increases offset any reduction of P. This stimulus will shift the AD curve to the right, with the equilibrium point moving rightward and downward to the new equilibrium point.

14-3) The Fed shifts the demand curve in the appropriate direction by lowering rates to stimulate demand. An increase in P1 and Y1 could result because the Fed dropped the rates too low, overstimulating the economy. Demand exceeded supply, causing an increase in price -- the overheated demand and increased price raised the GDP.

14-5) I do not agree. The Fed does not have much control over AS and it does over AD. AS typically responds to signals in the direction of AD. Finding equilibrium would prevent inflation and recession, but the notion that the Fed has unlimited levers with which to make this happen is erroneous -- the Fed does not have strict control over AS.

15-3) Debt relative to GDP does not need to be adjusted for inflation, as you are comparing a 1990 ratio to a 2000 ratio -- this is 1.17% in 1990 and 2.5% in 2000. Comparing real national debt between 1990 and 2000 requires an adjustment for inflation. This real national debt in 2000 was 4.287 billion.

15-7) Neither country is violating the guidelines for responsible government. The first country has very little debt, and can easily meet its obligations. Country B. has debt almost equal to GDP, but because GDP is an annual figure, this is within reason. When debt becomes a multiple of GDP, then responsible government is not being undertaken.

16- 3) a. The equilibrium is .016 dollars per peso.

b. If the Philippine government set the exchange rate at 50 peso, they would need to sell 20 pesos per month, because supply would be 60 and demand would be 80.

16-7) a) A country would want an overvalued currency if they were a net importer of goods. This would make foreign goods cheaper. The policy would cause harm to that country's exporters.

b) A country would want an undervalued currency in order to facilitate exports. This would cause harm to importers, other countries who want to sell their goods in that market, and to their own citizens traveling abroad.

16-9) a) The exchange rate would be the equilibrium point. In this case, $0.90 dollars per euro.

b) If there is no intervention, the new equilibrium point would be $1.00 per euro, so that will be the new exchange rate.

c) The European central bank would need to created an additional 700 euros of supply. They cannot do this -- they have buy the 300 euros from the U.S., but the 400 dollars they sell is only worth 360 euros at the given exchange rate. Thus, they can only create 660 euros, not 700.

17-1) a) The opportunity cost of another winter hat in Russia is 2 bushels of wheat. The opportunity cost of another winter hat in the U.S. is 10 bushels of wheat.