Category: Economics

➤ What are the direct effects of tariffs?
Tariffs raise the domestic price of imported goods, which increases domestic production compared to free trade but results in higher consumer prices. They misallocate resources toward less efficient domestic industries, harm efficient foreign producers, and generate revenue for the government imposing the tariff, reducing overall welfare versus free trade.

Which of the following is an example of an intermediate good or service?
A. Samsung buys compressors for manufacturing refrigerators.
B. Sarah bought a Sony HDTV.
C. United buys Boeing aircrafts.
D. Mike bought Puma shoes.

Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company.
Part 2a. You purchase a new Ford Escape Hybrid from a Ford dealer.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation
Part 3b. You purchase a 2013​ (preowned) Ford Escape Hybrid from a friend.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation
Part 4c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation
Part 5d. Ford produces​ 1,000 Escapes in a factory in Missouri and ships them to a car dealer in​ Shanghai, China.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation
Part 6e. Ford purchases new machine tools to use in its Missouri Escape factory.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation
Part 7f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant.
▼ Consumption Expenditure
Investment Expenditure
Government Expenditure
Net Export Expenditure
Not included in GDP calculation

Question content area
Part 1
The law of demand is the assertion that
Part 2
A. the quantity demanded of a product is inversely related to its price.
B. the quantity demanded of a product is directly related to its price.
C. changes in price and changes in quantity demanded move in the same direction.
D. the demand for a product is negatively related to its price.
Part 3
An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,
A. the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers’ purchasing power.
B. the substitution effect is the decrease in quantity demanded because consumer tastes have changed and the income effect is the decrease in quantity demanded because consumer incomes have fallen.
C. the substitution effect is the decrease in quantity demanded because the consumers’ purchasing power is reduced and the income effect is the decrease in quantity demanded owing to the fact that the product is more expensive relative to other goods.
D. the substitution effect is the decrease in quantity demanded because there are fewer consumers and the income effect is the decrease in quantity demanded because consumer incomes failed to increase.

23-4 The Dangers of High Debt
Suppose that, for good or bad reasons, large deficits have led to a high debt ratio. What should the government do then? Simply trying to stablize the debt at this high level is unwise: The lesson from history is that high debt can lead to viclous cycles and makes the conduct of fiscal policy extremely difficult. Let’s look at this more closely.
High Debt, Default Risk, and Vicious Cycles
Return to equation (23.5):
BiYi-Bi-1Yi-1=(r-g)Bi-1Yi-1 (Gi-Ti)Yi
Take a country with a high debt ratio, say, 100%. Suppose the real interest rate is 3% and the growth rate is 2%. The first term on the right is (3%-2%) times 100%=1% of GDP. Suppose further that the government is running a primary surplus of 1%, thus just enough to keep the debt ratio constant (the right side of the equation equals (3%-2%) times 100% (-1%)=0%.
(Now suppose financial investors start to worry, that the government my not be able to fully repay the debit They ask tor a higher interest rate, to compensute for what they perceive as ahigher risk of defaily on the debt. But this in turn makes it more difficult for the government to stabilize the debt, Suppose, for example, that the interest nate increases from 3% to say, 8%. Then, fust to stablize the debt, the government now needs to run a primary surplus of 6% (the right side of the equation is then equal to

Use the real business cycle model to explain the business cycles.
This model assumes that persistent total factor productivity increases, can produce expansions.
Question 1:
Use the graphs of the labor, output, and money markets to show how a persistent TFP shock increase produces an expansion for exogenous monetary policy behavior. Denote the initial points with the letter A and the final points with the letter B. Graph the movement of each of the curves and explain, step-by-step, why those movements occur.
Question 2:
How consumption, employment, investment, price level, and total output change, i.e., how do C
B
, N
B
, I
B
, P
B
, Y
B
compare to C
A
, N
A
, I
A
, P
A
, Y
A
? To answer this question, just indicate the direction of change using the right symbol ( <, >, or = ), e.g., X
A
= X
B
.
Question 3:
What does the model predict for the following variables, after a persistent change in total factor productivity? Are they procyclical, countercyclical, or acyclical?
Consumption:
Employment:
Investment:
Price Level:
Question 4:
What do the data tell us for the following variables, are they procyclical, countercyclical, or acyclical?
Consumption:
Employment:
Investment:
Price Level:
Question 5:
Are total factor productivity shocks likely to be generating the business cycle? Circle: Yes / No (Tip: compare your answers in question 2 & 3).