# ECON 104 Macroeconomics Analysis (Homework (Ch. 02)

ECON 104 Macroeconomics Analysis (Homework (Ch. 02)
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1. Economic models

Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship:

P=A×MP=A×M

 • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.

How might an economist gather empirical data to test the proposed relationship between money and the price level?

An economist would look for data on past changes in the money supply and note the resulting changes in the price level.

An economist would persuade the Federal Reserve to change the money supply to various levels, and observe the resulting changes in the price level.

Unlike researchers in the hard sciences, economists cannot study complex relationships using data.

Economists do not usually develop theoretical models of the economy but only analyze summary statistics about the current state of the economy.

1. The circular-flow model

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.

Based on this model, households earn income when ____ purchase _____ in factor markets.

Suppose Maria earns \$800 per week working as a corporate attorney for Rowan and Martin Associates. She uses \$9 to have breakfast at Dinah’s Diner. Dinah’s Diner pays Kevin \$275 per week to work as a short-order cook. Kevin uses \$375 to purchase legal service from Rowan and Martin Associates.

Identify whether each of the following events in this scenario occurs in the factor market or the product market.

 Event Factor Market Product Market Maria spends \$9 to have breakfast. Maria earns \$800 per week working for Rowan and Martin Associates. Kevin earns \$275 per week working for Dinah’s Diner.

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.

The \$275 per week Kevin earns working for Dinah’s Diner

The \$375 Kevin spends to purchase legal service from Rowan and Martin Associates

Maria’s labor

1. Efficiency in the production possibilities model

Suppose South Africa produces only two goods: alfalfa and blu rays. The following graph shows South Africa’s current production possibilities frontier, along with six output combinations represented by black points (plus symbols) labeled A to F.

Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply.

 Point Inefficient Efficient Unattainable A B C D E F

1. Shifts in production possibilities

Suppose Japan produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for alfalfa, an agricultural good, and industrial robots, a capital good.

Drag the production possibilities frontier (PPF) on the graph to show the effects of an immigration law that results in fewer workers entering the country.

Note: Select either end of the curve on the graph to make the endpoints appear. Then drag one or both endpoints to the desired position. Points will snap into position, so if you try to move a point and it snaps back to its original position, just drag it a little farther.

1. Opportunity cost and production possibilities

Kevin is a skilled toy maker who is able to produce both cars and puzzles. He has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of his time.

 Choice Hours Producing Produced (Cars) (Puzzles) (Cars) (Puzzles) A 8 0 4 0 B 6 2 3 8 C 4 4 2 13 D 2 6 1 15 E 0 8 0 16

On the following graph, use the blue points (circle symbol) to plot Kevin’s initial production possibilities frontier (PPF).

Suppose Kevin is currently using combination D, producing one car per day. His opportunity cost of producing a second car per day is _____ per day.

Now, suppose Kevin is currently using combination C, producing two cars per day. His opportunity cost of producing a third car per day is _____ per day.

From the previous analysis, you can determine that as Kevin increases his production of cars, his opportunity cost of producing one more car _____ .

Suppose Kevin buys a new tool that enables him to produce twice as many cars per hour as before, but it doesn’t affect his ability to produce puzzles. Use the green points (triangle symbol) to plot his new PPF on the previous graph.

Because he can now make more cars per hour, Kevin’s opportunity cost of producing puzzles is _____ it was previously.

1. Microeconomics and macroeconomics

Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics.

 Microeconomics Macroeconomics The effect of government regulation on a monopolist’s production decisions The optimal interest rate for the Federal Reserve to target The effects of government tax policy on long-term economic growth

1. Microeconomics and macroeconomics

Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics.

 Microeconomics Macroeconomics The effect of a large government budget deficit on the economy’s price level The effect of an increase in consumer income on demand for smart phones The effects of the Internet on the pricing of used cars

1. Normative and positive statements

The following table contains statements that provide some analysis of policies that address breast cancer.

Categorize each of these statements as either positive or normative.

 Statement Positive Normative Breast cancer is the fifth most common cause of cancer death. For women aged 60 to 69, breast cancer screening significantly reduces breast cancer mortality. Doctors should encourage women aged 60 to 69 to be screened for breast cancer. The government should force doctors to encourage women aged 60 to 69 to be screened for breast cancer.

1. Agreement and disagreement among economists

Suppose that Antonio, an economist from a business school in Georgia, and Caroline, an economist from a nonprofit organization on the West Coast, are arguing over government intervention. The following dialogue shows an excerpt from their debate:

Caroline: The usefulness of government intervention in the economy is a long-standing issue that economists continue to debate.

Antonio: I feel that government involvement in the economy should be reduced because government programs cause more harm than good.

Caroline: While I do agree that government programs can be inefficient, I really think they are necessary to help the less fortunate.

The disagreement between these economists is most likely due to ____________.

Despite their differences, with which proposition are two economists chosen at random most likely to agree?

Immigrants receive more in government benefits than they contribute in taxes.

Having a single income tax rate would improve economic performance.

Rent ceilings reduce the quantity and quality of available housing.

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