Midterm II Review Problems

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Economics

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Jan 9, 2024

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Principles of Macroeconomics Midterm II Review Problems The following problems should be similar in difficulty and test some of the same concepts that will be on the Midterm. 1. Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet our text says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itself. Can you reconcile these two facts? 2. In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China made significant direct and portfolio investments in the United States. At the time, many Americans were unhappy that this investment was occurring. a. In what way was it better for the United States to receive this foreign investment than not to receive it? b. In what way would it have been better still for Americans to have made this investment? 3. Using a diagram of the labor market, show the effect of an increase in the minimum wage on: a. the wage paid to workers, b. the number of workers supplied, c. the number of workers demanded, and d. the amount of unemployment. 4. Suppose that Congress passes a law requiring employers to provide employees some benefit (such as healthcare) that raises the cost of an employee by $4 per hour. (Be quantitative when possible in answering the following questions.) a. What effect does this employer mandate have on the demand for labor? b. If employees place a value on this benefit exactly equal to its cost, what effect does this employer mandate have on the supply of labor? c. If the wage can freely adjust to balance supply and demand, how does this law affect the wage and level of employment? Are employers better or worse off? Are employees better or worse off? d. Suppose that, before the mandate, the wage in this market was $3 above the minimum wage. In this case, how does the employer mandate affect the wage, the level of employment, and the level of unemployment? e. Now suppose that workers do not value the mandated benefit at all. How does this alternative assumption change your answers to parts (b) and (c)?

5. Suppose you take $100 you had kept under your mattress and deposit it into your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase? 6. Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply by $40 million. a. If the Fed decides to use open-market operations, will it buy or sell bonds? b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain your reasoning.

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