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PROBLEMS 1. “For many years, the hands-off fiscal policies advocated by the classical economists held sway with American government. When times were hard, the prevailing response was to tough it out, awaiting the ‘inevitable’ turnaround. The lessons of the Great Depression and a booming wartime economy have since taught us, however, that government intervention is sometimes necessary and desirable—and that to an extent, we can take charge of our own economic lives.” Evaluate the foregoing quotation based upon the discussion in this chapter. How would you classify the speaker in terms of a school of economic thought? 2. In his 1982 Economic Report of the President, Ronald Reagan said, “We simply cannot blame crop failures and oil price increases for our basic inflation problem. The continuous, underlying cause was poor government policy.” What policies might he have been referring to? 3. Many journalists blamed economic policies of the Reagan administration for the extremely high levels of unemployment in 1982 and 1983. Given the record of the rest of the decade, do you agree that President Reagan’s economic policies were a failure? Why or why not? 4. The day after the U.S. stock market crash of October 19, 1987, Federal Reserve Board Chairman Alan Greenspan issued the following statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” Evaluate why the Fed chairman might have been prompted to make such a statement. 5. Compare the rationale of the Reagan administration for the 1981 tax reductions with the rationale behind the Kennedy–Johnson tax cut of 1964, the Bush tax cut of 2001, and the Bush tax cut of 2003. 6. If the economy is operating below its potential output, what kind of gap exists? What kinds of fiscal or monetary policies might you use to close this gap? Can you think of any objection to the use of such policies? 7. If the economy is operating above its potential output, what kind of gap exists? What kinds of fiscal or monetary policies might you use to close this gap? Can you think of any objection to the use of such policies? 8. In General Theory, Keynes wrote of the importance of ideas. The world, he said, is ruled by little else. How important do you think his ideas have been for economic policy today? 9. State whether each of the following events appears to be the result of a shift in short-run aggregate supply or aggregate demand, and state the direction of the shift involved. a. The price level rises sharply while real GDP falls. b. The price level and real GDP rise. c. The price level falls while real GDP rises. d. The price level and real GDP fall. 10. Explain whether each of the following events and policies will affect the aggregate demand curve or the short-run aggregate supply curve, and state what will happen to the price level and real GDP. a. Oil prices rise b. The Fed sells bonds c. Government purchases increase d. Federal taxes increase e. The government slashes transfer payment spending f. Oil prices fall 11. Using the model of aggregate demand and aggregate supply, illustrate an economy with a recessionary gap. Show how a policy of nonintervention would ultimately close the gap. Show the alternative of closing the gap through stabilization policy. 12. Using the model of aggregate demand and aggregate supply, illustrate an economy with an inflationary gap. Show how a policy of nonintervention would ultimately close the gap. Show the alternative of closing the gap through stabilization policy. Chapter 18 Inequality, Poverty, and Discrimination Start Up: Poverty in the United States
The United States is the richest large country on the planet. Yet, in 2006, 36.5 million people in the United States were, by the official definition, poor. The United States has a greater percentage of its people in poverty than does any other industrialized country. How can a nation that is so rich have so many people that are poor? It was January 8, 1964 when President Lyndon B. Johnson stood before the Congress of the United States to make his first State of the Union address and to declare a new kind of war, a War on Poverty. “This administration today here and now declares unconditional war on poverty in America,” the President said. “Our aim is not only to relieve the symptoms of poverty but to cure it; and, above, all, to prevent it.” In the United States that year, 35.1 million people, about 22% of the population, were, by the official definition, poor. The President’s plan included stepped-up federal aid to low-income people, an expanded health-care program for the poor, new housing subsidies, expanded federal aid to education, and job training programs. The proposal became law later that same year. More than four decades and trillions of dollars in federal antipoverty spending later, the nation seems to have made little progress toward the President’s goal. While the percentage of people living in poverty has fallen since Johnson was president, the number of people living in poverty is actually slightly higher than it was then. Moreover, over the past four decades, the distribution of income has also become more skewed. The share of income going to the rich has risen, while the share going to the poor has fallen. Income inequality took center stage during the 2008 U.S. presidential election. Both Democratic candidate Barack Obama and Republican candidate John McCain campaigned on platforms to address this issue. McCain advocated making permanent tax cuts voted in under President Ge<strong>org</strong>e W. Bush that are set to expire. Obama advocated an increase in taxes on wealthy Americans and a reduction in taxes for most others. The issue came to the fore in the last presidential debate as the two candidates sparred around the image of “Joe the Plumber.” The conversation went like this: McCain: You know, when Senator Obama ended up his conversation with Joe the plumber—we need to spread the wealth around. In other words, we’re going to take Joe’s money, give it to Senator Obama, and let him spread the wealth around. I want Joe the plumber to spread that wealth around. You told him you wanted to spread the wealth around. The whole premise behind Senator Obama’s plans are class warfare, let’s spread the wealth around. I want small businesses—and by the way, the small businesses that we’re talking about would receive an increase in their taxes right now. Who—why would you want to increase anybody’s taxes right now? Why would you want to do that, anyone, anyone in America, when we have such a tough time, when these small business people, like Joe the plumber, are going to create jobs, unless you take that money from him and spread the wealth around. I’m not going to… Obama: OK. Can I… McCain: We’re not going to do that in my administration. Obama: If I can answer the question. Number one, I want to cut taxes for 95% of Americans. Now, it is true that my friend and supporter, Warren Buffett, for example, could afford to pay a little more in taxes in order… McCain: We’re talking about Joe the plumber. Obama:… in order to give—in order to give additional tax cuts to Joe the plumber before he was at the point where he could make $250,000. Then Exxon Mobil, which made $12 billion, record profits, over the last several quarters, they can afford to pay a little more so that ordinary families who are hurting out there—they’re trying to figure out how they’re going to afford food, how they’re going to save for their kids’ college education, they need a break. So, look, nobody likes taxes. I would prefer that none of us had to pay taxes, including myself. But ultimately, we’ve got to pay for the core investments that make this economy strong and somebody’s got to do it. McCain: Nobody likes taxes. Let’s not raise anybody’s taxes. OK? Obama: Well, I don’t mind paying a little more. McCain: The fact is that businesses in America today are paying the second highest tax rate of anywhere in the world. Our tax rate for business in America is 35%. Ireland, it’s 11%. Where are companies going to go where they can create jobs and where they can do best in business? We need to cut
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This content is copyright Flat Worl
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The Economics of Poverty The Econom
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Carlos Aguilar El Paso Community Co
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the opportunity to be active learne
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One person’s use of gravity is no
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Case in Point: The Rising Cost of E
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Opportunity Costs Are Important If
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as well as the ranking for each of
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TRY IT! The Department of Agricultu
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assumed conditions that are simpler
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Case in Point: Does Baldness Cause
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PROBLEMS 1. Why does the fact that
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for the production of goods and ser
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TRY IT! Explain whether each of the
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USA Today, August 30, 2001, p. 1B;
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Figure 2.3 The Slope of a Productio
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the firm were to produce 100 snowbo
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At point A, the economy was produci
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Points on the production possibilit
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ANSWER TO TRY IT! PROBLEM The produ
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An increase in the physical quantit
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Resources society could have used t
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e that higher incomes lead nations
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has increased the welfare of people
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CONCEPT PROBLEMS 1. How does a coll
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producing bowling balls? Bicycles?
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and a lower price tends to increase
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Just as demand can increase, it can
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Heads Up! Figure 3.5 It is crucial
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ANSWER TO TRY IT! PROBLEM Since goi
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Figure 3.9 An Increase in Supply If
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Heads Up! There are two special thi
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“The chickens didn’t stop layin
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Figure 3.15 A Surplus in the Market
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An Increase in Demand An increase i
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Figure 3.19 Simultaneous Decreases
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Figure 3.21 The Circular Flow of Ec
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Case in Point: Demand, Supply, and
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CONCEPT PROBLEMS 1. What do you thi
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NUMERICAL PROBLEMS Problems 1-5 are
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In the third section of the chapter
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Figure 4.2 The Increasing Demand fo
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The intersection of the demand and
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Case in Point: 9/11 and the Stock M
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The Great Depression of the 1930s l
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120. These distortions have grown o
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ANSWER TO TRY IT! PROBLEM A minimum
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Figure 4.16 Total Spending for Phys
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were explicitly stated, political p
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CONCEPT PROBLEMS 1. Like personal c
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A good deal of the economy’s mome
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At time t 1 in , an expansion ends
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Case in Point: The Art of Predictin
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Concern about changes in the price
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epay their loans. Deflation was com
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of each component of consumption sp
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Sources of Bias 1997 Estimate 2006
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ANSWER TO TRY IT! PROBLEM Rearrangi
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employment. It is sometimes referre
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KEY TAKEAWAYS People who are not wo
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ANSWER TO TRY IT! PROBLEM In Year 1
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NUMERICAL PROBLEMS 1. Plot the quar
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The primary measure of the ups and
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By recording additions to inventori
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Figure 6.5 Spending in the Circular
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TRY IT! Here is a two-part exercise
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ANSWER TO TRY IT! PROBLEM 1. GDP eq
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generated in the production of thos
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Case in Point: The GDP-GDI Gap Figu
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that productivity has increased gre
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Figure 6.9 Comparing Per Capita Rea
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ANSWER TO TRY IT! PROBLEM 1. Real G
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NUMERICAL PROBLEMS 1. Given the fol
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LEARNING OBJECTIVES 1. Define poten
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Figure 7.2 Changes in Aggregate Dem
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Equation 7.1 We use the capital Gre
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7.2 Aggregate Demand and Aggregate
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The Short Run Analysis of the macro
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Finally, minimum wage laws prevent
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Figure 7.10 An Increase in Governme
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ANSWER TO TRY IT! PROBLEM All compo
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Now suppose aggregate demand increa
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price level of P 3 . For both kinds
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Case in Point: Survey of Economists
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CONCEPT PROBLEMS 1. Explain how the
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Aggregate Quantity of Goods and Ser
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2. We define growth in terms of the
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Figure 8.3 Differences in Growth Ra
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Case in Point: Presidents and Econo
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Figure 8.6 The Aggregate Production
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Figure 8.9 Increase in the Supply o
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ANSWER TO TRY IT! PROBLEM The produ
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In general, countries with accelera
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ANSWER TO TRY IT! PROBLEM Situation
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NUMERICAL PROBLEMS 1. The populatio
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not get eaten. Prisoners knew other
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circulation. Unless a means can be
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KEY TAKEAWAYS Money is anything tha
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LEARNING OBJECTIVES 1. Explain what
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Acme Bank Assets Liabilities Reserv
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Figure 9.7 Notice that Bellville is
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per insured bank, for each account
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ANSWER TO TRY IT! PROBLEM 1. Acme B
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discount rate. Lowering the discoun
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Case in Point: Fed Supports the Fin
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CONCEPT PROBLEMS 1. Airlines have
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a. 10%. b. 15%. c. 20%. d. 25%. 10.
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price. Buyers of bonds will seek th
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trade-weighted exchange rate index
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Case in Point: Betting on a Plunge
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Of course, money is money. One cann
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The speculative demand for money is
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Equilibrium in the Market for Money
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The reduction in interest rates req
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Economic Perspectives 29 (First Qua
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NUMERICAL PROBLEMS 1. Compute the r
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ased on a section of the Federal Re
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an oil-price boost that came in the
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Figure 11.2 A Contractionary Moneta
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Case in Point: A Brief History of t
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Only after policy makers recognize
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The Degree of Impact on the Economy
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Regardless of where one stands on t
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11.3 Monetary Policy and the Equati
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velocity is constant when viewed ov
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First, we do not expect a given per
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Summary Part of the Fed’s power s
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chosen. 11. Since August 1997, the
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. 1% c. 2% 7. Suppose the velocity
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A number of changes have influenced
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The Government Budget Balance The g
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KEY TAKEAWAYS Over the last 50 year
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ANSWER TO TRY IT! PROBLEM A budget
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A reduction in government purchases
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Case in Point: Post-World War II Ex
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Our analysis of monetary policy sho
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Case in Point: Crowding Out in Cana
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NUMERICAL PROBLEMS 1. Look up the t
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LEARNING OBJECTIVES 1. Explain and
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Equation 13.3 The saving function r
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Other Determinants of Consumption T
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Case in Point: Consumption and the
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that firms did not intend to make.
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Equation 13.11 Equation 13.11 is th
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Figure 13.10 Adjusting to Equilibri
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inducing a further change in the le
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There are two major differences bet
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Case in Point: Fiscal Policy in the
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This is called the interest rate ef
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Case in Point: Predicting the Impac
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Summary This chapter presented the
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NUMERICAL PROBLEMS 1. Suppose the f
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only major part of investment left
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Figure 14.2 "Gross Private Domestic
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KEY TAKEAWAYS Investment adds to th
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We will see in this section that in
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Firms need capital to produce goods
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TRY IT! Show how the investment dem
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Figure 14.10 A Change in Investment
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Summary Investment is an addition t
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a. Draw the investment demand curve
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of the first meeting in Doha, Qatar
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Figure 15.2 U.S. Real GDP and Impor
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KEY TAKEAWAYS International trade a
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ANSWERS TO TRY IT! PROBLEMS 1. Mexi
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Equation 15.3 represents an extreme
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KEY TAKEAWAYS The balance of paymen
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ANSWERS TO TRY IT! PROBLEMS 1. All
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Page 343 and 344: CONCEPT PROBLEMS 1. David Ricardo,
Page 345 and 346: a. If the exchange rate was free-fl
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Page 349 and 350: increases. The term, coined by Mass
Page 351 and 352: 16.2 Explaining Inflation-Unemploym
Page 353 and 354: Figure 16.9 The Stagflation Phase I
Page 355 and 356: Case in Point: From the Challenging
Page 357 and 358: In the long run, real GDP moves to
Page 359 and 360: A worker’s reservation wage is li
Page 361 and 362: KEY TAKEAWAYS Two factors that can
Page 363 and 364: 16.4 Review and Practice Summary Du
Page 365 and 366: NUMERICAL PROBLEMS 1. Here are annu
Page 367 and 368: The contraction in output that bega
Page 369 and 370: Figure 17.2 "Aggregate Demand and S
Page 371 and 372: Case in Point: Early Views on Stick
Page 373 and 374: The Kennedy administration also add
Page 375 and 376: changes in the money supply as the
Page 377 and 378: Two particularly controversial prop
Page 379 and 380: Case in Point: Tough Medicine Figur
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Page 385 and 386: Case in Point: Steering on a Diffic
Page 387: Summary We have surveyed the experi
Page 391 and 392: We have seen that the income distri
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Page 395 and 396: Case in Point: Attitudes and Inequa
Page 397 and 398: Figure 18.4 Weighted Average Povert
Page 399 and 400: Figure 18.6 "The Demographics of Po
Page 401 and 402: Given a choice between cash and an
Page 403 and 404: Look at Figure 18.9 "Poor People an
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Page 407 and 408: white men; in 2005, they were 75% o
Page 409 and 410: Case in Point: Early Intervention P
Page 411 and 412: CONCEPT PROBLEMS 1. Explain how ris
Page 413 and 414: for skilled workers and the market
Page 415 and 416: income countries in 2007. We should
Page 417 and 418: We can also see the results of poor
Page 419 and 420: HDI rank Country Human Development
Page 421 and 422: Case in Point: (Growth and Developm
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Page 425 and 426: Figure 19.7 Income Levels and Popul
Page 427 and 428: Case in Point: China Curtails Popul
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Page 431 and 432: notably Indonesia and Malaysia, the
Page 433 and 434: Summary Developing nations face a h
Page 435 and 436: The Economics of Karl Marx Marx is
Page 437 and 438: TRY IT! Briefly explain how each of
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crowded into the factory, are organ
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Although the Soviet Union was able
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Case in Point: Socialist Cartoons T
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The practical alternative to allowi
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Russia: An Uncertain Path to Reform
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TRY IT! Table 20.1 "Official Versus
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TRY IT! There is a shortage of cars
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Figure 21.1 Ski Club Revenues The s
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horizontal axis, measured between t
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As an example of a graph of a negat
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evenue curves unchanged. That is be
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LEARNING OBJECTIVES 1. Understand n
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Figure 21.14 Tangent Lines and the
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TRY IT! Consider the following curv
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the scaling of the vertical axis us
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Figure 21.22 Intended Academic Majo
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ANSWER TO TRY IT! Here are the time
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What do you think is the argument m
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Equation 22.14 The coefficient of r
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Figure 22.2 A Decrease in Autonomou
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NUMERICAL PROBLEMS 1. Suppose an ec
show all

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