Macroeconomics

1. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

 

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  1. Graph the production possibilities frontiers for the American and Japanese economies.
  2. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain?
  3. Which country has an absolute advantage in producing cars? In producing grain?
  4. Which country has a comparative advantage in producing cars? In producing grain?
  5. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?
  6. Starting from a position without trade, give an example in which trade makes each country better off.

 

  1. Are the following statements true or false? Explain in each case.
  2. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”
  3. “Certain talented people have a comparative advantage in everything they do.”
  4. “If a certain trade is good for one person, it can’t be good for the other one.”
  5. “If a certain trade is good for one person, it is always good for the other one.”
  6. “If trade is good for a country, it must be good for everyone in the country.”

 

  1. For each of the following events, explain the short-run effects on output and the price level, assuming policymakers take no action and draw graphs to illustrate your answers.
  2. The stock market declines sharply, reducing consumers’ wealth.
  3. The federal government increases spending on national defense.
  4. A technological improvement raises productivity.
  5. A recession overseas causes foreigners to buy fewer U.S. goods.

 

  1. Explain why the following statements are false.
  2. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.”
  3. “The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply.”
  4. “If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.”
  5. “Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left.”

 

 

 

 

  1. The economy is in a recession with high unemployment and low output.
  2. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate-demand curve, the short- run aggregate-supply curve, and the long-run aggregate-supply curve.
  3. Identify an open-market operation that would restore the economy to its natural rate.
  4. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the resulting change in the interest rate.
  5. Draw a graph similar to the one in part a to show the effect of the open-market operation on output and the price level. Explain in words why the policy has the effect that you have shown in the graph.

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