Short assignments
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ECON201_FULL.pdf
Chapter 1
Econ 201
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Scarcity )الندرة(: the limited nature of society’s resources
Economics )علم االقتصاد(: the study of how society manages its scarce resources, e.g.
How people decide what to buy, how much to work, save, and spend
How firms decide how much to produce, how many workers to hire
How society decides how to divide its resources between national defense,
consumer goods, protecting the environment, and other needs.
The principals of how people take decisions للقرارات( االشخاص)مبادئ لكيفية اتخاذ :
1. People Face Tradeoffs) يواجه الناس المفاضالت(: All decisions involve tradeoffs,
Society faces an important tradeoff:
▪ Efficiency الكفاءة( ) : when society gets the most from its scarce resources
▪ Equality )المساواه(: when prosperity is distributed uniformly among society’s
members
▪ Tradeoff )المفاضالت(: To achieve greater equality, could redistribute income from
wealthy to poor. But this reduces incentive to work and produce, shrinks the
size of the economic “pie.”
2. The Cost of Something Is What You Give Up to Get It )تكلفة الشئ هو مالذي تتخلى عنه للحصول عليه(
Making decisions requires comparing the costs and benefits of alternative choices.
The opportunity cost )تكفة الفرصة البديلة( of any item is whatever must be given up to
obtain it.
It is the relevant cost for decision making.
3. Rational People Think at the Margin نهج الحدي( )االشخاص الرشيدين هم من يفكرون في ال
Systematically and purposefully do the best they can to achieve their
objectives.
Make decisions by evaluating costs and benefits of marginal changes,
incremental adjustments to an existing plan.
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4. People Respond to Incentives )استجابة الناس للحوافز(
Incentive: something that induces a person to act, i.e. the prospect of
a reward or punishment.
Rational people respond to incentives.
The Principals of how people Interact تفاعل بين االشخاص( )مبادئ عن كيفية ال :
5. Trade Can Make Everyone Better Off )التجارة تمكن الجميع من المقايضة(
Rather than being self-sufficient,
People can specialize in producing one good or service and exchange it for other
goods.
Countries also benefit from trade and specialization
6. Markets Are Usually A Good Way to Organize Economic Activity
)عادة ما تكون االسواق وسيلة جيدة لتنظيم النشاط االقتصادي(
▪ Market: a group of buyers and sellers (need not be in a single location)
▪ “Organize economic activity” means determining
» what goods to produce
» how to produce them
» how much of each to produce
» who gets them
A market economy allocates resources through the decentralized decisions of
many households and firms as they interact in markets.
▪ The invisible hand(by Adam Smith in The Wealth of Nations (1776)) works
through the price system:
» The interaction of buyers and sellers determines prices.
» Each price reflects the good’s value to buyers and the cost of producing the
good.
» Prices guide self-interested households and firms to make decisions that, in
many cases, maximize society’s economic well-being.
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7. Governments Can Sometimes Improve Market Outcomes
)يمكن الحكومات احيانا تحسين نتائج االسواق(
▪ Important role for government: enforce property rights (with police, courts)
▪ People are less inclined to work, produce, invest, or purchase if large risk of their
property being stolen.
▪ Market failure )فشل االسواق(: when the market fails to allocate society’s resources
efficiently
▪ Causes of market failure:
» Externalities, when the production or consumption of a good affects
bystanders (e.g. pollution)
» Market power, a single buyer or seller has substantial influence on market
price (e.g. monopoly)
» Public policy may promote efficiency.
Government may alter market outcome to promote equity.
If the market’s distribution of economic well-being is not desirable, tax or welfare
policies can change how the economic “pie” is divided.
The principals of how the economy as whole works:
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods &
Services )يعتمد مستوى معيشة البلد على قدرته على انتاج السلع والخدمات(
▪ Huge variation in living standards across countries and over time:
▪ Average income in rich countries is more than ten times average income in
poor countries.
▪ The most important determinant of living standards: productivity )االنتاجية(, the
amount of goods and services produced per unit of labor.
▪ Productivity depends on the equipment, skills, and technology available to
workers.
▪ Other factors (e.g., labor unions, competition from abroad) have far less impact
on living standards.
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9. Prices Rise When the Government Prints Too Much Money
)ترتفع االسعار عندما تطبع الحكومة الكثير من االوراق النقدية(
▪ Inflation )التضخم(: increases in the general level of prices.
▪ In the long run, inflation is almost always caused by excessive growth
in the quantity of money, which causes the value of money to fall.
▪ The faster the government creates money, the greater the inflation rate.
10. Society Faces a Short-run Tradeoff Between Inflation and Unemployment
)المجتمعات تواجه مقايضات على المدى القصير بين التضخم والبطالة(
▪ In the short-run (1–2 years), many economic policies push inflation and
unemployment in opposite directions.
▪ Other factors can make this tradeoff more or less favorable, but the tradeoff
is always present.
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QUESTIONS BANK: MULTIPLE CHOICE
1. The word “economy” comes from the Greek word oikonomos, which means
a. “environment.” b. “production.” c. “one who manages a household.” d. “one who makes decisions.”
Answer: C
2. Economics deals primarily with the concept of
a. scarcity. b. money. c. poverty. d. banking.
Answer: a
3. Which of the following is correct?
a. The word economy comes from the Greek word for “rational thinker.” b. Economists study the management of scarce resources. c. Because economists believe that people pursue their best interests, they
are not interested in how people interact. d. All of the above are correct.
Answer: b
4. Oil is considered to be a non-renewable energy source. Oil
a. is an unlimited resource. b. is a scarce resource. c. is not a productive resource. d. has no opportunity cost.
Answer: b
5. The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product.
Answer: c
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6. Which of the following examples does not illustrate the principle represented by the
adage, "There is no such thing as a free lunch"?
a. Joe needs to pay his rent and his electric bill. b. Pete must choose between buying a new flat screen television and buying
his textbooks for this semester. c. Kevin must decide between studying for his economics exam and working
at his part-time job. d. Lisa can spend her money on a new sweater or a pair of jeans.
Answer: a
7. While pollution regulations yield the benefit of a cleaner environment and the improved
health that comes with it, the regulations come at the cost of reducing the incomes of
the regulated firms’ owners, workers, and customers. This statement illustrates the
principle that
a. trade can make everyone better off. b. rational people think at the margin. c. people face tradeoffs. d. people respond to incentives.
Answer: c
8. Which of the following words and phrases best captures the notion of equality?
a. minimum waste b. maximum benefit c. sameness d. Efficiency
Answer: c
9. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
b. Government policies usually improve upon both equality and efficiency. c. As long as the economic pie continually gets larger, no one will have to go
hungry. d. Efficiency and equality can both be achieved if the economic pie is cut into
equal pieces.
Answer: a
10. When the government redistributes income from the wealthy to the poor,
a. efficiency is improved, but equality is not. b. both wealthy people and poor people benefit directly. c. people work less and produce fewer goods and services. d. the government collects more revenue in total.
Answer: c
Chapter 2
Econ 201
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Economists play two roles )يقوم االقتصاديون بدورين(:
1. Scientists: try to explain the world
2. Policy advisors: try to improve it
In the first, economists employ the scientific method, the dispassionate development and testing of theories about how the world works.
Assumptions simplify the complex world, make it easier to understand.
Model )نموذج(: a highly simplified representation of a more complicated reality.
Economists use models to study economic issues.
First Model: The Circular-Flow Diagram )مخطط التدفق الدائري(: a visual model of the
economy, shows how dollars flow through markets among households and firms
» Two types of ―actors‖:
▪ Households
▪ firms » Two markets:
▪ the market for goods and services
▪ the market for ―factors of production‖
Factors of production )عوامل االنتاج(: the resources the economy uses to produce
goods & services, including: labor, land, capital (buildings & machines used in
production)
Figure(1):
Households:
▪ Own the factors of production, sell/rent them to firms for income
▪ Buy and consume goods & services Firms:
▪ Buy/hire factors of production, use them to produce goods and services
▪ Sell goods & services
Second Model: The Production Possibilities Frontier )حدود امكانيات االنتاج(
The Production Possibilities Frontier (PPF):
a graph that shows the combinations of two goods the economy can possibly
produce given the available resources and the available technology. Example:
wheat, Computers.
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▪ Economy has 50,000 labor hours per month available for production.
▪ Producing one computer requires 100 hours labor.
▪ Producing one ton of wheat requires 10 hours labor.
Points on the PPF (like A – E)
▪ possible ▪ efficient: all resources are fully utilized
Points under the PPF (like F)
▪ possible ▪ not efficient: some resources underutilized (e.g., workers
unemployed, factories idle)
Points above the PPF (like G), not possible
The slope )االنحدار( of the PPF tells you the opportunity cost of one good in terms of the
other Moving along a PPF involves shifting resources (e.g., labor) from the production of one
good to the other.
Society faces a tradeoff: Getting more of one good requires sacrificing some of the other.
Slope = the ―rise over the run
E D
C
B A
Point
on
graph
Production
Computers
Wheat
A 500 0
B 400 1,000
C 250 2,500
D 100 4,000
E 0 5,000
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Economic Growth and the PPF
)النمو االقتصادي وحدود اماكانيات االنتاج( With additional resources or an improvement In
Technology, the economy can produce more
computers more wheat or any Combination in
between.
The PPF Might Be Bow-Shaped
)لماذا منحنى حدود امكانيات االنتاج على شكل قوس(
As the economy shifts resources from beer to mountain
Bikes: PPF becomes steeper, OPP. Cost of the mountain
Bikes increases.
A:
B:
Economic growth
shifts the PPF
outward.
Mountain bikes
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▪ PPF is bow-shaped when different workers have different skills, different opportunity
costs of producing one good in terms of the other.
▪ The PPF would also be bow-shaped when there is some other resource, or mix of
resources with varying opportunity costs
(E.g., different types of land suited for different uses).
▪ Microeconomics )االقتصاد الجزئي)is the study of how households and firms make
decisions and how they interact in markets.
▪ Macroeconomics )االقتصاد الكلي( is the study of economy-wide phenomena,
including inflation, unemployment, and economic growth.
▪ These two branches of economics are closely intertwined, yet distinct—they
address different questions.
▪ As scientists, economists make positive statements (ايجابيةعبارات ): which attempt to describe the world as it is.
▪ As policy advisors, economists make normative statements بيانات معيارية( ): which attempt to prescribe how the world should be.
▪ Positive statements can be confirmed or refuted, normative statements cannot.
Economists often give conflicting policy advice
)غالبا ما يقدم االقتصاديون نصائح متضاربة مع السياسيين(
▪ They sometimes disagree about the validity of alternative positive theories about
the world.
▪ They may have different values and, therefore, different normative views about
what policy should try to accomplish.
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BANK QUESTIONS: MULTIPLE CHOICES 1. Economists use some familiar terms in specialized ways
a. to make the subject sound more complex than it is.
b. because every respectable field of study has its own language.
c. to provide a new and useful way of thinking about the world.
d. because it was too difficult to come up with new terms.
Answer: c
2. Economists, like mathematicians, physicists, and biologists,
a. make use of the scientific method.
b. try to address their subject with a scientist’s objectivity.
c. devise theories, collect data, and then analyze these data in an attempt to verify or
refute their theories.
d. All of the above are correct.
Answer :d
3. Instead of conducting laboratory experiments to generate data to test their theories, economists
often
a. ask winners of the Nobel Prize in Economics to evaluate their theories.
b. argue that data is impossible to collect in economics.
c. gather data from historical episodes of economic change.
d. assume that data would support their theories.
Answer: c
4. Economists make assumptions in order to
a. mimic the methodologies employed by other scientists.
b. minimize the number of experiments that yield no useful data.
c. minimize the likelihood that some aspect of the problem at hand is being
overlooked.
d. focus their thinking on the essence of the problem at hand.
Answer :d
5. Economists build economic models by
a. generating data.
b. conducting controlled experiments in a lab.
c. making assumptions.
d. reviewing statistical forecasts.
Answer: c
6. Which of the following transactions does not take place in the markets for the factors of
production in the circular-flow diagram?
a. Jason provides plumbing services for a plumbing company and receives an hourly
wage from the company for his services.
b. Jennifer works as a marriage counselor and her clients pay her on a per-hour basis
for her services.
c. Brody owns several shopping malls and receives rent payments from the
companies that operate those malls.
d. Bree sells advertising for a newspaper and receives a commission from the
newspaper company for each advertisement that she sells.
Answer: b
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7. The inner loop of the circular-flow diagram represents the flows of inputs and outputs. Which of
the following does not appear on the inner loop?
a. Wages
b. Land
c. Capital
d. Goods and services sold
Answer: a
8. In the circular-flow diagram,
a. profit flows from households to firms.
b. labor flows from households to firms.
c. services flow from households to firms.
d. All of the above are correct.
Answer: b
9. In the circular-flow diagram, which of the following items does not flow from households to
firms?
a. revenue
b. land, labor, and capital
c. factors of production
d. profit
Answer: D
10. In the circular-flow diagram, which of the following items does not flow from firms to
households?
a. goods
b. services
c. capital
d. profit
Answer: C
Chapter 3
Econ 201
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Interdependence )االعتماد المتبادل (
One of the Ten Principles from Chapter 1: Trade can make everyone better off. الجميع أفضل( تجعل)التجارة
We now learn why people—and nations— choose to be interdependent, and
how they can gain from trade.
Our Example:
▪ Two countries: the U.S. and Japan ▪ Two goods: computers and wheat ▪ One resource: labor, measured in hours
1. Production Possibilities in the U.S: )امكانيات االنتاج في الواليات المتحدة(
▪ The U.S. has enough labor to produce 500 computers, or 5000 tons of wheat,
▪ or any combination along the PPF.
▪ The U.S. has 50,000 hours of labor available for production, per month.
▪ Producing one computer requires 100 hours of labor.
▪ Producing one ton of wheat requires 10 hours of labor.
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2. Production Possibilities in the Japan )امكانيات االنتاج في اليابان(.
▪ Japan has enough labor to produce 240 computers, or 1200 tons of wheat, or
any combination along the PPF.
Exports & Imports )التصديرو االستيراد(
▪ Exports )التصدير(: goods produced domestically and sold abroad
▪ To export means to sell domestically produced goods abroad.
▪ Imports )الستيراد(: goods produced abroad and sold domestically
▪ To import means to purchase goods produced in other countries.
U.S. Consumption With Trade )استهالك الويالت المتحدة مع وجود التجارة(
computers wheat
produced 160 3400
+ imported 110 0
– exported 0 700
= amount consumed
270 2700
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Japan’s Consumption With Trade )استهالك اليابان مع وجود التجارة(
computers wheat
produced 240 0
+ imported 0 700
– exported 110 0
= amount
consumed 130 700
Trade Makes Both Countries Better Off )التجارة تجعل الدولتين افضل(
▪ Absolute advantage )الميزة المطلقة(: the ability to produce a good using fewer inputs
than another producer
▪ The U.S. has an absolute advantage in wheat: producing a ton of wheat uses 10
labor hours in the U.S. vs. 25 in Japan.
▪ If each country has an absolute advantage in one good and specializes in that good,
then both countries can gain from trade.
▪ The U.S. has an absolute advantage in both goods, but Japan specialized in
computers because of comparative advantage.
▪ Comparative advantage )الميزة النسبية(: the ability to produce a good at a lower
opportunity cost than another producer
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The opportunity cost of a computer is)تكلفة الفرصة البديلة للكمبيوتر(
▪ 10 tons of wheat in the U.S., because producing one computer requires 100
labor hours, which instead could produce 10 tons of wheat.
▪ 5 tons of wheat in Japan, because producing one computer requires 125 labor
hours, which instead could produce 5 tons of wheat.
So, Japan has a comparative advantage in computers.
Absolute advantage is not necessary for comparative advantage
لتحقيق الميزة النسبية()الميزة المطلقة ليست ضروره
Gains from trade arise from comparative advantage (differences in opportunity
costs). )تنشأ المكاسب من التجارة من خالل الميزة النسبية(
▪ When each country specializes in the good(s) in which it has a comparative
advantage, total production in all countries is higher, the world’s ―economic pie‖ is
bigger, and all countries can gain from trade.
▪ The same applies to individual producers (like the farmer and the rancher)
specializing in different goods and trading with each other.
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BANK QUESTIONS: MULTIPLE CHOICES
1. The production possibilities frontier illustrates
a. the combinations of output that an economy should produce.
b. the combinations of output that an economy should consume.
c. the combinations of output that an economy can produce.
d. All of the above are correct.
Answer: c
2. A production possibilities frontier is a straight line when
a. the more resources the economy uses to produce one good, the fewer resources it
has available to produce the other good.
b. an economy is interdependent and engaged in trade instead of self-sufficient.
c. the rate of tradeoff between the two goods being produced is constant.
d. the rate of tradeoff between the two goods being produced depends on how much
of each good is being produced.
Answer: c
3. Table 3-1
Assume that Andia and Zardia can switch between producing wheat and producing beef at a
constant rate.
Minutes Needed to Make 1
Bushel of Wheat Pound of Beef
Andia 20 12
Zardia 15 10
Refer to Table 3-1. Assume that Andia and Zardia each has 360 minutes available. If each
person divides his time equally between the production of wheat and beef, then total production
is
a. 10.5 bushels of wheat and 16.5 pounds of beef.
b. 21 bushels of wheat and 33 pounds of beef.
c. 35 bushels of wheat and 22 pounds of beef.
d. 42 bushels of wheat and 66 pounds of beef.
Answer:b
4. Refer to Table 3-1. Which of the following combinations of wheat and beef could Andia produce
in one 8-hour day?
a. 6 bushels of wheat and 35 pounds of beef
b. 9 bushels of wheat and 25 pounds of beef
c. 15 bushels of wheat and 20 pounds of beef
d. 24 bushels of wheat and 40 pounds of beef
Answer:b
5. Refer to Table 3-1. Which of the following combinations of wheat and beef could Zardia not
produce in one 10-hour day?
a. 10 bushels of wheat and 45 pounds of beef
b. 20 bushels of wheat and 30 pounds of beef
c. 25 bushels of wheat and 25 pounds of beef
d. 30 bushels of wheat and 15 pounds of beef
Answer: c
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6. Table 3-2
Assume that Aruba and Iceland can switch between producing coolers and producing radios at a
constant rate.
Labor Hours
Needed to Make 1
Cooler Radio
Aruba 2 5
Iceland 1 4
Refer to Table 3-2. Which of the following represents Aruba's production possibilities frontier
when 100 labor hours are available?
a.
c.
b.
d.
Answer: c
7. Refer to Table 3-2. Assume that Aruba and Iceland each has 80 labor hours available. If each
country divides its time equally between the production of coolers and radios, then total
production is
a. 28 coolers and 50 radios.
b. 30 coolers and 9 radios.
c. 60 coolers and 18 radios.
d. 120 coolers and 36 radios.
Answer: c
8. Refer to Table 3-2. Which of the following combinations of coolers and radios could Aruba
produce in one 40-hour week?
a. 3 coolers and 7 radios
b. 5 coolers and 6 radios
c. 11 coolers and 4 radios
d. 13 coolers and 3 radios
Answer: b
1 2 3 4 5 coolers
1
2
3
4
5
radios
10 20 30 40 50 coolers
10
20
30
40
50
radios
1 2 3 4 5 coolers
1
2
3
4
5
radios
100 200 300 400 500 coolers
100
200
300
400
500
radios
Chapter 4
Econ 201
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A market )السوق ( is a group of buyers and sellers of a particular product.
A competitive market )السوق التنافسي( is one with many buyers and sellers, each has a negligible effect on price.
In a perfectly competitive market )سوق المنافسة الكاملة(:
All goods exactly the same
Buyers & sellers so numerous that no one can affect market price—each is a “price taker”
The quantity demanded )الكمية المطلوبة(
of any good is the amount of the
good that buyers are willing and able
to purchase.(there are negative
relationship between price and
quantity demanded)
Law of demand )قانون الطلب(: the claim
that the quantity demanded of a
good falls when the price of the good
rises, other things equal
▪ The quantity demanded in the
market is the sum of the quantities
demanded by all buyers at each price.
▪ Suppose Helen and Ken are the only
two buyers in the Latte market (Q d
= quantity demanded)
These “other things” are non-price
determinants of demand (i.e., things
that determine buyers’ demand for a
good, other than the good’s
price),Changes in them shift the D
curve…
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Demand Curve Shifters )عوامل تنقل منحنى الطلب(:
1. Income )الدخل(
Demand for a normal good is positively related to income.
Increase in income causes increase in quantity demanded at each price, shifts D curve
to the right. (Demand for an inferior good is negatively related to income.An increase in
income shifts D curves for inferior goods to the left.)
2. Prices of related goods )اسعار السلع ذات العالقة(:
a. Two goods are substitutes if an increase in the price of one سلعتين بديلتين() causes an increase in demand for the other. Example: pizza and hamburgers.
b. Two goods are complements if an increase in the price of سلعتين متكاملتين() one causes a fall in demand for the other. Example: computers and software
3. Tastes )االذواق (:
Anything that causes a shift in tastes toward a good will increase demand for
that good and shift its D curve to the right.
4. Expectations )التوقعات(: Expectations affect consumers’ buying decisions.
ـــــــــــــــــــــــــــــــــــــــــ
The quantity supplied )الكمية المعروضة(
of any good is the amount that
sellers are willing and able to
sell.(there are positive
relationship between price and
quantity supplied)
Law of supply )قانون العرض( : the
claim that the quantity supplied of a
good rises when the price of the
good rises, other things equal
The Market Supply Curve )منحنى عرض السوق(:
The quantity supplied in the market is
the sum of the quantities supplied by
all sellers at each price.
Suppose Starbucks and Jitters are the only two sellers in this market.
(Q s
= quantity supplied)
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Supply curve shifts )انتقال منحنى العرض(:
1. The supply curve shows how price
affects quantity supplied, other things
being equal.
2. These “other things” are non-
price determinants of supply.
Changes in them shift the S curve
Supply Curve Shifters )عوامل تنقل منحنى العرض(:
1. Input prices Examples of input prices: wages, prices of raw : ر المدخالت(ا)اسع
materials.
2. Technology : )التكنولوجيا( determines how much inputs are required to produce a
unit of output.
A cost-saving technological improvement has the same effect as a fall in input
prices ,shifts S curve to the right.
3. Number of Sellers An increase in the number of sellers increases : )عدد البائعين(
the quantity supplied at each price, shifts S curve to the right.
4. Expectations sellers may adjust supply* when their expectations of : )التوقعات(
future prices change.
ـــــــــــــــــــــــــــــــــــــــــــــــــ
Demand and Supply together معاً( الطلب والعرض) :
Equilibrium التوازن( ) : P has reached the level
where quantity supplied equals quantity
demanded.
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When there is an excess in the Supply )عندما يكون هناك فائض في العرض(:
Facing the surplus, sellers try to increase sales by cutting price; prices continue
to fall until market reach equilibrium.
When there is an excess in the Demand )عندما يكون هنالك فائض في الطلب(:
Facing the surplus, sellers try raising the price; prices continue to rise until
market reach equilibrium.
Terms for Shift vs. Movement Along Curve)عوامل لالنتقال المنحنى وعوامل للتحرك على نفس المنحنى(
1. Change in supply )تغير العرض(: a shift in the S curve occurs when a non-price
determinant of supply changes (like technology or costs)
2. Change in the quantity supplied )تغير الكمية المعروضة(: a movement along a fixed
S curve occurs when P changes
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3. Change in demand )تغير الطلب(: a shift in the D curve occurs when a non-price
determinant of demand changes (like income or # of buyers)
4. Change in the quantity demanded )تغير في الكمية المطلوبة(: a movement along a fixed D
curve occurs when P changes
In market economies, prices adjust to balance supply and demand. These
equilibrium prices are the signals that guide economic decisions and thereby
allocate scarce resources.
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Bank questions:
1. In a market economy,
a. supply determines demand and demand, in turn, determines prices. b. demand determines supply and supply, in turn, determines prices. c. the allocation of scarce resources determines prices and prices, in turn,
determine supply and demand. d. supply and demand determine prices and prices, in turn, allocate the
economy’s scarce resources. Answer: D
2. Which of the following statements is correct?
a. Buyers determine supply, and sellers determine demand. b. Buyers determine demand, and sellers determine supply. c. Buyers determine both demand and supply. d. Sellers determine both demand and supply. Answer:B
3. The demand for a good or service is determined by
a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service. Answer: A
4. In a competitive market, the quantity of a product produced and the price of the product
are determined by
a. buyers. b. sellers. c. both buyers and sellers. d. None of the above is correct. Answer: C
5. The quantity demanded of a good is the amount that buyers are
a. willing to purchase. b. willing and able to purchase. c. willing, able, and need to purchase. d. able to purchase. Answer:B
6. An increase in quantity demanded
a. results in a movement downward and to the right along a demand curve. b. results in a movement upward and to the left along a demand curve. c. shifts the demand curve to the left. d. shifts the demand curve to the right. Answer: A
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7. A decrease in quantity demanded
a. results in a movement downward and to the right along a demand curve. b. results in a movement upward and to the left along a demand curve. c. shifts the demand curve to the left. d. shifts the demand curve to the right. Answer:B
8. The quantity supplied of a good is the amount that
a. buyers are willing and able to purchase. b. sellers are able to produce. c. buyers and sellers agree will be brought to market. d. sellers are willing and able to sell. Answer: D
9. If the price of a good is low,
a. firms would increase profit by increasing output. b. the quantity supplied of the good could be zero. c. the supply curve for the good will shift to the left. d. firms can and should raise the price of the product. Answer:B
10. A decrease in the price of a good will
a. increase supply. b. decrease supply. c. increase quantity supplied. d. decrease quantity supplied. Answer: D
Chapter 6
Econ 201
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Government Policies That Alter the Private Market Outcome
)السياسات الحكومية التي تغير مخرجات السوق(
1. Price controls )التحكم باالسعار(
Price ceiling على للسعر( ال)حد ا : a legal maximum on the price of a good or service Example:
rent control
Price floor دنى للسعر( ال)حد ا : a legal minimum on the price of a good or service Example:
minimum wage
2. Taxes)الضرائب(
The government can make buyers or sellers pay a specific amount on each unit.
How Price Ceilings Affect Market Outcomes )كيف يؤثر فرض حد اعلى للسعر على مخرجات السوق(
A price ceiling above the equilibrium price is not binding )غير ملزم(— has no effect on the
market outcome.
The equilibrium price ($800) is above the ceiling and therefore illegal. The ceiling is a
binding constraint on the price, causes a shortage.
In the long run, supply and demand are more price-elastic. So, the shortage is larger.
How Price floor Affect Market Outcomes )كيف يؤثر فرض حد ادنى للسعر على مخرجات السوق(
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A price floor below the equilibrium price is not binding )غير ملزم( – has no effect on the
market outcome.
The equilibrium wage ($6) is below the floor and therefore illegal. The floor is a binding
constraint )ًقيداً ملزما(on the wage, causes a surplus (i.e.,unemployment).
The minimum wage: )الحد االدني لالجور(
Prices are the signals that guide the allocation of society’s resources. This allocation is
altered when policymakers restrict prices.
Price controls often intended to help the poor, but often hurt more than help.
Taxes: )الضرائب(
The government levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc.
The government can make buyers or sellers pay the tax.
The tax can be a % of the good’s price, or a specific amount for each unit sold. For simplicity, we analyze per-unit taxes only.
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A tax on good places a wedge between the price buyers pay and the price sellers
receive, and causes the equilibrium quantity to fall, whether the tax is imposed on
buyers or sellers.
The incidence of a tax is the division of the burden of the tax between buyers and sellers,
and does not depend on whether the tax is imposed on buyers or sellers.
The incidence of the tax depends on the price elasticity of supply and demand.
A Tax on Sellers ى البائعين( لعالمفروضة )الضريبة
The tax effectively raises sellers’ costs by
$1.50 per pizza. Sellers will supply 500 pizzas
only if P rises to $11.50, to compensate for
this cost increase. Hence, a tax on sellers
shifts the S curve up by the amount of the
tax.
The Outcome Is the Same in Both Cases!
)الناتج واحد في الحالتين(
The effects on P and Q, and the tax incidence
are the same whether the tax is imposed on
buyers or sellers!
Elasticity and Tax Incidence )المرونة ونسبة الضرائب(
CASE 1: Supply is more elastic than demand )العرض مرن اكثر من الطلب(
It’s easier for sellers than buyers to leave the
market.
So buyers bear most of the burden of the tax.
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CASE 2: Demand is more elastic than Supply )الطلب مرن اكثر من العرض(
It’s easier for buyers than sellers to leave the
market.
Sellers bear most of the burden of the tax.
Who Pays the Luxury Tax?
)من يدفع ضريبة الرفاهية(
Demand is price-elastic. In the short run, supply
is inelastic.
Hence, companies that build yachts pay most of
the tax.
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Bank questions:
1. Minimum-wage laws dictate
a. the exact wage that firms must pay workers.
b. a maximum wage that firms may pay workers.
c. a minimum wage that firms may pay workers.
d. both a minimum wage and a maximum wage that firms may pay workers.
ANS: C
2 . Price controls are usually enacted
a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers or
sellers.
c. when policymakers detect inefficiencies in a market.
d. All of the above are correct.
ANS: B
3. Policymakers use taxes
a. to raise revenue for public purposes but not to influence market outcomes.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.
ANS: B
4. In a competitive market free of government regulation,
a. price adjusts until quantity demanded is greater than quantity supplied.
b. price adjusts until quantity demanded is less than quantity supplied.
c. price adjusts until quantity demanded equals quantity supplied.
d. supply adjusts to meet demand at every price.
ANS : C
5. In a free, competitive market, what is the rationing mechanism?
a. seller bias
b. buyer bias
c. government law
d. price
ANS: D
6. A legal maximum on the price at which a good can be sold is called a price
a. floor.
b. subsidy.
c. support.
d. ceiling.
ANS: D
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7. In response to a shortage caused by the imposition of a binding price ceiling on a market,
a. price will no longer be the mechanism that rations scarce resources.
b. long lines of buyers may develop.
c. sellers could ration the good or service according to their own personal biases.
d. All of the above are correct.
ANS: D
Figure 6-1
Panel (a) Panel (b)
8.Refer to Figure 6-1. A binding price ceiling is shown in
a. panel (a) only.
b. panel (b) only.
c. both panel (a) and panel (b).
d. neither panel (a) nor panel (b).
ANS: B
9.Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the price ceiling?
a. panel (a) only
b. panel (b) only
c. both panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANS: B
10. Refer to Figure 6-1. The price ceiling shown in panel (a)
a. is not binding.
b. creates a surplus.
c. creates a shortage.
d. Both a) and b) are correct.
ANS: A
D
S
price ceiling
quantity
price
D
S
price ceiling
quantity
price
Chapter 7
Econ 201
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Welfare economics )الرفاهية االقتصادية( studies how the allocation of resources affects
economic well-being.
A buyer’s willingness to pay )استعداد المشتري للدفع( for a good is the maximum
amount the buyer will pay for that good.
WTP )تقييم المشتري للسلعة( measures how much the buyer values the good.
Example: If price of iPod is $200, who
will buy an iPod, and what is quantity
demanded?
Answer: Anthony & Flea will buy an
iPod, Chad & John will not.
Hence, Q d
= 2 when P = $200.
WTP and the Demand Curve
)تقييم المشتري للسلعة ومنحنى الطلب(
This Demand curve looks like a staircase
with 4 steps one- per buyer.
If there were a huge number of buyers as in
competitive market there would be a huge
Number of very tiny steps and it would look
more like a smooth curve.
At any Q the height of the demand curve is
the WTP of the marginal buyer. The buyer
who would leave the market price were any
higher.
Consumer surplus )فائض المستهلك( is the amount a buyer is willing to pay minus the
amount the buyer actually pays:
CS= WTP- P
Suppose P = $260. Flea’s CS = $300 – 260 = $40.
The others get no CS because they do not buy an iPod at this price. Total CS = $40.
name WTP
Anthony $250
Chad 175
Flea 300
John 125
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CS and demand curve:
الطلب(ى ن)فائض المستهلك ومنح
Suppose: P = $220
Flea’s CS = $300 – 220 = $80
Anthony’s CS =$250 – 220 = $30
Total CS = $110
But with lots of buyers the Demand curve will be smooth.
How a Higher Price Reduces CS )كيف يؤدي ارتفاع السعر الى خفض فائض المستهلك(
ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ
▪ Cost is the value of everything a seller must give up to produce a
good (i.e., opportunity cost).
▪ Includes cost of all resources used to produce good, including value of the seller’s
time.
Cost and supply curve التكلفة ومنحنى العرض()
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At each Q,
the height of the S curve is the cost of the marginal seller, the seller who would
leave the market if the price were any lower.
PS=P - cost
Producer surplus )فائض المنتج( (PS): the amount a seller is paid for a good
minus the seller’s cost
Total PS equals the area above the supply curve under the price, from 0 to Q.
But with lots of buyers the supply curve will be smooth.
How a Lower Price Reduces PS فائض للمنتج( )كيف يؤدي خفض السعر الى تحقيق
CS = (value to buyers) – (amount paid by buyers)
= buyers’ gains from participating in the market
PS = (amount received by sellers) – (cost to sellers)
= sellers’ gains from participating in the market
Total surplus = CS + PS
= total gains from trade in a market
= (value to buyers) – (cost to sellers)
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An allocation of resources is efficient if it maximizes total surplus. Efficiency means:
▪ The goods are consumed by the buyers who value them most highly.
▪ The goods are produced by the producers with the lowest costs.
▪ Raising or lowering the quantity of a good would not increase total surplus.
Which Buyers Consume the Good?
المشترى الذي يستهلك السلعة( )ماهو
Every buyer whose WTP is≥ $30 will buy.
Every buyer whose WTP is<$30 will not.
So, the buyers who value the good most
highly are the ones who consume it.
Which Sellers Produce the Good? )ماهو المنتج الذي ينتج السلعة(
Every seller whose cost is ≤ $30 will produce
the good. Every seller whose cost is > $30
will not. So, the sellers with the lowest cost
produce the good.
Does Equilibrium Q maximize total surplus?
)هل التوازن يؤدي الى تعظيم الفائض(
The market equilibrium quantity maximizes
total surplus: at any other quantity can
increase total surplus by moving toward the
market equilibrium.
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The market equilibrium is efficient No other outcome achieves higher توازن السوق الفعال()
total surplus.
Government cannot raise total surplus by changing the market’s allocation of
resources.
Suppose resources were allocated )بفرض ان الموارد تم اعادة توزيعها( not by the market, but
by a central planner who cares about society’s well-being.
To allocate resources efficiently and maximize total surplus
الفائض(عادة توزيع الموارد بطريقة مثلى وتعظيم اجمالي )إل , the planner would need to know every
seller’s cost and every buyer’s WTP for every good in the entire economy.
This is impossible, and why centrally-planned economies are never very efficient.
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Bank questions:
1. Which of the following statements is correct?
a. Buyers always want to pay less and sellers always want to be paid more.
b. Buyers always want to pay less and sellers always want to be paid less.
c. Buyers always want to pay more and sellers always want to be paid more.
d. Buyers always want to pay more and sellers always want to be paid less.
ANS: A
2. An example of positive analysis is studying
a. how market forces produce equilibrium.
b. whether equilibrium outcomes are fair.
c. whether equilibrium outcomes are socially desirable.
d. if income distributions are fair.
ANS: A
3. Which of the Ten Principles of Economics does welfare economics explain more fully?
a. The cost of something is what you give up to get it.
b. Rational people think at the margin.
c. Markets are usually a good way to organize economic activity.
d. People respond to incentives.
ANS: C
4. In which of the following circumstances would a buyer be indifferent about buying a good?
a. The amount of consumer surplus the buyer would experience as a result of buying the
good is zero.
b. The price of the good is equal to the buyer’s willingness to pay for the good.
c. The price of the good is equal to the value the buyer places on the good.
d. All of the above are correct.
ANS: D
5. Consumer surplus is equal to the
a. Value to buyers - Amount paid by buyers.
b. Amount paid by buyers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Willingness to pay of buyers.
ANS: A
6. Consumer surplus is
a. a concept that helps us make normative statements about the desirability of market
outcomes.
b. represented on a graph by the area below the demand curve and above the price.
c. a good measure of economic welfare if buyers' preferences are the primary concern.
d. All of the above are correct.
ANS: D
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Figure 7-1
7. Refer to Figure 7-1. If the price of the good is $250, then consumer surplus amounts to
a. $50.
b. $100.
c. $150.
d. $200.
ANS: A
8. Refer to Figure 7-1. If the price of the good is $150, then consumer surplus amounts to
a. $150.
b. $200.
c. $250.
d. $300.
ANS: C
9. Refer to Figure 7-1. If the price of the good is $50, then consumer surplus amounts to
a. $400.
b. $500.
c. $600.
d. $750.
ANS: C
10. Refer to Figure 7-1. If the price of the good is $200, then
a. consumer surplus is $150.
b. consumer surplus is $650.
c. producer surplus is $650.
d. producer surplus is $750.
ANS: A
Demand
1 2 3 4 5 Q
50
100
150
200
250
300
350 P
Chapter 8
Econ 201
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A tax )الضرائب(
Drives a wedge between the price buyers pay and the price sellers receive.
Raises the price buyers pay and lowers the price sellers receive.
Reduces the quantity bought & sold.
A tax on a good reduces the welfare of buyers and sellers. This welfare loss usually
exceeds the revenue the tax raises for the govt.
The affects of Tax: )تأثير الضرائب (
Revenue from tax: $T x QT
Eq’m with no tax: Price = PE
Quantity = QE
Eq’m with tax = $T per unit: Buyers
pay PB
Sellers receive PS Quantity = QT
With the tax, CS = A, PS = F Tax revenue= B + D Total surplus= A + B+ D + F
The tax reduces total surplus by C + E
C+E is called the deadweight loss
(DWL) of the tax, the fall in total surplus
that results from market distortion such
as a tax.
The deadweight loss:
)خسارة المكاسب القصوى(
Because of the tax, the units between P
QT and QE are not sold.
The value of these units to buyers is
greater than the cost of producing them,
so the tax prevents some mutually beneficial trades.
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DWL and the elasticity of supply
العرض()خسارة المكاسب القصوى ومرونة
When supply is inelastic, it’s harder for firms
to leave the market when the tax reduces PS.
So, the tax only reduces Q a little, and DWL is
small.
DWL and the elasticity of demand:
)خسارة المكاسب القصوى ومرونة العرض(
When demand is inelastic, it’s harder for
consumers to leave the market when the tax
raises PB.
So, the tax only reduces Q a little, and DWL is
small.
The more elastic is demand, the easier for
buyers to leave the market when the tax
increases PB,
The more Q falls below the surplus- maximizing
quantity, and the greater the DWL.
A bigger government provides more services, but requires higher taxes, which cause
DWLs.
The larger the DWL from taxation, the greater the argument for smaller government.
The tax on labor income )الضريبة على دخل العامل( is especially important; it’s the biggest
source of government revenue.
For the typical worker, the marginal tax rate )معدل الضريبة الحدية( (the tax on the last dollar of earnings) is about 40%.
The fall in total surplus (consumer surplus, producer surplus, and tax revenue) is
called the deadweight loss (DWL) of the tax.
A tax has a DWL because it causes consumers to buy less and producers to sell less,
thus shrinking the market below the level that maximizes total surplus.
If labor supply is inelastic .then this DWL is small , غير مرنة( ه)اذا كان عرض العامل
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Other economists believe labor taxes are highly distorting because some groups of
workers have elastic supply and can respond to incentives:
جيب للحوافز()يعتقد اقتصاديون اخرون ان ضرائب على العماله مشوهه للغاية الن بعض العمال لديهم عرض مرون يمكن ان يست
Many workers can adjust their hours, e.g., by working overtime.
Many elderly choose when to retire based on the wage they earn.
Some people work in the “underground economy” to evade high taxes.
Policymakers often change taxes, raising some and lowering others.
DWL and the Size of the Tax
)خسارة المكاسب القصوى والضرائب(
Initially, the tax is T per unit.
Doubling the tax causes the DWL to
more than double.
When tax rates are low عندما يكون معدل الضريبة raising them doesn’t cause much harm, and lowering them doesn’t bring much ,(منخفض(
benefit.
When tax rates are high )عندما يكون معدل الضريبة مرتفع(, raising them is very harmful, and
cutting them is very beneficial.
Revenue and the Size of the Tax
)العائد وحجم الضربية(
When the tax is larger, increasing it
causes tax revenue to fall.
Revenue and the Size of the Tax
The Laffer curve )منحنى لوفر( shows the
relationship between the size of the tax
and tax revenue.
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Bank Questions:
1. Who once said that taxes are the price we pay for a civilized society?
a. Milton Friedman
b. Theodore Roosevelt
c. Arthur Laffer
d. Oliver Wendell Holmes, Jr.
ANS: D
2. To fully understand how taxes affect economic well-being, we must
a. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed.
b. compare the taxes raised in the United States with those raised in other countries,
especially France.
c. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
d. take into account the fact that almost all taxes reduce the welfare of buyers, increase the
welfare of sellers, and raise revenue for the government.
ANS: C
3. To fully understand how taxes affect economic well-being, we must compare the
a. benefit to buyers with the loss to sellers. b. price paid by buyers to the price received by sellers.
c. profits earned by firms to the losses incurred by consumers.
d. decrease in total surplus to the increase in revenue raised by the government.
ANS: D
4. When a tax is levied on a good, the buyers and sellers of the good share the burden,
a. provided the tax is levied on the sellers.
b. provided the tax is levied on the buyers. c. provided a portion of the tax is levied on the buyers, with the remaining portion levied on
the sellers.
d. regardless of how the tax is levied.
ANS: D
5. A tax on a good
a. raises the price that buyers effectively pay and raises the price that sellers effectively
receive. b. raises the price that buyers effectively pay and lowers the price that sellers effectively
receive.
c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive.
d. lowers the price that buyers effectively pay and lowers the price that sellers effectively
receive.
ANS: B
6. The government’s benefit from a tax can be measured by
a. consumer surplus.
b. producer surplus. c. tax revenue.
d. All of the above are correct.
ANS: C
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7. A tax levied on the sellers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right). c. demand curve upward (or to the right).
d. demand curve downward (or to the left).
ANS: A
8. The vertical distance between points A and B represents a tax in the market.
9. Refer to Figure 8-2. The imposition of the tax causes the quantity sold to
a. increase by 1 unit.
b. decrease by 1 unit.
c. increase by 2 units.
d. decrease by 2 units.
ANS: B
10. Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to
a. decrease by $2. b. increase by $3.
c. decrease by $4.
d. increase by $5.
ANS: B
11. Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to
a. decrease by $2. b. increase by $3.
c. decrease by $4.
d. increase by $5.
ANS: A
Supply
Demand
A
B
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity
1
2
3
4
5
6
7
8
9
10
11
12
Price
Chapter 9
Econ 201
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P W
= the world price of a good )السعر العالمي للسلعة(, the price that prevails in world
markets
P D
= domestic price without trade )السعر المحلي للسلعة(
If P D
< P W
, so the country has comparative advantage in the good, so under free trade,
country exports the good If P
D > P
W ,country does not have comparative advantage, so under free trade, country
imports the good
A small economy is a price taker in world markets: Its يأخذ السعر كما هو( )االقتصاد الصغير
actions have no effect on P W
.
When a small economy engages in free trade, P W
is the only relevant price:
▪ No seller would accept less than P W
, since she could sell the good for P W
in world
markets.
▪ No buyer would pay more than P W
, since he could buy the good for P W
in world
markets.
Example: Country that exports Beans )دولة تصدر الحبوب(
Without trade: PD = $4, Q = 500
P W
= $6, Under free trade, domestic consumers demand 300
domestic producers supply 750 and exports = 450
Without trade تبادل تجاري( )بدون : CS = A + B, PS = C, Total surplus= A + B + C
With trade )بالتبادل التجاري(, CS = A, PS = B + C + D, Total surplus= A + B + C + D
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The welfare effect of the trade : )تأثير التجارة على الرفاهية(
Other Benefits of International Trade )فوائد اخرى للتجارة الدولية(
Consumers enjoy increased variety of goods.
Producers sell to a larger market, may achieve lower costs by producing on a
larger scale.
Competition from abroad may reduce market power of domestic firms, which
would increase total welfare.
Trade enhances the flow of ideas, facilitates the spread of technology around the
world.
The winners from trade could compensate the losers and still be better off.
Hence, the losers have more incentive to organize and lobby for restrictions on trade.
An Example of a Trade Restriction قيود على التجارة(:مثال على فرض
1. Tariff )التعريفة الجمركية(
Free trade: CS = A + B + C + D + E + F PS = G
Total surplus = A + B + C + D + E + F + G
Tariff: CS = A + B PS = C + G, Revenue =
Total surplus = A + B + C + E + G
D = deadweight loss from the over
production of shirts
F = deadweight loss from the under-
consumption of shirts
PD < PW PD > PW
direction of trade exports imports
consumer surplus falls rises
producer surplus rises falls
total surplus rises rises
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2. An import quota )حصص االستيراد(is a quantitative limit on imports of a good. Mostly
has the same effects as a tariff:
▪ Raises price, reduces quantity of imports.
▪ Reduces buyers’ welfare.
▪ Increases sellers’ welfare.
▪ A tariff creates revenue for the govt. A quota creates profits for the foreign producers
of the imported goods, who can sell them at higher price.
▪ Or, government could auction licenses to import to capture this profit as revenue.
Usually it does not.
Arguments for Restricting Trade )الجدل القائم حول فرض قيود على التجارة(
1. The jobs argument )الجدل القائم بشأن الوظائف(: Trade destroys jobs in industries that compete
with imports.
Economists’ response )رد االقتصاديين على هذا الجدل(:
▪ Total unemployment does not rise as imports rise, because job losses from imports
are offset by job gains in export industries.
▪ Even if all goods could be produced more cheaply abroad, the country need only have a comparative advantage to have a viable export industry and to gain from trade.
2. The national security argument )الجدل القائم حول االمن القومي(
An industry vital to national security should be protected from foreign competition, to
prevent dependence on imports that could be disrupted during wartime.
Economists’ response)رد االقتصاديين على هذا الجدل(:
Fine, as long as we base policy on true security needs.But producers may exaggerate
their own importance to national security to obtain protection from foreign competition.
3. The infant-industry argument )الجدل القائم حول الصناعة الناشئة(
A new industry argues for temporary protection until it is mature and can compete with
foreign firms.
Economists’ response)رد االقتصاديين على هذا الجدل(:
Difficult for govt to determine which industries will eventually be able to compete and
whether benefits of establishing these industries exceed cost to consumers of
restricting imports. Besides, if a firm will be profitable in the long run, it should be
willing to incur temporary losses.
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4. The unfair-competition argument )الجدل القائم حول المنافسة غير العادلة( Producers argue
their competitors in another country have an unfair advantage, e.g. due to govt
subsidies.
Economists’ response)رد االقتصاديين على هذا الجدل(:
we can import extra-cheap products subsidized by the other country’s taxpayers.
The gains to our consumers will exceed the losses to our producers.
5. The protection-as-bargaining-chip argument )الجدل القائم عن حجة الحماية كمساومة(
Example: The U.S. can threaten to limit imports of French wine unless France lifts
their quotas on American beef.
Economists’ response)رد االقتصاديين على هذا الجدل(:
Suppose France refuses. Then the U.S. must choose between two bad options:
Restrict imports from France, which reduces welfare in the U.S. Don’t restrict
imports, which reduces U.S. credibility.
Examples of trade agreements )امثلة على االتفاقيات التجارية(:
1. North American Free Trade Agreement (NAFTA), 1993
2. General Agreement on Tariffs and Trade (GATT), ongoing
3. World Trade Organization (WTO), est. 1995, enforces trade agreements, resolves
disputes
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Bank Questions:
1. Which of the following tools and concepts is useful in the analysis of international trade?
a. total surplus
b. domestic supply
c. equilibrium price
d. All of the above are correct.
ANS : D
2. A logical starting point from which the study of international trade begins is
a. the recognition that not all markets are competitive.
b. the recognition that government intervention in markets sometimes enhances the economic
welfare of the society.
c. the principle of absolute advantage.
d. the principle of comparative advantage.
ANS : D
3. What is the fundamental basis for trade among nations?
a. shortages or surpluses in nations that do not trade
b. misguided economic policies
c. absolute advantage
d. comparative advantage
ANS : D
4. The principle of comparative advantage asserts that
a. not all countries can benefit from trade with other countries.
b. the world price of a good will prevail in all countries, regardless of whether those
countries allow international trade in that good.
c. countries can become better off by exporting goods, but they cannot become better off by
importing goods.
d. countries can become better off by specializing in what they do best.
ANS: D
5. A tax on an imported good is called a
a. quota.
b. tariff.
c. supply tax.
d. trade tax.
ANS : B
6. A tariff is a
a. limit on how much of a good can be exported.
b. limit on how much of a good can be imported.
c. tax on an exported good.
d. tax on an imported good.
ANS: D
7. The price of sugar that prevails in international markets is called the
a. export price of sugar.
b. import price of sugar.
c. comparative-advantage price of sugar.
d. world price of sugar.
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ANS : D
Figure 9-1
The figure illustrates the market for wool in Scotland.
8 . Refer to Figure 9-1. From the figure it is apparent that
a. Scotland will experience a shortage of wool if trade is not allowed.
b. Scotland will experience a surplus of wool if trade is not allowed.
c. Scotland has a comparative advantage in producing wool, relative to the rest of the world.
d. foreign countries have a comparative advantage in producing wool, relative to Scotland.
ANS: C
9 .Refer to Figure 9-1. From the figure it is apparent that
a. Scotland will export wool if trade is allowed.
b. Scotland will import wool if trade is allowed.
c. Scotland has nothing to gain either by importing or exporting wool.
d. the world price will fall if Scotland begins to allow its citizens to trade with other
countries.
ANS: A
10 Refer to Figure 9-1. With trade, Scotland will
a. export 11 units of wool.
b. export 5 units of wool.
c. import 15 units of wool.
d. import 6 units of wool.
ANS: A
11. . Refer to Figure 9-1. In the absence of trade, the equilibrium price of wool in Scotland is
a. $15.
b. $45.
c. $55.
d. $70.
ANS: B
12. Refer to Figure 9-1. In the absence of trade, total surplus in Scotland is represented by the area
a. A + B + C.
b. A + B + C + D + F.
c. A + B + C + D + F + G.
d. A + B + C + D + F + G + H.
ANS: B
Domestic supply
Domestic demand
World price
A
B
C
D
F
G
H
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Quantity
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
Price
Chapter 10
Econ 201
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▪ Gross Domestic Product (GDP) )الناتج المحلي االجمالي( measures total income of
everyone in the economy.
▪ GDP also measures total expenditure on the economy’s output of g&s.
▪ Factors of production عوامل االنتاج( ) are inputs like labor, land, capital, and natural
resources.
▪ Factor payments عوامل االنفاق( ) are payments to the factors of production (e.g., wages,
rent).
What This Diagram Omits
Households:
▪ Own the factors of production, sell/rent them to firms for income
▪ Buy and consume goods & services Firms:
▪ Buy/hire factors of production, use them to produce goods and services
▪ Sell goods & services
▪ The government: collects taxes, buys g&s
▪ The financial system: matches savers’ supply of funds with borrowers’ demand for loans
▪ The foreign sector: trades g&s, financial assets, and currencies with the country’s residents
Gross Domestic Product (GDP) )الناتج المحلي االجمالي(Is…the market value )القيمة السوقية(of
all final goods & services produced within a country in a given period of time.
▪ Final goods: intended for the end user
▪ Intermediate goods: used as components or ingredients in the production of other
goods
▪ GDP only includes final goods ( )بحتوي الناتج المحلي االجمالي على السلع النهائية —they already
embody the value of the intermediate goods used in their production.
▪ GDP includes tangible goods )يحتوي الناتج المحلي االجمالي على السلع الملموسة( (like DVDs,
mountain bikes, beer) and intangible services (dry cleaning, concerts, cell phone
service).
▪ GDP includes currently produced goods, not goods produced in the past.
▪ GDP measures the value of production that occurs within a country’s borders, whether
done by its own citizens or by foreigners located there.
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▪ The Four components of GDP )المكونات االربعة للناتج المحلي االجمالي( :
1. Consumption (C)
2. Investment (I)
3. Government Purchases (G)
4. Net Exports (NX)
▪ These components add up to GDP (denoted Y):
Y = C + I + G + NX
1. Consumption(c))االستهالك(: is total spending by households on g&s. Note on housing costs:
▪ For renters, consumption includes rent payments.
▪ For homeowners, consumption includes the imputed rental value of the house, but not the purchase price or mortgage payments.
2. Investment(I) )االستثمار( : is total spending on goods that will be
used in the future to produce more goods. includes spending on:
▪ capital equipment (e.g., machines, tools)
▪ structures (factories, office buildings, houses)
▪ inventories (goods produced but not yet sold)
3. Government purchase (G) )االنفاق الحكومي(: is all spending on the g&s
purchased by government at the federal, state, and local levels.
▪ G excludes transfer payments, such as Social Security or
unemployment insurance benefits.
▪ They are not purchases of g&s.
4. Net Export(NE) NX = exports – imports : )صافي الصادرات(
▪ Exports represent foreign spending on the economy’s g&s.
▪ Imports are the portions of C, I, and G that are spent on g&s produced abroad.
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Nominal GDP)الناتج المحلي االجمالي االسمي(: values output using current prices, not corrected for inflation
Real GDP )الناتج المحلي االجمالي الحقيقي(: values output using the prices of a base year, is
corrected for inflation
▪ Nominal GDP is measured using the (then) current prices.
▪ Real GDP is measured using constant prices from the base year
▪ The change in nominal GDP reflects both prices and quantities.
▪ The change in real GDP is the amount that GDP would change if prices
were constant (i.e., if zero inflation).
The GDP deflator )معامل انكماش الناتج المحلي االجمالي(is a measure of the overall level
of prices.
Real GDP per capita is the main indicator of the average االجمالي للفرد()الناتج المحلي
person’s standard of living.
GDP does not value)الناتج المحلي االجمالي ال يقيم ما يلي(:
the quality of the environment
▪ leisure time
▪ non-market activity, such as the child care a parent provides his or her child at
home
▪ an equitable distribution of income
Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc.
Many indicators of the quality of life are positively correlated with GDP. For example
real GDP GDP deflator = 100 x
nominal GDP
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Bank Questions:
1. Macroeconomists study
a. the decisions of individual households and firms.
b. the interaction between households and firms.
c. economy-wide phenomena.
d. regulations imposed on firms and unions.
ANS: C
2. Gross domestic product measures
a. income and expenditures.
b. income but not expenditures.
c. expenditures but not income.
d. neither income nor expenditures.
ANS: A
3. Expenditures on a nation’s domestic production
a. are less than its domestic production.
b. are equal to its domestic production.
c. are greater than its domestic production.
d. could be less than, equal to, or greater than its domestic production.
ANS: B
4. Income generated by a nation’s domestic production
a. is less than its domestic production.
b. is equal to its domestic production.
c. is greater than its domestic production.
d. could be less than, equal to, or greater than its domestic production.
ANS: B
5. For an economy as a whole,
a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.
ANS: C
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6. For an economy as a whole, income must equal expenditure because
a. the number of firms is equal to the number of households in an economy.
b. individuals can only spend what they earn each period.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other consumer.
ANS: C
7. If an economy’s GDP rises, then it must be the case that the economy’s
a. income rises and saving falls.
b. income and saving both rise.
c. income rises and expenditure falls.
d. income and expenditure both rise.
ANS: D
8. A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to
produce a bicycle, which it sells for $250. Taken together, these two transactions contribute
a. $150 to GDP.
b. $250 to GDP.
c. between $250 and $400 to GDP, depending on the profit earned by the bicycle company
when it sold the bicycle.
d. $400 to GDP.
ANS: B
9. Whip-It manufactures blenders. In 2009 it had $50,000 of blenders in inventory. In 2010 it sold $300,000
of blenders to consumers and had $40,000 of blenders in inventory. How much did blenders produced
by Whip-it add to GDP in 2010?
a. $340,000
b. $310,000
c. $300,000
d. $290,000
ANS: D
10. A newspaper article informs you that most businesses reduced production in the last quarter but also
sold from their inventories during the last quarter. Based on this information GDP likely
a. increased.
b. decreased.
c. stayed the same.
d. may have increased, decreased, or stayed the same.
ANS: B
Chapter 11
Econ 201
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The Consumer Price Index (CPI) )الرقم القياسي السعار المستهلكين(: measures the
typical consumer’s cost of living
▪ The basis of cost of living adjustments (COLAs) in many contracts and in Social
Security.
How can you calculate CIP? )كيف يمكن حساب الرقم القياسي السعار المستهلكين(
1. Fix the “basket” بمعنى يثبت السلع داخل السلة()يثبت السلة : The Bureau of Labor Statistics
(BLS) surveys consumers to determine what’s in the typical consumer’s “shopping
basket.”
2. Find the prices) يحدد اسعار السلع(: The BLS collects data on the prices of all the goods in the basket.
3. Compute the basket’s cost )حساب تكلفة السلة(: Use the prices to compute the total cost of the basket.
4. Choose a base year and compute the index
المستهلكين( ر)اختار سنة االساس لحساب الرقم القياسي السعا
The CPI in any year =
5. Compute the inflation rate )حساب معدل التضخم(: The percentage change in the CPI from the preceding period.
What is the CPI basket? مكونات الرقم القياسي السعار المستهلكين()ماهي
Housing
Transportation
Food and beverages
Medical care
Recreation
Education and Communication
Apparel
Other
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The problems of CPI:)ماهي مشكالت الرقم القياسي السعار المستهلكين(
1. Substitution Bias )تحيز االستبدال(
Over time, some prices rise faster than others.
Consumers substitute toward goods that become relatively cheaper, mitigating the
effects of price increases.
The CPI misses this substitution because it uses a fixed basket of goods.
Thus, the CPI overstates increases in the cost of living.
2. Introduction of New Goods )ادخال سلع جديدة(
The introduction of new goods increases variety, allows consumers to find products that more closely meet their needs.
In effect, dollars become more valuable.
The CPI misses this effect because it uses a fixed basket of goods.
Thus, the CPI overstates increases in the cost of living.
3. Unmeasured Quality Change )تغير الجودة غير المقاسة(
Improvements in the quality of goods in the basket increase the value of each dollar.
The BLS tries to account for quality changes but probably misses some, as quality is hard to measure.
Thus, the CPI overstates increases in the cost of living.
There are two measure of the inflation : )هناك نوعين من مقاييس التضخم( 1. CPI )الرقم القياسي السعار المستهلكين( uses fixed basket
2. GDP deflector uses basket of currently produced : )عاكس الناتج المحلي االجمالي(
goods & services
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Imported consumer goods: )السلع االستهالكية المستوردة(
▪ included in CPI
▪ excluded from GDP deflator
Capital goods: )السلع الرأسمالية(
excluded from CPI
included in GDP deflator
Correcting Variables for Inflation: )تصحيح متغيرات التضخم(
1. Comparing Dollar Figures from Different Times)مقارنة ارقام الدوالر خالل اوقات مختلفة(
Researchers, business analysts, and policymakers often use this technique to convert a
time series of current-dollar (nominal) figures into constant-dollar (real) figures.
They can then see how a variable has changed over time after correcting for inflation.
2. Indexation )الفهرسة(
A dollar amount is indexed for inflation if it is automatically corrected for
inflation by law or in a contract.
For example, the increase in the CPI automatically determines:
▪ the COLA in many multi-year labor contracts
▪ adjustments in Social Security payments and federal income tax brackets
3. Real vs. Nominal Interest Rates )القيمة االسمية والحقيقية السعار الفائدة(
» The nominal interest rate )القيمة االسمية لسعر الفائدة(
▪ The interest rate not corrected for inflation
▪ the rate of growth in the dollar value of a
deposit or debt
» The real interest rate)القيمة الحقيقية لسعر الفائدة(
▪ corrected for inflation
▪ the rate of growth in the purchasing power of a deposit or
debt
Real interest rate = (nominal interest rate) – (inflation rate)
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Questions Bank:
1. The consumer price index is used to
a. monitor changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living over time.
c. monitor changes in the level of real GDP over time.
d. monitor changes in the stock market.
ANS: B
2. Which of the following is not correct?
a. The consumer price index gives economists a way of turning dollar figures into
meaningful measures of purchasing power.
b. The consumer price index is used to monitor changes in the cost of living over time.
c. The consumer price index is used by economists to measure the inflation rate.
d. The consumer price index is used to measure the quantity of goods and services that the
economy is producing.
ANS: D
3. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
a. the CPI is easier to measure.
b. the CPI is calculated more often than the GDP deflator is.
c. the CPI better reflects the goods and services bought by consumers.
d. the GDP deflator cannot be used to gauge inflation.
ANS: C
4.Which of the following statements is correct?
a. The CPI can be used to compare dollar figures from different points in time.
b. The percentage change in the CPI is a measure of the inflation rate, but the percentage
change in the GDP deflator is not a measure of the inflation rate.
c. Compared to the consumer price index (CPI), the GDP deflator is the more common
gauge of inflation.
d. The GDP deflator better reflects the goods and services bought by consumers than does
the CPI.
ANS: A
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5. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical consumer, and the CPI is computed and reported by the Department of the
Treasury.
b. typical consumers and typical business firms, and the CPI is computed and reported by
the Department of the Treasury.
c. a typical consumer, and the CPI is computed and reported by the Bureau of Labor
Statistics.
d. typical consumers and typical business firms, and the CPI is computed and reported by
the Bureau of Labor Statistics.
ANS: C
6. The inflation rate is calculated
a. by determining the change in the price index from the preceding period.
b. by adding up the price increases of all goods and services.
c. by computing a simple average of the price increases for all goods and services.
d. by determining the percentage increase in the price index from the preceding period.
ANS: D
7. If 2004 is the base year, then the inflation rate for 2005 equals
a.
b.
c.
d.
ANS: A
8. If the consumer price index was 88 in 2009, 95 in 2010, and 100 in 2011, then the base year must be
a. 2009.
b. 2010.
c. 2011.
d. The base year cannot be determined from the given information.
ANS: C
Chapter 12
Econ 201
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Income and growth around the world : العالم()الدخل والنمو على مستوى
FACT 1: There are vast differences in living standards around the world.
FACT 2: There is also great Variation in growth rates across countries
Since growth rates vary, the country rankings can change over time:
▪ Poor countries )الدول الفقيرة( are not necessarily doomed to poverty forever, e.g.
Singapore incomes were low in 1960 and are quite high now.
▪ Rich countries )الدول الغنية( can’t take their status for granted: They may be
overtaken by poorer but faster-growing countries.
Recall one of the Ten Principles from Chap. 1: A country’s standard of living
depends on its ability to produce g&s.
This ability depends on productivity )االنتاجية(, the average quantity of g&s produced
per unit of labor input.
Y = real GDP = quantity of output produced, L = quantity of labor, so productivity = Y/L (output per worker)
When a nation’s workers are very productive, real GDP is large and incomes are high.
When productivity grows rapidly, so do living standards.
The Determines of productivity and its growth rate )محددات االنتاجية ومعدل النمو(: 1. Physical Capital )رأس المال المادي(: The stock of equipment and structures used to
produce g&s, denoted K.
▪ K/L = capital per worker.
▪ Productivity is higher when the average worker has more capital (machines, equipment, etc.).
2. Human capital (H) )رأس المال البشري (: the knowledge and skills workers acquire
through education, training, and experience H/L = the average worker’s human capital
Productivity is higher when the average worker has more human
capital.
3. Natural resources (N) )الموارد الطبيعية(: the inputs into production that nature
provides, e.g., land, mineral deposits Other things equal, more N allows a country to
produce more Y. In per-worker terms, an increase in N/L causes an increase in Y/L.
Some countries are rich because they have abundant natural resources (e.g., Saudi Arabia has lots of oil).
But countries need not have much N to be rich (e.g., Japan imports the N it needs).
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4. Technological knowledge )المعرفة التكنولوجية(: society’s understanding of the best
ways to produce g&s
Technological progress does not only mean a faster computer, a higher-definition
TV,
or a smaller cell phone.
It means any advance in knowledge that boosts productivity (allows
society to get more output from its resources).
The production function اج( )ت)دالة االن : Y = A F(L, K, H, N)
F( ) is a function that shows how inputs are
combined to produce output
―A‖ is the level of technology
A‖ multiplies the function F( ), so improvements in technology (increases in ―A‖) allow more
output (Y) to be produced from any given combination of
inputs.
Constant returns to scale: Changing all inputs by the same percentage causes
output to change by that percentage. For example,
Doubling all inputs (multiplying each by 2) causes output to double:
2Y = A F(2L, 2K, 2H, 2N)
Increasing all inputs 10% (multiplying each by 1.1) causes output to increase
by 10%:
1.1Y = A F(1.1L, 1.1K, 1.1H, 1.1N)
If we multiply each input by 1/L, then output is multiplied by 1/L:
Y/L = A F(1, K/L, H/L, N/L)
This equation shows that productivity (output per worker) depends on:
)توضح هذه المعادلة أن االنتاجية )الناتج لكل عامل( يعتمد على(
the level of technology (A) physical capital per worker human capital per worker natural resources per worker
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ECONOMIC GROWTH AND PUBLIC POLICY )النمو االقتصادي والسياسة العامة(
1. Saving and Investment )االدخار واالستثمار(
We can boost productivity by increasing K, which requires investment.
Since resources scarce, producing more capital requires producing fewer
consumption goods.
Reducing consumption = increasing saving. This extra saving funds the
production of investment goods.
2. Diminishing Returns and the Catch-Up Effect )تناقص العوائد واثار اللحاق بالركب(
The government can implement policies that rise saving and investment.
(Details in next chapter.) Then K will rise, causing productivity and living
standards to rise.
But this faster growth is temporary, due to diminishing returns to capital: As K
rises, the extra output from an additional unit of K falls….
The Production Function & Diminishing Returns
If workers have little K, giving
them more increases their
productivity a lot.
If workers already have a lot of K,
giving them more increases
productivity fairly little.
3. Investment from abroad )االستثمارالوافد من الخارج(:
To raise K/L and hence productivity, wages, and living standards, the govt can also
encourage
foreign direct investment )االستثمار االجنبي المباشر(: a capital investment (e.g., a
factory) that is owned & operated by a foreign entity
foreign portfolio investment )محفظة االستثمار االجنبي(: a capital investment financed
with foreign money but operated by domestic residents
Some of the returns from these investments flow back to the foreign countries that
supplied the funds. Especially beneficial in poor countries that cannot generate
enough saving to fund investment projects themselves.
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4. Education : )التعليم(
Government can increase productivity by promoting education–investment in human
capital (H). Public schools, subsidized loans for college
Education has significant effects: In the U.S., each year of schooling raises a
worker’s wage by 10%.
5. Health care and Nutrition : )الرعاية الصحية والتغذية(
Healthcare expenditure is a type of investment in human capital , healthier human are more
productive.
6. Property rights and political stability : )حقوق الملكية واالستقرار السياسي(
The price system allocates resources to their most efficient uses.
This requires respect for property rights, the ability of people to exercise authority over
the resources they own.
In many poor countries, the justice system doesn’t work very well:
Contracts aren’t always enforced
Fraud, corruption often go unpunished
In some, firms must bribe govt officials for permits
Political instability (e.g., frequent coups) creates uncertainty over whether property
rights will be protected in the future.
7. Free trade )تحرير التجارة(:
Inward-oriented policies (e.g., tariffs, limits on investment from abroad) aim to raise living standards by avoiding interaction with other countries.
Outward-oriented policies (e.g., the elimination of restrictions on trade or foreign
investment) promote integration with the world economy.
Trade has similar effects as discovering new technologies—it improves productivity and
living standards.
8. Research and Development )البحث والتنمية (
Technological progress is the main reason why living standards rise over the long run.
One reason is that knowledge is a public good: Ideas can be shared freely, increasing the
productivity of many.
Policies to promote tech. progress:
Patent laws
Tax incentives or direct support for private sector R&D
Grants for basic research at universities
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9. Populations Growth )النموالسكاني(:
May affect living standards in 3 different ways:
1. Stretching natural resources الطبيعية()تمدد الموارد 200 years ago, Malthus argued that pop. Growth would strain society’s ability to
provide for itself. Since then, the world population has increased six fold. If Malthus was right, living
standards would have fallen. Instead, they’ve risen. Malthus failed to account for technological progress and productivity growth.
2. Diluting the capital stock )تخفيف رأس المال( Bigger population = higher L = lower K/L = lower productivity & living standards. This applies to H as well as K: fast pop. Growth = more children = greater strain on
educational system.
Countries with fast pop. Growth tends to have lower educational attainment.
To combat this, many developing countries use policy to control population growth.
3. Promoting tech. progress )تعزيز التقدم التكنولوجي( More people
= more scientists, inventors, engineers
= more frequent discoveries
= faster tech. progress & economic growth
Evidence from Michael Kremer: Over the course of human history,
growth rates increased as the world’s population increased
more populated regions grew faster than less populated ones
Are the natural resources a limit to growth?
)هل الموارد الطبيعية محدودة وال يمكن نموها او زيادتها(
Some argue that population growth is depleting the Earth’s non-renewable resources, and
thus will limit growth in living standards.
But technological progress often yields ways to avoid these limits:
Hybrid cars use less gas. Better insulation in homes reduces the energy required to heat or cool them.
As a resource becomes scarcer, its market price rises, which increases the incentive to
conserve it and develop alternatives.
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Bank Questions: Multiple Choices
1. The average income in a rich country, such as the United States or Japan, is more than
a. 3 times, but less than 5 times, the average income in a poor country, such as Indonesia or
Nigeria.
b. 5 times, but less than 10 times, the average income in a poor country, such as Indonesia
or Nigeria.
c. 10 times, but less than 20 times, the average income in a poor country, such as Indonesia
or Nigeria.
d. more than 20 times the average income in a poor country, such as Indonesia or Nigeria.
ANS: C
2. A country experiencing a growth rate of 8% per year can go from being one of the poorest to one of the
richest in how many generations?
a. one
b. two
c. three
d. four
ANS: A
3. A nation's standard of living is best measured by its
a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.
ANS: B
4. As of 2008, using real GDP per person as a measure, we would classify
a. the United States and Mexico as advanced economies and Bangladesh as a middle-
income country.
b. Canada as an advanced economy, Mexico as a middle-income country, and Pakistan as a
poor country.
c. Japan and India as advanced economies and Mexico as a poor country.
d. Japan as an advanced economy, the United Kingdom as a middle-income country, and
Argentina as a poor country.
ANS: B
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5. Countries that have lower levels of real GDP per person than the United States
a. tend to have growth rates that are higher than that of the United States.
b. tend to have growth rates that are about the same as that of the United States.
c. tend to have growth rates that are lower than that of the United States.
d. in some cases have growth rates that are higher than that of the United States and in
other cases lower than that of the United States.
ANS: D
6. Which of the following is correct?
a. Although levels of real GDP per person vary substantially from country to country, the
growth rate of real GDP per person is similar across countries.
b. Productivity is not closely linked to government policies.
c. The level of real GDP per person is a good gauge of economic prosperity, and the growth
rate of real GDP per person is a good gauge of economic progress.
d. Productivity may be measured by the growth rate of real GDP per person.
ANS: C
7. The one variable that stands out as the most significant explanation of large variations in living standards
around the world is
a. productivity.
b. population.
c. preferences.
d. prices.
ANS: A
8. The key determinant of the standard of living in a country is
a. the amount of goods and services produced from each hour of a worker's time.
b. the total amount of goods and services produced within the country.
c. the total amount of its physical capital.
d. its growth rate of real GDP.
ANS: A
Chapter 13
Econ 201
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The financial system )النظام المالي(: the group of institutions that helps match the saving
of one person with the investment of another.
Financial markets )االسواق المالية(: institutions through which savers can directly provide
funds to borrowers. Examples:
1. The Bond Market. A bond )السند( is a certificate of indebtedness. 2. The Stock Market. A stock )السهم( is a claim to partial ownership in a firm.
Financial intermediaries )الوسطاء الماليين(: institutions through which savers can indirectly
provide funds to borrowers. Examples:
Banks )البنوك( Mutual funds )صناديق االستثمار( – institutions that sell shares to the
public and use the proceeds to buy portfolios of stocks and bonds
A financial crisis led to a deep recession in the U.S. and around the world.(2008-2009)
Elements of Financial Crises )عناصر االزمة المالية(
1. Large decline in some asset prices: Housing prices fell 30%.
2. Insolvencies at financial institutions: Banks and other institutions failed when many
homeowners stopped paying their mortgages.
3. Decline in confidence in financial institutions: Customers with uninsured deposits
began pulling their funds out of financial institutions.
4. Credit crunch: Borrowers unable to get loans because troubled lenders not confident
in borrowers’ credit-worthiness.
5. Economic downturn: Failing financial institutions and a fall in investment caused GDP
to fall and unemployment to rise.
6. Vicious circle: The downturn reduced profits and asset values, which worsened the
crisis.
Different Kinds of Saving )االنواع المختلفة لالدخار(
1. Private saving )االدخار الخاص( = The portion of households’ income that is not
used for consumption or paying taxes
Private saving = Y – T – C
2. Public saving )االدخار العام(= Tax revenue less government spending
Public saving = T – G
3. National saving )االدخار القومي( = private saving + public saving
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National saving = (Y – T – C)+(T – G)
= Y –C – G
National saving = the portion of national income that is not used for
consumption or government purchases
Saving and Investment )االدخار واالستثمار(
Recall the national income accounting identity:
Y = C + I + G + NX
For the rest of this chapter, focus on the closed economy
case: Y = C + I + G
I = Y – C – G
Saving = investment in a closed economy
Budget Deficits and Surpluses )فائض وعجز الموازنة(
1. Budget surplus )فائض الموازنة(
= an excess of tax revenue over govt spending
= T – G
= public saving
2. Budget deficit )عجز الموازنة(
= a shortfall of tax revenue from govt spending
= G – T
= – (public saving)
Private saving )االدخار الخاص( is the income remaining after households pay their
taxes and pay for consumption.
Investment )االستثمار( is the purchase of new capital.
The Market for Loanable Funds )سوق الصناديق القابلة لالقراض( A supply–demand model
of the financial system. Helps us understand
▪ how the financial system coordinates saving & investment
▪ how govt policies and other factors affect saving, investment, the interest rate
economics, investment is NOT the purchase of stocks and bonds!
Assume: only one financial market
All savers deposit their saving in this market.
All borrowers take out loans from this market.
There is one interest rate, which is both the return to saving and the cost of
borrowing.
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The supply of loanable funds comes from saving )عرض االموال القابلة لالقراض يأتي من االدخار (:
▪ Households with extra income can loan it out and earn interest.
▪ Public saving, if positive, adds to national saving and the supply of loanable
funds.
▪ If negative, it reduces national saving and the supply of loanable funds.
The demand for loanable funds comes from investment)طلب االموال القابلة لالقراض يأتي من االستثمار(:
▪ Firms borrow the funds they need to pay for new equipment, factories, etc.
▪ Households borrow the funds they need to purchase new houses.
An increase in the interest rate makes saving more attractive, which increases the
quantity of loanable funds supplied.
A fall in the interest rate reduces the cost of borrowing, which increases the quantity
of loanable funds demanded.
Equilibrium )التوازن(
▪ The interest rate adjusts to equate supply
and demand.
▪ The eq’m quantity of L.F. equals eq’m
investment and eq’m saving.
Policy 1: Saving Incentives )حوافز االدخار(
▪ Tax incentives for saving increase the
supply of L.F.
▪ which reduces the eq’m interest rate and
increases the eq’m quantity of L.F.
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Policy 2: Investment Incentives )حوافز االستثمار(
▪ An investment tax credit increases the
demand for L.F.
▪ which raises the eq’m interest rate and
increases the eq’m quantity of L.F.
Increase in budget deficit causes fall in investment. The govt borrows to finance its
deficit, leaving less funds available for investment.This is called crowding out.
The U.S. Government Debt )ديون الحكومة االمريكية(
▪ The government finances deficits by borrowing (selling government bonds).
▪ Persistent deficits lead to a rising govt debt.
▪ The ratio of govt debt to GDP is a useful measure of the government’s
indebtedness relative to its ability to raise tax revenue.
▪ Historically, the debt-GDP ratio usually rises during wartime and falls during
peacetime—until the early 1980s.
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Bank Questions: Multiple Choices
1. When opening a print shop you need to buy printers, computers, furniture, and similar items.
Economists call these expenditures
a. capital investment.
b. investment in human capital.
c. business consumption expenditures.
d. personal saving.
ANS: A
2.If you were to start a business delivering documents, you might need to purchase cell phones,
bicycles, desks, and chairs.
a. These purchases are called capital investment. If you raise the funds to purchase
them from others you are a saver.
b. These purchases are called capital investment. If you raise the funds to purchase
them from others you are a borrower.
c. These purchases are called consumption. If you raise the funds to purchase them
from others you are a saver.
d. These purchases are called consumption. If you raise the funds to purchase them
from others you are a borrower.
ANS: B
3. Most entrepreneurs do not have enough money of their own to start their businesses. When
they acquire the necessary funds from someone else,
a. their consumption expenditures are being financed by someone else’s saving.
b. their consumption expenditures are being financed by someone else’s investment.
c. their investments are being financed by someone else’s saving.
d. their saving is being financed by someone else’s investment.
ANS: C
4. Which of the following statements is correct?
a. The expected future profitability of a corporation influences the demand for that
corporation’s stock.
b. When a corporation sells stock as a means of raising funds it is engaging in debt
finance.
c. The owners of bonds sold by the Microsoft Corporation are part owners of that
corporation.
d. All bonds are, by definition, perpetuities.
ANS: A
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5. Which of the following is a certificate of indebtedness?
a. stocks and bonds
b. stocks but not bonds
c. bonds but not stocks
d. neither stocks nor bonds
ANS: C
6. Compared to stocks, bonds offer the holder
a. lower risk and lower potential return.
b. lower risk and higher potential return.
c. higher risk and lower potential return.
d. higher risk and higher potential return.
ANS: A
7. A stock index is
a. an average of a group of stock prices.
b. an average of a group of stock yields.
c. a measure of the risk relative to the profitability of corporations.
d. a report in a newspaper or other media outlet on the price of the stock and
earnings of the corporation that issued the stock.
ANS: A
8. Retained earnings are
a. earnings of a company that are not paid out to stockholders.
b. the amount of revenue a corporation receives for the sale of its products minus its
costs of production as measured by its accountants.
c. the single most important piece of information about a stock.
d. computed by multiplying the dividend yield by the price of the stock.
ANS: A
Chapter 14
Econ 201
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Finance )التمويل( is the field that studies such decision making regarding the allocation
of resources over time and the handling of risk.
To compare sums from different times, we use the concept of present value.
The present value )القيمة الحالية( of a future sum: the amount that would be
needed today to yield that future sum at prevailing interest rates
The future value )القيمة المستقبلية( of a sum: the amount the sum will be worth at a
given future date, when allowed to earn interest at the prevailing rate
The future value : In N years: FV = PV(1 + r ) N
Where r denotes the interest rate (in decimal form).
The present value : PV = FV/(1 + r ) N
Present value helps explain why investment falls when the interest rate rises.
Compounding )المضاعفة(: the accumulation of a sum of money where the interest
earned on the sum earns additional interest
▪ Because of compounding, small differences in interest rates lead to big
differences over time.
Most people are risk averse )تجنب المخاطر(—they dislike uncertainty.
The Utility Function)دالة المنفعة (
Utility )المنفعة( is a subjective measure of
well-being that depends. As wealth rises the
curve becomes flatter due to diminishing
marginal utility )تناقص المنفعة الحدية(: the more
wealth a person has, the less extra utility he
would get from an extra dollar.
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Managing Risk With Insurance )التحكم بالمخاطر من خالل التأمين(
▪ How insurance works: A person facing a risk pays a fee to the insurance company,
which in return accepts part or all of the risk.
▪ Insurance allows risks to be pooled, and can make risk averse people better off:
E.g., it is easier for 10,000 people to each bear 1/10,000 of the risk of a house
burning down than for one person to bear the entire risk alone.
Two Problems in Insurance Markets )مشكلتين في سوق التأمين(
1. Adverse selection ر العكسي( )االختيا : A high-risk person benefits more from
insurance, so is more likely to purchase it.
2. Moral hazard )المخاطر االخالقية(: People with insurance have less incentive to
avoid risky behavior.
Insurance companies cannot fully guard against these problems, so
they must charge higher prices.
As a result, low-risk people sometimes forego insurance and lose the benefits
of risk-pooling.
We can measure risk of an asset with the standard deviation, a statistic that
measures a variable’s volatility—how likely it is to fluctuate.
The higher the standard deviation of the asset’s return, the greater the risk.
Diversification )التنوع( reduces risk by replacing a single risk with a large number
of smaller, unrelated risks.
A diversified portfolio contains assets whose returns are not strongly related:
Some assets will realize high returns, others low returns.
The high and low returns average out, so the portfolio is likely to earn an
intermediate return more consistently than any of the assets it contains.
Diversification can reduce firm-specific risk )مخاطر خاصة بالشركة(, which affects only
a single company.
Diversification cannot reduce market risk )مخاطر السوق(, which affects all
companies in the stock market.
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Reducing cost through diversification: )تقليل التكلفة من خالل التنوع(
Tradeoff: Riskier assets pay a higher return, on average, to compensate for the extra risk of holding them.
E.g., over past 200 years, average real return on stocks, 8%. On short-term govt
bonds, 3%.
The risk and return on the portfolio depends on the percentage of each asset class
in the portfolio…
Increasing the share of stocks in the portfolio increases the average return but
also the risk.
When deciding whether to buy a company’s stock, you compare the price of
the shares to the value of the company.
If share price > value, the stock is overvalued ( )مقومة بأعلى من قيمتها . If price < value, the stock is undervalued )مقومة بأقل من قيمتها(. If price = value, the stock is fairly valued )القيمة العادلة(.
Value of a share )قيمة السهم(
= PV of any dividends the stock will pay + PV of the price you get
when you sell the share
▪ Problem: When you buy the share, you don’t know what future dividends or
prices will be.
▪ One way to value a stock: fundamental analysis )التحليل االساسي(, the study of a
company’s accounting statements and future prospects to determine its value.
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▪ Efficient Markets Hypothesis (EMH) )فرضية االسواق الفعالة(: the theory that each
asset price reflects all publicly available information about the value of the
asset.
Implications of EMH: السواق الفعالة(ا)االثار المترتبة على فرضية
Stock market is informationally efficient )كفاءة المعلومات(:
» Each stock price reflects all available information about the value of the
company.
Stock prices follow a random walk )السير العشوائي(:
» A stock price only changes in response to new information (―news‖)
about the company’s value. News cannot be predicted, so stock price
movements should be impossible to predict.
It is impossible to systematically beat the market. By the time the news reaches you,
mutual fund managers will have already acted on it.
An index fund )مؤشر التمويل(is a mutual fund that buys all the stocks in a given stock
index.
An actively managed mutual fund aims to buy only the best stocks.
Actively managed funds have higher expenses than index funds.
EMH implies that returns on actively managed funds should not consistently
exceed the returns on index funds.
Many believe that stock price movements are partly psychological:
» J.M. Keynes: stock prices driven by ―animal spirits,‖ ―waves of pessimism and optimism‖
» Alan Greenspan: 1990s stock market boom due to ―irrational exuberance‖
Bubbles)الفقاعات( occur when speculators buy overvalued assets expecting prices to rise further. The importance of departures from rational pricing is not known
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BANK QUESTIONS: MULTIPLE CHOICES
1. Most financial decisions involve two related elements:
a. advice and consent.
b. investment and taxes.
c. time and risk.
d. saving and consumption.
ANS: C
2. Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest
rate is 6 percent. The future value of the $350 after 4 years is
a. $414.09.
b. $434.00.
c. $441.87.
d. $481.24.
ANS: C
3. Suppose you put $500 into a bank account today. Interest is paid annually and the annual interest
rate is 5.5 percent. The future value of the $500 is
a. $637.50 after 5 years and $822.09 after 10 years.
b. $637.50 after 5 years and $775.00 after 10 years.
c. $653.48 after 5 years and $854.07 after 10 years.
d. $688.36 after 5 years and $915.56 after 10 years.
ANS: C
4. One way to characterize the difference between compounding and discounting is to say that
a. compounding involves the assumption that the interest rate is zero, whereas discounting
does not involve that assumption.
b. discounting involves the assumption that the interest rate is zero, whereas compounding
does not involve that assumption.
c. the process of compounding produces a future value, whereas the process of discounting
produces a present value.
d. the process of compounding produces a present value, whereas the process of
discounting produces a future value.
ANS: C
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5. A manufacturing company is thinking about building a new factory. The factory, if built, will yield the
company $300 million in 7 years, and it would cost $220 million today to build. The company will
decide to build the factory if the interest rate is
a. no less than 4.53 percent.
b. no greater than 4.53 percent.
c. no less than 5.81 percent.
d. no greater than 5.81 percent.
ANS: B
6. Felix deposited $500 into an account two years ago. The first year he earned 3 percent interest and
the second year he earned 5 percent interest. How much money does Felix have in his account now?
a. $540.75
b. $540.80
c. $540.85
d. None of the above are correct to the nearest cent.
ANS: A
7. Jorge deposited $1,000 into an account three years ago. The first two years he earned 5 percent
interest; the third year he earned 6 percent interest. How much money does Jorge have in his
account today?
a. $1,157.90
b. $1,168.65
c. $1,176.00
d. None of the above are correct to the nearest cent.
ANS: B
8. Your accountant tells you that if you can continue to earn the current interest rate on your balance
of $800 for the next two years you will have $898.88 in your account. If your accountant is correct
what is the current interest rate?
a. 6 percent
b. 7 percent
c. 8 percent
d. 9 percent
ANS: A
Chapter 15
Econ 201
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Labor force statistics:) (العاملة القوى إحصاءات
Produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
BLS divides population into 3 groups:
▪ Employed )موظف(: paid employees, self-employed, and unpaid workers in a family
business
▪ Unemployed )عاطل عن العمل(: people not working who have looked for work during
previous 4 weeks
▪ Not in the labor force )ال يتم حسابه في القوى العاملة(: everyone else
The labor force is the total # of workers, including the employed and unemployed.
Unemployment rate )معدل البطالة( (“u-rate”): % of the labor force that is unemployed
Labor force participation rate شاركة في القوى العاملة( م)معدل ال : % of the adult population that is
in the labor force
The BLS publishes these statistics for demographic groups within the population.
These data reveal widely different labor market experiences for different groups.
What Does the U-Rate Really Measure?)مالذي يقيسه معدل البطالة(
The u-rate is not a perfect indicator of joblessness or the health of the
labor market:
▪ It excludes discouraged workers.
▪ It does not distinguish between full-time and part-time work, or
people working part time because full-time jobs not available.
▪ Some people misreport their work status in the BLS survey.
# of unemployed
labor force = 100 x u-rate
= 100 x
labor force
adult population
labor force
participation rate
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Despite these issues, the u-rate is still a very useful barometer of the labor market &
economy.
Most spells of unemployment are short ( قصيرة البطالة فترات معظم) :
▪ Typically 1/3 of the unemployed: have been unemployed under 5 weeks, 2/3 have been unemployed under 14 weeks.
▪ Only 20% have been unemployed over 6 months.
▪ Yet, most observed unemployment is long term.
▪ The small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the unemployment observed over time.
▪ Knowing these facts helps policymakers design better policies to help the unemployed.
Natural rate of unemployment معدل البطالة الطبيعي( ) : the normal rate of unemployment
around which the actual unemployment rate fluctuates
Cyclical unemployment )البطالة الدورية( the deviation of unemployment from its natural
rate, associated with business cycles, which we’ll study in later chapters
Job search )البحث عن الوظيفة( is the process of matching workers with appropriate
jobs.
Sectoral shifts )التحوالت القطاعية( are changes in the composition of demand
across industries or regions of the country.
▪ Such shifts displace some workers, who must search for new jobs appropriate for their skills & tastes.
The economy is always changing, so some frictional unemployment is inevitable.
Govt employment agencies (الحكومية التوظيف وكاالت) provide information about job vacancies to speed up the matching of workers with jobs.
Public training programs ) (العامة التدريب برامج aim to equip workers displaced from declining industries with the skills needed in growing industries.
Unemployment insurance) ل ضد تأمين بطا ةال ( (UI): a govt program that partially protects workers’ incomes when they become unemployed
UI increases frictional unemployment. To see why, recall one of the Ten Principles of
Economics: People respond to incentives.
UI benefits end when a worker takes a job, so workers have less incentive to
search or take jobs while eligible to receive benefits.
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Benefits of UI:
▪ Reduces uncertainty over incomes
▪ Gives the unemployed more time to search, resulting in better job matches
and thus higher productivity
Structural Unemployment )البطالة الهيكلية)
Structural unemployment occurs when not enough jobs to go around. Occurs when wage is kept above eq’m. There are three reasons for this as following:
1. Minimum-Wage Laws ) لألجور األدنى الحد قوانين )
• The min. wage may exceed the eq’m wage for the least skilled or experienced
workers, causing structural unemployment.
2. Unions ت( ادا)االتح
▪ Union: a worker association that bargains with employers over wages, benefits, and
working conditions
▪ Unions exert their market power to negotiate higher wages for workers.
▪ The typical union worker earns 20% higher wages and gets more benefits than a
nonunion worker for the same type of work.
▪ When unions raise the wage above eq’m, quantity of labor demanded falls and
unemployment results.
▪ “Insiders” – workers who remain employed, are better off
▪ “Outsiders” – workers who lose their jobs, are worse off
▪ Critics of unions )نقد االتحادات(: Unions are cartels. They raise wages above eq’m, which causes unemployment and/or depresses wages in non-union labor markets.
▪ Advocates )المدافعون(: Unions counter the market power of large firms, make firms
more responsive to workers’ concerns.
3. Efficiency Wages )كفاءة االجور(
▪ The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to
boost worker productivity. Different versions of efficiency wage theory suggest
different reasons why firms pay high wages.
▪ There are Four reasons why firms might pay efficiency wages:
1. Worker health )صحة العمال( In less developed countries, poor nutrition is a
common problem. Paying higher wages allows workers to eat better, makes them
healthier, more productive.
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2. Worker turnover العمال( )دوران Hiring & training new workers is costly. Paying high
wages gives workers more incentive to stay, reduces turnover.
3. Worker quality )جودة العامل(: Offering higher wages attracts better job applicants,
increases quality of the firm’s workforce.
4. Worker effort )جهد العامل( Workers can work hard or shirk. Shirkers are fired if caught. Is being fired a good deterrent? Depends on how hard it is to find another
job.
If market wage is above eq’m wage, there aren’t enough jobs to go around, so
workers have more incentive to work not shirk.
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BANK QUESTIONS: MULTIPLE CHOICES
1. The Bureau of Labor Statistics is part of the U.S. Department of
a. the Treasury.
b. Commerce.
c. Labor.
d. the Interior.
ANS: C
2. The Bureau of Labor Statistics produces data on unemployment
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
ANS: B
3. Unemployment numbers reported by the Bureau of Labor Statistics are reported based on a
a. monthly survey of about 60,000 households
b. monthly survey of about 6,000 households
c. weekly survey of about 60,000 households
d. weekly survey of about 6,000 households
ANS: A
4. The labor-force participation rate tells us the fraction of the population that
a. is able to participate in the labor market.
b. has ever been employed.
c. has chosen to participate in the labor market.
d. has chosen not to participate in the labor market.
ANS: C
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Table 15-1
Labor Data for Aridia
Year 2010 2011 2012
Adult population 2000 3000 3200
Number of employed 1400 1300 1600
Number of unemployed 200 600 200
5. Refer to Table 15-1. The labor force of Aridia in 2010 was
a. 1400.
b. 1600.
c. 1800.
d. 2000.
ANS: B
6. Refer to Table 15-1. The labor force of Aridia in 2011 was
a. 1300.
b. 1900.
c. 2400.
d. 3000.
ANS: B
7. Refer to Table 15-1. The labor force of Aridia in 2012 was
a. 1600.
b. 1800.
c. 3000.
d. 3200.
ANS: B
8. Refer to Table 15-1. The labor force of Aridia
a. increased from 2010 to 2011 and increased from 2011 to 2012.
b. increased from 2010 to 2011 and decreased from 2011 to 2012.
c. decreased from 2010 to 2011 and increased from 2011 to 2012.
d. decreased from 2010 to 2011 and decreased from 2011 to 2012.
ANS: B
Chapter 16
Econ 201
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Money لنقود( ا ): the set of assets that people regularly use to buy g&s from other people.
Every transaction would require a double coincidence of wants—the unlikely
occurrence that two people each have a good the other wants.
The 3 Functions of Money )وظائف المال الثالثة(
Medium of exchange )وسيلة التبادل(: an item buyers give to sellers when they want to
purchase g&s
Unit of account)وحدة للحساب(: the yardstick people use to post prices and record debts
Store of value )مخزن للقيمة(: an item people can use to transfer purchasing power
from the present to the future
The 2 Kinds of Money )هناك نوعان من النقود(
1. Commodity money )النقود السلعية(: takes the form of a commodity with intrinsic value
Examples: gold coins, cigarettes in POW camps
2. Fiat money )النقود الورقية(: money without intrinsic value, used as money because of
govt decree
Example: the U.S. dollar
The money supply )عرض النقود( (or money stock): the quantity of money available in the economy
What assets should be considered part of the money supply? Two candidates:
▪ Currency )العملة النقدية(:the paper bills and coins in the hands of the (non-bank) public
▪ Demand deposits )ودائع تحت الطلب(: balances in bank accounts that depositors can
access on demand by writing a check
Measures of the U.S. Money Supply ) (ةاألمريكي النقود عرض مقاييس :
1. M1: currency, demand deposits, traveler’s checks, and other checkable deposits.
2. M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories.
Central bank)البنك المركزي(: an institution that oversees the banking system
and regulates the money supply
Monetary policy )السياية النقدية(: the setting of the money supply by policymakers
in the central bank
Federal Reserve (Fed) )االحتياطي الفيدرالي(: the central bank of the U.S.
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The Federal Reserve System consists of ) يتكون االحتياطي الفيدرالي من(
▪ Board of Governors (7 members),located in Washington, DC
▪ 12 regional Fed banks, located around the U.S.
▪ Federal Open Market Committee (FOMC), includes the Bd of Govs and
presidents of some of the regional Fed banks The FOMC decides monetary policy.
In a fractional reserve banking system, banks keep a fraction of deposits as
reserves and use the rest to make loans.
The Fed establishes reserve requirements, regulations on the minimum amount
of reserves that banks must hold against deposits.
Banks may hold more than this minimum amount if they choose.
The reserve ratio )نسبة االحتياطي(, R = fraction of deposits that banks hold as reserves
= total reserves as a percentage of total deposits
T-account: a simplified accounting statement that shows a bank’s assets &liabilities.
Banks’ liabilities وبات البنك( ل)مط include deposits, assets include loans & reserves.
Money supply = currency + deposits
Money multiplier: the amount of money the banking system generates with each
dollar of reserves
The money multiplier equals 1/R.
Assets )االصول(: Besides reserves and loans, banks also hold securities.
Liabilities: Besides deposits, banks also obtain funds from issuing debt and equity.
Bank capital )رأس مال البنك(: the resources a bank obtains by issuing equity to its
owners Also: bank assets minus bank liabilities
Leverage )النفوذ(: the use of borrowed funds to supplement existing funds for
investment purposes
Leverage ratio )نسبة النفوذ(: the ratio of assets to bank capital
If bank assets decrease more than 5%, bank capital is negative and bank is
insolvent.
Capital requirement )متطلبات رأس المال(: a govt regulation that specifies a minimum
amount of capital, intended to ensure banks will be able to pay off depositors and
debts.
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In the financial crisis of 2008–2009 ) االزمة المالية(, banks suffered losses on mortgage
loans and mortgage-backed securities due to widespread defaults.
▪ Many banks became insolvent من البنوك()تم افالس عدد : In the U.S., 27 banks failed during 2000–2007, 166 during 2008–2009.
▪ Many other banks found themselves with too little capital, responded by
reducing lending, causing a credit crunch )ازمة االئتمان(.
▪ To ease the credit crunch, the Federal Reserve and U.S. Treasury injected hundreds
of billions of dollars’ worth of capital into the banking system.
▪ The policy succeeded in recapitalizing the banking system and helped restore
lending to normal levels in 2009.
money supply = money multiplier × bank reserves
The Fed can change the money supply by changing bank reserves or changing the
money multiplier.
How the Fed Influences Reserves من قبل الحكومة الفيدرالية( )كيف يمكن التأثير على االحتياطي
1. Open-Market Operations (OMOs) )عمليات السوق المفتوحة(: the purchase and sale of
U.S. government bonds by the Fed.
▪ If the Fed buys a government bond from a bank, it pays by depositing new
reserves in that bank’s reserve account.
▪ With more reserves, the bank can make more loans, increasing the money
supply.
▪ To decrease bank reserves and the money supply, the Fed sells government
bonds.
▪ The Fed makes loans to banks, increasing their reserves.
Traditional method )الطريقة التقليدية(: adjusting the discount rate—the interest
rate on loans the Fed makes to banks—to influence the amount of reserves
banks borrow
New method: Term Auction Facility )المزاد اآلجل(—the Fed chooses the
quantity of reserves it will loan, then banks bid against each other for these
loans.
▪ The more banks borrow, the more reserves they have for funding new loans
and increasing the money supply.
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Reserve ratio )نسبة االحتياطي( = reserves/deposits, which inversely affects the money
multiplier.
The Fed sets reserve requirements )متطلبات االحتياطي(: regulations on the minimum
amount of reserves banks must hold against deposits.
Reducing reserve requirements would lower the reserve ratio and increase the
money multiplier.
Problems Controlling the Money Supply )مشاكل التحكم في العرض النقدي(
▪ If households hold more of their money as currency, banks have fewer reserves; make fewer loans, and money supply falls.
▪ If banks hold more reserves than required, they make fewer loans, and money supply falls.
▪ Yet, Fed can compensate for household and bank behavior to retain fairly precise control over the money supply.
A run on banks )أزمة البنوك(: When people suspect their banks are in trouble, they may
―run‖ to the bank to withdraw their funds, holding more currency and less deposits.
▪ Under fractional-reserve banking, banks don’t have enough reserves to pay off ALL
depositors, hence banks may have to close.
▪ Also, banks may make fewer loans and hold more reserves to satisfy depositors.
▪ These events increase R, reverse the process of money creation, cause money
supply to fall.
On any given day, banks with insufficient reserves can borrow from banks with
excess reserves.
The interest rate on these loans is the federal funds rate.
The FOMC uses OMOs to target the fed funds rate.
Changes in the fed funds rate cause changes in other rates and have a big impact on
the economy.
Monetary Policy and the Fed Funds
Rate) (الفيدرالية األموال على الفائدة وسعر النقدية السياسة
▪ To raise fed funds Fed set govt bonds
▪ This removes reserves from the
banking system, reduces supply of
federal funds, causes r f
to rise
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BANK QUESTIONS: MULTIPLE CHOICES
1. You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency
a. has no intrinsic value. The exchange is an example of barter.
b. has no intrinsic value. The exchange is not an example of barter.
c. has intrinsic value. The exchange is not an example of barter.
d. has intrinsic value. The exchange is not an example of barter.
ANS: B
2. Most financial assets other than money function as
a. a medium of exchange, a unit of account, and a store of value.
b. a medium of exchange and a store of value, but not a unit of account.
c. a store of value and a unit of account, but not a mediuim of exchange.
d. a store of value, but not a unit of account nor a medium of exchange
ANS: D
3. Liquidity refers to
a. the ease with which an asset is converted to the medium of exchange.
b. the measurement of the intrinsic value of commodity money.
c. the measurment of the durability of a good.
d. how many time a dollar circulates in a given year.
ANS: A
4. The ease with which an asset can be
a. traded for another asset determines whether or not that asset is a unit of account.
b. transported from one place to another determines whether or not that asset could serve
as fiat money.
c. converted into a store of value determines the liquidity of that asset.
d. converted into the economy’s medium of exchange determines the liquidity of that
asset.
ANS: D
5. John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account.
As a result of this transfer by itself
a. M1 increases by $2,500 and M2 decreases by $2,500.
b. M1 increases by $2,500 and M2 stays the same.
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c.
M1 decreases by $2,500 and M2 stays the same.
d. M1 decreases by $2,500 and M2 decreases by $2,500.
ANS: B
6. John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account.
As a result of this transfer by itself
a. M1 increases by $2,500 and M2 decreases by $2,500.
b. M1 increases by $2,500 and M2 stays the same.
c. M1 decreases by $2,500 and M2 stays the same.
d. M1 decreases by $2,500 and M2 decreases by $2,500.
ANS: B
7. In a system of 100-percent-reserve banking,
a. banks do not make loans.
b. currency is the only form of money.
c. deposits are banks’ only assets.
d. All of the above are correct.
ANS: A
8. A bank’s reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to
a. $5.
b. $50.
c. $95.
d. $950.
ANS: B
9. If a bank that desires to hold no excess reserves and has just enough reserves to meet the required
reserve ratio of 10 percent receives a deposit of $400 it has a
a. $400 increase in excess reserves and no increase in required reserves.
b. $400 increase in required reserves and no increase in excess reserves.
c. $360 increase in excess reserves and a $40 increase in required reserves.
d. $40 increase in excess reserves and a $360 increase in required reserves.
ANS: C
Chapter 17
Econ 201
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The value of money النقود ( قيمة ) P = the price level (e.g., the CPI or GDP deflator)
P is the price of a basket of goods, measured in money.
1/P is the value of $1, measured in goods.
The quality theory of money: النقود( جودة نظرية)
Developed by 18 th
century philosopher David Hume and the classical economists
Advocated more recently by Nobel Prize Laureate Milton Friedman
Asserts that the quantity of money determines the value of money
Money Supply )عرض النقود(: (MS) In real world, determined by Federal Reserve, the
banking system, consumers
Money Demand )الطلب على النقود((MD): Refers to how much wealth people want to hold
in liquid form.
Depends on P:
An increase in P reduces the value of money, so more money is required to
buy g&s.
Thus, quantity of money demanded
is negatively related to the value of money and positively related to P, other
things equal.
(These ―other things‖ include real income, interest rates, availability of ATMs.)
The supply – demand Diagram The Effects of a Monetary Injection
Result from graph: Increasing MS causes P to rise.
How does this work? Short version:
At the initial P, an increase in MS causes excess supply of money.
People get rid of their excess money by spending it on g&s or by loaning it to
others, who spend it. Result: increased demand for goods.
But supply of goods does not increase, so prices must rise.
(Other things happen in the short run, which we will study in later chapters.)
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Nominal variables )المتغيرات االسمية( are measured in monetary units.
Examples: nominal GDP, nominal interest rate (rate of return measured in $) nominal
wage ($ per hour worked)
Real variables )المتغيرات الحقيقية(are measured in physical units. Examples: real GDP, real interest rate (measured in output) real wage (measured in
output)
A relative price )السعر النسبي( is the price of one good relative to (divided by) another.
Real wage )االجر الحقيقي( is the price of labor relative to the price of output=
W = nominal wage = price of labor, P = price level = price of g&s,
The Classical Dichotomy ) (الكالسيكي االنقسام
Classical dichotomy: the theoretical separation of nominal and real variables
Hume and the classical economists suggested that monetary developments
affect nominal variables but not real variables.
If central bank doubles the money supply, Hume & classical thinkers contend
all nominal variables—including prices— will double.
all real variables—including relative prices— will remain unchanged.
The Neutrality of Money ) (نقودال حياد
Monetary neutrality: the proposition that changes in the money supply do not affect
real variables
Doubling money supply causes all nominal prices to double;
Similarly, the real wage W/P remains unchanged, so
quantity of labor supplied does not change
quantity of labor demanded does not change total employment of labor does not change
The same applies to employment of capital and other resources.
Since employment of all resources is unchanged, total output is also unchanged by the money supply.
Velocity of money: the rate at which money changes hands
Notation: P x Y = nominal GDP
= = (price level) x (real GDP)
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Velocity formula: v =
Multiply both sides of formula by M: M x V = P x Y
Called the quantity equation
The Quantity Theory in 5 Steps (خطوات 5 في الكمية نظرية)
Start with quantity equation M x V=P x Y
1. V is stable. 2. So, a change in M causes nominal GDP (P x Y) to change by the same percentage. 3. A change in M does not affect Y: money is neutral, Y is determined by technology &
resources 4. So, P changes by same percentage as P x Y and M. 5. Rapid money supply growth causes rapid inflation.
Hyperinflation is generally defined as inflation exceeding 50% per month.
Excessive growth in the money supply always causes hyperinflation.
Large govt budget deficits led to the creation of large quantities of money and high
inflation rates.
The Inflation Tax: )ضريبة التضخم (
When tax revenue is inadequate and ability to borrow is limited, govt may print
money to pay for its spending.
Almost all hyperinflations start this way.
The revenue from printing money is the inflation tax: printing money
causes inflation, which is like a tax on everyone who holds money.
The real interest rate is determined by saving & investment in the loan able funds market.
Money supply growth determines inflation rate. In the long run, money is neutral,
so a change in the money growth rate affects the inflation rate but not the real interest
rate.
So, the nominal interest rate adjusts one-for-one with changes in the inflation rate.
This relationship is called the Fisher effect) (فيشر تأثير
The Fisher effect: an increase in inflation causes an equal increase in the nominal
interest rate, so the real interest rate (on wealth) is unchanged.
Inflation is a general increase in prices of the things people buy and the things they sell
(e.g., their labor).
In the long run, real incomes are determined by real variables, not the inflation rate.
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▪ Shoeleather costs: the resources wasted when inflation encourages people to
reduce their money holdings, Includes the time and transactions costs of more
frequent bank withdrawals
▪ Menu costs ,the costs of changing prices, printing new menus : (القائمة تكاليف ) mailing new catalogs, etc.
▪ Misallocation of resources from relative-price variability
,Firms don’t all raise prices at the same time : لألسعار( النسبي التقلب من الموارد تخصيص سوء) so relative prices can vary… which distorts the allocation of resources.
▪ Confusion & inconvenience: Inflation changes the yardstick we use to measure transactions. Complicates long-range planning and the comparison of dollar amounts over time
▪ Tax distortions) (الضريبية التشوهات : Inflation makes nominal income grow faster than real income. Taxes are based on nominal income, and some are not adjusted for inflation. So, inflation causes people to pay more taxes even when their real incomes don’t increase.
A Special Cost of Unexpected Inflation )تكلفة خاصة للتضخم غير المتوقع (
Arbitrary redistributions of wealth للثروة( التعسفي التوزيع ) إعادة Higher-than-expected
inflation transfers purchasing power from creditors to debtors:
Debtors get to repay their debt with dollars that aren’t worth as much. الكثير( تساوي ال بدوالرات ديونهم سداد على المدينون يحصل)
Lower-than-expected inflation transfers purchasing power from debtors to creditors. High inflation is more variable and less predictable than low inflation. So, these
arbitrary redistributions are frequent when inflation is high.
For economies with low inflation (< 10% per year), these costs are probably much
smaller, though their exact size is open to debate.
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BANK QUESTIONS: MULTIPLE CHOICES
1. Which of the following is not correct?
a. The inflation rate is measured as the percentage change in a price index.
b. For the last 40 or so years, U.S. inflation hasn’t shown much variation from its average
rate of about 2 percent.
c. During the 19th century there were long periods of falling prices in the U.S.
d. Some economists argue that the costs of moderate inflation are not nearly as large as the
general public believes.
ANS: B
2. If the price level increased from 120 to 150, then what was the inflation rate?
a. 30 percent
b. 25 percent
c. 20 percent
d. None of the above is correct.
ANS: B
3. Deflation
a. increases incomes and enhances the ability of debtors to pay off their debts.
b. increases incomes and reduces the ability of debtors to pay off their debts.
c. decreases incomes and enhances the ability of debtors to pay off their debts.
d. decreases incomes and reduces the ability of debtors to pay off their debts.
ANS: D
4. Between 1880 and 1896 the average level of prices in the U.S. economy
a. fell 23 percent.
b. fell 4 percent.
c. rose 23 percent.
d. rose 50 percent.
ANS: A
5. The term hyperinflation refers to
a. the spread of inflation from one country to others.
b. a decrease in the inflation rate.
c. a period of very high inflation.
d. inflation accompanied by a recession.
ANS: C
6. Which of the following statements concerning the history of U.S. inflation is not correct?
a. Prices rose at an average annual rate of about 4 percent over the last 70 years.
b. There was about a 16-fold increase in the price level over the last 70 years.
c. Inflation in the 1970s was below the average over the last 70 years.
d. The United States has experienced periods of deflation.
ANS: C
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7. Economists agree that
a. neither high inflation nor moderate inflation is very costly.
b. both high and moderate inflation are quite costly.
c. high inflation is costly, but they disagree about the costs of moderate inflation.
d. moderate inflation is as costly as high inflation.
ANS: C
8. The classical theory of inflation
a. is also known as the quantity theory of money.
b. was developed by some of the earliest economic thinkers.
c. is used by most modern economists to explain the long-run determinants of the inflation
rate.
d. All of the above are correct.
ANS: D
9. The quantity theory of money
a. is a fairly recent addition to economic theory.
b. can explain both moderate inflation and hyperinflation.
c. argues that inflation is caused by too little money in the economy.
d. All of the above are correct.
ANS: B
10. The supply of money increases when
a. the value of money increases.
b. the interest rate increases.
c. the Fed makes open-market purchases.
d. None of the above is correct.
ANS: C
Chapter 18
Econ 201
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A closed economy )االقتصاد المغلق( does not interact with other economies in the
world.
An open economy )االقتصاد المفتوح( interacts freely with other economies around
the world.
Exports )الصادرات(: domestically-produced g&s sold abroad
Imports )الواردات(: foreign-produced g&s sold domestically
Net exports (NX) )صافي الصادرات(, the trade balance = value of exports – value of
imports
Variables that Influence Net Exports )متغيرات تؤثر على صافي الصادرات(
1. Consumers’ preferences for foreign and domestic goods
2. Prices of goods at home and abroad 3. Incomes of consumers at home and abroad 4. The exchange rates at which foreign currency trades for domestic currency
5. Transportation costs 6. Government policies
NX measures the imbalance in a country’s trade in goods and services.
▪ Trade deficit )عجز التجارة(: an excess of imports over exports
▪ Trade surplus )فائض التجارة(: an excess of exports over imports
▪ Balanced trade )توازن التجارة(: when exports = imports
Net capital outflow (NCO): (المال رأس تدفق صافي )الخارج domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets NCO is also called net foreign investment
The flow of capital abroad takes two forms )تدفق رأس المال للخارج يأخذ شكلين(:
▪ Foreign direct investment: )االستثمار االجنبي المباشر(
Domestic residents actively manage the foreign investment, e.g., McDonalds opens a fast-food outlet in Moscow.
▪ Foreign portfolio investment : )استثمارات المحافظ االجنبية(
Domestic residents purchase foreign stocks or bonds, supplying ―loanable funds‖ to a
foreign firm.
NCO measures the imbalance in a country’s trade in assets:
▪ When NCO > 0, ―capital outflow‖
Domestic purchases of foreign assets exceed foreign purchases of domestic assets.
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▪ When NCO < 0, ―capital inflow‖
Foreign purchases of domestic assets exceed domestic purchases of foreign
assets.
Variables that Influence NCO )متغيرات تؤثر على تدفق رأس المال للخارج(
1. Real interest rates paid on foreign assets 2. Real interest rates paid on domestic assets 3. Perceived risks of holding foreign assets 4. Govt policies affecting foreign ownership of domestic assets
The Equality of NX and NCO
An accounting identity: NCO = NX arises because every transaction that affects NX also affects NCO by the same amount
(and vice versa)
Saving, Investment, and International Flows of Goods & Assets
Y = C + I + G + NX accounting identity
Y – C – G = I + NX rearranging terms
S = I + NX since S = Y – C – G
S = I + NCO since NX = NCO
When S > I, the excess loanable funds flow abroad in the form of positive net capital
outflow.
When S < I, foreigners are financing some of the country’s investment, and NCO < 0.
Nominal exchange rate )سعر الصرف االسمي (: the rate at which one country’scurrency
trades for another
We express all exchange rates as foreign currency per unit of domestic currency. Appreciation )ارتفاع قيمة العملة( (or ―strengthening‖): an increase in the value of a
currency as measured by the amount of foreign currency it can buy
Depreciation )انخفاض سعر العملة( (or ―weakening‖): a decrease in the value of a
currency as measured by the amount of foreign currency it can buy
The Real Exchange Rate With Many Goods) سعر الصرف الحقيقي للعديد من السلع(
P = U.S. price level, e.g., Consumer Price Index, measures the price of a basket of
goods.
P* = foreign price level Real exchange rate= (e x P)/P* = price of a domestic
basket of goods relative to price of a foreign basket of goods
▪ If U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods.
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Law of one price the notion that a good should sell for the : (الواحد السعر قانون)
same price in all markets
▪ Suppose coffee sells for $4/pound in Seattle and $5/pound in Boston, and can be
costlessly transported.
▪ There is an opportunity for arbitrage, making a quick profit by buying coffee in
Seattle and selling it in Boston.
▪ Such arbitrage drives up the price in Seattle and drives down the price in Boston,
until the two prices are equal.
Purchasing-power parity )تعادل القوى الشرائية(: (PPP) a theory of exchange rates whereby
a unit of any currency should be able to buy the same quantity of goods in all countries
▪ based on the law of one price
▪ implies that nominal exchange rates adjust to equalize the price of a basket of goods across countries
If the two countries have different inflation rates, then e will change over time:
If inflation is higher in Mexico than in the U.S., then P* rises faster than P, so e rises—
the dollar appreciates against the peso.
If inflation is higher in the U.S. than in Japan, then P rises faster than P*, so e falls— the
dollar depreciates against the yen.
Limitations of PPP Theory )محدودية نظرية تعادل القوى الشرائية(
Two reasons why exchange rates do not always adjust to equalize prices
across countries:
1. Many goods cannot easily be traded Examples: haircuts, going to the movies
2. Price differences on such goods cannot be arbitraged away Foreign, domestic
goods not perfect substitutes E.g., some U.S. consumers prefer Toyotas over
Chevys, or vice versa, Price differences reflect taste differences
Nonetheless, PPP works well in many cases, especially as an explanation
of long-run trends. For example, PPP implies:
the greater a country’s inflation rate,
the faster its currency should depreciate (relative to a low-inflation
country like the US).
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BANK QUESTIONS: MULTIPLE CHOICE
1. Which type(s) of economies interact with other economies?
a. only closed economies b. only open economies c. closed economies and open economies d. neither closed nor open economies
ANS: B
2. Foreign-produced goods and services that are purchased domestically are called
a. imports. b. exports. c. net imports. d. net exports.
ANS: A
3. Net exports of a country are the value of
a. goods and services imported minus the value of goods and services exported. b. goods and services exported minus the value of goods and services imported. c. goods exported minus the value of goods imported. d. goods imported minus the value of goods exported.
ANS: B 4. The value of the goods and services Australia purchases from the U.S. are greater than the value of goods
and services the U.S. purchases from Australia. The U.S. has a. positive net exports with Australia and a trade surplus with Australia. b. positive net exports with Australia and a trade deficit with Australia. c. negative net exports with Australia and a trade surplus with Australia. d. negative net exports with Australia and a trade deficit with Australia.
ANS: A 5. Which of the following both reduce net exports?
a. exports rise, imports rise b. exports rise, imports fall c. imports rise, exports rise d. imports rise, exports fall
ANS: D
6. A country's trade balance
a. must be zero. b. must be greater than zero. c. is greater than zero only if exports are greater than imports. d. is greater than zero only if imports are greater than exports.
ANS: C
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7. A country purchases $3 billion of foreign-produced goods and services and sells $2 billion dollars of
domestically produced goods and services to foreign countries. It has a. exports of $3 billion and a trade surplus of $1 billion. b. exports of $3 billion and a trade deficit of $1 billion. c. exports of $2 billion and a trade surplus of $1 billion. d. exports of $2 billion and a trade deficit of $1 billion.
ANS: D
8. Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing this is the
only trade that these countries do. What are the net exports of Oceania and Escudia in that order? a. $140 and $140 b. $100 and $40 c. $60 and -$60 d. None of the above is correct.
ANS: C Table 18-1
Bolivian Trade Flows
Goods Services
Purchased Abroad
$40 billion Purchased Abroad
$20 billion
Sold Abroad $10 billion Sold Abroad $25 billion
9. Refer to Table 18-1. What are Bolivia’s exports?
a. $60 billion b. $35 billion c. $10 billion d. None of the above are correct.
ANS: B
10. Refer to Table 18-1. What are Bolivia’s imports? a. $60 billion b. $35 billion c. $40 billion d. None of the above are correct.
ANS: A
11. Refer to Table 18-1. What are Bolivia’s net exports? a. $30 billion b. $5 billion c. -$5 billion d. -$25 billion
ANS: D
Chapter 19
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How NCO Depends on the Real Interest Rate:
(على سعر الفائدة الحقيقي الخارج المال رأس تدفق صافيكيف يعتمد )
The real inters rare, r is the real return on
domestic assets. r
A fall in r makes domestic assets less attractive
relative to foreign assets.
People in the U.S purchase more foreign
assets.
People abroad purchase fewer U.S. assets.
NCO rises.
The Loanable Funds Market Diagram )مخطط سوق التمويل القابلة لالقراض(
FYD: Disentangling Supply and Demand )فصل العرض والطلب(
When a U.S. resident buys imported goods, does the transaction affect supply or
demand in the foreign exchange market? Two views:
1. The supply of dollars increases الدوالر( ض)ارتفاع عر . The person needs to sell her dollars to obtain the foreign currency she needs to buy the imports.
2. The demand for dollars decreases )انخفاض طلب الدوالر(. The increase in imports reduces NX, which we think of as the demand for dollars. (So, NX is really the net demand for dollars.)
When a foreigner buys a U.S. asset, does the transaction affect supply or demand in
the foreign exchange market? Two views:
1. The demand for dollars increases )ارتفاع طلب الدوالر(. The foreigner needs dollars in order to purchase the U.S. asset.
2. The supply of dollars falls )انخفاض عرض الدوالر(. The transaction reduces NCO, which we think of as the supply of dollars. (So, NCO is really the net supply of dollars.)
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The connection between interest rate and
exchange rate )االرتباط بين سعر الفائدة وسعر الصرف(
Keep in mind:
The LF market (not shown) determines r.
This value of r then determines NCO
(shown in upper graph).
This value of NCO then determines
supply of dollars in foreign exchange
market (in lower graph).
Budget Deficit vs. Investment Incentives (االستثمار حوافز مقابل الميزانية عجز)
A tax incentive for investment has similar effects as a budget deficit:
r rises, NCO falls E rises, NX falls
But one important difference )هناك اختالف هام(:
Investment tax incentive increases investment, which increases productivity
growth and living standards in the long run.
Budget deficit reduces investment, which reduces productivity growth and living standards.
Trade policy: a govt policy that directly influences the quantity of g&s that a country
imports or exports. Examples:
▪ Tariff )التعريفة الجمركية(– a tax on imports
▪ Import quota )حصة الواردات(– a limit on the quantity of imports
▪ “Voluntary export restrictions” (الطوعية التصدير قيود) – the govt pressures another
country to restrict its exports; essentially the same as an import quota
Common reasons for policies that restrict imports االسباب الشائعة للسياسات التي تقسد( : الوارادات(
▪ Save jobs in a domestic industry that has difficulty competing with imports
▪ Reduce the trade deficit
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Analysis of a Quota on Cars from Japan) (اليابان من السيارات على حصة تحليل
Since NCO unchanged, S curve
does not shift. The D curve shifts:
At each E, imports of cars fall,
so net exports rise, D shifts to the
right.
1
At E 1
, there is excess
demand in the foreign exchange
market.
E rises to restore eq’m.
What happens to NX? )ماذا حدث لصافي الصادرات( Nothing!
If E could remain at E 1
, NX would rise, and the quantity of dollars demanded would
rise. But the import quota does not affect NCO, so the quantity of dollars supplied is
fixed.
Since NX must equal NCO, E must rise enough to keep NX at its original level.
Hence, the policy of restricting imports does not reduce the trade deficit.
The quota reduces imports of Japanese autos.
U.S. consumers buy more U.S. autos. U.S. automakers hire more workers to produce these extra cars.
So the policy saves jobs in the U.S. auto industry. But E rises, reducing foreign
demand for U.S. exports.
Export industries contract, exporting firms lay off workers.
The import quota saves jobs in the auto industry but destroys jobs in U.S. export
industries!!
Capital flight )هبوط رأس المال(: a large and sudden reduction in the demand for assets
located in a country
Political instability may cause capital flight )عدم االسقرار السياسي يؤدي الى هبوط رأس المال(, as nervous investors sell assets and pull their capital out of the country. As a result, interest rates rise and the country’s exchange rate falls. This occurred in Mexico in 1994 and in other countries more recently.
A budget deficit reduces national saving )عجز الميزانية يؤدي الى خفض االدخار المحلي(, drives up interest rates, reduces net capital outflow, reduces the supply of dollars in the foreign exchange market, appreciates the exchange rate, and reduces net exports.
A policy that restricts imports does not affect net capital outflow السياسة التي تقيد الواردات ال( لخارج( ا تؤثر على تدفق رأس المال , so it cannot affect net exports or improve a country’s trade
deficit. Instead, it drives up the exchange rate and reduces exports as well as imports.
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Bank Questions: Multiple Choice
1. Over the past three decades, the United States has a. generally had, or been very near to a trade balance. b. had trade deficits in about as many years as it has trade surpluses. c. persistently had a trade deficit. d. persistently had a trade surplus.
ANS: C 2. The open-economy macroeconomic model takes
a. GDP, but not the price level as given. b. the price level, but not GDP as given. c. both the price level and GDP as given. d. the price level and GDP as variables to be determined by the model.
ANS: C 3. The open-economy macroeconomic model includes
a. only the market for loanable funds. b. only the market for foreign-currency exchange. c. both the market for loanable funds and the market for foreign-currency exchange. d. neither the market for loanable funds or the market for foreign-currency exchange.
ANS: C 4. In an open economy, national saving equals
a. domestic investment plus net capital outflow. b. domestic investment minus net capital outflow. c. domestic investment. d. net capital outflow.
ANS: A 5. In the open-economy macroeconomic model, the supply of loanable funds comes from
a. the sum of domestic investment and net capital outflow. b. net capital outflow alone. c. domestic investment alone. d. None of the above is correct.
ANS: D 6.Other things the same, people in the U.S. would want to save more if the real interest rate in the U.S.
a. fell. The increased saving would increase the quantity of loanable funds demanded. b. fell. The increased saving would increase the quantity of loanable funds supplied. c. rose. The increased saving would increase the quantity of loanable funds demanded. d. rose. The increased saving would increase the quantity of loanable funds supplied.
ANS: D
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7. A country has national saving of $70 billion, government expenditures of $20 billion, domestic investment
of $30 billion, and net capital outflow of $40 billion. What is its supply of loanable funds? a. $30 billion b. $40 billion c. $50 billion d. $70 billion
ANS: D 8. If a country has a negative net capital outflow, then
a. on net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds.
b. on net it is purchasing assets from abroad. This subtracts from its demand for domestically generated loanable funds.
c. on net other countries are purchasing assets from it. This adds to its demand for domestically generated loanable funds.
d. on net other countries are purchasing assets from it. This subtracts from its demand for domestically generated loanable funds.
ANS: D 9. Other things the same, an increase in the U.S. real interest rate induces
a. Americans to buy more foreign assets, which increases U.S. net capital outflow. b. Americans to buy more foreign assets, which reduces U.S. net capital outflow. c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow. d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.
ANS: C 10. Other things the same, as the real interest rate falls
a. domestic investment and net capital outflow both rise. b. domestic investment and net capital outflow both fall. c. domestic investment rises and net capital outflow falls. d. domestic investment falls and net capital outflow rises.
ANS: A
Chapter 20
Econ 201
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Recessions )فترات الكساد): periods of falling real incomes and rising
unemployment
Depressions )االنخفاضات(: severe recessions (very rare)
▪ Short-run economic fluctuations are often called business cycles.
Most economists use the model of aggregate demand and aggregate supply to
study fluctuations.
This model differs from the classical economic theories economists use to
explain the long run.
Most economists believe classical theory describes the world in the long run, but not
the short run.
In the short run, changes in nominal variables (like the money supply or P ) can affect
real variables (like Y or the u-rate).
The Model of Aggregate Demand and Aggregate Supply
)نموذج الطلب الكلي والعرض الكلي(
The AD curve shows the quantity
of all g&s demanded in the economy at any given price level.
Y = C + I + G + NX P Assume G fixed by govt policy, To
understand the slope of AD, must determine how a change in P affects C, I, and NX.
The Wealth Effect )تأثير الثورة(:
Suppose P rises.
The dollars people hold buy fewer g&s, so real wealth is lower.
People feel poorer. Result: C falls.
The Interest-Rate Effect (P and I ) .Suppose P rises )تأثير سعر الفائدة(
Buying g&s requires more dollars. To get these dollars, people sell bonds or other assets. This drives up interest rates. Result: I falls.
The Exchange-Rate Effect (P and NX) )تأثير سعر الصرف( Suppose P rises.
▪ U.S. interest rates rise (the interest-rate effect).
▪ Foreign investors desire more U.S. bonds.
▪ Higher demand for $ in foreign exchange market.
▪ U.S. exchange rate appreciates.
▪ U.S. exports more expensive to people abroad, imports cheaper to U.S. residents. Result: NX falls.
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Why the AD curves might shifts? )لماذا قد تتحرك منحنيات الطلب(
Any event that changes C, I, G, or NX— except change in P—will shift the AD curve.
1. Changes in C )التغير في االستهالك( ▪ Stock market boom/crash ▪ Preferences re: consumption/saving tradeoff ▪ Tax hikes/cuts
2. Changes in I )التغيير في االستثمار( ▪ Firms buy new computers, equipment,
factories ▪ Expectations, optimism/pessimism ▪ Interest rates, monetary policy ▪ Investment Tax Credit or other tax incentives
3. Changes in G )التغيير في االنفاق الحكومي( ▪ Federal spending, e.g., defense ▪ State & local spending, e.g., roads, schools
4. Changes in NX )التغيير في صافي الصادرات(
▪ Booms/recessions in countries that buy our exports
▪ Appreciation/depreciation resulting from international speculation in
foreign exchange market
The Aggregate-Supply (AS ) Curves )منحنيات العرض الكلي(
The AS curve shows the total quantity of g&s
firms produce and sell at any given price level.
AS is:
▪ upward- sloping in short run ▪ vertical in long run
The Long-Run Aggregate-Supply Curve
(LRAS)
The natural rate of output (Y N
) is the
amount of output P
the economy produces when unemployment is at its natural rate.
Y N
is also called potential output or full-
employment output.
Why LRAS Is Vertical? )لماذا منحنيات العرض في المدى الطويل رأسية(
Y N
determined by the economy’s stocks of labor, capital, and natural resources, and
on the level of technology. An increase in P does not affect any of these, so it does not affect Y
N .
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Any event that changes any of the determinants of Y
N will shift LRAS
Why the LRAS Curve Might Shift? )لماذا قد تتحرك منحنيات العرض في المدى الطويل(
1. Changes in L or natural rate of unemployment 2. Changes in K or H 3. Changes in natural resources 4. Changes in technology
Using AD & AS to Depict Long-Run Growth and Inflation
استخدام منحنى العرض ومنحنى الطلب لتصوير النمو
والتضخم على الدى الطويل
Over the long run, the Tech progress
shifts LRAS to the right
And growth in the money supply shifts
AD to the right.
Result: ongoing inflation and growth in
output.
Short Run Aggregate Supply (SRAS)
العرض الكلي على المدى القصير
The SRAS curve is upward sloping:
Over the period of 1–2 years, an
increase in P causes an increase in the
quantity of g & s supplied.
Why the Slope of SRAS Matters
If AS is vertical, fluctuations in AD do not
cause fluctuations in output or employment. If AS slopes up, then shifts in AD do affect
output and employment.
1. The Sticky-Wage Theory)نظرية مرونة االجور(
Imperfection: Nominal wages are sticky in the short run, they adjust sluggishly.
Due to labor contracts, social norms Firms and workers set the nominal wage in advance based on
P E
, the price level they expect to prevail.
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If P > P E
, revenue is higher, but labor cost is not.
Production is more profitable, so firms increase output and employment.
Hence, higher P causes higher Y, so the SRAS curve slopes upward.
2. The Sticky-Price Theory )نظرية مرونة السعر(
Imperfection: Many prices are sticky in the short run.
Due to menu costs, the costs of adjusting prices.
Examples: cost of printing new menus, the time required to change price tags
Firms set sticky prices in advance based on P E
.
Suppose the Fed increases the money supply unexpectedly. In the long run, P will rise.
In the short run, firms without menu costs can raise their prices immediately.
Firms with menu costs wait to raise prices. Meanwhile, their prices are relatively low,
which increases demand for their products, so they increase output and employment.
Hence, higher P is associated with higher Y, so the SRAS curve slopes upward.
3. The Misperceptions Theory )نظرية المفاهيم الخاطئة(
Imperfection: Firms may confuse changes in P with changes in the relative price of
the products they sell.
If P rises above P E
, a firm sees its price rise before realizing all prices are rising.
The firm may believe its relative price is rising, and may increase output and
employment. So, an increase in P can cause an increase in Y, making the SRAS
curve upward-sloping.
In all 3 theories, Y deviates from Y N
when P deviates from P E
.
The imperfections in these theories are temporary. Over time,
▪ Sticky wages and prices become flexible
▪ misperceptions are corrected
▪ In the LR, P E
= P, AS curve is vertical
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Y = Y N
+ a (P – P E
)
In the long run, P E
= P and Y = Y N
.
Every things that shifts LRSA shifts SRSA, Also P
The Long-Run Equilibrium
)التوازن طويل االجل(
In the long-run equilibrium,
P E
= P, Y =Y N
,
and unemployment is at its natural rate
Economic Fluctuations)التقلبات االقتصادية(
▪ Caused by events that shift the AD and/or AS curves. ▪ Four steps to analyzing economic fluctuations:
1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD–AS diagram to see how the shift changes Y and P in the short run.
4. Use AD–AS diagram to see how economy moves from new SR eq’m to new LR eq’m.
Two Big AD shifts: 1. Great Depression
2. The world War II Boom
CASE STUDY: The 2008–2009 Recession
From 12/2007 to 6/2009, real GDP fell about 4%
Unemployment rose from 4.4% in 5/2007 to 10.1% in 10/2009
The housing market played a central role in this recession…
The General Theory of Employment, Interest, and Money, 1936
Argued recessions and depressions can result from inadequate demand;
policymakers should shift AD.
Famous critique of classical theory: The long run is a misleading guide to current
affairs.
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Bank Questions: Multiple Choices
1. Which of the following explains why production rises in most years?
a. increases in the labor force
b. increases in the capital stock
c. advances in technological knowledge
d. All of the above are correct.
ANS: D
2. During recessions
a. workers are laid off.
b. factories are idle.
c. firms may find they are unable to sell all they produce.
d. All of the above are correct.
ANS: D
3. Which of the following is correct?
a. Short run fluctuations in economic activity happen only in developing countries.
b. During economic contractions most firms experience rising sales.
c. Recessions come at regular intervals and are easy to predict.
d. When real GDP falls, the rate of unemployment rises.
ANS: D
4. Which of the following is most commonly used to monitor short-run changes in economic activity?
a. the inflation rate
b. real GDP
c. aggregate demand
d. aggregate supply
ANS: B
5. Historically, the change in real GDP during recessions has been a. mostly a change in investment spending. b. mostly a change in consumption spending. c. about equally divided between consumption and investment spending. d. sometimes mostly a change in consumption and sometimes mostly a change in
investment. ANS: A
6. Which of the following accounts for about two-thirds of the decline in output during a recession?
a. the decline in consumption expenditures on consumer durables alone
b. the decline in total consumption spending alone
c. the decline in investment spending alone
d. the combined decline in consumption and investment spending
ANS: C
7. Which of the following typically rises during a recession?
a. consumption
b. unemployment
c. corporate profits
d. automobile sales
ANS: B
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8. During recessions unemployment typically rises
a. little. As the recession ends, unemployment declines gradually.
b. little. As the recession ends, unemployment declines rapidly.
c. substantially. As the recession ends, unemployment declines gradually.
d. substantially. As the recession ends, unemployment declines rapidly.
ANS: C
9. The classical dichotomy refers to the separation of
a. variables that move with the business cycle and variables that do not.
b. changes in money and changes in government expenditures.
c. decisions made by the public and decisions made by the government.
d. real and nominal variables.
ANS: D
10. According to classical macroeconomic theory, changes in the money supply affect
a. real GDP and the price level.
b. real GDP but not the price level.
c. the price level, but not real GDP.
d. neither the price level nor real GDP.
ANS: C
Chapter 21
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The Theory of Liquidity Preference )نظرية تفضيل السيولة(
A simple theory of the interest rate (denoted r) r adjusts to balance supply and demand for money
Money supply: assume fixed by central bank, does not depend on interest rate
Money demand reflects how much wealth people want to hold in liquid form.
For simplicity, suppose household wealth includes only two assets:
Money )المال( – liquid but pays no interest
Bonds )السندات( – pay interest but not as liquid A household’s ―money demand‖ reflects its preference for liquidity. The variables that influence money demand: Y, r, and P.
Money Demand)الطلب على النقود(
Suppose real income (Y) rises. Other things equal, what happens to money
demand? If Y rises:
▪ Households want to buy more g&s, so they need more money.
▪ To get this money, they attempt to sell some of their bonds.
▪ I.e., an increase in Y causes an increase in money demand, other things equal.
How r Is Determined?
)كيف يتحدد سعر الصرف(
MS curve is vertical: Changes in r
do not affect MS, which is fixed by
the Fed.
MD curve is downward sloping: A fall
in r increases money demand.
A fall in P reduces money demand, which lower r.
A fall in r increases and the quantity of g&s demanded.
Monetary Policy and Aggregate Demand )السياسة النقدية والطلب الكلي(
To achieve macroeconomic goals, the Fed can use monetary policy
to shift the AD curve.
The Fed’s policy instrument is MS. The news often reports that the Fed targets the interest rate.
More precisely, the federal funds rate, which banks charge each other
on short-term loans
To change the interest rate and shift the AD curve, the Fed conducts open
market operations to change MS.
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The Effects of Reducing the Money Supply )تأثيرات تخقيض عرض النقود(
The Fed can raise r by reducing the money supply.
An increase in r reduces the quantity of g&s demanded
Liquidity trap )مصيدة السيولة(: when the interest rate is zero
In a liquidity trap, mon. policy may not work, since nominal interest rates cannot
be reduced further.
However, central bank can make real interest rates negative by raising inflation
expectations.
Also, central bank can conduct open-market ops using other assets—like mortgages
and corporate debt—thereby lowering rates on these kinds of loans. The Fed
pursued this option in 2008–2009.
Fiscal policy)السياسة المالية(: the setting of the level of govt spending and taxation by
govt policymakers Expansionary fiscal policy
an increase in G and/or decrease in T
shifts AD right Contractionary fiscal policy
a decrease in G and/or increase in T
shifts AD left
Fiscal policy has two effects on AD:
1. The Multiplier Effect the additional shifts in
AD that result when fiscal policy increases income
and thereby increases consumer spending A $20b increase in G initially shifts AD
to the right by $20b.The increase in Y causes C to
rise, which shifts AD further to the right.
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Marginal propensity to consume (MPC))الميل الحدي لالستهالك(: the fraction of extra
income that households consume rather than save
A Formula for the Multiplier )صيغة المضاغف(
Notation: ΔG is the change in G, ΔY and ΔC are the ultimate changes in Y and C
Y = C + I + G + NX identity, ΔY = ΔC + ΔG I and NX do not change,
ΔY = MPC ΔY + ΔG because ΔC = MPC ΔY
The multiplier effect: Each $1 increase in G can generate more than a $1 increase in agg demand.
Also true for the other components of GDP.
2. The Crowding-Out Effect )تأثير التكدس(
▪ Fiscal policy has another effect on AD that works in the opposite direction.
▪ A fiscal expansion raises r, which reduces investment, which reduces the net increase
in agg demand.
▪ So, the size of the AD shift may be smaller than the initial fiscal expansion.
▪ This is called the crowding-out effect.
How the Crowding-Out Effect Works
$20b increase in G initially shifts AD right by $20b But higher Y increases MD and r, which reduces AD.
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A tax cut increases households’ take-home pay. األسر رواتب زيادة إلى الضريبي التخفيض يؤدي Households respond by spending a portion of this extra income, shifting AD
to the right.
The size of the shift is affected by the multiplier and crowding-out effects.
Another factor: whether households perceive the tax cut to be temporary or
permanent.
A permanent tax cut causes a bigger increase in C—and a bigger shift in the
AD curve—than a temporary tax cut.
Proponents of active stabilization policy believe the govt should use policy to reduce
these fluctuations:
When GDP falls below its natural rate, use expansionary monetary or fiscal policy to prevent or reduce a recession.
When GDP rises above its natural rate, use contractionary policy to prevent or reduce an inflationary boom.
Monetary policy affects economy with a long lag السياسة النقدية تؤثر على االقتصاد على المدى الطويل()
Firms make investment plans in advance, so I take time to respond to
changes in r.
Most economists believe it takes at least 6 months for mon policy to affect output and employment.
Fiscal policy also works with a long lag لمدى الطويل( ) السياسة المالية ايضا تؤثر على ا
Changes in G and T require acts of Congress.
The legislative process can take months or years.
Due to these long lags, critics of active policy argue that such policies may destabilize
the economy rather than help it: By the time the policies affect agg demand, the
economy’s condition may have changed.
These critics contend that policymakers should focus on long-run goals like economic
growth and low inflation.
Automatic stabilizers: ) تلقائية )مثبتات : changes in fiscal policy that stimulate agg demand when economy goes into recession, without policymakers having to take any deliberate action
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BANK QUESTIONS: MULTIPLE CHOICES\
1. Shifts in the aggregate-demand curve can cause fluctuations in a. neither the level of output nor the level of prices. b. the level of output, but not in the level of prices. c. the level of prices, but not in the level of output. d. the level of output and in the level of prices. ANS: D
2.Fiscal policy affects the economy
a. only in the short run. b. only in the long run. c. in both the short and long run. d. in neither the short nor the long run.
ANS: C
3. The interest-rate effect
a. depends on the idea that increases in interest rates increase the quantity of money demanded.
b. depends on the idea that increases in interest rates increase the quantity of money supplied.
c. is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
d. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
ANS: C
4. The wealth effect stems from the idea that a higher price level
a. increases the real value of households’ money holdings. b. decreases the real value of households’ money holdings. c. increases the real value of the domestic currency in foreign-exchange markets. d. decreases the real value of the domestic currency in foreign-exchange markets.
ANS: B 5. With respect to their impact on aggregate demand for the U.S. economy, which of the following
represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important? a. wealth effect, exchange-rate effect, interest-rate effect b. exchange-rate effect, interest-rate effect, wealth effect c. interest-rate effect, wealth effect, exchange-rate effect d. interest-rate effect, exchange-rate effect, wealth effect
ANS: D 6. For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?
a. An increase in the price level decreases the interest rate. b. An increase in the price level increases the interest rate. c. An increase in the money supply decreases the interest rate. d. An increase in the money supply increases the interest rate.
ANS: B
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7. According to John Maynard Keynes,
a. the demand for money in a country is determined entirely by that nation’s central bank. b. the supply of money in a country is determined by the overall wealth of the citizens of
that country. c. the interest rate adjusts to balance the supply of, and demand for, money. d. the interest rate adjusts to balance the supply of, and demand for, goods and services.
ANS: C 8. According to classical macroeconomic theory,
a. the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process.
b. for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.
c. output is determined by the supplies of capital and labor and the available production technology.
d. All of the above are correct. ANS: C
9. Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level
increases, a. firms may believe the relative price of their output has risen. b. real wealth declines. c. the interest rate increases. d. the exchange rate increases.
ANS: A
10. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
a. the price level. b. the interest rate. c. the exchange rate. d. real wealth.
ANS: B
Chapter 23
Econ 201
Moussa Academy 00201007153601 WWW.MOUSSAACADEMY.COM
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1. Should Policymakers Try to Stabilize the Economy?
االقتصاد؟ استقرار تحقيق محاولة السياسة صانعي على يجب هل ( )
Arguments for active stabilization:)حجج تحقيق االسقرار(
Left on their own, economies tend to fluctuate. E.g., pessimism of households
and firms causes a fall in agg demand, which causes a recession.
Policymakers can “lean against the wind,” i.e. use monetary & fiscal policy to stabilize agg demand, output, and employment.
A more stable economy benefits everyone.
Arguments against active stabilization )حجج ضد تحقيق االستقرار( :
Monetary & fiscal policy work with long lags, so policy must act in advance of economic changes.
But the shocks that cause fluctuations are unpredictable, and forecasting is highly imprecise.
If policy takes effect too late, it will worsen fluctuations. So, leave economy to its own devices.
2. Should the Government Fight Recessions with Spending Hikes or Tax Cuts? ) (الضرائب؟ تخفيض أو اإلنفاق زيادة خالل من الركود محاربة الحكومة على يجب هل
Arguments for fighting recessions with spending: (باإلنفاق الكساد محاربة )حجج
Each $ of govt spending adds directly to aggregate demand, but only part of
each $ of a tax cut does because consumers save part of it.
Since most states must keep balanced budgets, federal spending given to states
can prevent states from laying off public workers, saving jobs.
Arguments for fighting recessions with tax cuts (الضريبية بالتخفيضات الركود مكافحة حجج)
▪ Tax cuts increase households’ disposable income and therefore increase consumption spending.
▪ Tax cuts can increase aggregate demand with incentives—like the investment tax credit.
▪ Tax cuts can increase aggregate supply by increasing the incentive to work and produce g&s.
▪ Rapid spending increases may be wasteful (“bridges to nowhere”) and will require future tax increases.
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3. Should Monetary Policy Be Made by Rule or Discretion? بتقدير؟ أم بحكم النقدية السياسة تتم أن يجب هل) (
The Federal Reserve has almost complete discretion over monetary policy. (النقدية السياسة بشأن تقريبًا كاملة تقديرية بسلطة الفيدرالي االحتياطي يتمتع)
Some argue that the Fed should be forced to follow a rule, such as
constant money growth rate,
inflation targeting, increase money growth rate if inflation is below target decrease money growth rate if inflation is above target.
Arguments against discretion )الحجج ضد السلطة التقديرية( ▪ Allowing central bankers discretion could do great harm if they are incompetent. ▪ Discretion allows the possibility of abuse.
E.g., using monetary policy to affect election outcomes, causing fluctuations called “the political business cycle.”
▪ Central bankers who promise price stability may renege if a recession occurs. Time-inconsistency: the discrepancy between actual policy and announced
policy
Arguments for discretion: )الحجج ضد السلطة التقديرية(
Discretion allows flexibility to react to unforeseen events.
▪ Political business cycles and time-inconsistency are theoretical possibilities but not that important in practice.
▪ It is difficult to specify rules precisely and to determine what the best rule would be.
4. Should the Central Bank Aim for Zero Inflation?
صفر؟( تضخم معدل تحقيق إلى يهدف أن المركزي للبنك ينبغي هل)
Arguments for a zero inflation target: (الحجج من أجل هدف تضخم صفر)
▪ The costs of inflation (shoeleather, menu, etc.) can be substantial even for low
inflation.
▪ Achieving zero inflation would have temporary costs (higher unemployment)
but permanent benefits.
▪ And these costs could be reduced if the commitment to zero inflation is
credible (reduces the expected inflation rate)
Arguments against a zero inflation target:)الحجج ضد هدف تضخم صفر )
▪ The benefits of moving from moderate to zero inflation are small, but the costs are large:
▪ Estimates: must sacrifice 5% of a year’s GDP for each 1% reduction in inflation
▪ A disinflation would leave permanent scars: ▪ Investment falls, lowering the future capital stock ▪ Workers’ skills diminish while unemployed
▪ Some of inflation’s costs could be reduced through more widespread indexation.
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5. Should the Government Balance Its Budget? ) (ميزانيتها؟ موازنة الحكومة على يجب هل
Arguments for balancing the budget )حجج مع موازنة الميزانية(
▪ Govt debt places a burden on future generations.
▪ Budget deficits crowd out investment, reducing growth and future living
standards.
▪ While deficits may be justified during recessions or wars, the surging peacetime
debt of recent decades is unsustainable and detrimental.
Arguments against balancing the budget )حجج ضد موازنة الميزانية(
▪ The burden of the govt’s debt is exaggerated; it’s only a tiny % of a person’s
lifetime income.
▪ Cutting the deficit could do more harm than good:
▪ Cutting education would reduce human capital accumulation and future
living standards
▪ Raising taxes reduces incentives to work and save
▪ Focusing on the deficit diverts attention from other programs that redistribute
income across generations, such as Social Security.
▪ Debt/income ratio more relevant than debt itself
6. Should the Tax Laws Be Reformed to Encourage Saving? االدخار؟ لتشجيع الضرائب قوانين إصالح ينبغي )هل (
Arguments for tax reform to encourage saving : )حجج اإلصالح الضريبي لتشجيع االدخار(
▪ Another of the Ten Principles of Economics: People respond to incentives.
▪ The current U.S. tax system discourages saving: ▪ High marginal tax rates reduce return on saving ▪ Some saving is taxed twice (as corporate income and again as personal
income)
▪ High tax rates on bequests (up to 55%!!!)
▪ Better: replace income tax with a consumption tax to increase the incentive to
save
Arguments against tax reform to encourage saving:)الحجج ضد اإلصالح الضريبي لتشجيع االدخار (
▪ Such tax reform would mainly benefit the wealthy, who need tax relief the
least.
▪ Estimates of interest-rate elasticity of saving are low, so tax incentives may not
increase saving much.
▪ Reducing taxes on capital income may increase the govt’s budget deficit,
negating the benefits of higher private saving.
▪ Better: increase national saving directly by reducing the budget
deficit.
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Bank Question: Multiple Choices
1.Fluctuations in employment and output result from changes in
a. aggregate demand only.
b. aggregate supply only.
c. aggregate demand and aggregate supply.
d. neither aggregate demand nor aggregate supply.
ANS: C
2. If aggregate demand shifts because of a wave of optimism about stock prices, those who favor a policy
that “leans against the wind” would advocate the
a. Federal Reserve increase the money supply or the government increase taxes.
b. Federal Reserve increase the money supply or the government decrease taxes.
c. Federal Reserve decrease the money supply or the government increase taxes.
d. Federal Reserve decrease the money supply or the government decrease taxes.
ANS: C
3. "Leaning against the wind" is exemplified by a
a. tax increase when there is a recession.
b. decrease in the money supply when there is an expansion.
c. decrease in government expenditures when there is a recession.
d. All of the above are correct.
ANS: B
4. If the unemployment rate rises, which policies would be appropriate to reduce it?
a. increase the money supply, increase taxes
b. increase the money supply, cut taxes
c. decrease the money supply, increase taxes
d. decrease the money supply, cut taxes
ANS: B
5. The Federal Reserve will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. it thinks the unemployment rate is too high.
c. the growth rate of real GDP is quite sluggish.
d. it thinks inflation is too high today, or will become too high in the future.
ANS: D
6. Which of the following is an argument against trying to use policy to stabilize the economy?
a. Recessions represent a waste of resources.
b. Pessimism on the part of households and firms may become a self-fulfilling prophecy.
c. "Leaning against the wind" requires policymakers to increase aggregate demand in
recessions and reduce aggregate demand in booms.
d. Macroeconomic forecasting is not developed sufficiently to allow policymakers to change
aggregate demand at the proper time.
ANS: D
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7. All of the following are arguments against stabilization policy except
a. Economic forecasting is highly imprecise.
b. Long lags may cause stabilization policies to in fact destabilize the economy.
c. Monetary policy affects aggregate demand by changing interest rates.
d. Fiscal policy must go through a long political process.
ANS: C
8. Part of the lag in monetary policy effects is due to
a. the long political process of monetary policy decisions.
b. precise economic forecasts.
c. the time required for firms and households to alter their spending plans.
d. changes in the unemployment rate.
ANS: C
9. Suppose there is a decrease in aggregate demand. If the Fed wants to stabilize output it could
a. buy bonds. These purchases also move the price level closer to its original level.
b. buy bonds. However these purchases move the price level farther from its original level.
c. sell bonds. These sales also move the price level closer to its original level.
d. sell bonds. However these sales move the price level farther from its original level.
ANS: A
10. In 2009 Barack Obama responded to recession
a. only by cutting taxes.
b. by cutting taxes and reducing government expenditures.
c. only by raising government expenditures.
d. by cutting taxes and by raising government expenditures.
ANS: D
- Scarcity (الندرة) : the limited nature of society’s resources
- How people decide what to buy, how much to work, save, and spend
- ▪ Efficiency (الكفاءة) : when society gets the most from its scarce resources
- It is the relevant cost for decision making.
- Systematically and purposefully do the best they can to achieve their objectives.
- Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan.
- Economists play two roles(يقوم الاقتصاديون بدورين) :
- 1. Scientists: try to explain the world
- ▪ Households
- Points on the PPF (like A – E)
- ▪ possible
- ▪ Microeconomics الاقتصاد الجزئي))is the study of how households and firms make decisions and how they interact in markets.
- ▪ As scientists, economists make positive statements :(عبارات ايجابية)which attempt to describe the world as it is.
- Economists often give conflicting policy advice
- (غالبا ما يقدم الاقتصاديون نصائح متضاربة مع السياسيين)
- The opportunity cost of a computer is(تكلفة الفرصة البديلة للكمبيوتر)
- ▪ 10 tons of wheat in the U.S., because producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat.
- Gains from trade arise from comparative advantage (differences in opportunity costs).(تنشأ المكاسب من التجارة من خلال الميزة النسبية)
- A market( السوق) is a group of buyers and sellers of a particular product.
- All goods exactly the same
- These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price),Changes in them shift the D curve…
- The quantity supplied(الكمية المعروضة) of any good is the amount that sellers are willing and able to sell.(there are positive relationship between price and quantity supplied)
- The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
- 2. These “other things” are non-price determinants of supply.
- 1. Change in supply(تغير العرض) : a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)
- 3. Change in demand(تغير الطلب) : a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)
- In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
- Government Policies That Alter the Private Market Outcome
- (السياسات الحكومية التي تغير مخرجات السوق)
- 1. Price controls(التحكم بالاسعار)
- 2. Taxes(الضرائب)
- Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices.
- A tax on good places a wedge between the price buyers pay and the price sellers receive, and causes the equilibrium quantity to fall, whether the tax is imposed on buyers or sellers.
- A buyer’s willingness to pay(استعداد المشتري للدفع) for a good is the maximum amount the buyer will pay for that good.
- Flea’s CS = $300 – 220 = $80
- ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ
- ▪ Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost).
- At each Q,
- CS = (value to buyers) – (amount paid by buyers)
- = total gains from trade in a market
- A tax(الضرائب)
- Drives a wedge between the price buyers pay and the price sellers receive.
- Sellers receive PS Quantity = QT
- Because of the tax, the units between P
- When the tax is larger, increasing it causes tax revenue to fall.
- The Laffer curve(منحنى لوفر) shows the relationship between the size of the tax and tax revenue.
- Consumers enjoy increased variety of goods.
- The winners from trade could compensate the losers and still be better off.
- D = deadweight loss from the over production of shirts
- Restrict imports from France, which reduces welfare in the U.S. Don’t restrict imports, which reduces U.S. credibility.
- ▪ GDP also measures total expenditure on the economy’s output of g&s.
- ▪ For renters, consumption includes rent payments.
- The GDP deflator (معامل انكماش الناتج المحلي الاجمالي)is a measure of the overall level of prices.
- Real GDP per capita(الناتج المحلي الاجمالي للفرد) is the main indicator of the average person’s standard of living.
- The Consumer Price Index (CPI)(الرقم القياسي لاسعار المستهلكين) : measures the typical consumer’s cost of living
- Over time, some prices rise faster than others.
- The introduction of new goods increases variety, allows consumers to find products that more closely meet their needs.
- In effect, dollars become more valuable.
- The CPI misses this effect because it uses a fixed basket of goods.
- Thus, the CPI overstates increases in the cost of living.
- Improvements in the quality of goods in the basket increase the value of each dollar.
- The BLS tries to account for quality changes but probably misses some, as quality is hard to measure.
- Thus, the CPI overstates increases in the cost of living. (1)
- There are two measure of the inflation :(هناك نوعين من مقاييس التضخم)
- 2. Indexation(الفهرسة)
- 3. Real vs. Nominal Interest Rates(القيمة الاسمية والحقيقية لاسعار الفائدة)
- ▪ The interest rate not corrected for inflation
- 3. Natural resources (N)(الموارد الطبيعية) : the inputs into production that nature provides, e.g., land, mineral deposits Other things equal, more N allows a country to produce more Y. In per-worker terms, an increase in N/L causes an increase in Y/L.
- Technological progress does not only mean a faster computer, a higher-definition TV,
- Increasing all inputs 10% (multiplying each by 1.1) causes output to increase by 10%:
- If we multiply each input by 1/L, then output is multiplied by 1/L:
- This equation shows that productivity (output per worker) depends on:
- ECONOMIC GROWTH AND PUBLIC POLICY(النمو الاقتصادي والسياسة العامة)
- We can boost productivity by increasing K, which requires investment.
- The Production Function & Diminishing Returns
- To raise K/L and hence productivity, wages, and living standards, the govt can also encourage
- A financial crisis led to a deep recession in the U.S. and around the world.(2008-2009) Elements of Financial Crises(عناصر الازمة المالية)
- 1. Large decline in some asset prices: Housing prices fell 30%.
- 3. National saving(الادخار القومي) = private saving + public saving
- National saving = the portion of national income that is not used for consumption or government purchases
- For the rest of this chapter, focus on the closed economy case: Y = C + I + G
- Budget Deficits and Surpluses(فائض وعجز الموازنة)
- 1. Budget surplus(فائض الموازنة)
- Private saving(الادخار الخاص) is the income remaining after households pay their taxes and pay for consumption.
- Increase in budget deficit causes fall in investment. The govt borrows to finance its deficit, leaving less funds available for investment.This is called crowding out.
- Compounding(المضاعفة) : the accumulation of a sum of money where the interest earned on the sum earns additional interest
- Insurance companies cannot fully guard against these problems, so they must charge higher prices.
- We can measure risk of an asset with the standard deviation, a statistic that measures a variable’s volatility—how likely it is to fluctuate.
- Diversification cannot reduce market risk(مخاطر السوق) , which affects all companies in the stock market.
- Value of a share(قيمة السهم)
- » Each stock price reflects all available information about the value of the company.
- » A stock price only changes in response to new information (―news‖) about the company’s value. News cannot be predicted, so stock price movements should be impossible to predict.
- Produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
- The labor force is the total # of workers, including the employed and unemployed.
- What Does the U-Rate Really Measure?(مالذي يقيسه معدل البطالة)
- The u-rate is not a perfect indicator of joblessness or the health of the labor market:
- Most spells of unemployment are short: (معظم فترات البطالة قصيرة)
- ▪ Typically 1/3 of the unemployed: have been unemployed under 5 weeks, 2/3 have been unemployed under 14 weeks.
- ▪ Only 20% have been unemployed over 6 months.
- ▪ Yet, most observed unemployment is long term.
- ▪ The small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the unemployment observed over time.
- ▪ Knowing these facts helps policymakers design better policies to help the unemployed.
- UI benefits end when a worker takes a job, so workers have less incentive to search or take jobs while eligible to receive benefits.
- 3. Worker quality(جودة العامل) : Offering higher wages attracts better job applicants, increases quality of the firm’s workforce.
- Store of value(مخزن للقيمة) : an item people can use to transfer purchasing power from the present to the future
- 1. Commodity money(النقود السلعية) : takes the form of a commodity with intrinsic value Examples: gold coins, cigarettes in POW camps
- 1. M1: currency, demand deposits, traveler’s checks, and other checkable deposits.
- 2. M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories.
- Central bank(البنك المركزي): an institution that oversees the banking system and regulates the money supply
- The Federal Reserve System consists of ( يتكون الاحتياطي الفيدرالي من)
- ▪ Board of Governors (7 members),located in Washington, DC
- The Fed establishes reserve requirements, regulations on the minimum amount of reserves that banks must hold against deposits.
- Assets(الاصول) : Besides reserves and loans, banks also hold securities.
- On any given day, banks with insufficient reserves can borrow from banks with excess reserves.
- The FOMC uses OMOs to target the fed funds rate.
- The value of money ( قيمة النقود ) P = the price level (e.g., the CPI or GDP deflator)
- Hume and the classical economists suggested that monetary developments affect nominal variables but not real variables.
- Notation:
- Start with quantity equation M x V=P x Y
- Hyperinflation is generally defined as inflation exceeding 50% per month.
- Large govt budget deficits led to the creation of large quantities of money and high inflation rates.
- The Inflation Tax: ( ضريبة التضخم)
- When tax revenue is inadequate and ability to borrow is limited, govt may print money to pay for its spending.
- Debtors get to repay their debt with dollars that aren’t worth as much.
- (يحصل المدينون على سداد ديونهم بدولارات لا تساوي الكثير)
- An open economy(الاقتصاد المفتوح) interacts freely with other economies around the world.
- Variables that Influence Net Exports(متغيرات تؤثر على صافي الصادرات)
- 1. Consumers’ preferences for foreign and domestic goods
- Net capital outflow (NCO): (صافي تدفق رأس المال الخارج)
- domestic residents’ purchases of foreign assets minus
- foreigners’ purchases of domestic assets
- The flow of capital abroad takes two forms:(تدفق رأس المال للخارج يأخذ شكلين)
- When S > I, the excess loanable funds flow abroad in the form of positive net capital outflow.
- We express all exchange rates as foreign currency per unit of domestic currency.
- P = U.S. price level, e.g., Consumer Price Index, measures the price of a basket of goods.
- P* = foreign price level Real exchange rate= (e x P)/P* = price of a domestic basket of goods relative to price of a foreign basket of goods
- The Loanable Funds Market Diagram (مخطط سوق التمويل القابلة للاقراض)
- A tax incentive for investment has similar effects as a budget deficit:
- But one important difference:(هناك اختلاف هام)
- Investment tax incentive increases investment, which increases productivity growth and living standards in the long run.
- Common reasons for policies that restrict imports: (الاسباب الشائعة للسياسات التي تقسد الوارادات)
- Political instability may cause capital flight(عدم الاسقرار السياسي يؤدي الى هبوط رأس المال) , as nervous investors sell assets and pull their capital out of the country. As a result, interest rates rise and the country’s exchange rate falls. This o...
- A budget deficit reduces national saving(عجز الميزانية يؤدي الى خفض الادخار المحلي) , drives up interest rates, reduces net capital outflow, reduces the supply of dollars in the foreign exchange market, appreciates the exchange rate, and reduces net...
- A policy that restricts imports does not affect net capital outflow(السياسة التي تقيد الواردات لا تؤثر على تدفق رأس المال الخارج) , so it cannot affect net exports or improve a country’s trade deficit. Instead, it drives up the exchange rate and re...
- ▪ Short-run economic fluctuations are often called business cycles.
- This model differs from the classical economic theories economists use to explain the long run.
- Any event that changes C, I, G, or NX—except change in P—will shift the AD curve.
- The AS curve shows the total quantity of g&s firms produce and sell at any given price level.
- ▪ upward- sloping in short run
- the economy produces when unemployment is at its natural rate.
- Any event that changes any of the determinants of YN will shift LRAS
- استخدام منحنى العرض ومنحنى الطلب لتصوير النمو والتضخم على الدى الطويل
- Over the long run, the Tech progress shifts LRAS to the right
- And growth in the money supply shifts AD to the right.
- Short Run Aggregate Supply (SRAS)
- Imperfection: Many prices are sticky in the short run.
- Examples: cost of printing new menus, the time required to change price tags
- Imperfection: Firms may confuse changes in P with changes in the relative price of the products they sell.
- In all 3 theories, Y deviates from YN when P deviates from PE.
- The imperfections in these theories are temporary. Over time,
- ▪ Sticky wages and prices become flexible
- and unemployment is at its natural rate
- Economic Fluctuations (التقلبات الاقتصادية)
- ▪ Caused by events that shift the AD and/or AS curves.
- ▪ Four steps to analyzing economic fluctuations:
- From 12/2007 to 6/2009, real GDP fell about 4%
- Argued recessions and depressions can result from inadequate demand; policymakers should shift AD.
- Money(المال) – liquid but pays no interest
- The variables that influence money demand: Y, r, and P.
- Suppose real income (Y) rises. Other things equal, what happens to money demand? If Y rises:
- MS curve is vertical: Changes in r do not affect MS, which is fixed by the Fed.
- To change the interest rate and shift the AD curve, the Fed conducts open market operations to change MS.
- In a liquidity trap, mon. policy may not work, since nominal interest rates cannot be reduced further.
- an increase in G and/or decrease in T
- a decrease in G and/or increase in T
- Fiscal policy has two effects on AD:
- A $20b increase in G initially shifts AD
- Notation: ΔG is the change in G, ΔY and ΔC are the ultimate changes in Y and C Y = C + I + G + NX identity, ΔY = ΔC + ΔG I and NX do not change,
- ΔY = MPC ΔY + ΔG because ΔC = MPC ΔY
- Left on their own, economies tend to fluctuate. E.g., pessimism of households and firms causes a fall in agg demand, which causes a recession.
- Arguments for fighting recessions with spending: (حجج محاربة الكساد بالإنفاق)
- Each $ of govt spending adds directly to aggregate demand, but only part of each $ of a tax cut does because consumers save part of it.
- Arguments for discretion: (الحجج ضد السلطة التقديرية)
- Discretion allows flexibility to react to unforeseen events.
- Arguments for balancing the budget(حجج مع موازنة الميزانية)
- ▪ Govt debt places a burden on future generations.
- Arguments against tax reform to encourage saving:( الحجج ضد الإصلاح الضريبي لتشجيع الادخار)
