TUT1:

1. Why is there trade off between equality and efficiency?

There is often a trade-off between equality and efficiency because
policies that promote equality can sometimes have negative effects on efficiency,
and policies that promote efficiency can sometimes have negative effects on
equality.
For example, implementing policies that aim to reduce income inequality,
such as progressive taxation and welfare programs, can reduce the incentives for
individuals to work hard and invest, which can lead to lower economic growth and
efficiency. On the other hand, policies that prioritize efficiency, such as reducing
regulation and cutting taxes, can lead to increased income inequality, as those who are
already wealthy benefit more from these policies than those who are not.
Moreover, policies that promote equality often require redistribution of
resources from the wealthy to the less well-off, which can create disincentives for
people to work hard and invest, leading to lower overall economic growth and
efficiency. Conversely, policies that prioritize efficiency can lead to income disparities
and social inequality, which can have negative social and political consequences.
Therefore, finding a balance between equality and efficiency is a complex
task, and policymakers must consider the trade-offs involved when making decisions
that affect both factors.
2. Water is necessary for life. Diamonds are not. Is the marginal benefit of an
additional glass of water greater or lesser than an additional one-carat diamond?
Why?
The marginal benefit of an additional glass of water is greater than the
marginal benefit of an additional one-carat diamond because water is essential for
survival and has a high value in meeting our basic needs, whereas diamonds are a
luxury item and do not have as much inherent value in fulfilling our needs. As a
result, the additional utility or satisfaction gained from an extra glass of water is much
higher than that of an extra one-carat diamond.
3. If the government printed twice as much money, what do you think would
happen to prices and output if the economy were already producing at maximum
capacity?
If the government printed twice as much money and the economy was
already producing at maximum capacity, it would lead to an increase in the general
price level or inflation. This is because the increase in the money supply would lead
to an excess supply of money relative to the supply of goods and services in the
economy.
With an unchanged level of output, the increase in the money supply would
lead to more money chasing the same amount of goods, which would increase
demand and push up prices. As a result, the purchasing power of the currency would
decline, and consumers would need more money to buy the same amount of goods
and services.
Overall, an increase in the money supply without a corresponding increase
in output would lead to inflation and a decline in the value of the currency, which
could have negative effects on the economy, such as reduced purchasing power and
higher borrowing costs.
4. A goal for a society is to distribute resources more equally and fairly. How
might you distribute resources if everyone were equally talented and worked
equally hard? What if people had different talents and some people worked
hard, while others did not?
If everyone were equally talented and worked equally hard, then
distributing resources equally and fairly would be straightforward. One way to
achieve this goal would be to distribute resources equally to each individual, without
regard to their specific talents or efforts. This would ensure that everyone had an
equal opportunity to access the same resources and enjoy the same standard of living.
However, if people had different talents and some people worked hard
while others did not, then distributing resources equally and fairly would be more
complex. One approach would be to design a system that rewards people based on
their contribution to society, such as their productivity or the value of their work. This
could involve a progressive tax system that redistributes resources from high earners
to low earners, or a social welfare system that provides assistance to those in need.
Another approach would be to provide equal opportunities for all
individuals to develop their talents and abilities through education and training
programs. By giving people the tools to succeed, regardless of their background, the
society can ensure that resources are distributed more equally and fairly based on
merit rather than privilege.
In general, the specific method of resource distribution that is deemed fair
and appropriate will depend on the values, priorities, and circumstances of the society.
5. Who is more self-interested, the buyer or the seller?
Both the buyer and seller are self-interested, but in different ways. The
buyer is typically seeking to purchase a product or service that will satisfy their needs
or wants at the lowest possible price, while the seller is seeking to sell the product or
service at the highest possible price to maximize their profit.
The buyer's self-interest is in obtaining the product or service they desire at
the best possible price, while the seller's self-interest is in maximizing their revenue
or profit from the sale. Both parties are motivated by their own self-interest, which
creates the potential for mutually beneficial exchanges in a market economy.
 However, it is important to note that not all buyers and sellers are purely
self-interested. Some individuals may be motivated by altruistic or ethical concerns,
such as supporting fair trade practices or environmental sustainability, in their
purchasing or selling decisions. Nonetheless, self-interest is a fundamental driving
force behind market transactions.
TUT 2:
1. What contributes more to GDP- production of an economy car or a luxury
car? Why?
The production of a luxury car typically contributes more to GDP than the
production of an economy car. This is because the production of a luxury car involves
a higher value of goods and services, including higher quality materials, advanced
technologies, and skilled labor, which generates more economic activity and value
added.
2. A farmer sells wheat to a baker for $2. The baker uses the wheat to make
bread, which is sold for $3. What is the total contribution of these transactions to
GDP?
The contribution to GDP is $3, the market value of the bread, which is the
final good that is sold.
3. Many years ago, Peggy paid $500 to put together a record collection. Today,
she sold her albums at a garage sale for $100. How does this sale affect current
GDP?
The sale of used records does not affect GDP at all because it involves no
current production.
4. List two components of GDP. Give an example.
Investment- purchase of a a computer by a business.
Net Exports- sale of American wheat to Russia.
5. Why do economists use real gdp rather than nominal gdp to gauge economic
well-being?
Economists use real GDP rather than nominal GDP to gauge economic
well-being because real GDP is not affected by changes in prices, so it reflects only
changes in the amounts being produced. A rise in nominal GDP can be been caused
by increased production, higher prices, or both
6. why is it desirable for a country to have a large GDP?
give an example something that would raise GDP and yet be undesirable?
because people could enjoy more goods and services. But GDP is not the only
important measure of well-being. For example, laws that restrict pollution cause GDP
to be lower. If laws against pollution were eliminated, GDP would be higher but the
pollution might make us worse off. Or, for example, an earthquake would raise GDP,
as expenditures on cleanup, repair, and rebuilding increase. But an earthquake is an
undesirable event that lowers our welfare.
TUT 3: Measuring the Cost of Living
The consumer price index tries to measure the overall cost of the goods and
services bought by a
typical consumer. It is constructed by surveying consumers to fix a basket of
goods and services
that the typical consumer buys, finding the prices of the goods and services over
time, computing
the cost of the basket at different times, and then choosing a base year. To
compute the price
index, we divide the cost of the market basket in the current year by the cost of
the market
basket in the base year and multiply by 100
The consumer price index tries to measure the overall cost of the goods and
services bought by a
typical consumer. It is constructed by surveying consumers to fix a basket of
goods and services
that the typical consumer buys, finding the prices of the goods and services over
time, computing
the cost of the basket at different times, and then choosing a base year. To
compute the price
index, we divide the cost of the market basket in the current year by the cost of
the market
basket in the base year and multiply by 100
The consumer price index tries to measure the overall cost of the goods and
services bought by a
typical consumer. It is constructed by surveying consumers to fix a basket of
goods and services
that the typical consumer buys, finding the prices of the goods and services over
time, computing
the cost of the basket at different times, and then choosing a base year. To
compute the price
index, we divide the cost of the market basket in the current year by the cost of
the market
basket in the base year and multiply by 100
1.Explain briefly what the consumer price index is trying to measure and
how it is constructed.
 The consumer price index tries to measure the overall cost of the goods
and services bought by atypical consumer. It is constructed by surveying
consumers to fix a basket of goods and services that the typical consumer buys,
finding the prices of the goods and services over time, computingthe cost of the
basket at different times, and then choosing a base year. To compute the price
index, we divide the cost of the market basket in the current year by the cost of
the market basket in the base year and multiply by 100.
2. Which do you think has a greater effect on the consumer price index: a 10
percent increase in the price or chicken or a 10 percent increase in the price
or caviar? whv?
A 10 percent increase in the price of chicken has a greater effect on the
consumer price index than a 10 percent increase in the price or caviar because
chicken is a bigger part or the average consumer's market basket.
3.Describe the three problems that make the consumer price index an
imperfect measure of the cost of living.
The three problems in the consumer price index as a measure of the
cost of living are: (1) substitution bias, which arises because people substitute
toward goods that have become relatively less expensive; (2) the introduction of
new goods, which are not reflected quickly in the CPI; and (3) unmeasured
quality change
4.Explain the meaning of nominal interest rate and real interest rate. How
are they related?
The nominal interest rate is the rate of interest paid on a loan in dollar
terms. The real interest rate is the rate of interest corrected for inflation. The real
interest rate is the nominal interest rate minus the rate of inflation.
5. Suppose there is an increase in the price of imported BMW automobiles
(which are produced in Germany). Would this have a larger impact on the
CPI or the GDP deflator? why?
the CPI, because BMWs are the typical consumption basket, but
BMWs are not included in US GDP
6. If the price of a Navy submarine rises, is the consumer price index or the
GDP deflator affected More? Why?
If the price of a Navy submarine rises, there is no effect on the
consumer price index, because Navy submarines are not consumer goods. But the
GDP price index is affected, because Navy submarines are included in GDP as a
part of government purchases.
7. Which would have a greater impact on the CPE: a 20% increase in the
price of Rolex watches or a 20% increase in the price of new cars? Why
 new cars, because there are a greater number of new cars in the typical
consumption basket
8. Suppose you lend money to your sister at a nomimal interest rate of 10%
because you both expect the inflation rate to be 6%. Furthermore, suppose
that after the loan has been repaid, you discover that the actual inflation rate
over the life of the loan was only 2 percent. Who gained at the other's
expense - you or your sister? Why?
Expected real int. rate 4%. Actual real int. rate = 8% you gained and
your sister lost
TUT 4: Production and Growth
1. What does the level of a nation's GDP measure?
The level of a nation's GDP measures its economy's income and output.
2. What does the growth rate of GDP measure?
The growth rate of GDP measures growth of productivity, which
measures a nation's standard of living.
3. Would you rather live in a nation with a high level of GDP and a low
growth rate or in a nation with a low level of GDP and a high growth rate?
I would rather live in a nation with a high level of GDP and a low
growth rate because although the catch-up effect assumes that nations with a low
GDP and a high growth rate will be able to rapidly grow and catch up with
already-developed nations, I'd rather just live in a nation that is already
developed.
List and describe four determinants of productivity.
1) Physical capital - tools that allow workers to produce output more efficiently
2) Human capital - knowledge and skills that workers have
3) Natural resources - production inputs provided by nature, i.e. land, river,
mineral deposits; can be renewable and nonrenewable
4) Technological knowledge - the understanding of the best ways to efficiently
produce goods and services

4. Explain how higher saving leads to a higher standard of living. What

might deter a policymaker from trying to raise the rate of saving?
Higher saving leads to a higher standard of living because society
presently sacrifices consumption of goods and services to enjoy higher
consumption in the future. What might deter a policymaker from trying to raise
the rate of saving could be a sudden need to raise government spending, i.e.
raising the defense budget due to a new declaration of war.
5. Why would removing a trade restriction, such as a tariff, lead to more
rapid economic growth?
Removing a trade restriction would lead to more rapid economic
growth because trade is, in some ways, a type of technology -- when a country
exports wheat and imports textiles, the country benefits as if it had invented a
technology for turning wheat into textiles, therefore allowing the country to
experience the same kind of economic growth that would occur after a major
technological advance.
6. How does the rate of population growth influence the level of GDP per
person?
The rate of population growth is inversely related to the level of GDP
per person -- the higher the rate of population growth, the lower the level of GDP
per capita, and vice versa.
7. Some economists argue for lengthening patent protection while some
economists argue for shortening it. Why might patents increase
productivity? Why might they decrease productivity?
Patents provide a property right to an idea; therefore, people are willing
to invest in research and development because it is more profitable. Research and
development is a public good once the information is disseminated, and a patent
restricts this public use.
TUT 5: Saving, Investment, and the Financial System
1. Why is it important for people who ownstocks and bonds to diversify their
holdings? What type of financial institution makes diversification easier?
It is important for people who own stocks and bonds to diversify their
holdings because then they will have only a small stake in each asset, which
reduces risk. Mutual funds make such diversification easy by allowing a small
investor to purchase parts of hundreds of different stocks and bonds.
2. What is national saving? What is private saving? What is public saving? How
are these three variables related?
National saving is the amount of a nation's income that is not spent on
consumption or government purchases.
Private saving is the amount of income that households have left after paying
their taxes and paying for their consumption. Public saving is the amount of tax
revenue that the government has left after paying for its spending. The three
variables are related because national saving equals private saving plus public
saving.

S = (Y-T-C) + (T-G) => National Saving = Private Saving + Public Saving

3. What is investment? How is it related to national saving?
Investment refers to the purchase of new capital, such as equipment or buildings.
It is equal to national saving.
S=I
4. What is a government budget deficit? How does it affect interest rates,
investment, and economic
growth?
A government budget deficit arises when the government spends more than it
receives in tax revenue.
Because a government budget deficit reduces national saving, it raises interest
rates, reduces private investment, and thus reduces economic growth.
5. Explain why a mutual fund is likely to be less risky than individual stock?
Mutual funds tend to be less risky than individual stocks, because they are more
diversified — meaning they contain a mix of investments.
If you buy a single stock, there is no diversification in your investment.
Investing in mutual funds ensures diversification and, therefore, lowers risk.

TUT 6: Unemployment
1. is unemployment typically short-term or long-term? Explain.
Unemployment is typically short-term because workers are usually able
to apply their skills learned at one job to another job quite easily. However, this is
not always the case due to structural unemployment, which can lead to
discouraged workers.
2. Why is frictional unemployment inevitable? How might the government
reduce the amount of frictional unemployment?
Frictional unemployment is inevitable because the economy is always
changing and some firms are always shrinking while others are expanding. The
government might reduce the amount of frictional unemployment by paying for
programs that will match unemployed workers with job opportunities that match
their tastes and skills.
3. Are minimum-wage laws a better explanation for structural
unemployment among teenagers or college graduates? Why?
minimum-wage laws are a better explanation for structural
unemployment among teenagers because they are younger, less qualified, and
less experienced. So, their wages are typically low enough to be affected by
minimum-wage laws, whereas college graduates are older, more qualified, and
more experienced, which would give them higher wages.
4. How do unions affect the natural rate of unemployment?
Unions affect insiders and outsiders in regards to the natural rate of
unemployment. Unions raise the wage above equilibrium, so quantity of labor
demanded is less than the quantity of labor supplied, so there is unemployment
and insiders keep their jobs. Outsiders, who work non-unionized jobs, will
either get another non-unionized job or wait for a unionized job to open up. As
a result, the natural rate of unemployment would be higher with unions.
5. What claims do advocates of unions make to argue that unions are good
for the economy?
advocates of unions claim that unions balance firms' market power and
protect workers from being at the mercy of the firm's owners and unions help
firms respond efficiently to workers' concerns.
6. Explain four ways in which a firm might increase its profits by raising the
wages it pays.
A firm might increase its profits by raising the wages it pays because
worker turnover will decrease, worker's health will increase, worker quality will
increase, and worker health will increase, which will therefore increase
productivity of the firm in the long run.
7. Does the minimum wage cause much unemployment in the market for
accountants? Why or why not?
No because the competitive equilibrium wage for accountants exceeds
the minimum wage, and hence, the minimum wage is not a binding constraint for
accounts

TUT 7: The Money System

1. What distinguishes money from other assets in the economy?
Money is different from other assets in the economy because it is the most liquid
asset available. Other assets vary widely in their liquidity.
2. What is commodity money? What is fiat money? Which kind do we use?
Commodity money is money with intrinsic value, like gold, which can be used
for purposes other than as a medium of exchange.Fiat money is money without
intrinsic value; it has no value other than its use as a medium of exchange.Our
economy today uses fiat money.
*the term instrictic value means that the item would have value even if it were
not used as money.
3. What are demand deposits and why should they be included in the stock
of money?
Demand deposits are balances in bank accounts that depositors can access on
demand simply by writing a check. They should be included in the supply of
money because they can be used as a medium of exchange.
4. Who is responsible for setting monetary policy in the United States? How
is this group chosen?
The Federal Open Market Committee (FOMC) is responsible for setting
monetary policy in the United States.The FOMC consists of the 7 members of the
Federal Reserve Board of Governors and 5 of the 12 presidents of Federal
Reserve Banks.Members of the Board of Governors are appointed by the
president of the United States and confirmed by the U.S. Senate.The presidents of
the Federal Reserve Banks are chosen by each bank's board of directors.
5. Why don't banks hold 100 percent reserves? How is the amount of
reserves banks hold related to the amount of money the banking system
creates?
Banks do not hold 100% reserves because it is more profitable to use the reserves
to make loans, which earn interest, instead of leaving the money as reserves,
which earn no interest.
The amount of reserves banks hold is related to the amount of money the banking
system creates through the money multiplier. The smaller the fraction of reserves
banks hold, the larger the money multiplier, because each dollar of reserves is
used to create more money.
6. What is the discount rate? What happens to the money supply when the
Fed raises the discount rate ?
The discount rate is the interest rate on loans that the Federal Reserve makes to
banks.
If the Fed raises the discount rate, fewer banks will borrow from the Fed, so both
banks' reserves and the money supply will be lower.
7. What are reserve requirements? What happens to the money supply when
the Fed raises reserve requirements?
Reserve requirements are regulations on the minimum amount of reserves that
banks must hold against deposits. An increase in reserve requirements raises the
reserve ratio, lowers the money multiplier, and decreases the money supply.
8. Why can't the Fed control the money supply perfectly?
The Fed cannot control the money supply perfectly because:
(1) the Fed does not control the amount of money that households choose to hold
as deposits in banks; and
(2) the Fed does not control the amount that bankers choose to lend.
The actions of households and banks affect the money supply in ways the Fed
cannot perfectly control or predict.
TUT 8: Money Growth and Inflation
1. Explain how an increase in the price level affects the real value of money.
An increase in the price level reduces the real value of money because each dollar
in your wallet now buys a smaller quantity of goods and services.

2. According to the quantity theory of money, what is the effect of an

increase in the quantity of money?
According to the quantity theory of money, an increase in the quantity of money
causes a proportional increase in the price level.
3. Explain the difference between nominal and real variables and give two
examples of each. According to the principle of monetary neutrality, which
variables are affected by changes in the quantity of money?
Nominal variables are those measured in monetary units, while real variables are
those measured in physical units. Examples of nominal variables include the
prices of goods, wages, and nominal GDP. Examples of real variables include
relative prices (the price of one good in terms of another), real wages, and real
GDP. According to the principle of monetary neutrality, only nominal variables
are affected by changes in the quantity of money.
4. According to the Fisher effect, how does an increase in the inflation rate
affect the real interest rate and the nominal interest rate?
Inflation is like a tax because everyone who holds money loses purchasing
power. In a hyperinflation, the government increases the money supply rapidly,
which leads to a high rate of inflation. Thus the government uses the inflation tax,
instead of taxes, to finance its spending.

5. What are the costs of inflation when inflation is perfectly anticipated?

According to the Fisher effect, an increase in the inflation rate raises the nominal
interest rate by the same amount that the inflation rate increases, with no effect on
the real interest rate.
6. If inflation is less than expected, who benefits- debtors or creditors? Union
workers or firms? Why?
The costs of inflation include shoeleather costs associated with reduced money
holdings, menu costs associated with more frequent adjustment of prices,
increased variability of relative prices, unintended changes in tax liabilities due to
nonindexation of the tax code, confusion and inconvenience resulting from a
changing unit of account, and arbitrary redistributions of wealth between debtors
and creditors. With a low and stable rate of inflation like that in the United States,
none of these costs are very high. Perhaps the most important one is the
interaction between inflation and the tax code, which may reduce saving and
investment even though the inflation rate is low.