Assignment:
1. What is an interest rate? How is it calculated? What is the inflation rate? How is it calculated?
2. What is a real variable and what is a nominal variable? What is the relationship between real and nominal interest rates? If the nominal rate increases, can we say that the real rate of interest has increased? Why or why not?
3. What is meant by a production possibility frontier? What is the interpretation of the slope of ppf? Write down a linear equation of a ppf between tuna fish and coconuts. What are the interpretations of the coefficients in your ppf equation?
4. What is an indifference curve? Why are they downward sloping and why are they convex?
5. Use a linear ppf and indifference curves to illustrate the fundamental elements of decision-making. What is the objective of the decision-maker and how is that displayed in your graphical analysis?
6. What is comparative advantage? What are some possible sources of comparative advantage for countries and for people?
7. Explain how to construct an aggregate ppf using two linear production possibility frontiers and comparative advantage. Identify the points on the aggregate ppf where there is complete specialization by both countries and where only one country completely specializes.
8. What can you say about the relative prices of the two goods once trade takes place? Show the welfare gains for an individual country and show how you can measure this gain.
9. What are trading costs or transactions cost? Explain how these costs would motivate the creation of a medium of exchange.How does money facilitate trade? In particular, how does a medium of exchange increase the volume trade?
10. If exchange is voluntary, and people have adequate information and there are no negative externalities, explain why an increase in the volume of trade will likely increase welfare.
11. What is the difference between a commodity money and a fiat money?What is Gresham's law? Use this law to explain why silver dimes disappeared.
12. Is it more likely that money arose from the design of wise ancients or did it evolve? Explain.
13. What are the useful physical characteristics of money? Have all monies possessed all these characteristics?
14. What is unit of account? How does a unit of account improve a society's welfare?
15. What is bitcoin? What makes it attractive as a medium of exchange? How can you use the market price and quantity of bitcoin to get a hint at the value of a medium of exchange for society?
16. What is capital and what is investment? How are these different from financial capital or financial investment? Does investment in new capital require trust in another person?
17. What is meant by the marginal product of capital? Why does the marginal product decline?
18. Derive the ppf between current consumption, Ct, and future consumption, Ct+1. Explain why this ppf is concave.
19. Consider the utility function, total utility = U(Ct) + U(Ct+1)/(1+ρ). Explain the meaning of the term Given this utility function, what is the slope of an indifference curve?
20. Use the ppf, and indifference curves to find the optimal intertemporal choice of current consumption and future consumption. Use your result to confirm that at the optimal choice 1+MPK -d = (1+ρ)*MU(Ct)/MU(Ct+1).
21. Suppose that new technology increases the MPK. Use the above condition to argue that this change with cause Ct+1 to increase relative to Ct.
22. What is debt? Does debt require trust? How is debt different than capital?
23. What is the intertemporal budget constraint? What is its slope and what is the interpretation of the absolute value of this slope?
24. Use the intertemporal budget constraint and indifference curves to find the optimal intertemporal choice. Explain why at this point 1+r = (1+ρ)*MU(Ct)/MU(Ct+1).
25. What is a steady state? Why do economists use the concept of a steady state? Argue that at the steady state r = ρ. Use this result to provide an explanation for the absence of a long-run trend in real interest rates.
26. Explain why the investment demand curve has a negative slope. What is held constant along an investment demand curve? How does the investment demand curve react to a change in variables that are held constant along it?
27. Explain why the supply of savings curve has a positive slope. What is held constant along a savings supply curve? How does the supply of savings curve react to a change in variables that are held constant along it?
28. Explain the forces at work that drive the market to the equilibrium interest rate and the equilibrium quantities of savings and investment.
29. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is an improvement in technology that increases the marginal product of capital? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
30. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is a decline in the tax rate on the returns from capital? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
31. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is a regulatory change that reduces the marginal product of capital? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
32. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is a temporary change in income from a spell of good weather? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
33. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is an increase in the riskiness of household's income streams? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
34. Explain why net exports measures the flow of savings from domestic households to residents of foreign countries.
35. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when there is an increase in net exports caused by decrease in spending by people abroad. Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
36. What happens when the government deficit (G-T) increasesto the equilibrium interest rate, and the equilibrium quantities of savings and investment? Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
37. What happens to the equilibrium interest rate, and the equilibrium quantities of savings and investment when prices are constant and there is a greater increase in the money supply.Be sure to able to draw the appropriate diagram and to understand the argument from the initial effect of the shock to the arrival at the new equilibrium.
38. Are higher interest rates generally good news or bad news? Explain.