final_prep

potential	uppose that Prescottia's government introduces a 25 percent income tax. Using your graph, what happens to
GDP?	the demand for labor? What happens to the supply of labor? Explain.
d)	e)	After the tax is imposed, what happens to Prescottia's full-employment quantity of labor? What

S happens to Prescottia's potential GDP?

409)The figure above shows the demand for money in Kiteland.

a)If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve.

b)Suppose that Kiteland's Central Bank wants to raise the interest rate by 1 percentage point. By how much must it change the quantity of real money?

c)In order to change the quantity of money to raise the interest rate by one percentage point, if the Central Bank uses an open market operation, does it make an open market purchase or an open market sale? Explain your answer.

410)The figure above shows the demand for money in Kiteland.

a)If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve.

b)Suppose Kiteland's real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy?

c)If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve.

d)In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

	Price	Quantity	Quantity
		supplied	demanded
	(dollars
		(thousands	(thousands
	per
		of pounds	of pounds
	pound)
		per year)	per year)
	21	120	60
	18	100	100

15	80	140
12	60	180
9	40	220

411)The United States imports cheese from a variety of countries. The table above gives the domestic supply of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is unrestricted.

a)How many pounds of cheese are consumed in the United States?

b)How many pounds of cheese are produced in the United States?

c)How many pounds of cheese are imported into the United States?

If a $3 per pound tariff is imposed,

d)How many pounds of cheese are consumed in the United States?

e)How many pounds of cheese are produced in the United States?

f)How many pounds of cheese are imported into the United States?

g)How much will the U.S. government collect in tariff revenue?

h)Who benefits from the tariff? Who loses?

412)The above figure shows the domestic supply of and domestic demand for an imported good. The world price is $15 per unit.

a)At the world price of $15 per unit, what is the domestic consumption and domestic production?

b)At the world price of $15 per unit, what is the quantity imported?

c)If the government imposes a tariff of $5 per unit, what is the domestic consumption and domestic production?

d)With the $5 per unit tariff, what is the quantity imported?

e)How much revenue does the government collect with a tariff of $5 per unit?

413)Suppose that elimination of tariffs on agricultural products means that 1,000 farm workers lose jobs that pay an average of $20,000 per year. At the same time, because of the importation of relatively cheaper foreign vegetables, 150 million consumers save $2 per year on their grocery bills.

a)What is the total income lost by farm workers because of the free trade?

b)What is the total dollar amount saved by all consumers combined?

c)Which is greater, the lost income or the consumer savings? Do the benefits of free trade out-weigh the costs in this simple example?

d)Which group is most likely to become politically involved over the issue of removing the tariffs, the farm workers or the consumers? Why?