Question: In the previous chapter you learned about

> The Fed has announced a new, lower target for the federal funds rate; in other words the Fed wants to lower the federal funds rate from its present level. What does setting a lower target for the federal funds rate have to do with open market operations?

> What does it mean to say the Fed serves as the lender of last resort?

> The Fed can change the discount rate directly and the federal funds rate indirectly. Explain.

> Identify the major responsibilities of the Federal Reserve System.

> If you were on an island with 10 other people and there were no money, do you think that money would emerge on the scene? Why or why not?

> True or false? As the price of oranges rises, the demand for oranges falls, ceteris paribus. Explain your answer.

> “Money is a means of lowering the transaction costs of making exchanges.” Do you agree or disagree? Explain your answer.

> Explain why gold backing is not necessary to give paper money value.

> Money makes trade easier. Would having a money supply twice as large as it currently is make trade twice as easy? Would having a money supply half its current size make trade half as easy?

> “A barter economy would have very few comedians.” Do you agree or disagree with this statement? Explain your answer.

> “People in a barter economy came up with the idea of money because they wanted to do something to make society better off.” Do you agree or disagree with this statement? Explain your answer.

> Does inflation, which is an increase in the price level, affect the three functions of money? If so, how?

> Suppose the value of the dollar declines relative to other currencies. How does the decline affect the three functions of money?

> Explain the difference between a bank’s loans and its borrowings.

> Explain how financial intermediaries help to solve adverse selection problems and moral hazard problems when it comes to lending and borrowing.

> Identify each of the following as either an adverse selection or a moral hazard problem: (a) Poor drivers apply for car insurance more than good drivers do (b) The federal government promises to help banks that get into financial problems (c) The federa

> What is the difference between demand and quantity demanded?

> What is a financial system, and why would a country with a well-developed and fully functional financial system be better off than a country without it?

> Explain the process by which goldsmiths could increase the money supply.

> Define the following: (a) Time deposit (b) Money market mutual fund (c) Money market deposit account (d) Fractional reserve banking (e) Reserves

> Why isn’t credit card money?

> Can M1 fall as M2 rises? Can M1 rise without M2 rising too? Explain your answers.

> “How much money did you make last year?” What is wrong with that statement?

> What is the difference between discretionary fiscal policy and automatic fiscal policy?

> What is the difference between a structural deficit and a cyclical deficit?

> Jim favors progressive taxation and equal after-tax pay for equal work. Comment.

> A progressive income tax always raises more revenue than a proportional income tax. Do you agree or disagree? Explain your answer.

> What is the difference between supply and quantity supplied?

> Is it true that, under a proportional income tax structure, a person who earns a high income will pay more in taxes than a person who earns a low income? Explain your answer.

> What percentage of total income did the top 10 percent of income earners earn in2011? What percentage of federal income taxes did this group pay in 2011?

> The bulk of federal government expenditures go for four programs. What are they?

> Georgia Dickens is sitting with a friend at a coffee shop and they are talking about the new tax bill. Georgia thinks that cutting tax rates at this time would be wrong: “Lower tax rates,” she says, “will lead to a larger budget deficit, and the budget

> Will tax revenue necessarily rise if tax rates are lowered? Explain your answer.

> What is the difference between a marginal tax rate and an average tax rate?

> Will tax cuts that the public perceives to be temporary affect the SRAS and LRAS curves differently than tax cuts that are perceived to be permanent? Explain your answer.

> Suppose the economy is in a recessionary gap, and both Smith and Jones advocate expansionary fiscal policy. Does it follow that both Smith and Jones favor so-called big government?

> How much were government expenditures in2013? How much were government tax revenues in 2013?

> Identify and explain the five lags associated with fiscal policy.

> How might the price of corn affect the supply of wheat?

> Explain how, under expansionary fiscal policy, expansionary fiscal policy can, , destabilize the economy.

> Tax cuts will likely affect aggregate demand and aggregate supply. Does it matter which is affected more? Explain in terms of the AD-AS framework.

> Is crowding out equally likely under all economic conditions? Explain your answer.

> The debate over using government spending and taxing powers to stabilize the economy involves more than technical economic issues. Do you agree or disagree? Explain your answer.

> Give a numerical example to illustrate the difference between complete crowding out and incomplete crowding out.

> Some economists argue for the use of fiscal policy to solve economic problems; some argue against it. What are some of the arguments on both sides?

> Why is crowding out an important issue in the debate over the use of fiscal policy?

> Explain two ways crowding out may occur.

> According to Buchanan and Wagner, why is there a political bias towards expansionary fiscal policy and not contractionary fiscal policy?

> What is the difference between government expenditures and government purchases?

> Explain the multiplier process.

> Using the Keynesian consumption function, prove numerically that, as the MPC rises, saving declines.

> Look at the Keynesian consumption function: C = C0 + (MPC × Yd). What part of it relates to autonomous consumption? What part of it relates to induced consumption? Define autonomous consumption and induced consumption.

> Given the Keynesian consumption function, how would a cut in income tax rates affect consumption? Explain your answer.

> According to some economists, why might business firms pay wage rates above market-clearing levels?

> How was Keynes’s position different from the classical position with respect to saving and investment?

> Give two reasons explaining the possibility that wage rates may not fall.

> How will a rise in government purchases change the TE curve in Exhibit 12?

> If Real GDP is $10.4 trillion in Exhibit 12, what is the state of business inventories?

> Identify the three states of the economy in terms of TE and TP. 45° Line B. TE = C +1+ G A E Q3 Q2 Real GDP

> What is wrong with this statement? Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific time period.

> What role do inventories play in the equilibrating process in the simple Keynesian model (as described in the TE-TP framework)?

> Explain how to derive a total expenditures (TE) curve.

> Suppose consumption rises while investment and government purchases remain constant. How will the AD curve shift in the simple Keynesian model? Under what condition will the rise in Real GDP be equal to the rise in total spending?

> Classical economists assumed that wage rates, prices, and interest rates were flexible and would adjust quickly. Consider an extreme case: Suppose classical economists believed wage rates, prices, and interest rates would adjust instantaneously. What wou

> “In the simple Keynesian model, increases in AD that occur below Natural Real GDP will have no effect on the price level.” Do you agree or disagree with this statement? Explain your answer.

> What does the aggregate supply curve look like in the simple Keynesian model?

> According to Keynes, can the private sector always remove the economy from a recessionary gap? Explain your answer.

> Can a person believe that wages are inflexible downward for, say, one year and also believe in a self-regulating economy? Explain your answer.

> According to Keynes, an increase in saving and decrease in consumption may lower total spending in the economy. But how could this happen if the increased saving lowers interest rates (as shown in the last chapter)? Wouldn’t a decrease in interest rates

> What factors will shift the AD curve in the simple Keynesian model?

> What does it mean to say that “the market” feeds Cleveland, Austin, Atlanta, or Indianapolis?

> According to Keynes, can an increase in saving shift the AD curve to the left? Explain your answer.

> In which factors will a change lead to a change in consumption?

> Explain how a rise in autonomous spending can increase total spending by some multiple.

> What is the relationship between the MPC and the multiplier?

> How is Keynes’s position different from the classical position with respect to wages, prices, and Say’s law?

> Describe the relationship of the (actual) unemployment rate to the natural unemployment rate in each of the following economic states: (a) A recessionary gap, (b) An inflationary gap, and (c) long-run equilibrium.

> What is the state of the labor market in; (a) A recessionary gap, (b) An inflationary gap, (c) long-run equilibrium?

> What does it mean to say that the economy is in a recessionary gap? In an inflationary gap and In long-run equilibrium?

> According to classical economists, does an increase in saving shift the AD curve to the left? Explain your answer.

> Explain why saving rises as the interest rate rises.

> On most days more people want to see the taping of the The Tonight Show Starring Jimmy Fallon (in New York City) than there are seats in the taping studio. What might explain this shortage?

> Consumers start to expect higher future incomes. The price level will _______________ and Real GDP will _______________.

> Morgan, CPA, is approached by a prospective audit client who wants to engage Morgan to perform an audit for the current year. In prior years, this prospective client was audited by another CPA. Identify the specific procedures that Morgan should follow i

> Distinguish between batch processing and online real-time (OLRT) processing. In which of these systems is strong internal control over input most easily attained? Explain.

> A primary requirement of effective internal control is a satisfactory plan of organization. Explain the characteristics of a satisfactory plan of organization for an information systems department, including the relationship between the department and th

> Many companies have part or all of their IT processing done by cloud service providers. a. What controls should the company maintain to ensure the accuracy of processing done by a cloud service provider? b. How do auditors assess internal control over ap

> An integrated test facility (ITF) is a method used primarily by internal auditors for testing IT based system controls. Discuss the advantages and disadvantages of implementing an ITF.

> Discuss how generalized audit software can be used to aid the auditors in examining accounts receivable in a fully IT-based system.

> The use of test data is one method of performing tests of processing controls in an IT-based system. Identify and discuss several other methods by which auditors may test internal processing controls over IT activity.

> Auditors encounter the use of user operated computers on almost every audit engagement. a. How do user operated computers differ from large computer systems? b. When are the auditors concerned with internal control over the use of user operated computers

> Randall, Inc., is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audi

> Internal auditing is a staff function found in virtually every large corporation. The internal audit function is also performed in many smaller companies as a part-time activity of individuals who may or may not be called “internal auditors.” The differe

> Many CPA firms are taking a business risk approach to audits. Define what is meant by business risk. Provide an example of a business risk that could result in a risk of material misstatement of the financial statements.

> During your first audit of a medium-size manufacturing company, the owner, John Bell, explains that in order to establish clear-cut lines of responsibility for various aspects of the business, he has made one employee responsible for the purchasing, rece

> Assume that you are auditing the financial statements of Wexler, Inc. As you are reviewing the work on internal control, you become concerned about the adequacy of documentation. Describe the required documentation of internal control matters.

> Management is responsible for establishing effective internal control for its organization, including measures to prevent, deter, and detect fraud. Appendix 7A describes antifraud programs and measures. Required: a. What are the three major categories o

> Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding of internal control include the use of a questionnaire,

> Henry Bailey, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Bailey has decided that he w

> The auditors’ consideration of internal control begins with obtaining an understanding of the client’s internal control. Required: a. Describe the remaining stages of the auditors’ consideration. b. Provide examples of audit procedures that are performe