Question: This chapter assumes that expected inflation

> What are the main practical differences between the audit risk approach and the business risk approach to auditing?

> Take another look at both The County Hotel and Fine Faces and discuss the proposition that auditors are so willing to help management that they might forget that their primary duty is to form an opinion on the financial statements issued to and used by t

> Segregation of duties is a basic requirement of a good control system. Explain what is meant by this statement and show how segregation of duties in a modern computer system might differ from that in a manual system.

> In January 2018, Carillion, a major UK multinational construction and facilities management company, suddenly collapsed, leaving in its wake almost £7 billion of liabilities and only £29 million in cash. Astonishingly, in 2016, Carillion’s senior executi

> Why do you think it is important to have NEDs on the board?

> Good corporate governance is more likely to exist in companies where there are large institutional shareholders holding a substantial proportion of the shares than in companies where the shares are held by many individual investors. Discuss

> Discuss what are likely to be the main limitations a company faces in establishing an effective audit committee.

> Discuss how corporate governance mechanisms will impact on audit quality and the audit expectations gap.

> Explain why you believe auditors have been reluctant to report on the directors’ reviews of the effectiveness of internal controls.

> In 2014, Lord Myners set out the need to reform the Cooperative Group after near ruinous failure at the bank, describing ‘a dysfunctional board in which some directors did not know the difference between debits and credits’ and [were] ‘clearly out of the

> Audit evidence is required to be both sufficient and appropriate. Explain what is meant by this statement giving appropriate examples.

> The EU Audit Regulation (537/2014) states:’ In order to increase the confidence in … the statutory auditors and the audit firms carrying out the statutory audit of public interest entities, it is important that the transparency reporting by statutory aud

> Your firm has been external auditor of Elgol plc for some years. Elgol has an internal audit department engaged in both compliance and operational auditing. You have a high opinion of the quality of internal audit work and have established a good relatio

> You are the engagement partner of an audit assignment with an entity specializing in the provision of information technology services and software. At the beginning of the financial year the company entered into a contract with the government of China an

> We noted in the chapter that often the directors of a company exerted a considerable influence, more so when there is no audit committee, in determining which firm of auditors should be appointed. Give reasons why this is not an ideal state of affairs an

> A major criticism of the regulatory regime in the past was that it lacked independence from the accounting profession. Discuss the extent to which that criticism is still valid for the new regulatory regime introduced in 2012 as amended by SATCAR.

> Assume you are the senior partner in an audit firm which is considering submitting a tender for the audit of a large company. Outline what information you might want to collect about the company before making a final decision about whether to submit a te

> Explain how a review engagement differs from an audit engagement. Explain why a report on a review engagement might be useful to the person requesting that the engagement be carried out.

> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.

> Discuss the extent to which you believe liability limitation agreements will be helpful in mitigating auditors’ exposure to large claims for negligence.

> The EU Audit Regulations (537/2014) states: ‘The public-interest function of statutory audit means that a broad community of people and institutions rely on the quality of a statutory auditor’s or an audit firm’s work. Good audit quality contributes to t

> You are a member of an internal audit department and have been asked the following questions by an audit assistant: a. Why is it that we check all purchases invoices daily to goods received notes and purchase orders when the definition of internal audit

> Dunino Limited is a company manufacturing, selling and laying carpet tiles, currently preparing financial statements at 31 December 2020. Under the terms of sale, Dunino gives a warranty, whereby it agrees to make good manufacturing or laying defects tha

> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.

> Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1) a. Explain the term (i* - πe). Why does the foreign nominal interest rate appear in the relation? b. Explain why when πe increases, t

> You are the economic adviser to a newly elected president. In four years he or she will face another election. Voters want a low unemployment rate and a low inflation rate. However, you believe that voting decisions are influenced heavily by the values o

> a. Download the series EXCHUS from the FRED database. This expresses the exchange rate between the yuan (one of the names for the Chinese currency) as the number of yuan per US dollar. Convert that exchange rate to the number of US cents per yuan so that

> Policy choices when the real exchange rate is “too high” and the nominal exchange rate is fixed an overvalued real exchange rate is a rate such that domestic goods are too expensive relative to foreign goods, net expor

> a. Go the Web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section “Markets & Data” and then the subsection “Economic and Financial Indicators.&ac

> a. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and is expected to pay its next dividend in one year. b. Using of equation (14.14), explain the contribution of each component to t

> Suppose that in your country, the saving rate slowly declines from 12% in year t to 11% in year t+1 and 10% in year t+2. Suppose, moreover, that the depreciation rate, a. Using the production function given in the chapter, what happens to the steady-stat

> The Cobb-Douglas production function and the steady state. This problem is based on the material in the chapter appendix. Suppose that the economy’s production function is given by Y = KαN1 - α and assume that a = 1>3 a. Is this production function char

> The appendix to this chapter shows how data on output, capital, and labor can be used to construct estimates of the rate of growth of technological progress. We modify that approach in this problem to examine the growth of capital per worker. Y = K1/3 (A

> Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, Suppose that financial investors worry that the level of debt is too high and that the government may devalue to stimulate output (and therefore tax revenues) to

> Assume that money demand takes the form where Y = 1,000 and r = 0.1. a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, ∆M/M, listed. a. 25% , b.

> Consider a country with two political parties, Party A and Party B. Party A cares more about unemployment than Party B, In 2018 New Zealand rewrote the charter of its central bank to include high employment as well as low inflation as its goals. Why woul

> a. The World Bank reports gross domestic saving rate by country and year. Go to the World Bank website (https://data. worldbank.org/indicator/NY.GNS.ICTR.ZS) and find the most recent saving rates for Indonesia, India, South Korea (the Republic of Korea),

> Go to the World Bank’s website (http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD), find the data on GDP per capita (in constant 2010 US$) for China and the euro area for the years 1960, 1980, 2000, and the latest year available. The euro area includes

> Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological advances of that period were made in the United States. H

> Consider the production function given in Problem 3. Assume that N is constant and equal to 1. Note that if z = xa , then gz ≈ a gx, where gz and gx are the growth rates of z and x (See Appendix 2 at the end of the book). a. Given the growth approximatio

> Consider the production function: Y = K + 2N a. Compute output when K = 10 and N = 20. b. If both capital and labor triple, what happens to output? c. How would you qualify the returns to scale for this production function? d. Write this production funct

> Assume that every month the average student in Japan and the average student in China buy the quantities and pay the prices indicated in the following table: a. Compute the Japanese consumption per student in yen. b. Compute the Chinese consumption per

> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. On a logarithmic scale, a variable that increases at 5% per year will move along an upward-sloping line with a slope of 0.05. b.

> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year’s rate of inflation. The rate of inflation in 1928 was -1.7%. D

> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Do you believe that output had returned to its potential level in 1933? b. Which years suggest a deflation spiral as described in Figure 9-3?

> Suppose the economy is operating at the zero lower bound for the nominal policy rate; the initial equilibrium is at the positive target rate of inflation and the economy is resting at potential output but there is a large government deficit in period t.

> Okun’s Law is written as u - u(-1) = -0.4 (gY - 3%) a. What is the sign of u – u (-1) in a recession? What is the sign of u – u (-1) in a recovery? b. Explain where the 3% number comes from? c. Explain why the coefficient on the term (gY - 3%) is -0.4 an

> Suppose you are measuring annual GDP of a country by adding up the final value of all goods and services produced in the economy. Determine the effect on the country’s GDP for each of the following transactions. a. A seafood restaurant buys €100 worth of

> A shock to aggregate supply will also have different outcomes when there are different assumptions about the formation of the level of expected inflation. As in Question 4, one assumption is that the level of expected inflation equals lagged inflation. T

> The medium-run equilibrium is characterized by four conditions: Output is equal to potential output Y = Yn and the real policy rate rn must be chosen by the central bank so: The unemployment rate is equal to the natural rate u = un. The real policy inter

> Identifying if an economy is in medium run equilibrium and the necessary central bank action to return the economy to medium run equilibrium Here are values for a hypothetical economy Yn = 1000; un = 5%; rn = 2%; x = 1%; πe = 2% and

> President’s Trump’s complaints about Federal Reserve policy in 2018 made the news. On December 22, 2017 President Trump signed a bill, the Tax Cuts and Jobs Act that substantially reduced federal taxes in 2018. a. On November 20, 2018, Bloomberg reported

> Answer the following questions based on information found in the table below a. Is there evidence that the depression originating in the US diffused to every European country? Explain. b. Compare the relationship between production, price, and unemployme

> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. The IS curve shifts to the right with an increase in G, to the right with an increase in T, and to the right with an increase in

> Using the rate of unemployment to predict inflation between 1996 and 2018 The estimated Phillips curve from Figure 8.5 is πt = 2.8% − 0.16 ut Fill in the table below using the Phillips curve above after collecting the data fr

> Consider each table below. Is the data presented consistent with the Phillips curve model of wage determination? Each table has a point A and a point B. Start your answer with true/false/uncertain. a. The natural rate of unemployment is 5%. b. The natu

> a. The equation of the Phillips curve from 1970 to 1995 is πt - πt - 1 = 7.4% - 1.2ut. Calculate and define the natural rate of unemployment using this curve. b. The equation of the Phillips curve from 1996 to 2018 is πt = 2.8% - 0.16ut Here the natural

> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. US GDP was 38 times higher in 2018 than it was in 1960. b. When the unemployment rate is high, the participation rate is also li

> Suppose that the Phillips curve is given by Suppose that inflation in year t + 1 is zero. In year t, the central bank decides to keep the unemployment rate at 4% forever. a. Compute the rate of inflation for years t, t + 1, t + 2 and t + 3. Now suppose

> Suppose that the Phillips curve is given by and expected inflation is given by and suppose that θ is initially equal to 0, and that π is given and does not change. It could be zero or any positive value. Suppose that the rate o

> The text proposes the following model of expected Inflation a. Describe the process of the formation of expected inflation when θ = 0 b. Describe the process of the formation of expected inflation when θ = 0 c. How do you form

> a. The Phillips curve is Rewrite this relation as a relation between the deviation of the unemployment rate from the natural rate, inflation, and expected inflation. b. In the previous chapter, we derived the natural rate of unemployment. What condition

> Discuss the following statements. a. The Phillips curve implies that when an economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in unemployment and an increase in inflation. b. Monetary pol

> Fill in the values in the table below for inflation and expected inflation using the 1960s. The data will come from FRED as they did in the last question. You will have the most success using a spreadsheet. From the 1960s: From the 1970s and 1980s: Fro

> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kin

> Go to the website maintained by the International Labour Organization (ILO). Select a labor overview report that provides the international definition of unemployment a. Does this definition differ from the one used by policy makers in your country? Expl

> According to the data presented in this chapter, about 44% of unemployed workers leave unemployment each month. a. Assume that the probability of leaving unemployment is the same for all unemployed persons, independent of how long they have been unemploy

> You learned in Chapter 2 that informal work at home (e.g., preparing meals and taking care of children) is not counted as part of GDP. This constitutes the informal, shadow, or grey labor market. According to World Bank reports, the size of informal labo

> Eurostat is the statistical agency of the European Commission that provides data to the institutions of the 27 member countries (The number of member states changed following the Brexit results) of the European Union (EU) and harmonizes statistical metho

> a. Why does the wage-setting relation in Figure 1 have an upward slope? As N approaches L, what happens to the unemployment rate? b. The price-setting relation is horizontal. How would an increase in the mark-up affect the position of the price-setting r

> Even in the absence of collective bargaining, workers do have some bargaining power that allows them to receive wages higher than their reservation wage. Each worker’s bargaining power depends both on the nature of the job and on the economywide labor ma

> In the mid-1980s, a famous supermodel once said that she would not get out of bed for less than $10,000 (presumably per day). a. What is your own reservation wage? b. Did your first job pay more than your reservation wage at the time? c. Relative to your

> Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W = P(1 - u) , where u is the unemployment rate. a. What is the real wage, as determined by the price-setting equation? b. What is the natural rate of

> Answer the following questions using the information provided in this chapter. a. As a percentage of employed workers, what is the size of the flows into and out of employment (i.e., hires and separations) each month? b. As a percentage of unemployed wor

> A closer look at changes in state labor markets There is a lot of discussion of the decline of the “Rust Belt” and the differences between labor markets at the state level. The table below is a snapshot of the labor ma

> Go to IMF data mapper (http://www.imf.org/external/ data mapper/datasets). Select the following countries—France, Germany, the UK, Spain, Japan, and the US. Build a table to compare each country’s GDP annual growth and

> 1.Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. Since 1950, the participation rate in the United States has remained roughly constant at 60%. b. Each month, the flows into and

> We have written the IS-LM model in the following terms: Interpret the real policy rate as the federal funds rate adjusted for expected inflation. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that

> Calculating the risk premium on bonds (1 + i) = (1 – p) (1 + i + x) + p (0) p is the probability that the bond does not pay at all (the bond issuer is bankrupt) and has a zero return. i is the nominal policy interest rate. x is the risk premium. a. If t

> Suppose that instead of cooking dinner for an hour, you decide to work an extra hour, earning an additional $12. You then purchase some (takeout) Chinese food, which costs you $10. a. By how much does measure GDP increase? b. Do you think the increase in

> Consider a bank that has assets of 100, capital of 20, and short-term credit of 80. Among the bank’s assets are securitized assets whose value depends on the price of houses. These assets have a value of 50. a. Set up the bank’s balance sheet. Suppose th

> Around the world Since the Great Financial Crisis and the difficulty to recover growth, a negative interest policy has been implemented by some central banks. Some may or may not be in place as you read this book. As of January 2018, the following centra

> The IS-LM view of the world with more complex financial markets Consider an economy described by Figure 6-6 in the text. a. What are the units on the vertical axis of Figure 6-6? b. If the nominal policy interest rate is 5% and the expected rate of infla

> Consider a simple bank that has assets of 100, capital of 20, and checking deposits of 80. Recall from Chapter 4 that checking deposits are liabilities of a bank. a. Set up the bank’s balance sheet. b. Now suppose that the perceived value of the bank’s a

> Fill in the table below and answer the questions that relate to the data in the table. a. Which situations correspond to a liquidity trap as defined in Chapter 4? b. Which situations correspond to the case where the nominal policy interest rate is at th

> Assume that the interest rate, i, for France and Switzerland is 1.7%, and the expected rate of inflation, πe, in France is 0.8% and for Switzerland it is 0.5%. a. Compute the real interest rates for both countries using the exact formula. b. Compute the

> In the face of a slowdown in economic growth and an increase in current account deficit and inflation, the Indian government decided to implement inflation indexed bonds (IIB) in 2013. When presenting this measure, the Ministry of Finance stated that &ac

> Immediately after the British voted for Brexit, two major credits rating agencies, S&P Global (Standard & Poor’s) and Fitch, downgraded the United Kingdom’s sovereign credit rating by two notches, from AAA to A

> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money. b. As long as expe

> A chapter problem at the end of Chapter 3 considered the effect of a drop in consumer confidence on private saving and investment, when investment depended on output but not on the interest rate. Here, we consider the same experiment in the context of th

> As the first Focus box in this chapter explains, it is difficult to measure the true increase in prices of goods whose characteristics change over time. For such goods, part of any price increase can be attributed to an increase in quality. Hedonic prici

> What mix of monetary and fiscal policy is needed to meet the following objectives? a. Increase Y while keeping i constant. Would investment (I) change? b. Decrease a fiscal deficit while keeping Y constant. Why must i also change?

> In the aftermath of the Great Financial Crisis the Great Financial Crisis left many nations with slow GDP growth rates and high levels of public debt. While most nations pursued a monetary policy, some nations simply lowered income taxes through expansio

> The chapter argues that investment depends negatively on the interest rate because an increase in the cost of borrowing discourages investment. However, firms often finance their investment projects using their own funds. If a firm is considering using i

> Consider the following numerical example of the IS-LM model: C = 100 + 0.3YD I = 150 + 0.2Y - 1000i G = 200 T = 100 i = 0.03 a. Derive the IS relation. b. The central bank sets an interest rate of 3%. How is that decision represented in the equations? c

> Consider the money market to better understand the horizontal LM curve in this chapter. The LM relation (equation 5.3) is M/P = Y L(i). a. What is on the left-hand side of equation (5.3)? b. What is on the right-hand side of equation (5.3)? c. Go back to

> The response of the economy to fiscal policy a. Use an IS-LM diagram to show the effects on output of a decrease in government spending. Can you tell what happens to investment? Why? Now consider the following IS-LM model: C = c0 + c1(Y - T) I = b0 + b1

> Consider first the goods market model with constant investment that we saw in Chapter 3. Consumption is given by C= C0 + C1(Y - T) and I, G, and T are given. a. Solve for equilibrium output. What is the value of the multiplier for a change in autonomous

> To answer this question, examine the changes in the components of GDP over this period and the movements of investment and consumption in China during the last two or three decades and its relative slowdown since the Great Financial Crisis. Along with ot

> As described in this chapter, during the Clinton administration the policy mix changed toward more contractionary fiscal policy and more expansionary monetary policy. This question explores the implications of this policy mix, in both theory and fact. a.