Question: What “backs” the money supply in the

> Refer to the accompanying table for Waxwania: a. What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, regressive? b. Suppose Waxwania is producing $600 of real GDP,

> (For students who were assigned Chapter 29) Assume that, without taxes, the consumption schedule for an economy is as shown below: a. Graph this consumption schedule. What is the size of the MPC? b. Assume that a lump-sum (regressive) tax of $10 billio

> Refer back to the table in Figure 30.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level. By what percent will the price level increase? Will this inflati

> What are the variables (the items measured on the axes) in a graph of the (a) consumption schedule and (b) saving schedule? Are the variables inversely (negatively) related or are they directly (positively) related? What is the fundamental reason that

> Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the sam

> Suppose GDP is $5.0 trillion, resource extraction is $0.5 trillion, production is $1.5 trillion, and distribution is $1.0 trillion. a. How big is GO? b. How big is GO minus GDP?

> On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1 percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax incre

> Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?

> What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?

> What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.

> Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to try to achieve the lower rate. Use the concept of the short-run Phillips Curve to exp

> Which of the following statements are true? Which are false? Explain why the false statements are untrue. a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output. b. The long-run aggregat

> Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?

> In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion. That drives the interest rate up to 7 percent. A

> An increase in _______ GDP guarantees that more goods and services are being produced by an economy. a. Nominal. b. Real.

> If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

> Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent. a. What is the amount of excess reserves in this commercial bank

> The balance sheet at the top of the next page is for Big Bucks Bank. The reserve ratio is 20 percent. a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank’s b

> Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in re

> The Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $5000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank no

> Suppose that Serendipity Bank has excess reserves of $8,000 and checkable deposits of $150,000. If the reserve ratio is 20 percent, what is the size of the bank’s actual reserves?

> Suppose the assets of the Silver Lode Bank are $100,000 higher than on the previous day and its net worth is up $20,000. By how much and in what direction must its liabilities have changed from the day before?

> Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either recognition lag, administrative lag, or operational lag. a. To fight a recession, Congress has passed a bill to increase

> Last year, while an economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have b

> During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers? a. Yes. b. No

> When discussing pure competition, the term long run refers to a period of time long enough to allow: a. Firms already in an industry to either expand or contract their capacities. b. New firms to enter or existing firms to leave. c. Both a and b. d. Non

> The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxe

> Which of the following would help a government reduce an inflationary output gap? a. Raising taxes. b. Lowering taxes. c. Increasing government spending. d. Decreasing government spending.

> Which of the following items will be included in official U.S. GDP statistics? Select one or more answers from the choices shown. a. Revenue generated by illegal marijuana growers in Oregon. b. Money spent to clean up a local toxic waste site in Ohio. c

> What are the major categories of firms that make up the U.S. financial services industry? Are there more or fewer banks today than before the start of the financial crisis of 2007-2008? Why are the lines between the categories of financial firms even mor

> What is TARP and how was it funded? What is meant by the term “lender of last resort” and how does it relate to the financial crisis of 2007-2008? How do government and Federal Reserve emergency loans relate to the concept of moral hazard?

> How do each of the following relate to the financial crisis of 2007-2008: declines in real estate values, subprime mortgage loans, mortgage backed securities, AIG.

> Identify three functions of the Federal Reserve of your choice, other than its main role of controlling the supply of money.

> Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the President or Congress?

> What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’ banks?

> The following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not? a. Upon taking office, the U.S. president appoints seven people to the Fed

> There are 300 purely competitive farms in the local dairy market. Of the 300 dairy farms, 298 have a cost structure that generates profits of $24 for every $300 invested. What is their percentage rate of return? The other two dairies have a cost structur

> How is the chairperson of the Federal Reserve System selected? Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the purpose of the Federal Open Market Committee (FOMC)? What

> Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering leverage make the financial system more stable?

> How would a decrease in the reserve requirement affect the (a) size of the money multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposi

> Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the re

> Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. How might it temporarily remedy this situation through the Federal funds market? Now assume Mountain Star finds that its reserves wil

> “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain.

> “Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Do you agree? Explain why or why not.

> Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held

> What is the difference between an asset and a liability on a bank’s balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?

> Why is the banking system in the United States referred to as a fractional reserve bank system? What is the role of deposit insurance in a fractional reserve system?

> A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275. What are

> Explain why merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government. What risk did goldsmiths introduce into the payments system by issuing loans in the form of gold receipts?

> Explain and evaluate the following statements: a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible. b. Money is whatever society says it is. c

> What are the components of the M1 money supply? What is the largest component? Which of the components of M1 is legal tender? Why is the face value of a coin greater than its intrinsic value? What near-monies are included in the M2 money supply?

> Which two of the following financial institutions offer checkable deposits included within the M1 money supply: mutual fund companies; insurance companies; commercial banks; securities firms; thrift institutions? Which of the following items is not inclu

> What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.

> True or False: The financial crisis hastened the ongoing process in which the financial services industry was transforming from having a few large firms to many small firms.

> City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s chances for success are dubious, but City Bank makes the loan

> James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an

> Which of the following is not a function of the Fed? a. Setting reserve requirements for banks. b. Advising Congress on fiscal policy. c. Regulating the supply of money. d. Serving as a lender of last resort.

> A firm in a purely competitive industry has a typical cost structure. The normal rate of profit in the economy is 5 percent. This firm is earning $5.50 on every $50 invested by its founders. What is its percentage rate of return? Is the firm earning an e

> An important reason why members of the Federal Reserve’s Board of Governors are each given extremely long, 14-year terms is to: a. Insulate members from political pressures that could result in inflation. b. Help older members avoid job searches before

> Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates? a. The Federal Reserve System. b. The 12 Federal Reserve Banks. c. The Board of Governors of the Federal Reserve System. d. The Federal Op

> Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar? a. It will rise by a third (33.3 percent). b. It will rise b

> Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small denominated time deposits, and $30 million of money market mutual fund deposits. Fr

> The three functions of money are: a. Liquidity, store of value, and gifting. b. Medium of exchange, unit of account, and liquidity. c. Liquidity, unit of account, and gifting. d. Medium of exchange, unit of account, and store of value.

> Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 50 percent of any gambling losses that she incurs. Will Lady Gaga wager more or less as a result of the reimbursement offer? W

> Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of existing financial securities at a geometric rate, specifically from $2 to $4 to $8 to $16 to $32 to $64 over a 6-year time period. Ove

> Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. If the price level rises to 1.25 in year 2, what is the new value of the dollar? If, instead, the price level falls to .50, what is the value of the dollar?

> Assume that Jimmy Cash has $2,000 in his checking account at Folsom Bank and uses his checking account card to withdraw $200 of cash from the bank’s ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated tr

> Assume that the following asset values (in millions of dollars) exist in Ironmania: Federal Reserve Notes in circulation = $700; Money market mutual funds (MMMFs) held by individuals = $400; Corporate bonds = $300; Iron ore deposits = $50; Currency in co

> How can patents speed up the process of creative destruction? How can patents slow down the process of creative destruction? How do differences in manufacturing costs affect which industries would be most likely to be affected by the removal of patents?

> Suppose that this year’s nominal GDP is $16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level five years ago. Using that index, we find that this year’s real GDP

> Suppose GDP is $15 trillion, with $8 trillion coming from consumption, $2.5 trillion coming from gross investment, $3.5 trillion coming from government expenditures, and $1 trillion coming from net exports. Also suppose that across the whole economy, per

> Assume the following information for a hypothetical economy in year 1: money supply = $400 billion; long-term annual growth of potential GDP = 3 percent; velocity = 4. Assume that the banking system initially has no excess reserves and that the reserve r

> Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billi

> Suppose GDP is $16 trillion, with $10 trillion coming from consumption, $2 trillion coming from gross investment, $3.5 trillion coming from government expenditures, and $500 billion coming from net exports. Also suppose that across the whole economy, dep

> Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at $200. With the 10 percent s

> Suppose that this year a small country has a GDP of $100 billion. Also assume that Ig = $30 billion, C = $60 billion, and Xn = - $10 billion. How big is G? a. $0. b. $10 billion. c. $20 billion. d. $30 billion.

> A small economy starts the year with $1 million in capital. During the course of the year, gross investment is $150,000 and depreciation is $50,000. How big is the economy’s stock of capital at the end of the year? a. $1,150,000. b. $1,100,000. c. $1,00

> Which of the following transactions would count in GDP? Select one or more of the answers from the choices shown. a. Kerry buys a new sweater to wear this winter. b. Patricia receives a Social Security check. c. Roberto gives his daughter $50 for her bi

> Tina walks into Ted’s sporting goods store and buys a punching bag for $100 dollars. That $100 payment counts as ________________ for Tina and _______________ for Ted. a. Income; Expenditure. b. Value added; Multiple Counting. c. Expenditure; Income. d.

> “Ninety percent of new products fail within two years—so you shouldn’t be so eager to innovate.” Do you agree? Explain why or why not.

> Suppose that purely competitive firms producing cashews discover that P exceeds MC. Will their combined output of cashews be too little, too much, or just right to achieve allocative efficiency? In the long run, what will happen to the supply of cashews

> Suppose that a monopolistically competitive restaurant is currently serving 230 meals per day (the output where MR = MC). At that output level, ATC per meal is $10 and consumers are willing to pay $12 per meal. What is the size of this firm’s profit or l

> Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in

> Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 23%, 22%, 18%, 12%, 11%, 8%, and 6%. What is the four‐firm concentration ratio of the hamburger industry i

> Using diagrams for both the industry and a representative firm, illustrate competitive long-run equilibrium. Assuming constant costs, employ these diagrams to show how (a) an increase and (b) a decrease in market demand will upset that long-run equilib

> Which of the following best describes the efficiency of monopolistically competitive firms? a. Allocatively efficient by productively inefficient. b. Allocatively inefficient but productively efficient. c. Both allocatively efficient and productively ef

> In the small town of Geneva, there are 5 firms that make watches. The firms’ respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and 10 watches per year. The four-firm concentration ratio for t

> There are 10 firms in an industry, and each firm has a market share of 10 percent. The industry’s Herfindahl index is: LO1 a. 10. b. 100. c. 1,000. d. 10,000.

> Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be: a. Upward sl

> Did the eventual recovery of the unemployment rate after the Great Recession indicate recovery in all aspects of employment? Explain and give examples

> The basic model of pure competition reviewed in this chapter finds that in the long run all firms in a purely competitive industry will earn normal profits. If all firms will only earn a normal profit in the long run, why would any firms bother to develo

> Jean Baptiste Colbert was the Minister of Finance under King Louis XIV of France. He famously observed, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissi

> A retailer has a beginning monthly inventory valued at $100,000 at retail and $61,000 at cost. Net purchases during the month are $190,000 at retail and $115,000 at cost. Transportation charges are $10,500. Sales are $225,000. Markdowns and discounts equ

> A retailer has yearly sales of $900,000. Inventory on January 1 is $360,000 (at cost). During the year, $660,000 of merchandise (at cost) is purchased. The ending inventory is $325,000 (at cost). Operating costs are $90,000. Calculate the cost of goods s

> Present two situations in which it would be advisable for a retailer to take a markdown instead of carry over merchandise from one budget period to another.

> Contrast the weeks’ supply method and the percentage variation method of merchandise planning.

> Why use sophisticated weather forecasting services if daily weather predictions tend to be inaccurate?

> Why should a local appliance store designate control units, even though this may be time-consuming?

> Explain the basic premise of the retail method of accounting. Present an example.

> The FIFO method seems more logical than the LIFO method, because it assumes the first merchandise purchased is the first merchandise sold. So, why do many more retailers use LIFO?