What is a capital gain, and what role does it play in the arbitrage equation?
> Abbott Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but instead uses statistical sampling to estimate the year-end inventory. Abbott maintains a perpetual inventory record of par
> Rasch is the partner-in-charge of the audit of Bonner Distributing Corporation, wholesaler that owns one warehouse containing 80 percent of its inventory. Rasch is reviewing the working papers that were prepared to support the firm’s opinion on Bonner’s
> Yardley, CPA, prepared the flowchart below, which portrays the raw materials purchasing function of one of Yardley’s entities, a medium-size manufacturing company, from the preparation of initial documents through the vouching of invoic
> James, who was engaged to examine the financial statements of Talbert Corporation, is about to audit payroll. Talbert uses a computer service center to process weekly payroll as follows. Each Monday Talbert’s payroll clerk inserts data
> What role does the SEC play in the establishment of accounting and auditing standards for public companies?
> Why is studying auditing different from studying other accounting topics? How might understanding auditing concepts prove useful for consultants, business managers, and other business decision makers?
> Consider the special case solved in the text where = 1 and utility takes the log form. Suppose the real interest rate is 5 percent. Let’s give this consumer a financial profile that might look like that of a middle- aged college professor contemplating
> What is the policy trilemma, and why are countries restricted to one side of the triangle?
> Does the level of the exchange rate matter in the long run? Why or why not?
> What are three sources of saving that can be used to finance investment? What is “crowding out”?
> Using the Country Snapshots data file (snapshots.pdf), study the macroeconomic performance of Mexico, Indonesia, and Korea after the financial crises in each region. How large were the declines in GDP per worker in each country, and how quickly did the r
> What determines the price- earnings ratio for a stock? What does this imply about detecting bubbles in the stock market?
> Let’s use the arbitrage equation to determine the price of a patent in a simple setting. Let R denote the interest rate, let pi denote the price of an “idea” that is under patent, and let Prof denote the extra profit that can be earned by a firm that own
> Summarize the key facts about the behavior of the personal saving rate during recent decades, and place these facts in their macroeconomic context.
> What information does an impulse response function convey?
> Consider the complete dynamic response of the economy to a temporary rise in government purchases in the AS/AD framework. (a) Draw the AS/AD graph associated with this shock. (b) Plot the impulse response function of GDP to this shock, according to the A
> How are interest rates and growth rates related according to the neoclassical consumption model, and why?
> What key simplifying assumption allows us to use the labor market block of a DSGE model to study the immediate impact of shocks on the economy in that framework?
> Consider the Euler equation for consumption for log utility, equation (16.8), and answer the following questions: (a) If the real interest rate is 5 percent and
> Consider the neoclassical consumption model with log utility and
> Between 1970 and 1995, the dollar depreciated sharply versus the Japanese yen, while the average value of this exchange rate did not change much between 1995 and 2016. What might explain these facts?
> Why do economists use the terms “investment” and “capital” in very different contexts (physical investment and physical capital versus financial investment and financial capital)?
> In the simple theory developed in the chapter, why is the stock price equal to the dividend divided by interest rate (net of the capital gain)?
> What economic decisions do agents make in DSGE models?
> Are TFP shocks a reasonable explanation for the business cycles we see in modern economies? Why and why not?
> How much can the government borrow?
> Consider the complete dynamic response of the economy to a temporary rise in financial frictions in the AS/AD framework. (a) Draw the AS/AD graph associated with this shock. (b) Plot the impulse response function of GDP to this shock, according to the AS
> What is the Euler equation for consumption, and what is its economic interpretation?
> Summarize the main implications of the neoclassical consumption model for consumption and saving.
> What is a lifetime utility function, and in what sense does it exhibit diminishing returns?
> What is the relationship between real business cycle models and DSGE models?
> What do each of the letters in DSGE stand for, and what do these concepts mean?
> Why does a change in the foreign real interest rate lead to a shift of the AD curve?
> How and why are net exports and investment similar in the short- run model? Does this similarity make the IS curve steeper or flatter?
> Why do interest rates and exchange rates move in the same direction in the short run?
> Why would we expect the law of one price to hold in principle? Why might it fail to hold in practice?
> What is the difference between a nominal exchange rate and a real exchange rate?
> Suppose there is a temporary decline in the tax rate that households pay on their labor income. Analyze the effect of this shock in the labor market diagram of a standard DSGE model (with no sticky prices or wages). (a) What happens to the labor demand s
> Discuss the extent to which the U.S. trade deficit and net foreign debt are serious economic problems.
> Suppose there are two countries in the world, and one is better than the other at producing every good. Will the countries trade? Why or why not?
> Why do countries trade? What are the benefits and costs of trade?
> In what sense does a trade deficit represent borrowing from the rest of the world?
> What is the fiscal problem of the twenty- first century, and what are some possible solutions?
> Explain the flow version of the government budget constraint. Explain the government’s intertemporal budget constraint.
> What does it mean when economists say that the stock market is, at least to a great extent, “informationally efficient”?
> What is a “dividend return” and a “capital gain,” and how do these terms enter the arbitrage equation when it is written in percentages?
> When is the value of the stock market equal to the value of the capital stock? How is this related to Tobin’s q?
> What is the user cost of capital? How is this user cost related to investment in physical capital?
> In many other countries, especially in Europe, there is a value- added tax (sometimes called a VAT). Firms are charged taxes based on the value- added they produce. That is, they are allowed to deduct the cost of materials, energy, and other intermediate
> What is the arbitrage equation, and why is it useful in studying investment?
> How does the arbitrage equation help pin down the price of housing in our simple theory? What role does leverage play?
> What is an intertemporal budget constraint, and where does it come from? What is the economic interpretation of the intertemporal budget constraint?
> What are the key building blocks of the neoclassical consumption model?
> What is the marginal propensity to consume? How is it affected by borrowing constraints or precautionary saving issues?
> What role do nominal rigidities play in the analysis of business cycle models?
> Suppose there is a currency crisis in the rest of the world, leading to an increase in demand for U.S. dollars (a “flight to safety”). Use the AS/AD framework to explain the effects of this shock on the U.S. economy. Be sure to explain carefully how and
> In addition to depending on the exchange rate (and therefore on the interest rate), imports may depend on short- run output: when the economy is booming, consumers tend to demand more foreign goods. To incorporate this result into our short- run model, s
> Suppose the European Central Bank decides to stimulate the European economy by reducing interest rates there. Use the AS/AD model to explain how and why this affects the U.S. economy in the short run. How does the economy return to steady state?
> Suppose there is a large temporary decline in government purchases in the economy, financed by an unspecified decline in future lump sum taxes. (a) Analyze the effect of the shock in the labor market diagram of a standard DSGE model (with no sticky price
> Using the FRED database, search for the exchange rate of a country of your choosing relative to the U.S. dollar (other than for the euro area or Japan, since we’ve already discussed those in the chapter). (a) Display the graph of the exchange rate over t
> Look back at equation (20.3) in Section 20.2. (a) Apply our growth rates rules (from Chapter 3) to this equation to express the growth rate of the exchange rate as a function of the inflation rate at home and abroad. (b) Between 1
> Consider the way in which net exports depend on the real exchange rate. Does the dependence of net exports on the real exchange rate make the IS curve steeper or flatter? What is the economic interpretation of this result?
> One could make a reasonable case that the United States in the past decade has been able to achieve all three goals of the policy trilemma: it sets its own monetary policy, it has open capital markets, and it has experienced a relatively stable exchange
> Look back at the Big Mac Index in Table 20.1. Compute the level of the exchange rate that would be needed to equalize the dollar price of the Big Mac across all countries. State whether each currency appears to be currently overvalued or unde
> In the apple– computer example, suppose people in the North have the right to charge an “entrance fee” to immigrants. Assume the world starts from the position of free trade and considers moving from free trade to free migration. Find an entrance fee (a
> Let’s redo the trade problem with algebra instead of numbers. Suppose that one unit of labor produces xn apples in the North and xs apples in the South; one unit of labor can also produce zn computers in the North and zs computers in th
> Now suppose that the technological innovation occurs in the computer sector in the South: one unit of southern labor can now produce 10 computers instead of 2. (Other parameters take their original values.) (a) Does the North still have a comparative adv
> In the same apple– computer trade example given in Section 19.5, suppose that because of technology transfer, the South becomes just as productive as the North at producing apples: one unit of southern labor can now produce
> Consider the apple– computer trade example given in Section 19.5. Now suppose that because of a new technology, the North becomes even more productive at producing computers: one unit of labor can now produce 20 computers in
> Now consider a TFP shock that is permanent. For example, suppose the discovery and application of a new technology makes firms more productive. Consider the labor market block of a standard DSGE model with no sticky prices or wages. (a) What happens to
> In the years after World War II, the United States briefly ran a trade surplus that peaked at about 5% of GDP in 1947. Use the national income identity (the investment = savings version) to provide a hypothesis that could explain what was going on.
> The trade balance data is currently most easily obtained from the World Bank site: data.worldbank.org. Use that database to analyze graphs of the trade balance as a share of GDP in China and Germany. (a) The data series you are looking for is called the
> China currently shows a high investment rate as well as a trade surplus. In what sense is there a tension between these two facts? What is odd about China’s situation relative to conventional macroeconomic wisdom?
> (a) What is this problem? Is it limited to the United States? (b) To what extent is this fiscal problem driven by the Social Security program? By how much would taxes have to rise as a share of GDP in order to “solve” the Social Security problem? (c) How
> Suppose the government decides to reduce taxes today by 1% of GDP, financed by higher borrowing, with the borrowing to be repaid 10 years from now with higher taxes. Discuss the various arguments about what effect this will have on the investment rate to
> The debt- GDP ratio in Belgium exceeded 120% in the early 1990s and has fallen to just over 80% more recently. Italy had a debt- GDP ratio of about 100% even before the euro crisis. The rapid rise in Japan’s debt- GDP ratio was shown in Figure 18.4. Yet
> Consider the intertemporal budget constraint in equation (18.5). Assume the interest rate is i = 5%. (a) Suppose the government cuts taxes today by $100 billion. Describe three possible ways the government can change spending and taxes to satisfy its bud
> Consider an economy that exists for three periods: period 1, period 2, and period 3. In each period, the government must satisfy the budget constraint Bt+1 =(1 + i)Bt + Gt − Tt . (a) Write this budget constraint for each period. (b) What must be true abo
> To what extent were the U.S. budget deficits of the 1980s and 2000s caused by higher spending versus lower tax revenues? Using the Economic Report of the President, explain which categories of spending or taxes were most responsible. As a share of GDP, w
> What is the economic interpretation of the intertemporal budget constraint in equation (18.6)? Does this interpretation apply to the primary budget deficit or the total deficit? Why?
> Suppose the economy is hit with a temporary positive TFP shock. For example, suppose weather conditions are temporarily very favorable for agriculture. (a) Analyze the effect of the shock in the labor market diagram of a standard DSGE model (with no stic
> Suppose a condominium can be rented for $1,000 a month, it depreciates at 10Â percent per year, the annual interest rate is 5Â percent, and the tax rate relevant for the mortgage interest deduction is 40Â percent. Let the
> Suppose the TFP parameter,
> Create a graph of the investment rate in physical capital, such as we might use in studying the Solow growth model. In doing this, you will learn to appreciate some of the subtleties in the National Income and Product Accounts. Follow the steps below: (i
> Consider the user cost of capital in the presence of taxes, starting with equation (17.5). Suppose the price of capital, pk , is constant, so there is no capital- gain term. What is new, however, is an investment tax credit: rather than costing pk , a u
> Suppose the user cost of capital in an economy with no corporate income tax is 10 percent. (a) What is the user cost if the corporate tax rate rises to 20 percent? 30 percent? (b) Suppose an economy’s steady- state investment rate I / Y is 30 percent whe
> An economy begins in steady state with an investment rate of 20 percent, a corporate tax rate of 25 percent, a real interest rate of 2 percent, a depreciation rate of 7 percent, and a price of capital that falls at an annual rate of 2 percent. (a) What i
> Figures 16.3 and 16.4 show household debt as a percentage of GDP and the personal saving rate. According to these graphs, the ratio of household debt to GDP in 2007, before the financial crisis took hold, was just under 100Â percent. In the sa
> As discussed extensively in Chapter 7, income inequality has risen in recent decades in the United States. This question considers the implications for consumption inequality. (a) Suppose a substantial part of the rise in inequality is due to the rising
> Suppose that the government fears the economy might be heading into a recession and decides to cut income taxes today in an effort to prevent the recession. (a) How does the Ricardian equivalence argument apply in this case? How will consumption respond
> With log utility, the solution to the neoclassical consumption model is given implicitly by the first two equations on page 454, the Euler equation and the intertemporal budget constraint: There, we solved these two equations for ctoday and cfuture in
> Table 18.1 reports the composition of the federal budget as a percentage of GDP in 2015. Create a similar table using the latest available data from the Economic Report of the President. Has the composition of spending and taxes changed? What
> Sally and Charles Heck received the following dividends and interest during 2016: Assuming the Hecks file a joint tax return, complete Schedule B of Form 1040 (on Page 2-35) for them for the 2016 tax year. Do not attempt to complete the Q
> If a taxpayer holding Series I Bonds does not make an election with respect to the taxation of the bonds, how is the interest that accrues each year on the bonds taxed?
> How are qualified dividends taxed in 2016? Please give the rates of tax which apply to qualified dividends, and specify when each of these rates applies.
> Kerry and Jim have a successful marijuana farm in the woods around Humboldt County, California. Growing marijuana is illegal for federal purposes. Are Kerry and Jim required by law to report the income from their farm on their tax return? Why?
> David is certified by his doctor as terminally ill with liver disease. His doctor certifies that he cannot reasonably be expected to live for more than a year. He sells his life insurance policy to Viatical Settlements, Inc., for $250,000. He has paid $2
> Larry is a tax accountant and Sheila is a hairdresser. Larry prepares Sheila’s tax return for free and Sheila agrees to style Larry’s hair six times for free in return for the tax return. The value of the tax return is approximately $300 and the hair sty
> John installed a new roof on his friend’s house in return for a used truck worth $6,000. How much income must John report on his tax return for his services?
> 1. Indicate whether each of the items listed below would be included (I) in or excluded (E) from gross income for the 2016 tax year. a. Welfare payments b. Commissions c. Hobby income d. Scholarships for room and board e. $300 set of golf clubs, an emplo
