The economy is in a recession with high unemployment and low output. a. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate-demand curve, the short run aggregate-supply curve, and the long-run aggregate-supply curve. b. Identify an open-market operation that would restore the economy to its natural rate. c. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the resulting change in the interest rate. d. Draw a graph similar to the one in part a to show the effect of the open-market operation on output and the price level. Explain in words why the policy has the effect that you have shown in the graph.
> What is the significance of the Thor Power Tool Co. decision?
> What conditions must be met if the economic performance test is to be waived for an accrual method taxpayer?
> What constitutes a payment in determining when a cash-basis taxpayer is entitled to deduct an expense?
> Explain the legislative reenactment doctrine.
> Who may use the completed contract method of reporting income from long-term contracts?
> a. When are expenses deductible by a cash method taxpayer? b. Are the rules that determine when interest is deductible by a cash method taxpayer the same as for other expenses? c. Is a cash method taxpayer subject to the same rules for depreciable asse
> a. Does the term method of accounting refer only to overall methods of accounting? Explain. b. Does a taxpayer’s accounting method affect the total amount of income reported over an extended time period? c. How can the use of an accounting method affect
> a. Is it correct to say that businesses with inventories must use the accrual method? b. What other restrictions apply to taxpayers who are choosing an overall tax accounting method? c. Why is the cash method usually preferred to the accrual method?
> Under what circumstances can an individual taxpayer change tax years without IRS approval?
> How could the 52–53-week year prove to be beneficial to taxpayers? Explain.
> What restrictions apply to partnerships selecting a tax year?
> Why is it desirable for a new taxpayer to select an appropriate tax year?
> How does a taxpayer’s tax accounting method affect the amount of tax paid?
> Do accounting rules determine the amount of income to be reported by a taxpayer?
> In 2011, there was a change in the authoritative weight of interpretive versus legislative regulations. Briefly explain what changed and why.
> What is the primary impact of the imputed interest rules on installment sales?
> If a taxpayer changes the method of accounting used for financial reporting purposes, must the taxpayer also change his or her method of accounting for tax purposes?
> Explain the purpose of the four-year method used in computing the tax resulting from a net adjustment due to a change in accounting methods.
> Can the IRS require a taxpayer to change accounting methods?
> What changes in accounting method can be made without IRS approval?
> What impact does the gifting of an installment obligation have on the donor?
> What is the impact of having the entire gain on an installment sale consist of ordinary income from depreciation recapture?
> Is an accrual method taxpayer permitted to deduct estimated expenses? What about prepaid expenses? Explain.
> What is meant by economic performance?
> When is a cash method taxpayer allowed to deduct deposits?
> a. Distinguish between proposed, temporary, and final Treasury Regulations. b. Distinguish between interpretative and legislative Treasury Regulations.
> Explain the difference between closed-fact and open-fact situations.
> What claims do advocates of unions make to argue that unions are good for the economy?
> Are the following workers more likely to experience short-term or long-term unemployment? Explain. a. a construction worker who is laid off because of bad weather b. a manufacturing worker who loses his job at a plant in an isolated area c. a stagecoach-
> According to the theory of efficiency wages, a. firms may find it profitable to pay above- equilibrium wages. b. an excess supply of labor puts downward pressure on wages. c. sectoral shifts are the main source of frictional unemployment. d. right-to-wor
> Describe the efficient markets hypothesis, and give a piece of evidence consistent with this hypothesis.
> When the economy goes into a recession, real GDP ________ and unemployment ________. a. rises, rises b. rises, falls c. falls, rises d. falls, falls
> What are the three categories into which the Bureau of Labor Statistics divides everyone? How does the BLS compute the labor force, the unemployment rate, and the labor-force participation rate?
> Which kind of stock would you expect to pay the higher average return: stock in an industry that is very sensitive to economic conditions (such as an automaker) or stock in an industry that is relatively insensitive to economic conditions (such as a wate
> According to the efficient markets hypothesis, a. changes in stock prices are impossible to predict from public information. b. excessive diversification can reduce an investor’s expected portfolio returns. c. the stock market moves based on the changin
> What is a government budget deficit? How does it affect interest rates, investment, and economic growth?
> Suppose that Intel is considering building a new chip- making factory. a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory? b. If Intel has en
> A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving? a. $100 b. $200 c. $300 d. $400
> If the business community becomes more optimistic about the profitability of capital, the ________ curve for loan able funds would shift, driving the equilibrium interest rate ________. a. supply, up b. supply, down c. demand, up d. demand, down
> Explain how reducing a government budget deficit makes future generations better off. What fiscal policy might improve the lives of future generations better off. What fiscal policy might improve the lives of future generations better off. What fiscal po
> Why are some economists against a target of zero inflation?
> Why are the benefits of reducing inflation permanent and the costs temporary? Why are the costs of increasing inflation permanent and the benefits temporary? Use Phillips-curve diagrams in your answer.
> Throughout U.S. history, what has been the most common cause of substantial increases in government debt? a. recessions b. wars c. financial crises d. tax cuts
> The Fed decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short-run costs be reduced?
> Describe the sources of supply and demand in the market for loanable funds and the market for foreign-currency exchange.
> The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent. Economist Milton believes that expectations of inflation change quickly in response to new policies, whereas economis
> From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change? a. The central bank increases the growth rate of the money supply. b. The g
> Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.
> Give an example of a monetary policy rule. Why might your rule be better than discretionary policy? Why might it be worse?
> If the central bank in the preceding question instead holds the money supply constant and allows the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases will be a. larger. b. the same. c. smaller bu
> Suppose that the election of a popular presidential candidate suddenly increases people’s confidence in the future. Use the model of aggregate demand and aggregate supply to analyze the effect on the economy.
> List and explain the three theories for why the short-run aggregate-supply curve slopes upward.
> Explain why the following statements are false. a. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.” b. “The long-run aggregate-supply curve is vertical because economic forces do not
> Stagflation is caused by a. a leftward shift in the aggregate-demand curve. b. a rightward shift in the aggregate-demand curve. c. a leftward shift in the aggregate-supply curve. d. a rightward shift in the aggregate-supply curve.
> Suppose the French suddenly develop a strong taste for California wines. Answer the following questions in words and with a diagram. a. What happens to the demand for dollars in the market for foreign-currency exchange? b. What happens to the value of th
> Describe supply and demand in the market for loanable funds and the market for foreign-currency exchange. How are these markets linked?
> A civil war abroad causes foreign investors to seek a safe haven for their funds in the United States, leading to ________ U.S. interest rates and a ________ U.S. dollar. a. higher, weaker b. higher, stronger c. lower, weaker d. lower, stronger
> If the Fed started printing large quantities of U.S. dollars, what would happen to the number of Japanese yen a dollar could buy? Why?
> What might motivate a central banker to cause a political business cycle? What does the political business cycle imply for the debate over policy rules?
> Would each of the following groups be happy or unhappy if the U.S. dollar appreciated? Explain. a. Dutch pension funds holding U.S. government bonds b. U.S. manufacturing industries c. Australian tourists planning a trip to the United States d. an Americ
> If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate? a. 1/4 euro per dollar b. 1/3 euro per dollar c. 3 euros per dollar d. 4 euros per dollar
> According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?
> Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2016, the price of beans was $1 and the price of rice was
> According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth, a. inflation and the nominal interest rate both increase. b. inflation and the real interest rate both increase. c. the nominal inter
> If the Fed wants to increase the money supply with open-market operations, what does it do?
> You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the bank
> Which of the following actions by the Fed would reduce the money supply? a. an open-market purchase of government bonds b. a reduction in banks’ reserve requirements c. an increase in the interest rate paid on reserves d. a decrease in the discount rate
> Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers agai
> Give four explanations for why firms might find it profitable to pay wages above the level that balances quantity of labor supplied and quantity of labor demanded?
> Comparing the U.S. economy today to that of 1950, one finds that today, as a percentage of GDP, a. exports and imports are both higher. b. exports and imports are both lower. c. exports are higher, and imports are lower. d. exports are lower, and imports
> How do unions affect the natural rate of unemployment?
> Economists use labor-market data to evaluate how well an economy is using its most valuable resource— its people. Two closely watched statistics are the unemployment rate and the employment–population ratio (calculated as the percentage of the adult popu
> Unionized workers are paid about _____ percent more than similar nonunion workers. a. 2 b. 5 c. 15 d. 40
> What factors should a stock analyst think about in determining the value of a share of stock?
> For each of the following kinds of insurance, give an example of behavior that can be called moral hazard and another example of behavior that can be called adverse selection. a. health insurance b. car insurance c. life insurance
> The benefit of diversification when constructing a portfolio is that it can eliminate a. speculative bubbles. b. risk aversion. c. firm-specific risk. d. market risk.
> Describe a change in the tax code that might increase private saving. If this policy were implemented, how would it affect the market for loan able funds?
> Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000 C = 6,000 T = 1,50 G = 1,700 The economists also estimate that the investment function is: I = 3,300 - 100r, Where r i
> If a popular TV show on personal finance convinces Americans to save more for retirement, the ________ curve for loan able funds would shift, driving the equilibrium interest rate ________. a. supply, up b. supply, down c. demand, up d. demand, down
> Holding other things constant, an increase in a nation’s interest rate reduces a. national saving and domestic investment. b. national saving and the net capital outflow. c. domestic investment and the net capital outflow. d. national saving only.
> The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. a. If investors believed that capital taxes would rema
> Explain the costs and benefits of reducing inflation to zero. Which are temporary and which are permanent?
> Explain how credibility might affect the cost of reducing inflation.
> Chapter 2 explains the difference between positive analysis and normative analysis. In the debate about whether the central bank should aim for zero inflation, which areas of disagreement involve positive statements and which involve normative judgments?
> Which of the following is NOT an argument for maintaining a positive rate of inflation? a. It permits real interest rates to be negative. b. It allows real wages to fall without cuts in nominal wages. c. It increases the variability of relative prices. d
> What is the sacrifice ratio? How might the credibility of the Fed’s commitment to reduce inflation affect the sacrifice ratio?
> Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run trade-off between inflation and unemployment?
> Suppose the economy is in a long-run equilibrium. a. Draw the economy’s short-run and long-run Phillips curves. b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part a. If the Fed under-
> Advocates of the theory of rational expectations believe that a. the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation. b. if disinflation catches people by surprise, it will have minimal impact on unemployme
> Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? What should the Fed do if it wants to stabilize aggregate demand? If the Fed does
> Consider two policies—a tax cut that will last for only one year and a tax cut that is expected to be permanent. Which policy will stimulate greater spending by consumers? Which policy will have the greater impact on aggregate demand? Explain.
> Advocates for setting monetary policy by rule rather than discretion often argue that a. central bankers with discretion are tempted to renege on their announced commitments to low inflation. b. central bankers following a rule will be more responsive to
> Define net exports and net capital outflow. Explain how they are related.
> With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal
> Explain why the long-run aggregate-supply curve is vertical. Explain three theories for why the short-run aggregate-supply curve slopes upward. What variables shift both the long-run and short-run aggregate-supply curves? What variable shifts the short-r
> Explain why the long-run aggregate-supply curve is vertical.
> In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Explain what President R
> An increase in the aggregate demand for goods and services has a larger impact on output ________ and a larger impact on the price level ________. a. in the short run, in the long run b. in the long run, in the short run c. in the short run, also in the
> What is capital flight? When a country experiences capital flight, what is the effect on its interest rate and exchange rate?
> An economist discussing trade policy in The New Republic wrote: “One of the benefits of the United States removing its trade restrictions [is] the gain to U.S. industries that produce goods for export. Export industries would find it easier to sell their