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Questions and Answers of
Economics
Explain the real business cycle theorists" views on the proper conduct of monetary and fiscal policies?
Suppose there was a change in preferences in a real business cycle model such that the representative agent valued leisure more and consumption goods less. How would output and employment be affected
Explain why the assumption of imperfect competition is important within each of the new Keynesian models considered in Section 2?
Suppose wage data show that workers with identical skills are paid very different wage rates in different industries. Is this difference consistent with the assumption that the labor market is
Explain how the insider-outsider model accounts for the persistent high unemployment in European countries during the post-1980 period?
New classical economists believe that in useful macroeconomic models (a) agents optimize and (b) markets clear. Do the models that emerge from the new Keynesian research effort have either or both of
During the administration of George W. Bush, reductions in the tax rates on labor income, dividends, and capital gains were the centerpiece of fiscal policy. Analyze the effects of these tax cuts
Suppose that investment demand in a given economy is predicted to be weak next year, say 10 percent below this year's level, because of an exogenous shock. All other components of aggregate demand
The question of what information market participants possess at any point in time and how quickly they learn-in other words, the information structure of the model-is a distinguishing feature of the
Within the classical, real business cycle, Keynesian, monetarist, and new classical models, analyze the effect of an autonomous fall in the price of imported oil. Explain the effect of this change on
One rule that has been proposed for fiscal policy is that the government budget should be balanced each year-no budget deficits. What position do you think each of the following groups of economists
Why do the balance of payments accounts always balance?
Illustrate graphically the effects in the foreign exchange market of an expansionary monetary policy carried out by the foreign country in our two-country framework. Consider the cases of both a
Explain how the exchange rate for a country is determined under a. A fixed exchange rate system. b. A flexible exchange rate. c. A managed, or dirty, float?
Analyze the effects of an autonomous fall in the demand for a country's exports under fixed and flexible exchange rate systems. In each case, indicate the effects on the country's balance of
If central banks never intervened in foreign exchange markets, could there be deficits or surpluses in a country's balance of payments? Explain.
Describe the Bretton Woods system of exchange rate determination that was set up at the end of World War II and lasted until 1973?
Explain the relationship between the trade balance and the level of economic activity in a fixed exchange rate system. Why does this relationship create a potential conflict between the goals of
Taking account of the effect on both the trade balance and the financial account, explain the relationships between balance of payments equilibrium and both expansionary monetary and fiscal policies
Adoption of a system of flexible exchange rates would free monetary and fiscal policy for use in attaining domestic goals of full employment and price stability." Do you agree or disagree with this
What are some of the relative advantages and disadvantages of fixed versus flexible exchange rates?
Explain why the BP schedule in Figure 1 is upward sloping. What factors cause a shift in the BP schedule? Explain.
Explain what it means to say that we have perfect capital mobility. Why is the BP schedule horizontal in the case of perfect capital mobility?
Consider the effects of a lump-sum tax cut, from T0 to T1, in a fixed exchange rate system. Consider both imperfect and perfect capital mobility. In which case will the tax cut have a larger effect
What is meant by sterilization of the effects of foreign exchange market intervention? Explain how sterilization works in the case of imperfect capital mobility.
Within the Mundell-Fleming model assuming perfect capital mobility, analyze the effects of a positive shock to money demand (i.e., an increase in the demand for money for given levels of income and
Within the Mundell-Fleming model assuming perfect capital mobility, analyze the effect of a lump-sum tax increase for the case of a flexible exchange rate. Will the tax cut be effective? Explain.
Within the Mundell-Fleming model assuming imperfect capital mobility, analyze the effect of a fall in autonomous investment. Focus on the effect on income. Is this effect larger under fixed or
What is the Federal Open Market Committee (FOMC)? What role does this committee play in formulating monetary policy?
Suppose fiscal policy in a country is characterized by excessive government spending. Also suppose the central bank in that country is targeting the interest rate. What effect will the overly
Using the IS-LM framework, analyze whether an increase in the instability of the money demand function would increase or decrease the desirability of intermediate targeting a monetary aggregate?
Describe the shift that took place in Federal Reserve policy in 1979. Explain the reasons for this shift?
Suppose the Federal Reserve is using an interest rate as a target, while real income is the ultimate policy target, and there is an autonomous drop in business investment that the Federal Reserve had
Explain the time inconsistency problem as it pertains to monetary policy?
What relationship do you see between the problems many countries have experienced with money supply targeting and the move to inflation targeting?
Suppose that the IS schedule is vertical because the interest elasticity of investment demand is zero; investment is completely insensitive to the interest rate. Is it still true that for the case of
Some economists who accept the public-choice view of the fiscal policy-making process have concluded that a constitutional amendment to mandate a balanced federal budget would be desirable. Summarize
Explain the central element of the partisan theory of fiscal policymaking. Contrast the implications of the partisan theory concerning the relationship of fiscal policy to the business cycle with
Explain the concept of an automatic fiscal stabilizer? Give examples.
Suppose that, within the simple Keynesian model used in Section 4, the level of government spending (G) was 100, the level of investment spending (I) was 75, and consumption (C) was given by C = 25 +
Explain the Keynesians' objections to fixed rules for fiscal policy, such as a constitutional amendment that would mandate a balanced federal budget?
Return to the simple Keynesian model in Section 4. Suppose that: G is 700; I is 310; and C is given by C = 250 + 0.8YD Net Taxes (T) are given by the tax function T = -50 + 0.25Y Calculate
Suppose that the marginal propensity to consume out of disposable income is 0.8 and the marginal income tax rate is 0.1. What is the value of the autonomous expenditure multiplier? Now suppose that
Outline the main features of a supply-sider's prescription for policies to foster non-inflationary economic growth. How do these policy prescriptions differ from those of Keynesians?
Compare Keynesian and supply-side economists' positions on the effects of reduction in the income tax rate?
Compare Keynesian and supply-side economists' positions on the determinants of saving, investment, and capital formation?
Within the supply-side theory, what is the proper role for aggregate demand management policies?
An investment tax credit allows firms to deduct a portion of investment spending from their corporate tax liability. Analyze the effect on output of such a tax credit in the Keynesian model and,
Outline recent (post -1998) trends in U.S. growth rates in GDP and labor productivity. What are the possible factors responsible for these trends?
Use the IS-LM and aggregate demand-aggregate supply diagrams to present the case in favor of the George W. Bush administration tax cuts as a stimulus to growth. What criticisms would Keynesian
President Ronald Reagan often said that government was not the solution; government was part of the problem. In what way is this consistent with the supply-side policy views?
Explain why in the neoclassical growth model with exogenous technological change, the long-run equilibrium rate of growth in output is independent of the saving rate (S/Y)?
According to Denison's estimates, which factors were most important in accounting for the growth in real output over the 1929-82 period?
What features of the neoclassical growth model led to the criticism that the model did not really explain the processes that generated economic growth? How do endogenous growth models try to remedy
Explain the convergence hypothesis. I low does the hypothesis of absolute convergence differ from that of conditional convergence?
What does it mean to say that growth is exogenous or endogenous? How does the production structure of an endogenous growth model differ from that of the neoclassical growth model?
Why do many economists think that large cross-country income differences are hard to reconcile with implications of the neoclassical growth model?
Suppose the saving rate were increased from 10 percent to 20 percent in a middle-income country such as Egypt. What prediction does the neoclassical growth model have for the effect this would have
Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions?
Elaborate on the basic economic questions of what, how, and for whom. Provide specific examples of these questions with respect to the use of a country's scarce resources.
Define the market process, the command process, and the traditional process. How does each process deal with the basic questions of what, how, and for whom?
Discuss the importance of the command process and the traditional process in the making of management decisions. Illustrate specific ways in which managers must take these two processes into account.
Explain the differences between management skills and entrepreneurship. Discuss how each factor contributes to the economic success of a business.
Compare and contrast microeconomics with macroeconomics. Although managerial economic s is based primarily on microeconomics, explain why it is also important for managers to understand
What do you think is the key to success in the soft drink industry? What chance do you think Global Foods has in succeeding in its new venture into the soft drink market? Explain. (Answer these
Have you been personally involved in the making of a decision for a business concerning what, how, or for whom? If so, explain your rationale for making such decisions. Were these decisions guided by
The following is a quote from a New York Times article: "If a company makes product donations to the school-computers for instance-then the image of a company goes up as graduate students use the
because of inflation, a company must replace one of its (fully depreciated) machines at twice the nominal price paid for a similar machine 8 years ago. Based on present accounting rules, will the
How do implicit costs lead to a difference- between accounting and economic profits?
Is the maximization of profit margin (profit as a percentage of total sales) a valid financial objective of a corporation? Discuss.
The growth of consumer information organizations, legal requirements, and warrant) requirements has caused significant increases in the cost of customer satisfaction. Thus it is no longer useful to
Discuss the difference between profit maximization and shareholder wealth maximization. Which of these is a more comprehensive statement of a company's economic objectives?
Explain the term satisfies as it relates to die operations of a large corporation.
Discuss the meaning of the term principal-agent problem. Why does this problem exist?
Why may corporate managers not specifically aim at profit (or wealth) maximization for their companies?
What are some of the forces that cause managers to act in the interest of shareholders?
Do you believe that profit (or shareholder wealth) maximization still represents the best overall economic objective for today's corporation?
Define demand. Define supply. In your answers, explain the difference between demand and quantity demanded and between supply and quantity supplied.
"If Congress levies an additional tax on luxury items, the prices of these items will rise. However this will cause demand to decrease, and as a result the prices will fall back down, perhaps even to
Overheard at the water cooler in the corporate headquarters of a large manufacturing company: "The competition is really threatening us with their new product line. I think we should consider
Briefly list and elaborate on the factors that will be affecting the demand for the following products in the next several years. Do you think these factors will cause the demand to increase or
Briefly list and elaborate on the factors that will be- affecting the supply of the following products in the next several years. Do you think these- factors will cause- the supply to increase or
List the key non price factors that influence demand and supply.
In defining demand and supply, why do you think economists focus on price while holding constant other factors that might have- an impact on the behavior of buyers and sellers?
Define comparative statics analysis. How does it compare with sensitivity analysis or what-if analysis used in finance, act minting, and statistics?
Define the rationing function of price. Why is it necessary for price to serve this tune lion in the market economy?
Define the guiding or allocating junction of price.
Discuss the differences between the short run and the long run from the perspective l producers and from the perspective of consumers.
Explain the difference between shortages and scarcity. In answering this question, you should consider the difference between the short run and the Icing run in economic analysis.
Why do you think it is important for managers to understand the mechanics of supply and demand both in the- short run and in the long run? Give examples of companies whose business was either helped
The following function describes the demand condition for a company that makes caps featuring names of college and professional teams in a variety of sports. Q = 2,000 - 100 P where Q is cap sales
A travel company has hired a management consulting company to analyze demand in twenty-six regional markets for one of its major products: a guided tour to a particular, country. The consultant uses
Following are three sample equations. Plot them on a graph in which Q is on the vertical axis and P is on the horizontal axis. Then transform these equations so P is expressed in terms of (J and plot
Use the following equation to derive a demand schedule and a demand curve. What types of products might exhibit this type of nonlinear demand curve? Explain. Q = 100P-0.3
Restaurants have traditionally used bottom-end wines to sell by the glass (BTG) at reasonably low prices per glass. In recent years, there has been a growing trend within the restaurant industry to
Consider the following supply and demand curves for a certain product. QS = 25.000P QD, = 50,000 - 10.000P a. Plot the demand and supply curves. b. What are die equilibrium price and equilibrium
The following relations describe the supply and demand for posters.QD = 65,000 - 10,000PQS = - 35,000 + 15.000Pwhere Q is the quantity and P is die price of a poster, in dollars.a. Complete the
The following relations describe monthly demand and supply for a computer support service catering to small businesses. QD = 3,000 - 10P QS = -1,000 + 10P where Q is the number of businesses that
The ABC marketing consulting firm found that a particular brand of tablet PCs has the following demand curve for a certain region: Q = 10,000 - 200P + 0.03Pop + 0.6I + 0.2A where Q is the quantity
Joy's Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of joy's various outlets, it was found that die demand curve follows this pattern: Q =
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