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Contemporary Economics 2nd Edition William A. McEachern - Solutions
Why have some less-developed nations argued that they have been discriminated against by first GATT and then the WTO rules that discourage tariffs and quotas?
Many nations require imported car models to be crash-tested before they can be marketed to consumers. They refuse to accept the results of crash tests performed in other countries. This process is expensive for firms involved in trade.How is such a requirement a barrier to trade? How are consumers
If a quota was placed on the number of automobiles that could be imported into the United States, how would U.S. consumers be affected?
Why do many fruit farmers in the United States think tariffs should be placed on fruit imported from South America and China? Whom would such tariffs benefit, and whom would they harm?
Biology In recent years, many genetically engineered foods have been developed and marketed in the United States. These products include tomatoes that are firm and easy to ship, corn and wheat that resist fungus diseases, and fruit that can be stored for long periods of time without spoiling. It
One of the most important categories of goods imported into the United States is energy in the form of oil and natural gas.Use data in the table to construct a line graph that shows changes in the value of these imports from 2000 through 2004.Although the value of imported oil and gas fluctuated
Why doesn’t it make sense for the United States to try to export coffee or bananas?
Why do wealthy nations import a larger proportion of consumer goods than nations that are not as wealthy?
In the Far East, some people think that soup made from boiled bats is a special delicacy. How does this give nations in which people who do not share this taste an export opportunity?
Why wouldn’t the purchase of the most advanced technology necessarily provide a nation with a comparative advantage relative to other nations?
Why does the United States have a comparative advantage over New Zealand in the production or lamb during April and May, while New Zealand enjoys a similar comparative advantage over the United States during the months of October and November?
What “fudge factor” guarantees that the balance-of-payments accounts do, in fact, balance?
Is a growing U.S. trade deficit a growing worry?
What’s up with the euro?
If free trade is such a good idea, why do many producers try to restrict foreign trade?
Why isn’t the United States selfsufficient?
If the United States is such a rich and productive nation, why are so many goods and services imported?
Access EconNews Online at thomsonedu.com/school/econxtra. Find the article entitled “Will the Fed Raise Rates?” Read the article, and then answer this question: What was the relationship between the lack of inflation in the economy in late 2003 and the large numbers of unemployed and
Diagram the Check-Clearing Process When you deposit your paycheck in your bank, it must have the check cleared to obtain the funds it credits to your account. Here are the steps that take place.• You deposit your check for $250 in Bank ABC.The check was drawn on Bank XYZ, which is located in a
Construct a Graph of Demand and Supply for Money The hypothetical data in the table represents the demand and supply for money in the U.S. economy. Construct a graph from these data. What is the equilibrium interest rate in this example? What are two events that might cause the equilibrium interest
Sharpen Your Skills: Make Predictions In June 2004, the Federal Reserve began a policy of increasing the federal funds rate from the lowest rate in the last four decades of 1.0 percent. Over the next two years this key rate was raised 17 times to reach a level of 5.25 percent on June 29, 2006. The
Decide Whether to Accept an After-School Job You spend many hours every week doing school work and helping around your home. You like to go out with your friends on the weekend. You really don’t have much spare time. Interest rates are low, and the economy is booming. On your way home from
Choose When to Borrow Imagine that you have a job that pays you a good wage. You have decided to borrow $20,000 to buy a new car. Right now the interest rate on a new-car loan is 9 percent. You have read in the newspaper that the Fed is likely to lower interest rates soon because many workers are
Decide How Much Cash to Hold Imagine that it is 10 years in the future. You are married and have two young children. Every month you pay $800 for your rent, $300 for your car loan, and at least $1,900 in other costs of living. You are trying to save $300 from every paycheck to make a down payment
Calculate the Impact of a Change in the Reserve Ratio Suppose that the Fed decided to increase the reserve ratio from 10 to 12.5 percent. In theory, how would this change the value of the money multiplier? What would this do to the amount of each checking deposit that banks could lend? How would
__?__ may result from a decline in aggregate demand that forces the price level to fall.
Countries that have experienced high rates of inflation also have usually hada. totalitarian forms of government.b. independent monetary authorities.c. rapid growth in their money supplies.d. large government budget surpluses.
By increasing the money supply, the Fed can sometimesa. increase output beyond the economy’s potential in the short run.b. increase output beyond its potential in the long run.c. decrease output to its potential in the short run.d. decrease output below its potential in the long run.
True or False Inflation is likely to occur if the Fed increases the money supply when the economy is already at its potential level of output.
The Fed’s interest rate target is __?__.
The Fed could increase interest rates bya. buying additional government bonds.b. lowering the required reserve ratio.c. lowering the discount rate.d. selling some of its government bonds.
Lower interest rates stimulate the economy, while higher rates slow its __?__.
True or False The opportunity cost of holding cash is the interest that could have been earned but is forgone.
If the Fed increases the money supply, the demand curve for money willa. remain unchanged.b. immediately shift to the right.c. immediately shift to the left.d. eventually shift to the left.
Which of the following events would reduce the impact of the money multiplier?a. The Fed purchases additional government bonds.b. Banks choose to allow excess reserves to sit idly in the bank vault.c. The Fed lowers the required reserve ratio.d. The federal government borrows and spends more money.
True or False The demand for money is a measure of a stock. It shows the quantity of money people demand at various interest rates.
If people choose to hold a smaller share of income they receive in cash and deposit more of their earnings in checking accounts, the money expansion will bea. greater than it was in the past.b. the same as it was in the past.c. smaller than it was in the past.d. carried out more slowly than it was
If the Fed lowered the required reserve ratio from 10 percent to 8 percent, the money __?__ would increase from 10 to 12.5.
True or False If the Fed bought a $100,000 government bond from a bank, the money supply would immediately grow by more than $100,000.
The required reserve ratio is thea. amount of money a bank’s owners must invest in the bank.b. share of its deposits that a bank may lend.c. amount of its deposits that a bank must hold on reserve.d. share of its deposits that a bank must hold on reserve.
A bank’s balance sheet lists its assets on one side and its liabilities and the amount of the owner’s __?__on the other.
True or False Anyone who has enough money has the legal right to start a banking business.
Management Business owners cannot be sure what policy the Fed will follow.When they guess wrong, it can have a devastating effect. In 1978, for example, the owners of a small steel mill in upstate New York borrowed $50 million to purchase new equipment. They agreed to pay a flexible rate of
Use data in the table to create a double line graph of interest rates and changes in real(adjusted for inflation)GDP from 1996 through 2006. Does there seem to be a relationship between these values? Which do you think is the cause and which is the effect? Explain your answer.
Why might it take many months or possibly more than a year for people and businesses to respond to a change in the money supply? What does this tell you about the usefulness of monetary policy?
Why would deflation be harmful to the economy?
If the Fed worked to keep the unemployment rate at 3 percent by increasing the money supply year after year, what would happen to prices? Would the Fed be successful in reaching its goal in the long run? Why, or why not?
You have found a home you wish to buy.You need to take out a $100,000 mortgage to make this purchase. Your bank offers to lend you the money at either a 7 percent fixed rate or at an adjustable rate that currently is 6.5 percent. On one hand, you like the idea of having a fixed rate that you know
You plan to sell your home at some time in the next year or two. Right now, mortgages can be obtained at an interest rate of 6.0 percent. The economy has been growing rapidly for the past six months, and the rate of inflation has been going up steadily.Would your choose to put your home on the
You have a $100,000 mortgage on a house that has an adjustable interest rate of 6.0 percent that could change at any time. The economy has been growing rapidly for the past six months, and the rate of inflation has been going up steadily. You can refinance your mortgage at a fixed rate of 6.5
Government Investigate the policies of the Reagan administration that were intended to stimulate the economy in 1981 and 1982. Compare these policies with the monetary policy implemented at the same time under the Federal Reserve’s Chairman Paul Volcker. How does this show that government
Use data in the table to construct a double line graph to show changes in the federal funds rate and the prime interest rate over the years from 1996 through 2006. Does there appear to be a relationship between these interest rates? Would you expect to find similar relationships between the federal
Why might the Fed set a target rate for the federal funds rate that is 1 percent higher than its current rate? What steps would the Fed be likely to take to accomplish its goal?
If the Fed purchased $2 billion in government bonds, what would happen to the money supply and interest rates in the economy? Why might the Fed implement such a policy?
People tend to spend, deposit, or invest their cash quickly when interest rates are high. This increases the speed at which financial transactions take place.What then would happen when interest rates are low? How would this affect the economy?
If something happened to cause savers to lose faith in the safety of banks, what might happen to the economy? Explain your answer.
The demand for money normally grows when there is economic growth. What effect does this growth in the demand for money have on interest rates? Explain your answer.
Math Recalculate the table in exercise 5 above, assuming that the Fed increased the required reserve ratio from 0.1 to 0.12. Why is the required reserve ratio an important factor in determining the amount of money that banks are able to lend? What would happen to consumers’ ability to borrow
Construct a bar graph to show four rounds of the money-creation process that would result from a new deposit of $2,000 in a checking account when the required reserve ratio is 0.1. Expansion of a New $2,000 Deposit New Deposit Required Reserve New Loan Round 1 $2,000.00 $200.00 $1,800.00 Round 2
Why doesn’t the money multiplier work as effectively if people decide to hold additional funds they receive in cash?
Bank ABC holds $100 million in deposits upon which it must maintain a required reserve ratio of 0.1. The bank currently has $12 million on reserve. How much excess reserves does the bank hold? Why would it want to invest or loan these reserves as quickly as possible?
Why is a loan made by the bank counted as an asset to the bank, while a deposit made by a customer is counted as a liability to the bank?
Why are people who organize a bank required to invest their own funds as owner’s equity in the new business? How does this help to protect the bank’s depositors?
What’s the impact of changes in the money supply on the economy in the short run and in the long run?
How does the supply of money in the economy affect your chances of finding a job, your ability to finance a new car, and the interest rate you pay on credit cards?
What’s the price of holding money?
Why don’t you demand all the money you can get your hands on?
How does the Fed create money?
Access EconNews Online at thomsonedu.com/school/econxtra. Find the article entitled “Making It Tough on Counterfeiters.” Read the article, and then answer this question: Why do you think the government is changing the $10, $20,$50, and $100 bills, but not the $1 and $5 bills?
Sharpen Your Skills: Decision Making Imagine that you have decided to save $5,000 over the next two years to make the down payment on a used car. You work 20 hours each week after school and take home $127.35 after taxes. You believe you could save $30 each week during the 42 weeks of the school
Illustrate Limitations on Commodity Money Construct a grid that has five columns and eight rows. List the seven qualities of ideal money in cells 2 through 8 of the first column and the four types of commodity money identified below in cells 2 through 5 of the first row. Write “yes” or “no”
Identify Depository Institutions Make a list of all the depository institutions that have offices in your community. Identify them as commercial banks, savings and loans, mutual savings banks, credit unions, or other. How much difference is there in the services that they offer typical consumers?
Describe What Happens When the Fed Lends Money Banks that are short on cash may ask to borrow funds from the Federal Reserve System. This sometimes happens when banks located in rural areas need money to make loans to farmers in the spring when they are preparing to plant crops. These loans are
Calculate the Money Supply The following table lists amounts of money held in a variety of forms in January 2006. Use these values to calculate the amount in M1 and M2 at that time. Money Held in January 2006 Values in Billions of Dollars Currency $ 729.4 Checkable Deposits $ 646.4 Savings Deposits
Assess What Makes a Piece of Paper Money Some resort communities issue guests special pieces of paper that may be used to purchase goods or services within the resort. Guests may spend 50 credits to rent a small sailboat, 75 credits to purchase a meal, or 100 credits to play a round of golf or take
Decide When to Use Cash Which of the following transactions would you complete with cash and for which would you write a check?Explain each of your choices. What generalizations can you make about when people choose to use cash to make their payments?• Pay your $850 rent.• Buy two $8 movie
__?__ carried out through debit cards make it easier for people to spend their money.
True or False The use of a debit card will immediately impact the money supply while the use of a credit card will not.
A part of a collection of short-term interestearning assets that individuals are able to purchase is called a __?__.
M1 includes each of the following excepta. checkable deposits.b. currency.c. small savings account deposits.d. traveler’s checks.
True or False The FOMC was established to coordinate the Fed’s open-market operations.
Which of the following statements about the Federal Reserve’s Board of Governors is not true?a. Its members are responsible for setting monetary policy.b. Its members are elected by commercial bank presidents.c. Its members also serve on the Federal Open Market Committee.d. Its members serve
When the Fed lends money to banks, it charges them the __?__.
In the past, savings and loans and mutual savings banks specialized ina. issuing credit cards.b. extending credit to businesses.c. maintaining checking accounts.d. making home mortgage loans.
True or False Banks in the United States may be chartered only by state governments.
Federal Reserve notes are examples ofa. fiat money.b. representative money.c. commodity money.d. full-bodied money.
True or False Money is a stock while income is a flow.
Goats or sheep make poor money because theya. are not portable.b. are not divisible.c. have no value.d. exist in almost unlimited quantities.
Paper documents issued by banks that promised the bearer a specific amount of gold or silver were called __?__.
Which of the following is probably the greatest limitation on the usefulness of diamonds as commodity money?a. They are not durable.b. They are not portable.c. They do not have value.d. They are not easily divisable.
True or False Fiat money is accepted when people trust the issuing agency.
Gold, silver, wheat, and tobacco have all served as __?__ at some time in the past.
Which of the following is not a function of money?a. medium of exchangeb. unit of accountc. standard of depositd. store of value
True or False The high transaction cost of money gave birth to barter.
Without __?__ there is no need for money.
Mathematics Calculate the changes in M1 and M2 that would result from each of the following. Explain how you found your answers. Why don’t the values of M1 and M2 always change when the value of their components change?a. The Fed buys a $10,000 bond from a person who then deposits the funds in
Use data in the table to construct two bar graphs to show the components of M1 and M2 in June 2006.Calculate the percent each component represented of the total for these two measures of the money supply.Do any of these percentages surprise you? Why or why not?
Before electronic fund transfers became common, it could take days or weeks for checks to be presented to banks for payment. During this time, banks could use funds deposited in checking accounts even though they had already been spent by the depositor. This time was called float time. What do you
How would buying a $50 shirt with a credit card be different from buying the same shirt with a debit card from your bank?
If you had $100, would you be more likely to spend it if you held it in cash, had it deposited in a checking account, or had a traveler’s check in that amount? Are these forms of money all equally easy to spend?
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