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Contemporary Economics 2nd Edition William A. McEachern - Solutions
Why can’t the Fed be sure of exactly how much currency is in circulation at any specific time? Why does it have a much better idea of the amount deposited in checkable accounts?
Government Investigate the Banking Act of 1935 to find out how the creation of the Board of Governors changed the nature of the Federal Reserve System.Why do you think the government was willing to concentrate so much economic power in the hands of only seven people?
Although there were nearly 8,000 commercial banks in the United States in 2004, most of these banks were relatively small. Most of the business in the banking industry was dominated by a few large banks.Use data in the table to construct a double bar graph that shows the number of commercial banks
How may banks obtain extra cash on short notice if an urgent need arises?
Why is it important to the economy that people who save and deposit money in banks can be sure that they will be able to withdraw their savings anytime in the future without suffering a loss?
Why are you willing to accept Federal Reserve notes (fiat money) in payment for your labor? Remember, these notes are backed by nothing other than the government’s statement that they are money.
Why are banks able to keep only 10 percent of checking deposits on reserve and still be reasonably sure that they will be able to pay all checks presented for payment?
How would you feel about taking $10,000 in cash to an automobile dealership to purchase a used car? Why might you prefer to complete this type of transaction with a bank check instead?
English You probably have either read or seen a televison production of A Christmas Carol, a short novel writen by Charles Dickens, published in 1843. In his book, Dickens told the story of Ebenezer Scrooge, a miser who accumulated wealth more for the sake of having money than to be able to use it
History When gold and silver coins were the primary type of money in circulation, merchants often weighed the coins before accepting them. Why do you think they did this? What problem of using gold or silver coins as money does this situation demonstrate?
Fred has an electric saw he would like to trade for a tire for his boat trailer.Mary has a tire for a boat trailer that she would be willing to trade for an electric lawn mower. Rachel has an electric lawn mower she would like to trade for a portable TV. Tony has a portable TV he would be willing
What would happen if there were more than one type of commodity money in use—one that people trusted to hold its value and one that they did not? If you had some of both types of money, which would you spend and which would you save? How would this affect the economy?
At certain times in history the value of the gold or silver in coins has been greater than the face value of the coins themselves. What did this give people an incentive to do? How would this have affected the economy?
On the Pacific island of Yap, commodity money took the form of donut-shaped pieces of stone that could weigh a ton or more. In what ways did these stones fall short of being ideal forms of money?
Why have wheat and corn been used as commodity money in the past while strawberries and lettuce have not?
Why could it be difficult for you to exchange your collection of 500 CDs for a good-quality used car in a world with no money?
Why is there so much fascination with money, anyway?
When were thousands of different currencies circulating in the U.S. economy?
Why was a Montana bank willing to cash a check written on a clean but frayed pair of underpants?
Why is paper money more efficient than gold coins?
Why are you willing to exchange a piece of paper bearing Benjamin Franklin’s portrait and the number 100 in each corner for something worth at least$100 to you?
Access EconDebate Online at thomsonedu.com/school/econxtra. Find the article under Fiscal Policy entitled “Promises, Promises.” Read the article, and then write a sentence describing what the article says is the problem with Social Security. What did President Bush propose as a solution to this
Sharpen Your Skills: Graphs of Interest on the National Debt Interest on the national debt is an important part of the federal budget. The amount of this cost depends on the size of the federal debt and the interest rate the government pays on the debt. Use the data in the table to construct three
Evaluate a Proposed Constitutional Amendment Members of Congress have from time to time argued in favor of a constitutional amendment that would require the federal government to maintain a balanced budget except in times of war. Discuss whether you think this would be a good idea.Be sure to
Explain the Benefits of Unemployment Compensation When there is a downturn in the economy, unemployment grows and more workers receive unemployment compensation. How do these payments benefit workers who have not lost their jobs?
Calculate the Impact of the Multiplier Effect In 1993, President Bill Clinton asked Congress to approve an additional $15 billion in spending to repair and upgrade the nation’s highways. In addition to improving the nation’s roads, President Clinton argued that this spending would increase
“Sticky” Wages Imagine that you are 20 years older and married with two children.You have purchased a car, a house, and furniture on credit. Most of your income goes to pay bills. You work for a business where you are a member of a labor union. Your contract states that you will be paid $13.50
Evaluate Government Policy In the late 1970s, President Jimmy Carter and Congress expanded spending under the Comprehensive Employment and Training Act (CETA) to provide temporary employment to as many as 500,000 unemployed workers. Most of this money was made available to state and local
Gross debt includes debt the federal government owes to itself, whereas debt held by the public refers only to debt held bya. households and firms.b. non-profit institutions.c. foreign entities.d. all of the above.
True or False Crowding out refers to people and businesses choosing to borrow and spend less money because of higher interest rates that result from greater federal borrowing.
True or False Between 1946 and 2007, the federal debt held by the public as a percentage of GDP fell more than half.
The federal government accumulated most of its debt during the 20 years followinga. 1920.b. 1940.c. 1960.d. 1980.
The time that it takes the government to realize that there is a problem in the economy is called the __?__
Which of the following situations would indicate that the economy is below its potential output?a. Many workers have been laid off because of a decline in sales.b. A large number of construction workers are unemployed each February.c. In June, many graduating students spend several months looking
True or False Because of lags, it is difficult for the government to implement discretionary fiscal policy effectively.
__?__ takes place when there are both high rates of inflation and high unemployment.
True or False Keynes believed that it was necessary for the government to balance its budget every year.
Which of the following is an example of discretionary fiscal policy?a. Income tax payments grow during an economic expansion.b. Congress spends an extra $2 billion to provide jobs for unemployed workers.c. Fewer workers receive unemployment compensation payments in an expansion.d. More people apply
True or False According to Keynes, prices and wages are quite inflexible—they are “sticky.”
Which of the following is an automatic stabilizer for the economy?a. Congress decides to increase welfare benefits during a recession.b. An increase in income tax rates is passed by Congress during a period of inflation.c. More welfare compensation is paid because more people are unemployed in a
Keynes believed that the __?__ would cause an increase in government spending or reduction in taxes to have a larger impact on aggregate demand.
Keynes developed a theory that was intended to address which problem during the Great Depression?a. unemploymentb. inflationc. government deficitsd. high interest rates
True or False Classical economists believed that in a recession prices, wages, and interest rates would fall, and this would bring the recession to an end.
Classical economists believed that the federal government should have a(n) __?__ budget.
The natural rate of unemployment in the United States is estimated to fall betweena. 2 and 3 percent.b. 3 and 4 percent.c. 4 and 5 percent.d. 5 and 6 percent.
When output is less than the potential rate, there is a(n) __?__ gap in the economy.
True or False Output can only exceed the potential rate in the short run.
An economy’s potential output is reacheda. when there is no unemployment.b. at the natural rate of unemployment.c. when there is only cyclical unemployment.d. at the frictional rate of unemployment.
Math The federal debt was approximately$8.6 trillion dollars in 2006. If this debt grew at a rate of 3 percent per year in each of the following 10 years, how much would the debt total be in 2016? Should such an increase in the debt be a concern for U.S.citizens? Why or why not?
From 1980 to 2005, tax payments received by the Social Security system far exceeded the amount paid to beneficiaries. Money that the system accumulated was invested in government bonds and held in the Social Security Trust Fund to be used to make future payments. Use the data in the table to
If interest rates increased by 3 percent across the board, what would happen to annual interest payments on the federal debt owned by the public?
The Social Security system has purchased billions of dollars of U.S. Treasury bonds. Some economists believe this is simply a matter of taking money from one of the government’s pockets and putting it in another. Others do not agree.When the Social Security system cashes in its bonds to pay
Why didn’t the across-the-board income tax cut of 2001 immediately cause people to spend more and get the economy moving?
In 1930, the federal debt was just over $16.8 billion. Why doesn’t this fact provide much information about the size or importance of this debt? What other information would you need in order to evaluate the debt’s importance?
History In 1980 and 1981, there was a deep recession in the U.S. economy. Unemployment exceeded 10 percent. To try to speed the economy’s recovery, Congress passed a law in 1982 that increased federal excise taxes on gasoline. The funds collected were intended to create additional jobs when they
The so-called misery index is found by summing the unemployment rate and the inflation rate by year. Construct a line graph of the misery index based on data in the table.How does the misery index appear to be related to the economic conditions of the country?What would you expect to happen to the
Suppose that the federal government borrowed and spent an additional $10 billion to stimulate the economy. Because of this extra government borrowing, interest rates increased by 1 percent on average. How might this increase affect the willingness of people and businesses to borrow and spend? What
Why might some economists believe that the decision-making lag is the longest of the lags involved with discretionary fiscal policy?
If the government decided to extend unemployment benefits for an extra 13 weeks beyond the 26 that normally are paid, what would happen to the incentive unemployed people have to find work? How might this affect the economy?
Inflation often results when the economy is growing rapidly. Why is it politically difficult for Congress to use discretionary fiscal policy by passing tax increases that could slow economic growth and reduce inflation?
Why is the unemployment insurance program an example of an automatic stabilizer for the economy?
Find the budgeted revenue and spending in your state’s current budget. Use these data to construct similar pie charts for your state.What might explain differences between sources of revenue and types of spending between your state and New York State?
Why were cuts in spending for education and social services an important issue in preparing the budget for 2004–2005 in New York State?
Which type of government spending would have been easiest to cut when New York leaders found that their tax revenues fell below expectations in 2003?
Which of New York State’s sources of tax revenue would you expect to increase the most because of economic growth following 2003?
History When Keynes first asserted that the government could stabilize the economy by adjusting its spending and taxing, his ideas were met with skepticism from many economists and politicians. Events during World War II, however, caused most people to change their minds and come to believe that
Draw a bar graph to show five rounds of the multiplier effect on spending when the federal government implements fiscal policy by borrowing and spending an additional $10 million. Remember that all spending becomes someone else’s income. Assume that each person who receives additional income
If the federal government borrows and spends an additional $5 billion, why are aggregate demand, production, and income likely to grow by more than$5 billion?
In much of 2001, the U.S. economy was in recession. Why would classical economists have believed that this downturn in the economy would not last very long?
Why can the economy still have a 4 to 5 percent unemployment rate when it is at its natural rate of unemployment?
How close do you think the U.S. economy is currently to its potential output?Explain your answer.
What did President George W.Bush mean when he proposed a tax cut to “get the economy moving again”?
How is a strong economy like a crowded restaurant?
Why has the federal budget been in deficit most years?
Can fiscal policy reduce swings in the business cycle?
If the economy is already operating at full employment, how can it produce more?
What is your normal capacity for academic work, and when do you usually exceed that effort?
Access the Policy Debate entitled “How should we reform the current tax system?” in the EconDebate Online at thomsonedu.com/school/econxtra. Read the Issues and Background. Write a paragraph summarizing both sides of this debate. Then choose one of the links listed under “Different
Construct a Bar Graph to Show Marginal Income Tax Rates The federal marginal income tax rates for single individuals in 2006 are shown in the table. Construct a bar graph to show these rates. What if anything has happened to these rates since 2006? Why have changes been made in these rates or why
Calculate Historical Tax Liabilities In the past, maximum federal income tax rates have been much higher than they are today. In 1944, for example, those who had taxable incomes of$1,000,000 or more paid a marginal tax rate of 90 percent. If a person’s taxable income increased from $1 million to
Assess a Proportional Income Tax Some politicians believe that high marginal tax rates discourage people from working. They have suggested that it would be better to charge all taxpayers the same percent of their income so that the lower marginal tax rates for many people would encourage them to
Petition Your Congressional Representative The national debt is growing rapidly, and you are concerned that you will grow up to owe debts that have been imposed by older generations. Write a letter to your congressional representative expressing your concern and listing steps you think the
Sharpen Your Skills—Math: Evaluate the Marginal Tax Rate Members of Congress often have debated the importance of the marginal income tax rate on the economy. Suppose that your marginal federal income tax rate is 25 percent. You pay Social Security and Medicare taxes at a rate of 7.65 percent,
Decide Which Tax Is Best Suppose that the Environmental Protection Agency (EPA) has determined that the sewer system in your town is inadequate and must be replaced.Your community will need to borrow$20,000,000 to build a new system. This loan must be repaid from tax revenues over the next 20
Identify the Optimal Quantity of a Public Good Imagine that many residents of a riverside community wish to have a break wall built around their town to protect their homes when the river floods. The cost of construction is $100,000 per 100 yards. The break wall will have no value unless it is
True or False Bureaus usually offer products for either a zero price or some price below cost.
Which of the following is not an example of a government bureau?a. your community’s public school systemb. the state highway departmentc. a firm that has been hired to collect garbage in your communityd. the federal court system
One theory states that unless voters have a special interest in a piece of legislation, they are likely to adopt a stance of __?__.
Voters sometimes choose not to learn about how their taxes are spent becausea. collectively, they are not able to influence government decisions.b. there is no information available to them about how their tax money is spent.c. they are not affected by government policies.d. they think the cost of
True or False Some political leaders appear to be more interested in whether they are reelected than in how well government works.
Government outlays in the United States are roughly what percent relative to the nation’s GDP?a. 21b. 27c. 30d. 37
True or False The largest part of local government spending is for schools.
Which of the following is not a source of revenue for state or local governments?a. tariffs on imported goodsb. aid from the federal governmentc. income taxesd. sales taxes
The biggest spending category for state governments is __?__.
True or False The largest source of federal government revenue is borrowing.
True or False High marginal tax rates encourage people to work and earn additional income.
The largest share of federal spending is allocated toa. national defense.b. income redistribution.c. interest on the national debt.d. government employee salaries.
The part of the next dollar you earn that is taken in tax is your __?__.
If a tax structure is progressive and we know that Tom pays $1,000 on his $10,000 income, then Alicia, who earns $30,000, must paya. more than $3,000 in tax.b. exactly $3,000 in tax.c. less than $3,000 in tax.d. more than $4,000 in tax.
An ability-to-pay tax also is likely to bea. regressive.b. progressive.c. proportional.d. reactionary.
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