Ch. 34 Homework for Grooup C

CHAPTER 34 | INFLUENCES OF MONETARY AND FISCAL POLICY

1.        What is the theory of liquidity preference and how does it help explain the downward slope of the aggregate demand curve?

The theory of liquidity preference as proposed by John Maynard Keynes, the author of the book The General Theory of Employment, Interest, and Money. According to his theory, the interest rate adjusts to bring money supply and money demand into balance.  Note that the “interest rate” being discussed are both the nominal interest rate and the real interest rate because we are assuming that they will move together.

It helps explain the aggregate demand curve because an increase in the price level shifts the money-demanded curve to the right.  This increase in money demand causes the interest rate to rise.  Because the interest rate is the cost of borrowing, the increase in the interest rate reduces the quantity of goods and services demanded.  This negative relationship between the price level and quantity demanded is represented with a downward-sloping aggregate-demand curve.

2.       Use the liquidity preference theory to explain how decreases in the money supply affect the AD curve.

A decrease in the money supply, increases the equilibrium interest rate.  Because the interest rate is the cost of borrowing, the rise in the interest rate decreases the quantity of goods and services demanded at a given price.  Thus the aggregate-demand curve shifts to the left.

3.       Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.

Tax system is the most important automatic stabilizer.  When the economy goes into a recession, the amount of taxes collected by the government falls automatically because almost all  taxes are closely tied to economic activity.  The personal income tax depends on households’ incomes, the payroll tax depends on workers’ earnings, and the corporate income tax depends on firms’ profits.  Because incomes, earnings, and profits all fall in a recession, the government’s tax revenue falls as well.  This automatic tax cut stimulates aggregate demand and, thereby, reduces the magnitude of economic fluctuations.

Ch. 29 & Ch. 30 Homework for Grooup C

CHAPTERS 29 & 30 | THE MONETARY SYSTEM & MONEY GROWTH AND INFLATION

1.        What do we mean when we say, "money is whatever society says it is?"

This mean that money can be whatever function society wants it to be.  May it be as a medium of exchange, unit of account, or store of value.

2.       Describe the components of M1, M2, and M3. In general, how do they differ?

M1^: (the most liquid) currency, demand of deposits, traveler’s checks, and other checkable deposits.

M2^: all the components of M1 plus assets slightly less liquid* savings deposits, small time deposits, and money market mutual funds.

M3^: all of the components of M2 plus assets even less liquid* money held at the U.S. banks abroad, institutional money market funds,

^additional information obtained from getmoneyenergy.com

*liquidity: the ease with which an asset can be converted into the economy’s medium of exchange

3.       What is "the Fed" and its main purpose?

“The Fed” or Federal Reserve is the central bank of the United States.  Its main purpose is to oversee the banking system and regulate the quantity of money in the economy

4.      Take a look at the following banking in-class demonstrations. Pick one of the three demos to perform with some friends, relatives, or other persons who owe you a favor:-) You are to act as the teacher in the demonstration and you are to attempt to teach the group the concept the demonstration is attempting to illustrate. Once the role playing is completed, answer the following questions.

1.        Which demonstration did you choose and why?

2.       Give a general description of your volunteers - approx age, gender, etc.

3.       How did the demonstration go overall?

4.      Did the volunteers seem to understand the concept being demonstrated? Why or why not?

5.       Add any other comments you feel are relevant.

6.      Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?

The Inflation Fairy because for me, this demonstration was the simplest one to understand. My sister who is 34 years old and my cousin (female) who is 18 joined me in picturing the demonstration.  While all of us were able to picture the 100% inflation of everything including salaries, we were not happy about it as it does not change anything in the economy.  Even though our salary would be twice as much (as for my cousin, her allowance), everything also cost twice as much.  It is like there is no change at all.  My volunteers understood inflation because the details in the demonstration were clear with examples that are easy to understand.  We did enjoy the exercise because we were able to spend time together while learning something new in the process.

Ch. 24 Homework for Group C

CHAPTER 24 | MEASURING THE COST OF LIVING

1.        What is the CPI and what is its purpose?

Consumer Price Index (CPI) is a measure of the overall cost of the goods and services bought by a typical customer.  The purpose of measuring the CPI is to monitor changes in the cost of living over time and compare and evaluate its relationship to the inflation rate.

2.       Fix the basket at 3 footballs and 4 basketballs.

Year	Price of Footballs	Price of Basketballs
Year 1	$10	$12
Year 2	$12	$15
Year 3	$14	$18

1.        Compute the cost of the basket:
Cost in Year 1 = ($10 x 3) + ($12 x 4) = $78

Cost in Year 2 = ($12 x 3) + ($15 x 4) = $96

Cost in Year 3 = ($14 x 3) + ($18 x 4) = $114

2.       Using Year 1 as the base year, compute the index:
CPI in Year 1 = ($78 / $78) x 100 = 100
CPI in Year 2 = ($96 / $78) x 100 = 123.08
CPI in Year 3 = ($114 / $78) x 100 = 146.15

3.       Compute the inflation rate:
NOTE: This computation is modeled from page 531, table 1, step 5

Inflation rate for Year 2 = (123.08 – 100) / 100 x 100% = 23.08%
Inflation rate for Year 3 = (146.15 – 123.08) / 123.08 x 100% = 18.74%

NOTE: This computation is modeled from page 532

Inflation rate for Year 2 = (123.08 – 100) / 100 x 100% = 23.08%
Inflation rate for Year 3 = (146.15 – 100) / 100 x 100% = 46.15%

4.      Take a look at the following link. Notice all the different measures of a country's "Standard of Living." Which do you think is the best measure and why?

Seeing that the U.S. is ranked 4^th on the Human Development Index (HDI), this lead me to believe that the best measure is the HDI because it is a comprehensive and comparative measure of life expectancy, literacy, education, and standards of living for countries worldwide.

HDI seems to be the one measure that considers the overall human development down to states, cities, villages, etc. by local organization or companies.

HDI is also about creating an environment in which people can develop their full potential and lead productive, creative lives in accordance with their needs and interests, thus bringing the focus back onto people and not just in incomes.

Ch. 4 Homework for Group C

CHAPTER 4 | SUPPLY AND DEMAND

Consider the market for minivans.  For each of the events listed below, identify which of the determinants of demand or supply are affected.  Also, indicate whether demand or supply increases or decreases and the resulting effect on price and quantity demanded.

1.        PEOPLE DECIDE TO HAVE MORE CHILDREN.

Which of the determinants of demand or supply are affected?

One of the determinants of demand that is affected is income because a family deciding to have more children may have received a salary increase which in turn would give the family additional funds to purchase a minivan for their growing family.  Another determinant of demand that is affected is the number of buyers because if several families decide to have more children the quantity demanded in the market would be higher at every price, and market demand would increase.

On the other hand, one of the determinants of supply that is affected is expectations because a company may expect the price of the minivans to fall in the near future, that company may decide to put most of its current minivan production into the market for all the family who’s decided to have more children to purchase.

Indicate whether demand or supply increases or decreases.

With what is mentioned above for demand in minivans, the demand curve would shift to the right which means that there would be an increase in demand.

At the same time, the supply curve would shift to the left which means that there would be a decrease in supply because a lot of the families are buying the minivans for their growing family.

Indicate the resulting effect on price and quantity demanded.

Assuming that the statements above are true, the price of the minivan falls while the quantity demanded rises.

2.       A STRIKE BY STEELWORKS RAISES STEEL PRICES.

Which of the determinants of demand or supply are affected?

One of the determinants of demand that is affected is expectations because one might expect the steel price to go down in the future, therefore, one would put off on buying a minivan.

On the other hand, one of the determinants of supply that is affected is also expectations because a company may expect the price of steel to fall in the near future, that company may decide to put off production of minivans.

Indicate whether demand or supply increases or decreases.

With what is mentioned above for demand in minivans, the demand curve would shift to the left which means that there would be a decrease in demand.

At the same time, the supply curve would shift to the left which means that there would be a decrease in supply because a company is putting off the production of the minivans.

Indicate the resulting effect on price and quantity demanded.

Assuming that the statements above are true, the price of the minivan rises while the quantity demanded falls.

3.       The price of sport utility vehicles rise.

Which of the determinants of demand or supply are affected?

One of the determinants of demand that is affected is the prices of related goods because let’s say that the price of minivans falls, you would buy the minivan instead of the SUV, because the functions minivans are somewhat similar to SUVs.  

On the other hand, one of the determinants of supply that is affected is expectations because you may not expect the price of the SUV to fall in the near future, so you decide to purchase the minivan instead.

Indicate whether demand or supply increases or decreases.

With what is mentioned above for demand in minivans, the demand curve would shift to the right which means that there would be an increase in demand.

At the same time, the supply curve would shift to the left which means that there would be a decrease in supply because a lot of individuals are buying the minivans.

Indicate the resulting effect on price and quantity demanded.

Assuming that the statements above are true, the price of the minivan falls while the quantity demanded rises.

4.      A stock market crash lowers people's income.

Which of the determinants of demand or supply are affected?

One of the determinants of demand that is affected is number of buyers because with the lowered income, there would be fewer buyers out in the market for minivans.

On the other hand, one of the determinants of supply that is affected is number of sellers because a company may lay off some of their employees resulting of less supply of production of minivans.

Indicate whether demand or supply increases or decreases.

With what is mentioned above for demand in minivans, the demand curve would shift to the left which means that there would be a decrease in demand.

At the same time, the supply curve would shift to the left which means that there would be a decrease in supply.

Indicate the resulting effect on price and quantity demanded.

Assuming that the statements above are true, the price of the minivan rises while the quantity demanded falls.

Intro...

Hello!  My name is Christina.  I expect to complete my studies in Computer Applications-Database Track from MC this fall 2011 while I start pursuing my Bachelor’s in UMUC.

I have taken online classes before so I am familiar how it goes in addition to some differences on each classes.

I am balancing my rigorous academic schedule with a full-time job in DC, some social and active life, and always getting in touch with family.

Thank you for stopping by and I hope we all excel in the class.