Questions and Answers of Business Economics And Finance

Examine the causes of shifts in aggregate demand and aggregate supply?
Use the model of aggregate demand and aggregate supply to explain economic fluctuations?
Consider how the economy in the short run differs from the economy in the long run?
Describe the four reasons why firms may choose to pay wages in excess of the competitive wage?
List the reasons why unions cause unemployment and, alternatively, why unions might increase efficiency in some cases?
Illustrate in a diagram the impact of the minimum wage on high wage and low wage sectors?
Explain why some unemployment is inevitable?
Examine how unemployment results when firms choose to pay efficiency wages?
See how unemployment can arise from bargaining between firms and unions?
Consider how unemployment can result from minimum wage laws?
Explain why more than rational expectations are needed to reduce inflation costlessly?
Explain the sacrifice ratio?
Show the relationship between a shift in the short-run aggregate supply curve and a shift in the short-run Phillips curve?
Draw a graph of a long-run Phillips curve?
Draw a graph of a short-run Phillips curve?
Explain who gains and who loses on a loan contract when inflation rises unexpectedly?
Explain the concept of an inflation tax?
Explain why money has no impact on real variables in the long run?
See how policy makers’ credibility affects the cost of reducing inflation?
Consider the short-run cost of reducing the rate of inflation?
See how supply shocks can shift the inflationunemployment trade-off?
Consider why the inflation-unemployment trade-off disappears in the long run?
Explain and illustrate with diagrams how fiscal policy could be used for macroeconomic stabilization in the absence of exchange rate adjustment and independent monetary policy?
Explain and illustrate with diagrams the macroeconomic effects of asymmetric shocks in a common currency area, wherein exchange rate adjustment is not possible?
Explain the key features of a currency area and a single market?
Be able to present an argument outlining the costs and benefits of doing business in an emerging market.
Outline at least three key characteristics of an emerging market?
Give a definition of an emerging market?
Look at an outline of issues facing business in conducting operations in a global context?
Examine the practice of outsourcing and consider some of the costs and benefits of outsourcing?
Consider fiscal policy in common currency areas?
Consider the benefits and costs that might be expected to arise from a country joining a currency union?
Illustrate what an increase in the money supply does to aggregate demand?
Show what an increase in the money supply does to the interest rate in the short run?
Draw a diagram to explain the relevance of the slope of the expenditure line in relation to changes in autonomous expenditure?
Draw a diagram of the Keynesian cross and use it to show both an inflationary and deflationary gap?
Explain the difference between planned and actual spending, saving and investment?
Give a clear definition to outline the differences between monetary, fiscal and supply-side policies?
Analyze how monetary policy affects interest rates and aggregate demand?
Examine the concept of the marginal propensity to withdraw?
Consider why deflationary and inflationary gaps occur?
What is the difference between planned and actual spending, saving and investment?
What is the difference between monetary, fiscal and supply-side policies?
10. A firm closes its call centre operations in Belgium with the loss of 3000 jobs which has a significant impact on the local economy where the call centre was located. It outsources the operation
9. Put yourself in the position of a European finance minister in March 2012 negotiating with your fellow ministers on the sovereign debt crisis. To what extent do you think the setting up of the
8. Do you think that the free-rider problem associated with national fiscal polices in a currency union, as we discussed in the text, is likely to be a problem in actual practice?Justify your answer.
7. Explain, giving reasons, whether the following statements are true or false.a. ‘A high degree of trade among a group of countries implies that there would be benefits from them adopting a common
6. The United States can be thought of as a non-trivial currency union since, although it is a single country, it encompasses many states that have economies comparable in size to those of some
5. Suppose that Techoland and Cornsylvania decide to engage in fiscal federalism and adopt a common fiscal budget.a. Show, again using aggregate demand/aggregate supply diagrams, how fiscal policy
4. Suppose Techoland and Cornsylvania form a currency union and adopt the electrocarrot as their common currency. Now suppose again that there is an increase in demand for electronic goods in both
3. Consider two countries that trade heavily with one another –Cornsylvania and Techoland. The national currency of Cornsylvania is the cob, while the Techoland national currency is the byte. The
2. In order to be able to get permission to obtain a licence to do business in an emerging economy, senior managers have been left in no doubt that a private payment to local administrative officials
1. A firm is planning to invest in setting up a new manufacturing facility in an emerging economy. It aims to use some of its existing highly skilled workforce to help in the setting up of the new
10. What are the main challenges to firms doing business in a global environment?
9. Outline the main costs and benefits to a firm of outsourcing.
8. What is ‘outsourcing’?
7. Why might the members of a currency union wish to impose rules on the conduct of national fiscal policies?
6. What is fiscal federalism? How might the problems of macroeconomic adjustment in a currency union be alleviated by fiscal federalism?
5. Are the advantages and disadvantages you have listed in answer to Question 4 long run or short run in nature?
4. What are the main advantages of forming a currency union?What are the main disadvantages?
3. What are the main costs and benefits of doing business in emerging economies?
2. Why do an increasing number of firms believe that investment in emerging economies represents their future?
1. Define the term ‘emerging economies’ and outline the main characteristics of an emerging economy.
10. Assume the economy is in a recession. Explain how each of the following policies would affect consumption and investment. In each case, indicate any direct effects, any effects resulting from
9. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.a. When the investment accelerator is large, or when it is
8. The economy is in a recession with high unemployment and low output.a. Use a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate
7. 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
6. Suppose banks install automatic teller machines on every street corner and, by making cash readily available, reduce the amount of money people want to hold.a. Assume the central bank does not
5. Explain how each of the following developments would affect the supply of money, the demand for money and the interest rate. Illustrate your answers with diagrams.a. The central bank’s bond
4. Suppose the government reduces taxes by €2 billion, that there is no crowding out, and that the marginal propensity to consume is 0.75:a. What is the initial effect of the tax reduction on
3. Suppose economists observe that an increase in government spending of €10 billion raises the total demand for goods and services by €30 billion.a. If these economists ignore the possibility of
2. Explain, using an appropriate diagram, how a deflationary gap can occur and how this gap can be eliminated.
1. Prior to national elections, the existing government says that if elected again it wants to focus on delivering the following:a. a reduction in child povertyb. improvements in productivity in
10. The government spends €500 million to buy police cars.Explain why aggregate demand might increase by more than €500 million. Explain why aggregate demand might increase by less than €500
9. Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate demand curve.
8. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate demand curve?
7. Why are flexible labour markets such an important element in supply-side policies.
6. How can supply-side policies help an economy to produce greater output, reduce unemployment but reduce the price level at the same time?
5. Explain how the marginal propensity to withdraw affects the outcome of a rise in autonomous expenditure.
4. Draw a Keynesian cross diagram to show the effects of a rise in autonomous expenditure on an economy operating below full employment output.
3. Distinguish between planned expenditure and actual expenditure.
2. Explain how the interest rate transmission mechanism works to bring about changes in the components of aggregate demand and help to boost growth.
1. Define monetary policy, fiscal policy and supply-side policy.
10. Imagine an economy in which all wages are set in threeyear contracts. In this world, the central bank announces a disinflationary change in monetary policy to begin immediately.Everyone in the
9. Suppose the central bank announced that it would pursue contractionary monetary policy in order to reduce the inflation rate. Would the following conditions make the ensuing recession more or less
8. Suppose that a fall in consumer spending causes a recession.a. Illustrate the changes in the economy using both an aggregate supply/aggregate demand diagram and a Phillips curve diagram. What
7. Illustrate the effects of the following developments on both the short-run and long-run Phillips curves. Give the economic reasoning underlying your answers.a. A rise in the natural rate of
6. Suppose the natural rate of unemployment is 6 per cent. On one graph, draw two Phillips curves that can be used to describe the four situations listed here. Label the point that shows the position
5. Explain whether the following statements are true, false or uncertain.a. ‘Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.’b. ‘If prices
4. What are your shoe leather costs of going to the bank? How might you measure these costs in euros? How do you think the shoe leather costs of the head of your university or college differ from
3. Suppose that a country’s inflation rate increases sharply.What happens to the inflation tax on the holders of money?Why is wealth that is held in savings accounts not subject to a change in the
2. The economist John Maynard Keynes wrote: ‘Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation,
1. Suppose that changes in bank regulations expand the availability of credit cards, so that people need to hold less cash.a. How does this event affect the demand for money?b. If the central bank
10. The central bank 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?488 Part 6 Introduction to
9. 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?
8. What’s so natural about the natural rate of unemployment?Why might the natural rate of unemployment differ across countries?
7. Draw the long-run trade-off between inflation and unemployment.Explain how the short-run and long-run trade-offs are related.
6. Draw the short-run trade-off between inflation and unemployment.How might the central bank move the economy from one point on this curve to another?
5. Explain how business planning can be affected by inflation rising at rates deemed to be ‘too fast’.
4. If inflation is less than expected, who benefits – debtors or creditors? Explain.

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