ITS ECON

. In the aftermath of the financial crisis of 2007 and 2008, many US policymakers have suggested that banks and other financial intermediaries should be subjected to tighter regulations. a. Suppose that the main effect of these tighter regulations is to restore savers' confidence in the financial system and that, as a result, they work to increase the amount that savers are willing to save at any given interest rate. According to the loanable funds framework, what effect will this change in saving behavior have on the amounts of saving and investment taking place in the economy: will saving and investment rise or fall? b. Still assuming that the main effect of these tighter regulations is to restore savers' confidence in the financial system and that, as a result, they work to increase the amount that savers are willing to save at any given interest rate, what does the loanable funds framework predict about the change in the interest rate: will it rise or fall? c. Suppose instead that the main effect of these tighter regulations is to make it more difficult for firms to borrow and that, as a result, they work to decrease the amount of investment that firms are willing to undertake at any given interest rate. According to the loanable funds framework, what effect will this change in firm behavior have on the amounts of saving and investment taking place in the economy: will saving and investment rise or fall? d. Still assuming that the main effect of these tighter regulations is to make it more difficult for firms to borrow and that, as a result, they work to decrease the amount of investment that firms are willing to undertake at any given interest rate, what does the loanable funds framework predict about the change in the interest rate: will it rise or fall? 7. Ann just graduated from college; she's looking for a job, but hasn't found one yet. Dan had been looking for a job; but after having no luck finding one for more than a year, he gives up and stops looking. a. When Ann graduates and starts looking for a job, does the number of employed people go up, down, or stay the same? b. When Ann graduates and starts looking for a job, does the number of unemployed people go up, down, or stay the same? c. When Ann graduates and starts looking for a job, does the number of people in the labor force go up, down, or stay the same? d. When Dan stops looking for a job, does the number of unemployed people go up, down, or stay the same? e. When Dan stops looking for a job, does the number of people in the labor force go up, down, or stay the same? 8. According to a microeconomic model of labor supply and demand, when the government increases the minimum wage: a. Does the number of employed people go up, down, or stay the same? b. Does the number of unemployed people go up, down, or stay the same? c. Does the number of people in the labor force go up, down, or stay the same? d. Does the natural rate of unemployment go up, down, or stay the sa

1. Suppose that the market for ice cream cones starts out in an initial equilibrium in which the quantities of ice cream cones demanded and supplied both equal 6 and the price of an ice cream cone is $1.50. a. Suppose next that a hotter than normal summer causes more people to want to eat ice cream cones. In a standard microeconomic supply and demand diagram, will this event work to shift the demand curve or the supply curve? b. Will the curve you mentioned above - demand or supply - shift to the left or to the right? c. Suppose for a moment that the price of an ice cream cone remains unchanged at $1.50 after the curve you mentioned above shifts. At this old price, will there be a shortage or a surplus of ice cream cones? d. Now suppose instead that the price of an ice cream cone changes to bring the demand for and supply of ice cream cones back into balance after the curve shifts. Will this new equilibrium price be higher or lower than $1.50? e. In the new equilibrium with the new price, will the quantities of ice cream cones demanded and supplied be larger or smaller than 6? 2. Please indicate whether each statement is true or false (you don't need to explain why). a. If firms in an economy produce luxury automobiles that sell for $50,000 each and apples that sell for $1 each, then each automobile contributes the same amount as 50,000 apples to nominal GDP. b. It is possible for real GDP to rise more rapidly than nominal GDP; this happens if an economy is experiencing deflation. c. It is possible for the CPI to fall over time; this happens if an economy is experiencing deflation. d. US GDP includes the value of goods purchased by the federal government, but not by state and local governments. e. If a US citizen works temporarily in Canada, the market value of the goods he or she produces while in Canada still count as part of US GDP. 2 3. Please indicate by how much, in dollar terms, each of the follow transactions or set of transactions contributes to US nominal GDP. If GDP does not change, just write down $0. For simplicity, assume that all goods are sold during the same period in which they are produced. a. A farmer in the US sells a bag of oranges to a juice company for $5; the juice company uses the oranges to make bottles of juice in the US that then get purchased by an individual consumer in the US for $10. b. The same farmer in the US sells a bag of oranges to an individual consumer in the US for $5. c. A retired person in the US cashes his or her social security check and spends $50 on groceries, all of which were produced in the US. d. A US consumer takes $100 that he or she has saved and deposits it in the bank. e. A small business in the US manufactures and sells $1,000 worth of goods to a foreign customer; the business owner uses $500 to pay his or her rent, $250 to pay his or her workers, and keeps the remaining $250 as profit. 4. In 1960, about 40 percent of all US women of ages 16 years and over had paying jobs outside their homes; by 2010 this number had risen to almost 60 percent. a. How has this increase in women's "labor force participation" affected US GDP - specifically, is GDP today higher, lower, or the same as it would be if this trend towards higher labor force participation had not occurred? (Here, all you need to do is to say higher, lower, or the same as, you don't need to explain why.) b. Suppose that all of the women who joined the labor force between 1960 and 2010 report being happier working at their jobs than they would have been staying at home. Would the actual growth in GDP during this period overstate or understate the true increase in the quality of life that reflects the extra psychological benefits that women gain from working and earning income? (Again, all you need to say is overstate or understate, you don't need to explain why.) 5. Consider a simple economy in which only two goods are produced and sold: pizza and beer. The prices and quantities produced of these two goods over a three-year period are shown in the table below. Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2009 $2 1 $1 2 2010 $4 1 $2 2 2011 $4 2 $2 4 a. Calculate nominal GDP in 2009, 2010, and 2011. b. Next, using 2009 as your base year, calculate real GDP in 2009, 2010, and 2011. c. Finally, calculate the GDP deflator for 2009, 2010, and 2011. 3 6. Go back to the same example from question 5, just above. Consumers in the economy like two goods: pizza and beer. Prices and quantities consumed are the same as before: Year Price of Pizza Quantity of Pizza Price of Beer Quantity of Beer 2009 $2 1 $1 2 2010 $4 1 $2 2 2011 $4 2 $2 4 As a first step in computing the consumer price index (CPI), the Bureau of Labor Statistics surveys consumers to determine the "basket of goods" purchased by a typical consumer. Suppose that the BLS chooses 2009 as its base year.

(i) State and explain three assumptions underlying the theory of monopoly. (ii) Outline two possible advantages of monopoly as a market structure. (25 marks) (b) Iarnrd Eireann (Irish Rail) is the state monopoly in the provision of rail transport in Ireland. It operates a system of price discrimination in setting some of its prices. (i) Explain the underlined term, giving one example as practiced by Iarnrd Eireann. (ii) State and explain three conditions necessary for price discrimination to take place. (20 marks) (c) Using suitably labelled diagram(s), compare the long run equilibrium position of the monopoly firm with that of a perfectly competitive firm (assuming both operate under the same cost conditions) under the following headings: Price and Output; Profits; Efficiency. (30 marks) [75 marks] Page 5 of 8 3. (a) With reference to the factor of production labour, explain the following terms: Derived Demand; Marginal Revenue Productivity; Wage Drift; Cyclical Unemployment. (20 marks) (b) (i) State and explain four factors which influence the efficiency of labour as a factor of production. Recently the Organisation for Economic Cooperation and Development (OECD) recommended that lower wages are necessary to restore stability to the Irish economy and that consideration should be given to reducing the National Minimum Wage over time. (ii) Outline one possible economic advantage and one possible economic disadvantage, to the Irish economy, of reducing the National Minimum Wage. (30 marks) (c) Ireland's 'Black Economy' (underground economy) activity results in a loss of up to 6.1bn to the Exchequer annually, according to the economist Friedrich Schneider. (i) State and explain three economic effects of this activity in Ireland. (ii) Outline two economic measures the Irish Government could take to discourage this activity. (25 marks) [75 marks] 4. (a) "Next year, almost half of income earners will pay no income tax and 4% of income earners will pay almost half of the total tax yield". (Minister for Finance, Budget Statement, 9th December 2009). The above situation is occurring at a time when taxation revenues have fallen considerably and there is a debate about the need to broaden the tax base. (i) Explain briefly the underlined terms. (ii) Discuss the characteristics of a good taxation system. (30 marks) (b) The Irish government introduced a carbon tax in its latest Budget (9th December 2009). (i) Is this tax an example of a progressive or a regressive tax? Explain your answer. (ii) State and explain two possible economic advantages and two possible economic disadvantages of the new carbon tax. (25 marks) (c) At end of December 2008 the Irish National Debt amounted to approximately 50.4bn and at the end of December 2009 it was approximately 75bn. State and explain four problems associated with the Irish National Debt. (20 marks) [75 marks] Page 6 of 8 5. (a) Given that Gross National Product at Current Market Prices is 200m, price subsidies 5m, depreciation 12m and indirect taxes 30m. Calculate the value of each of the following: Show all your workings. (i) Gross National Product at Factor Cost; (ii) Net National Product at Factor Cost/National Income. (20 marks) (b) Explain the economic effect which each of the following could have on the level of GNP at Market Prices: (i) a reduction in the general level of VAT; (ii) a reduction in the subsidies paid to farmers. (20 marks) (c) (i) Outline the main uses of National Income Statistics. (ii) State and explain four reasons why care should be taken when using National Income Statistics as a measure of economic performance of a country. (35 marks) [75 marks] 6. (a) It has been suggested that the main commercial (retail) banks in Ireland should be nationalised. (i) Explain the underlined terms. (ii) Outline two possible economic arguments for and two possible economic arguments against the nationalisation of the banks. (30 marks) (b) (i) State and explain what you consider to be the three most important economic aims of the Irish Government. (ii) Outline two examples of possible conflicts between government economic aims/objectives. (25 marks) (c) The economist Milton Friedman was regarded as one of the major thinkers of the monetarist school of economic thought. Outline four features of 'Monetarism'.

Formulate the following problem in algebraic form. We have m facilities and n customers. Each customer requires dj , j = 1, . . . , n units of product, and each facility can produce at most pi, i = 1, . . . , m units. Shipping one unit from facility i to customer j costs cij dollars. Write a Linear Program to minimize the cost of shipping products from the facilities to the customers, meeting the demand of all customers while not exceeding the production capability of any facility. You can assume that we are allowed to ship fractional quantities of product. Do not be scared by the fact that we have parameters n, m, dj , pi, cij instead of numbers! You can treat them just as you would treat numbers. Start by defining the decision variables. (Hint: we want to decide how many units should go from each facility to each customer.)

There are tolerances around the benchmark weights which allow the manager to take active positions in order to deliver the required outperformance. As a consequence of a number of asset allocation decisions you have taken (all of which are satisfactorily within acceptable tolerances), a number of stock and asset class positions have arisen. One of the trustees has asked you to provide a written response to the following three questions about these positions. Draft your responses.

(a) BP Amoco is the largest stock in the FTSE All Share Index with a benchmark weight of 7.0% in that index. Your current holding in BP Amoco is 9% of the UK equity weighting which is 4.5% of the total fund. At the same time, you are underweight in US equities relative to the benchmark, so that your total exposure to US equities is only 4% of the total fund. How do you justify holding more in one UK stock than you hold in all of the US which is the world's largest stock market?

b) As part of your Index Linked exposure, you have chosen to hold 6% of the total fund in US Treasury Inflation Protected Securities (TIPS). TIPS are US Treasury Bonds which provide US inflation proofed returns, both at the income and capital level. They currently yield 3.9%, whereas the corresponding UK Index Linked securities are yielding 1.8%. You have hedged the US dollar currency exposure of the TIPS back to sterling. Why have you hedged the currency of the US Index-Linked position, when you have never hedged the currency exposure of any of your overseas equity holdings?

(c) The Japanese economy has been suffering from a series of structural problems such as abandonment of the former economic growth model, major financial restructuring, a continued decline in traditional industries, an ageing population, the strength of the Yen, the problems of dealing with global pressures of competition, and the country's balance of trade. In order to prevent these problems from plunging the economy into deep recession, the government has been obliged to provide large scale public spending plans. This would appear to be a poor environment for the market. Can you explain why you currently hold an overweight position in Japanese equities relative to benchmark?