Discuss how the Fed selling securities in the open market ripples through the different sectors of the economy
What will be an ideal response?
When the Fed sells securities in the open market it raises the federal funds rate. Banks' reserves decrease, in turn decreasing the quantity of money. The supply of loanable funds decreases so the real interest rate rises. The higher real interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rates increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the price of the dollar rises on the foreign exchange market. The rise in the price of the dollar makes exports more expensive to foreigners and imports less expensive to U.S. residents. As a result, exports decrease and imports increase so that net exports decrease. All of the changes decrease aggregate demand.
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If an investment project costing $2,700 was expected to yield $1,000 (to be received at year end) for each of the next three years, a profit-maximizing entrepreneur would
a. definitely undertake the project. b. never undertake the project. c. undertake the project if the interest rate exceeded 12 percent. d. undertake the project if the interest rate was 5 percent or less.
Which of the following is not an example of a group responding to an incentive?
a. Students attend class because of an attendance policy that reduces their grade for absences. b. Consumers buy more of a product when it is on sale at a reduced price. c. Universities offer fewer online classes when they generate more revenue than traditional classes. d. Employees work harder to earn higher commissions.
When indifference curves are bowed inward, the marginal rate of substitution is
a. the same at all points along an indifference curve. b. increasing as the consumer moves to the right along an indifference curve. c. decreasing as the consumer moves to the right along an indifference curve. d. constant.
Much of the nation's coal is extracted by strip mining. This process leaves a huge barren hole in the ground when complete, and the cost of replanting the trees is approximately $10 per ton of coal. Burning the coal for electricity causes air pollution. No one knows how much damage the air pollution causes, but we know that for another $10 per ton the power plant can be outfitted with a pollution control device. What is one measure of the true social cost of coal fired electricity, in dollars per ton?
A. Private marginal cost plus the $10 replanting charge. B. Private marginal cost plus the $10 emission control charge. C. Only the $20 of replanting and emission control charges, because the other costs are private, not social. D. Private marginal cost plus the $20 of replanting and emission control charges.