Question and Answer - 1

Define what is meant by a tick mark. What is its purpose?
The following audit procedures were performed in the audit of inventory to satisfy specific
balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the
auditor has obtained the inventory count sheets that list the client's inventory. The general
balance-related audit objectives from
Why are sales, sales returns and allowances, bad debts, cash discounts, accounts receivable, and
allowance for uncollectible accounts all included in the same cycle?
Distinguish between fraudulent financial reporting and misappropriation of assets. Discuss the
likely difference between these two types of fraud on the fair presentation of financial
statements.
Describe what is meant by the cycle approach to auditing. What are the advantages of dividing
the audit into different cycles?
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Multiple Choice Questions The following questions concern the reasons auditors do audits.
Choose the best response. a. Which of the following best describes the reason why an
independent auditor reports on financial statements? (1) A misappropriation of assets may exist,
and it is more likely to be detected by indepen
What are the characteristics of a confirmation? Distinguish between a confirmation and external
documentation.
The following are specific presentation and disclosure-related audit objectives applied to
presentation and disclosure for fixed assets (a through d) and management assertions (1 through
4). Specific Presentation and Disclosure-Related Audit Objective a. All required disclosures
regarding fixed assets have been made. b
Because management operates the business on a daily basis, they know more about the
company's transactions and related assets, liabilities, and equity than the auditor. For example, it
is extremely difficult, if not impossible, for the auditor to evaluate the obsolescence of inventory
as well as management can in a hig
Multiple Choice Questions The following questions concern the use of analytical procedures
during an audit. Select the best response. a. Analytical procedures used in planning an audit
should focus on identifying (1) Material weaknesses in internal control. (2) The predictability of
financial data from individual tran
See Full Question And Answer at solutionrank.comThe following are specific balance-related
audit objectives applied to the audit of accounts receivable (a through h) and management
assertions about account balances (1 through 4). The list referred to in the specific balance-
related audit objectives is the list of the accounts receivable from each customer at the bal
When are analytical procedures required on an audit? What is the primary purpose of analytical
procedures during the completion phase of the audit?
For how long does the Sarbanes-Oxley Act require auditors of public companies to retain audit
documentation?
Auditors provide "reasonable assurance" that the financial statements are "fairly stated, in all
material respects." Questions are often raised as to the responsibility of the auditor to detect
material misstatements, including misappropriation of assets and fraudulent financial reporting.
Required a. Discuss the conc
The following general ledger accounts are included in the trial balance for an audit client, Jones
Wholesale Stationery Store. Accounts payable Insurance expense Accounts receivable Interest
expense Accrued interest expense Inventory Accrued sales salaries Loans payable Accumulated
depreciationâ€” Note
See Full Question And Answer at solutionrank.comIdentify the four phases of the audit. What
is the relationship of the four phases to the objective of the audit of financial statements?
Multiple Choice Questions The following questions deal with errors and fraud. Choose the best
response. a. An independent auditor has the responsibility to design the audit to provide
reasonable assurance of detecting errors and fraud that might have a material effect on the
financial statements. Which of the following
Describe what is meant by an audit procedure. Why is it important for audit procedures to be
carefully worded?
Describe what is meant by an audit program for accounts receivable. What four things should be
included in an audit program?
Identify the cycle to which each of the following general ledger accounts will ordinarily be
assigned: sales, accounts payable, retained earnings, accounts receivable, inventory, and repairs
and maintenance.
At the completion of every audit, Roger Morris, CPA, calculates a large number of ratios and
trends for comparison with industry averages and prior-year calculations. He believes the
calculations are worth the relatively small cost of doing them because they provide him with an
excellent overview of the client's operat
Identify the two factors that determine the persuasiveness of evidence. How are these two factors
related to audit procedures, sample size, items to select, and timing?
You are the in-charge on the audit of Vandervoort Company and are to review the audit schedule
shown above. Required a. List the deficiencies in the audit schedule. b. For each deficiency,
state how the audit schedule could be improved. c. Prepare an improved audit schedule, using an
electronic spreadsheet softwarep
Analytical procedures consist of evaluations of financial information made by a study of

plausible relationships among both financial and nonfinancial data. They range from simple
comparisons to the use of complex models involving many relationships and elements of data.
They involve comparisons of recorded amounts, or
As auditor of the Star Manufacturing Company, you have obtained a. A trial balance taken from
the books of Star one month before year-end: Dr. (Cr.) Cash in bank .............. $ 87,000 Trade
accounts receivable ......... 345,000 Notes receivab
Define what is meant by a management assertion about financial statements. Identify the three
broad categories of management assertions.
Multiple Choice Questions The following questions deal with management assertions. Choose
the best response. a. An auditor reviews aged accounts receivable to assess likelihood of
collection to support management's assertion about account balances of (1) Existence. (3)
Valuation and allocation. (2) Completeness. (4)
Multiple Choice Questions The following questions pertain to client acceptance. Choose the best
response. a. In assessing whether to accept a client for an audit engagement, a CPA should
consider b. When approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This
Explain why it is important for audit documentation to include each of the following:
identification of the name of the client, period covered, description of the contents, initials of the
preparer, date of the preparation, and an index code.

Explain the importance of analytical procedures as evidence in determining the fair presentation
of the financial statements.
List the four major evidence decisions that must be made on every audit.
Distinguish between the general audit objectives and management assertions. Why are the
general audit objectives more useful to auditors?
Multiple Choice Questions The following questions concern the planning of the engagement.
Select the best response. a. Which of the following is an effective audit planning procedure that
helps prevent misunderstandings and inefficient use of audit personnel? (1) Arrange to make
copies, for inclusion in the audit file
Multiple Choice Questions The following questions concern audit documentation. Choose the
best response. a. Which of the following is not a primary purpose of audit documentation? (1) To
coordinate the audit. (2) To assist in preparation of the audit report. (3) To support the financial
statements. (4) To provide evid
Distinguish between the existence and completeness balance-related audit objectives. State the
effect on the financial statements (overstatement or understatement) of a violation of each in the
audit of accounts receivable.
Describe top management controls and their relation to client business risk. Give examples of
effective management and governance controls.
The minutes of the board of directors of the Meeting of March 5, 2011 The meeting of the board
of directors of Tetonic Metals was called to order by the James Cook, chairman of the board, at
8:30 am. The following directors were in attendance: Irene Arnold Robert Beardsley Mary Beth
Cape James Cook Larry Holden He
The following (1 through 18) are the balance-related, transaction-related, and presentation and
disclosure related audit objectives. Balance-Related Audit Objectives 1. Existence 2.
Completeness 3. Accuracy 4. Classification 5. Cutoff 6. Detail tie-in 7. Realizable value 8.
Rights and obligations Transaction-
The following are selected portions of the report of management from a published annual report.
REPORT OF MANAGEMENT Management's Report on Internal Control over Financial
Reporting The Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's
Explain the purposes and benefits of audit documentation software.
Identify the eight major steps in planning audits.
Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting
audits. For several engagements, he computed the industry ratios included in publications by
Standard and Poor's and compared them with industry standards. For most engagements, the
client's business was significantly differ
The use of audit software has increased dramatically in recent years. Software is now used to
fulfill administrative functions in the audit environment, document audit work, and conduct data
analysis. This problem requires students to visit the ACL web site (www.acl.com) to learn how
auditors use ACL to address issues
The following are various management assertions (a through m) related to sales and accounts
receivable. Management Assertion a. All sales transactions have been recorded. b. Receivables
are appropriately classified as to trade and other receivables in the financial statements and are
clearly described. c. Accounts rece
The following are examples of audit procedures: 1. Review the accounts receivable with the
credit manager to evaluate their collectibility. 2. Compare a duplicate sales invoice with the sales
journal for customer name and amount. 3. Add the sales journal entries to determine whether
they were correctly totaled. 4. Coun
Distinguish between attention-directing analytical procedures and those intended to eliminate or

reduce detailed substantive procedures.
Who owns the audit files? Under what circumstances can they be used by other people?
Define client business risk and describe several sources of client business risk. What is the
auditor's primary concern when evaluating client business risk?
Define what is meant by a related party. What are the auditor's responsibilities for related parties
and related party transactions?
Your client, Harper Company, has a contractual commitment as a part of a bond indenture to
maintain a current ratio of 2.0. If the ratio falls below that level on the balance sheet date, the
entire bond becomes payable immediately. In the current year, the client's financial statements
show that the ratio has dropped f
Discuss the similarities and differences between evidence in a legal case and evidence in an audit
of financial statements.
Distinguish between the following types of current period supporting schedules and state the
purpose of each: analysis, trial balance, and tests of reasonableness.
The following are examples of documentation typically obtained by auditors: 1. Vendors'

invoices 2. General ledger files 3. Bank statements 4. Cancelled payroll checks 5. Payroll time
records 6. Purchase requisitions 7. Receiving reports (documents prepared when merchandise is
received) 8. Minutes of the board of direc
Why is it essential that the auditor not leave questions or exceptions in the audit documentation
without an adequate explanation?
List two major characteristics that are useful in predicting the likelihood of fraudulent financial
reporting in an audit. For each of the characteristics, state two things that the auditor can do to
evaluate its significance in the engagement.
Grande Stores is a large discount catalog department store chain. The company has recently
expanded from 6 to 43 stores by borrowing from several large financial institutions and from a
public offering of common stock. A recent investigation has disclosed that Grande materially
overstated net income. This was accomplis
List the purposes of audit documentation and explain why each purpose is important.
Identify two types of information in the client's minutes of the board of directors meetings that
are likely to be relevant to the auditor. Explain why it is important to read the minutes early in
the engagement.
Following are seven audit activities. a. Examine invoices supporting recorded fixed asset
additions. b. Review industry databases to assess the risk of material misstatement in the
financial statements. c. Summarize misstatements identified during testing to assess whether the
overall financial statements are fairly st
Identify the six characteristics that determine the reliability of evidence. For each characteristic,
provide one example of a type of evidence that is likely to be reliable.

This problem requires the use of ACL software, which is included in the CD attached to the text.
Information about installing and using ACL and solving this problem can be found in Appendix,
pages 838-842. You should read all of the reference material preceding instructions about "Quick
Sort" before locating the approp
What are the responsibilities of the successor and predecessor auditors when a company is
changing auditors?
The following are two specific balance-related audit objectives in the audit of accounts payable.
The list referred to is the list of accounts payable taken from the accounts payable master file.
The total of the list equals the accounts payable balance on the general ledger. 1. All accounts
payable included on the lis
Identify the management assertion and presentation and disclosure-related audit objective for the
specific presentation and disclosure-related audit objective: Read the fixed asset footnote
disclosure to determine that the types of fixed assets, depreciation methods and useful lives are
clearly disclosed.
Distinguish between management's and the auditor's responsibility for the financial statements
being audited.
When a CPA has accepted an engagement from a new client who is a manufacturer, it is
customary for the CPA to tour the client's plant facilities. Discuss the ways in which the CPA's
observations made during the course of the plant tour will be of help in planning and conducting
the audit.
An auditor often tries to acquire background knowledge of the client's industry as an aid to audit
work. How does the acquisition of this knowledge aid the auditor in distinguishing between
obsolete and current inventory?
Explain why auditors need an understanding of the client's industry. What information sources
are commonly used by auditors to learn about the client's industry?
In your audit of Canyon Outdoor Provision Company's financial statements, the following
transactions came to your attention: 1. Canyon Outdoor's operating lease for its main store is
with York Properties, which is a real estate investment firm owned by Travis Smedes. Mr.
Smedes is a member of Canyon Outdoor's board of
Which types of loans to executives are permitted by the Sarbanes- Oxley Act?

Rene Ritter opened a small grocery and related-products convenience store in 1989 with money
she had saved working as an A&P store manager. She named it Ritter Dairy and Fruits. Because
of the excellent location and her fine management skills, Ritter Dairy and Fruits grew to three
locations by 1994. By that time, she n
The long-term debt schedule on page 207 (indexed K-1) was prepared by client personnel and
audited by AA, an audit assistant, during the calendar year 2011 audit of American Widgets,
Inc., a continuing audit client. The engagement supervisor is reviewing the audit documentation
thoroughly. Required Identify the defici
How does the auditor read and evaluate information that is available only in machine-readable
form?
The following are nine situations, each containing two means of accumulating evidence: 1.
Confirm receivables with consumers versus confirming accounts receivable with business
organizations. 2. Physically examine 3-inch steel plates versus examining electronic parts. 3.
Examine duplicate sales invoices when several co
Distinguish between the terms errors and fraud. What is the auditor's responsibility for finding
each?
Name the four categories of financial ratios and give an example of a ratio in each category.
What is the primary information provided by each financial ratio category?
Multiple Choice Questions The following questions concern persuasiveness of evidence. Choose
the best response. a. Which of the following types of documentary evidence should the auditor
consider to be the most reliable? (1) A sales invoice issued by the client and supported by a
delivery receipt from an outside truck
What are the benefits derived from planning audits?
For the audit of Radline Manufacturing Company, the audit partner asks you to carefully read the
new mortgage contract with the First National Bank and abstract all pertinent information. List
the information in a mortgage that is likely to be relevant to the auditor.
In recent years the stock market experienced significant declines, unprecedented since the Great
Depression. Why might it be important for you to consider current economic events as part of
planning an audit?

What is the purpose of the client's performance measurement system? How might that system be
useful to the auditor? Give examples of key performance indicators for the following businesses:
(1) A chain of retail clothing stores; (2) An Internet portal; (3) A hotel chain.
What factors should an auditor consider prior to accepting an engagement? Explain.
The following are specific transaction-related audit objectives applied to the audit of cash
disbursement transactions (a through f), management assertions about classes of transactions (1
through 5), and general transaction-related audit objectives (6 through 11). Specific Transaction-
Related Audit Objective a. Record
Identify the three categories of client objectives. Indicate how each objective may affect the
auditor's assessment of inherent risk and need for evidence accumulation.
An acquisition of a fixed-asset repair by a construction company is recorded on the wrong date.

Which transaction-related audit objective has been violated? Which transaction-related audit
objective has been violated if the acquisition had been capitalized as a fixed asset rather than
expensed?
Define what is meant by a permanent file, and list several types of information typically
included. Why does the auditor not include the contents of the permanent file with the current
year's audit file?
Identify the most important reasons for performing analytical procedures.
What is the purpose of an engagement letter? What subjects should be covered in such a letter?
Eight different types of evidence were discussed. The following questions concern the reliability
of that evidence: Required a. Explain why confirmations are normally more reliable evidence
than inquiries of the client. b. Describe a situation in which confirmation will be considered
highly reliable and another in whi
List two examples of audit evidence the auditor can use in support of each of the following: a.
Recorded amount of entries in the acquisitions journal b. Physical existence of inventory c.
Accuracy of accounts receivable d. Ownership of fixed assets e. Liability for accounts payable f.
Obsolescence of inventory g. Exi
Distinguish between internal documentation and external documentation as audit evidence and
give three examples of each.
Explain why the auditor can be persuaded only with a reasonable level of assurance, rather than
convinced, that the financial statements are correct.
List the eight types of audit evidence included in this chapter and give two examples of each.
This problem requires you to access authoritative standards to compare the objective of an audit
as defined by GAAS (www.aicpa.org) and International Standards on Auditing (ISA 200)
(www.iaasb.org) and the objective of an audit of internal control over financial reporting as
defined by PCAOB auditing standards (www.pca
The following are various audit procedures performed to satisfy specific transaction-related audit
objectives as discussed in Chapter 6. The general transaction-related audit objectives from
Chapter 6 are also included. Audit Procedures 1. Trace from receiving reports to vendorsâ€™
invoices and entries in the acquisit
Following are 10 audit procedures with words missing and a list of several terms commonly used
in audit procedures. Audit Procedures 1. _____ the unit selling price times quantity on the
duplicate sales invoice and compare the total to the amount on the duplicate sales invoice. 2.
_____ whether the accounts receivable
Explain how management assertions, general balance-related audit objectives, and specific
balance-related audit objectives are developed for an account balance such as accounts
receivable.
What are specific audit objectives? Explain their relationship to the general audit objectives.
What are the purposes of preliminary analytical procedures? What types of comparisons are
useful when performing preliminary analytical procedures?
Comic book fans eagerly compete to buy copies of Amazing Fantasy No. 15, which contains the
first appearance of the superhero Spider-Man. At the same time the publisher printed copies of
the comic for the U.S. market, with the price printed on the cover in cents, it printed copies for
the U.K. market, with the price pr
What is an entrepreneur? Why do entrepreneurs play a key role in a market system?
Warren Buffet is the chief executive officer of the investment firm Berkshire Hathaway and one
of the wealthiest people in the world. In an editorial in the Wall Street Journal, Buffet argued that
economic policies in the United States should be designed so that people who are willing to work
receive enough income to l
Imagine that the next time the Indianapolis Colts play the New England Patriots at Lucas Oil
Stadium in Indianapolis, Colts star quarterback Andrew Luck has a temporary lack of judgment
and plans to sell Colts memorabilia during the game because he realizes that he can sell five
times more Colts products than any other
The following are various activities an auditor does during audit planning. 1. Send an
engagement letter to the client. 2. Tour the client's plant and offices. 3. Compare key ratios for
the company to industry competitors. 4. Review management's risk management controls and
procedures. 5. Review accounting principles u
Would you expect a centrally planned economy to be better at productive efficiency or allocative
efficiency? Be sure to define productive efficiency and allocative efficiency in your answer.
Suppose we can divide all the goods produced by an economy into two types: consumption
goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods
used to produce other goods. a. Use a production possibilities frontier graph to illustrate the
trade-off to an economy between producing
What is meant by the Bretton Woods system being a goldâ€exchange standard? How were
exchange rates determined under the Bretton Woods system? Under what conditions were
nations allowed to change their exchange rates?
Using the information in Figure 1A.2 on page 29, calculate the percentage change in Ford's auto
sales from one year to the next. During which year did sales fall at the highest rate? Figure 1A.2:
Time-Series Graphs (a) Time-series graph where the scale is not truncated (b) Time-series graph
with truncated scale
In the court case over whether anyone could use Conan Doyle's character Sherlock Holmes
without paying a fee, Judge Posner argued that the first Sherlock Holmes story was written in
1887, so allowing the author's descendants to continue to claim a copyright to the character
raised the possibility of "perpetual, or at l
Briefly explain which of the following statements represent positive analysis and which represent
normative analysis. a. A 50-cent-per-pack tax on cigarettes will lead to a 12 percent reduction in
smoking by teenagers. b. The federal government should spend more on AIDS research. c.
Rising wheat prices will increase
What do economists mean by scarcity? Can you think of anything that is not scarce according to
the economic definition?
Why does scarcity imply that every society and every individual face trade-offs?
In The Wonderful Wizard of Oz and his other books about the Land of Oz, L. Frank Baum
observed that if people's wants were limited enough, most goods would not be scarce. According
to Baum, this was the case in Oz: There were no poor people in the Land of Oz, because there
was no such thing as money. . . . Each person
In a market economy, why does a firm have a strong incentive to be productively efficient and
allocatively efficient? What does the firm earn if it is productively and allocatively efficient, and
what happens if it is not?
An article discusses the market for autographs by Mickey Mantle, the superstar center fielder for
the New York Yankees during the 1950s and 1960s: "At card shows, golf outings, charity
dinners, Mr. Mantle signed his name over and over." One expert on sport autographs is quoted as
saying, "He was a real good signer. ...
What was the procedure for nations to borrow from the IMF?
Draw a demand and supply graph to show the effect on the equilibrium price in a market in the
following situations. a. The demand curve shifts to the right. b. The supply curve shifts to the
left?
The grading system plays an important role in student learning. In their book Effective Grading:
A Tool for Learning and Assessment in College, Barbara Walvoord and Virginia Anderson state
that "grading infuses everything that happens in the classroom." They also argue that grading
"needs to be acknowledged and managed
Under what circumstances are firms likely to produce more of a good or service? Under what
circumstances are firms likely to produce less of a good or service?
Real GDP in 2012 was $15,369 billion. Real GDP in 2013 was $15,710 billion. What was the
percentage change in real GDP from 2012 to 2013? What do economists call the percentage
change in real GDP from one year to the next?
In a famous essay on the market system, the economist Leonard Read discussed how a pencil
sold by the U.S. firm Eberhard Faber Pencil Company (now owned by Paper Mate) was made.
He noted that logging companies in California and Oregon grew the cedar wood used in the
pencil. The wood was milled into pencil-width slats a
Use the following production possibilities frontier for a country to answer the questions. a.
Which point or points are unattainable? Briefly explain why. b. Which point or points are
efficient? Briefly explain why. c. Which point or points are inefficient? Briefly explain why. d.
At which point is the country's fu
Can an individual or a country produce beyond its production possibilities frontier? Can an
individual or a country consume beyond its production possibilities frontier? Explain.
What is scarcity? Why is scarcity central to the study of economics?
Assume that the figure below accurately represents Apple's PPFs for 2020 and 2025 and that in
2025 it has customer orders for 110,000 four-door sedans and 65,000 two-door convertibles?
Explain whether Apple can fill all of these orders.
Suppose that from 2020 to 2025, the resources Apple uses to produce its automobiles remain
constant, while improvements in technology in 2025 allow Apple to produce the additional
quantity of two-door convertibles shown in the figure below, but no additional four-door sedans.
Draw a graph that illustrates this technolo
McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on
weekends. In 2015, the company began to experiment with serving breakfast all day at various
locations in San Diego. Several owners of McDonald's restaurants, however, point out that
offering breakfast 24 hours a day presents two
Assume that the demand curve for Pepsi passes through the following two points: Price per
bottle of Pepsi _________________ Number of bottles (In dollars)
____________________________ Demanded $2.50 ................................................... 100,000
1.25 ....................................................
Do you agree with the following statement: "The problem with economics is that it assumes that
consumers and firms always make the correct decisions. But we know that everyone makes
mistakes?"
Briefly discuss each of the following economic ideas: People are rational, people respond to
economic incentives, and optimal decisions are made at the margin?
In The Wealth of Nations, Adam Smith discussed what has come to be known as the "diamond
and water paradox": Nothing is more useful than water: but it will purchase scarce anything;
scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value
in use; but a very great quantity of othe
The chapter mentions that in 1965, married women with children did an average of 32 hours of
housework per week, while men did an average of only 4 hours of housework-a total of 36 hours
of housework. In 2014, the estimated average weekly hours of housework for women declined to
15, while the hours worked by men increa
An article on espn.com about declining attendance at college football games noted that schools
in the central time zone had particular problems with attendance at games that started at 11 a.m.
The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening
games." How would playing g
In what way did the Bretton Woods system operate as intended? In what way did it not? How did
the Bretton Woods system evolve over the years?
What is the area of the triangle shown in the following figure?
Writing in the New York Times, Michael Lewis argued that "a market economy is premised on a
system of incentives designed to encourage an ignoble human trait: self interest." Do you agree
that self-interest is an "ignoble human trait"? What incentives does a market system provide to
encourage self-interest?
State government Medicaid programs provide medical insurance to poor and disabled people.
Under federal law, the programs must provide reimbursements to people who use any
prescription drug that has been approved as effective by the U.S. Food and Drug Administration
(FDA). In recent years, pharmaceutical firms have dev
What is a production possibilities frontier? How can we show efficiency on a production

possibilities frontier? How can we show inefficiency? What causes a production possibilities
frontier to shift outward?
What do economists mean by shortage? By surplus?
If a market is in equilibrium, is it necessarily true that all buyers and sellers are satisfied with the
market price? Briefly explain.
According to an article on Phillyburbs.com, some farmers in rural Pennsylvania are causing a

"stink" by using pig manure for fertilizer. The farmers purchase the pig manure, which is an
organic fertilizer, from a nearby pork processing plant and spread it across the fields where they
grow corn and soybeans. The article
What is absolute advantage? What is comparative advantage? Is it possible for a country to have
a comparative advantage in producing a good without also having an absolute advantage? Briefly
explain.
Why do economists use models? How are economic data used to test models?
In a report on property rights around the world, Peruvian economist Hernando De Soto noted the
increasing evidence of a strong relationship between "economic successes and countries that
include protective policy measures over property rights." Why would the protection of property
rights be likely to increase economic
An article in the Wall Street Journal discussing Sanadu's prospects for successfully selling its
home medical devices observes, "Another challenge will be getting doctors on board with the
idea of patients bringing them information from home." What economic incentives do doctors
have to accept this information? What ec
Leonard Fleck, a philosophy professor at Michigan State University, has written: When it comes
to health care in America, we have limited resources for unlimited health care needs. We want
everything contemporary medical technology can offer that will improve the length or quality of
our lives as we age. But as presen
An economist remarks that "the cost of consuming a book is the combination of the retail price
and the opportunity cost of the time spent reading." Isn't the cost of consuming a book just the
price you pay to buy the book? Why include the cost of the time spent reading the book in the
cost of consuming the book?
In colonial America, the population was spread thinly over a large area, and transportation costs
were very high because it was difficult to ship products by road for more than short distances. As
a result, most of the free population lived on small farms, where they not only grew their own
food but also usually made t
The Food and Drug Administration (FDA) is part of the federal government's Department of
Health and Human Services. Among its other functions, the FDA evaluates the safety and
effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was
allowed to market its home HIV test. In a centrall
What is the difference between productive efficiency and allocative efficiency?
Explain what happens if the nation of Problem 2 (call it Nation A) stops borrowing after the first
year, but before it repays its loan, another nation borrows $10 million of Nation A's currency
from the IMF. In Problem 2 With respect to a nation with a $100 million quota in the IMF,
indicate how the nation was to pay
According to Forbes magazine, in 2015 Bill Gates was the world's richest person, with wealth of
$79.2 billion. Does Bill Gates face scarcity? Does everyone? Are there any exceptions?
In late 2014, oil prices were falling, but some energy traders were convinced that oil prices
would begin to rise within a few months. According to a news story, these expectations were
causing some "traders to put oil in storage while they wait for prices to rise." Predict the effect of
this strategy for the supply of
What are property rights? What role do they play in the working of a market system? Why are
independent courts important for a well-functioning economy?
In discussing dividing up household chores, Emily Oster, an economist at the University of

Chicago, advises, "No, you shouldn't always unload the dishwasher because you're better at it." If
you are better at unloading the dishwasher, why shouldn't you be the one to unload it?
What happens in a market if the current price is above the equilibrium price? What happens if
the current price is below the equilibrium price?
In a paper written by Bentley College economists Patricia M. Flynn and Michael A. Quinn, the
authors state: We find evidence that Economics is a good choice of major for those aspiring to
become a CEO [chief executive officer]. When adjusting for size of the pool of graduates, those
with undergraduate degrees in Econo
What does increasing marginal opportunity costs mean? What are the implications of this idea
for the shape of the production possibilities frontier?
Look again at the information in Figure 2.4 on page 49. Choose a rate of trading cherries for
apples different from the rate used in the text (15 pounds of cherries for 10 pounds of apples) that
will allow you and your neighbor to benefit from trading. Prepare a table like Table 2.1 on page
50 to illustrate your answer
Many universities and corporations offer a health and wellness program that helps their
employees improve or maintain their health and get paid (a relatively small amount) for doing so.
The programs vary but typically consist of employees completing a health assessment, receiving
a program for healthy living, and monit
What are the two main categories of participants in markets? Which participants are of greatest
importance in determining what goods and services are produced?
Jay Bhattacharya and Kate Bundorf of Stanford University have found evidence that people who
are obese and who work for firms that provide health insurance receive lower wages than
workers at those firms who are not obese. At firms that do not provide health insurance, obese
workers do not receive lower wages than work
If Nicaragua can produce with the same amount of resources twice as much coffee as Colombia,
explain how Colombia could have a comparative advantage in producing coffee?
What is the difference between normative analysis and positive analysis? Is economics
concerned mainly with normative analysis or positive analysis? Briefly explain.
Evaluate the following argument: "Adam Smith's analysis of the market system is based on a
fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm
not selfish, and most people I know aren't selfish."
Suppose the United Kingdom and Norway both produce oil and fish oil, which are sold for the
same prices in both countries. The following table shows the combinations of both goods that
each country can produce in a day, measured in thousands of barrels, using the same amounts of
capital and labor: a. Who has the comp
After Russia seized what had formerly been the Ukrainian territory of Crimea in February 2014,
the United States and many other countries imposed economic sanctions that reduced the ability
of Russia to engage in international trade. A columnist writing in the New York Times noted, "If
sanctions push Russia onto a path
The Making the Connection feature explains that there are both positive and normative elements
to the debate over whether medical schools should charge tuition and whether hospitals should
continue to pay residents who pursue primary care but not residents who specialize. What
economic statistics would be most useful i
The following table gives information about the quantity of glasses of lemonade demanded on
sunny and overcast days: Plot the data from the table on a graph similar to Figure 1A.5 on page
31. Draw two straight lines representing the two demand curves-one for sunny days and one for
overcast days?
Lawrence Summers served as secretary of the Treasury in the Clinton administration and as
director of the National Economic Council in the Obama administration. He has been quoted as
giving the following defense of the economic approach: There is nothing morally unattractive
about saying: We need to analyze which way
Using the same amount of resources, the United States and Canada can both produce lumberjack
shirts and lumberjack boots, as shown in the following production possibilities frontiers: a. Who
has a comparative advantage in producing lumberjack boots? Who has a comparative advantage
in producing lumberjack shirts? Expla
Consider an organization that exists to help the poor. The members of the organization are
discussing alternative methods of aiding the poor, when a proponent of one particular method
asserts, "If even one poor person is helped with this method, then all our time and money would
have been worth it." If you were a membe
The British historian Thomas Macaulay once remarked that copyrights are "a tax on readers." In
what sense are copyrights a tax on readers? If copyrights are a tax on readers, why do
governments enact them?
Some economists have been puzzled that although entrepreneurs take on the risk of losing money
by starting new businesses, on average their incomes are lower than those of people with similar
characteristics who go to work at large firms. Economist William Baumol believes part of the
explanation for this puzzle may be
What is the difference between efficiency and equity? Why do government policymakers often
face a trade-off between efficiency and equity?
Alberto Chong of the University of Ottawa and several colleagues conducted an experiment to
test the efficiency of government postal services around the world. They mailed letters to
nonexistent businesses in 159 countries and kept track of how many of the letters were returned.
Was this test most relevant to evaluatin
The federal government subsidizes some loans to college students. Typically, the more students
who participate in these programs and the more they borrow, the higher the cost to the federal
government. In 2011, President Barack Obama convinced Congress to pass these changes to the
federal student loan programs: (1) Pa
Describe the five steps economists follow to arrive at a useful economic model?
Nobel Prize-winning economist Kenneth Arrow of Stanford University once wrote that the
argument that the outcomes in a market system "may be very different from, and even opposed
to, intentions is surely the most important intellectual contribution that economic thought has
made." Briefly explain how it is possible for
Is every economic issue either strictly microeconomic or strictly macroeconomic? Briefly

explain.
What is a circular-flow diagram, and what does it demonstrate?
Dr. Strangelove's theory is that the price of mushrooms is determined by the activity of
subatomic particles that exist in another universe parallel to ours. When the subatomic particles
are emitted in profusion, the price of mushrooms is high. When subatomic particle emissions are
low, the price of mushrooms is also l
Late in the semester, a friend tells you, "I was going to drop my psychology course so I could
concentrate on my other courses, but I had already put so much time into the course that I
decided not to drop it." What do you think of your friend's reasoning? Would it make a
difference to your answer if your friend has to
Suppose that France and Germany both produce schnitzel and wine. The following table shows
combinations of the goods that each country can produce in a day: a. Who has a comparative
advantage in producing wine? Who has a comparative advantage in producing schnitzel? b.
Suppose that France is currently producing 1 bot
A news story from 2015 about the oil market stated, "the global glut of crude that has hit [oil]
prices is starting to shrink." a. What does the article mean by a "glut"? What does a glut imply
about the quantity demanded of oil relative to the quantity supplied? b. What would be the effect
of the glut on oil prices?
One of the trade-offs Tesla faces is between safety and the maximum range someone can drive
an all-electric car before having to recharge it. For example, adding steel to a car makes it safer
but also heavier, which results in fewer miles between recharges. Draw a hypothetical production
possibilities frontier that Tes
What is meant by the General Arrangements to Borrow? Standby arrangements? Swap

arrangements? Special Drawing Rights? Gold pool? Twoâ€tier gold market?
What are the two basic functions of the International Monetary Fund?
What is the basis for trade: absolute advantage or comparative advantage? How can an individual
or a country gain from specialization and trade?
What is a free market? In what ways does a free market economy differ from a centrally planned
economy?
You have exams in economics and chemistry coming up, and you have 5 hours available for
studying. The following table shows the trade-offs you face in allocating the time you will spend
studying each subject: a. Use the data in the table to draw a production possibilities frontier
graph. Label the vertical axis "Score
Identify whether each of the following transactions will take place in the factor market or in the
product market and whether households or firms are supplying the good or service or demanding
the good or service. a. George buys a Tesla Model S. b. Tesla increases employment at its
Fremont plant. c. George works 20
Draw a production possibilities frontier that shows the trade-off between the production of cotton
and the production of soybeans. a. Show the effect that a prolonged drought would have on the
initial production possibilities frontier. b. Suppose that genetic modification makes soybeans
resistant to insects, allowing
Suppose the U.S. president is attempting to decide whether the federal government should spend
more on research to find a cure for heart disease. Imagine that you are the president's economic
advisor and need to prepare a report discussing the relevant factors the president should consider.
Use the concepts of opportun
The following table shows the relationship between the price of custard pies and the number of
pies Jacob buys per week: a. Is the relationship between the price of pies and the number of pies
Jacob buys a positive relationship or a negative relationship? b. Plot the data from the table on a
graph similar to Figure 1
In addition to making cars, Tesla planned to open a new factory in Nevada in 2016 to make
batteries, including home storage battery packs. What is the opportunity cost to Tesla of
investing in a battery factory?
According to the FBI Bank Crime Statistics, there were nearly 4,000 bank robberies in the
United States in 2014. The FBI claims that banks have made themselves easy targets by refusing
to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public.
According to a special agent w
Suppose that your college decides to give away 1,000 tickets to the football game against your
school's biggest rival. The athletic department elects to distribute the tickets by giving them away
to the first 1,000 students who show up at the department's office at 10 a.m. the following
Monday. a. Which groups of stud
According to one news story, the cost of producing 4K televisions has been declining. According
to a second story, many people have switched from watching programs on television sets to
watching them on smart-phones, tablets, or laptops. After reading these news stories, a student
argues: "From this information, we kno
Moss Company invested $90,000 in TF Partnership on January 1, 20X1, for a 45 percent share of
its profits and losses. At December 31, 20X2, Moss reported total assets of $510,000 (excluding
its investment in TF) and liabilities of $40,000, and TF reported total assets of $250,000 and
liabilities of $30,000. Required
Search online to obtain and or prepare charts of the monthly average direct exchange rates for the
past two years for the U.S. dollar versus (1) the Japanese yen, (2) the European euro, (3) the
British pound, and (4) the Mexican peso. Your four charts should each have time on the
horizontal axis and the direct exchange
How are the sales of assets reported on the statement of realization and liquidation?
Cameron Corporation acquired 70 percent of Darla Corporation's common stock on December

31, 20X4, for $87,500. Data from the balance sheets of the two companies included the
following amounts as of the date of acquisition: At the date of the business combination, the
book values of Darla Corporation's assets and liabi
During the 1928 U.S. presidential election campaign, Herbert Hoover, the Republican candidate,
argued that the United States should import only products that could not be produced here. Do
you believe that this would be a good policy? Explain.
How does the use of interperiod tax allocation procedures affect the amount of income assigned
to noncontrolling shareholders in the period in which unrealized intercompany profits are
recorded by the subsidiary?
PricewaterhouseCoopers offers a publication on its Web site entitled "IFRS and US GAAP:
similarities and differences: September 2010" that provides a topic-based comparison. Access
this publication on the Web at www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-andus-
gaap-similarities-and-differences-september-
How is income assigned to the noncontrolling interest shown in the consolidation worksheet?
Shortly after a parent company purchased its subsidiary's bonds from a nonaffiliate, the
subsidiary retired the entire issue. How is the gain or loss on bond retirement reported by the
subsidiary treated for consolidation purposes?
What types of complexities arise in applying the equity method to accounting for an investment
in a partnership?
Is depreciation accounted for by a hospital? Why or why not?
The Statements of Governmental Accounting Standards are the final step in the GASB's decision
making process. Standard setting has a number of specific steps, with open and thorough study
of the issues, and with public participation and input encouraged throughout the process.
Required Access the GASB's Web site at w
What portion of consolidated retained earnings is assigned to the noncontrolling interest in the
consolidated balance sheet?
How are donated services accounted for by a hospital? How does it account for donated
equipment and donated medical supplies?
Explain the use of the account Reorganization Value in Excess of Amount Assigned to
Identifiable Assets during a Chapter 11 reorganization.
How-if at all-should the following items be reported on the financial statements? a. Foreign
Currency Receivable from Broker b. Foreign Currency Transaction Loss c. Foreign Currency
Transaction Gain d. Dollars Payable to Exchange Broker e. Premium on Forward Contract f.
Foreign Currency Units g. Accounts Payable
Should a rotary club, an ONPO, report depreciation expense? Why or why not?
For each general fund transaction listed in items 1 through 12, select the appropriate recording
for the transaction listed next to letters A through O. A letter may be selected once, more than
once, or not at all.
How can interim reports be used by investors to identify a company's seasonal trends?
What is a joint venture? How are corporate joint ventures accounted for on the books of the
investor companies?
Explain how the existence of a subsidiary's preferred shares might affect the amount of goodwill
reported following the purchase of the subsidiary.
What financial statements must be filed by a company during a Chapter 11 reorganization?
What are the rights of creditors with priority in a Chapter 7 liquidation?
Why are changes in inventory balances not shown in the statement of cash flows when the direct
method is used in presenting the cash flows from operating activities?
What portion of the sales of an acquired company is included in the consolidated income
statement following a midyear acquisition?
Down Corporation paid $96,000 to acquire 30 percent of the ownership of DF Partnership on
January 1, 20X4, and shares in its profits and losses at 30 percent. DF Partnership did not make
any distribution to its owners during 20X4. At December 31, 20X4, Down and DF reported the
following amounts when Down used the equit
Tye Corporation invested in an unincorporated joint venture and elected to use pro rata
consolidation in preparing its financial statements. For the year ended December 31, 20X3, Tye
reported income of $52,000 from its separate operations and net income of $60,000. The joint
venture reported assets of $293,000 and liab
What is the market value unit method of accounting for investments?
Specifically, what items are in the determination of a segment's profit or loss?
Why do some governmental units not report small amounts of supply inventories in their balance
sheets?
Which securities act-1933 or 1934-regulates the initial registration of securities? Which regulates
the periodic reporting of publicly traded companies?
How is the tax benefit of an interim period's operating loss treated if the future realizability of the
tax benefit is not assured beyond a reasonable doubt?
Are all expenditures encumbered?
Using the Internet, find the comprehensive annual financial report (CAFR) of a local government
selected by your instructor. At a minimum, a CAFR will include (1) management's discussion
and analysis (MD&A), (2) the basic financial statements-government-wide and fund-based
financial statements, (3) notes to the basic f
The company you work for is considering going public. Your current position is within the
external financial reporting group. The manager you work for wants you to review some public
company quarterly reports, Form 10-Qs, to see what type of information is disclosed. The
manager does not want you to perform technical r
How is a deficit in a partner's capital account eliminated if he or she is personally insolvent?
Farmstead Company reported the following summarized balance sheet data on December 31,
20X8: On January 1, 20X9, Horrigan Corporation acquired 70 percent of Farmstead's stock for
$210,000, the book value of the shares acquired. At that date the fair value of the noncontrolling
interest was equal to 30 percent of the b
Major companies often have investments in a number of other entities. The types of entities,
ownership shares, and circumstances may differ considerably for these various investments, thus
leading to different reporting methods for the different investments. The Dow Chemical
Company is a company with numerous investmen
How does the application of the lower-of-cost-or-market valuation method for inventories differ
between interim statements and annual statements?
Where is a gain on the sale of hospital properties recorded by a hospital? How is the gain
reported in the hospital's financial statements?
What is the attitude toward the possible use of IFRS in the United States?
Many companies transfer inventories from one affiliate to another. Often the companies have
integrated operations in which one affiliate provides the raw materials, another manufactures
finished products, another distributes the products, and perhaps another sells the products at
retail. In other cases, various affilia
Examining the General Fund Disclosures in a Comprehensive Annual Financial Report (CAFR)
This case focuses on the general fund of a governmental unit. Required Using the
Comprehensive Annual Financial Report (CAFR) for a governmental entity chosen by your
instructor, answer the following questions that relate to the
Distinguish between the discrete and integral views of interim reporting. Which view is used in
APB Opinion No. 28?
Currently, you are an experienced senior working at a public accounting firm. For the upcoming
busy season you received a new client, a publicly traded corporation. The manager on this client
is someone you have not worked with before. You hope to impress this manager because you
hear that she strongly supports those s
How is the income assigned to the noncontrolling interest normally computed?
J. Nitty and G. Gritty are considering the formation of a partnership to operate a crafts and
hobbies store. They have come to you to obtain information about the basic elements of a
partnership agreement. Partnership agreements usually specify an income and loss-sharing ratio.
The agreements also may provide for such
Glitter Enterprises acquired 60 percent of Lowtide Builders' stock on December 31, 20X4.
Glitter acquired its shares for $90,000, the book value of the shares acquired. At that date, the
fair value of the noncontrolling interest was equal to 40 percent of the book value of Lowtide.
Balance sheet data for Glitter and Lo
In what types of situations could it be appropriate to use equity-method reporting even though
the investor does not hold voting common stock of the investee?
Which governmental funds use operating budgets? Which use capital budgets?
You have a friend who was just elected to the County Board for your county. One of the first
items of business for the County Board is to prepare a budget for the new fiscal period. Your
friend does not understand the county governmental entity financial reporting requirements so
you volunteer to assist by preparing a
Are sales included in the consolidation worksheet in computing cash flows from operating
activities when the indirect method or direct method is used?
What are the nonjudicial actions available to a financially distressed company? What judicial
actions are available?
Where is an interfund transfer reported on the general fund's financial statements?
One of the partners of the partnership for which you are the accountant asks you to compare the
major features of the Revised Uniform Partnership Act of 1997 with those of the original
Uniform Partnership Act of 1914. Required Using an Internet search engine or other database, do
some research and provide a two- to t
Although few partnerships provide publicly available financial reports, some limited partnerships
do provide their financial reports. These limited partnerships usually have a general partner or
other major affiliate that has offered securities to the public, such as those offered by a real estate
investment trust. Usi
How might the accounting for an advertising campaign expenditure of $200,000 in the first
quarter of a company's fiscal year differ between the integral theory and the discrete theory of
interim reporting?
How does the consolidation process deal with preferred stock of a subsidiary?
Suppose one could measure the welfare gains derived from eliminating output (and
unemployment) fluctuations in the economy. Assuming these gains are relatively small for the
average individual, how do you think this measurement would affect the activist/ nonactivist
debate?
Why did the oil price shocks of the 1970s affect the economy differently than the oil price
shocks of 2007?
How does a credible nominal anchor help improve the economic outcomes that result from a
positive aggregate demand shock? How does a credible nominal anchor help if a negative
aggregate supply shock occurs? Use graphs of aggregate supply and demand to demonstrate.
As defined in Exercise 1, a "rate cycle" is a period of monetary policy during which the federal
funds rate moves from its low point toward its high point, or vice versa, in response to business
cycle conditions. Go to the St. Louis Federal Reserve FRED database, and find data on the
federal funds rate (FEDFUNDS), bank
What traits characterize a "conservative" central banker?
Suppose country A has a central bank with full credibility, and country B has a central bank with
no credibility. How does the credibility of each country's central bank affect the speed of
adjustment of the aggregate supply curve to policy announcements? How does this result affect
output stability? Use an aggregate s
Outline the benefits and costs of sticking to a set of rules in each of the following cases. How
does each of these situations relate to the conduct of economic policy? a. Going on a diet b.
Raising children
Where are fixed assets recorded for a VHWO? Is depreciation recorded for a VHWO?
What determines the unemployment rate when output is at potential?
Is stabilization policy more likely to be conducted through monetary policy or through fiscal
policy? Why?
Suppose the economy is in recession and the monetary policymakers lower interest rates in an
effort to stabilize the economy. Use an aggregate supply and demand diagram to demonstrate the
effects of a monetary easing when the transmission mechanisms are functioning normally and
when the transmission mechanisms are weak
Predict what will happen to stock prices after a monetary easing. Explain your prediction.
"Policymakers would never respond by stabilizing output in response to a temporary positive

supply shock." Is this statement true, false, or uncertain? Explain your answer.
How are the wealth effect and the household liquidity effect similar? How are they different?
As part of its response to the global financial crisis, the Fed lowered the federal funds rate target
to nearly zero by December 2008 and quadrupled the monetary base between 2008 and 2014, a
considerable easing of monetary policy. However, survey-based measures of five- to ten-year
inflation expectations remained low
Why do activists believe that the economy's self-correcting mechanism works slowly?
How is constrained discretion different from discretion in monetary policy? How are the
outcomes of these policies likely to differ?
How does the Great Depression demonstrate the unanticipated price level channel?
A "rate cycle" is a period of monetary policy during which the federal funds rate moves from its
low point toward its high point, or vice versa, in response to business cycle conditions. Go to the
St. Louis Federal Reserve FRED database, and find data on the federal funds rate (FEDFUNDS),
real business fixed investment
Central banks that engage in inflation targeting usually announce the inflation target and time
period for which that target will be relevant. In addition, central bank officials are held
accountable for their actions (e.g., they could be fired if the target is not reached), and their
success or lack thereof is also pu
How can demand-pull inflation lead to cost-push inflation?
"If autonomous spending falls, the central bank should lower its inflation target in order to
stabilize inflation." Is this statement true, false, or uncertain? Explain your answer.
Classify each of the following as a supply shock or a demand shock. Use a graph to show the
effects on inflation and output in the short run and in the long run. a. Financial frictions increase.
b. Households and firms become more optimistic about the economy. c. Favorable weather
produces a record crop of wheat and
Identify three factors that can shift the aggregate demand curve to the right and three different
factors that can shift the aggregate demand curve to the left.
Lars Svensson, a former Princeton professor and deputy governor of the Swedish central bank,
proclaimed that when an economy is at risk of falling into deflation, central bankers should be
"responsibly irresponsible" with monetary expansion policies. What does this mean, and how
does it relate to the monetary transmiss
How does the policy rate hitting a floor of zero lead to an upward-sloping aggregate demand
curve?
What nonconventional monetary policies shift the aggregate demand curve, and how do they
work?
During and after the global financial crisis, the Fed reduced the fed funds rate to nearly zero. At
the same time, the stock market fell dramatically and housing market values declined sharply.
Comment on the effectiveness of monetary policy during this period with regard to the wealth
channel.
In what way is a permanent negative supply shock worse than a temporary negative supply
shock?
Go to the St. Louis Federal Reserve FRED database, and find data on real government spending
(GCEC1), real GDP (GDPC1), taxes (W006RC-1Q027SBEA), and the personal consumption
expenditure price index (PCECTPI), a measure of the price level. Download all of the data into a
spreadsheet, and convert the tax data series int
In what sense can greater central bank independence make the time-inconsistency problem
worse?
During and after the global financial crisis, the Fed provided banks with large amounts of
liquidity. Banks' excess reserves increased sharply, while credit extended to households and
firms decreased sharply. Comment on the effectiveness of the bank lending channel during this
time.
From mid-2008 to early 2009, the Dow Jones Industrial Average declined by more than 50%,
while real interest rates were low or falling. What does this scenario suggest should have
happened to investment?
What does the Lucas critique state about the limitations of our current understanding of the way
in which the economy works?
What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-
run aggregate supply curve? Why?
"If prices and wages are perfectly flexible, then Î³= 0 and changes in aggregate demand have a
smaller effect on output." Is this statement true, false, or uncertain? Explain your answer.
Suppose the statistical office of a country does a poor job in measuring inflation and reports an
annualized inflation rate of 4% for a few months, while the true inflation rate has been around
2.5%. What will happen to the central bank's credibility if it is engaged in inflation targeting and
its target is 2%, plus or
Why did China fare much better than the United States and the United Kingdom during the
2007-2009 financial crisis?
Following the global financial crisis, mortgage rates reached record-low levels in 2011. a. What
effect should this have had on the economy, according to the household liquidity effect channel?
b. During the same time, most banks raised their credit standards significantly, making it much
more difficult to qualify fo
In general, how does credibility (or lack thereof) affect the aggregate supply curve?
Why does the credit view imply that monetary policy has a greater effect on small businesses
than on large firms?
Why are central banks so concerned with inflation expectations?
Many developing countries suffer from endemic corruption. How does this help explain why
these countries' economies typically have high inflation and economic stagnation? Use a graph of
aggregate demand and supply to demonstrate.
"Considering that consumption accounts for nearly two-thirds of total GDP, this means that the
interest rate, wealth, and household liquidity channels are the most important monetary policy
channels in the U.S." Is this statement true, false, or uncertain? Explain your answer.
"The costs of financing investment are related only to interest rates; therefore, the only way that
monetary policy can affect investment spending is through its effects on interest rates." Is this
statement true, false, or uncertain? Explain your answer.
Proposals advocating the implementation of a national sales tax have been presented before
Congress. Predict the effects of such a tax on the aggregate supply and demand curves, showing
the effects on output and inflation. Use a graph of aggregate supply and demand to demonstrate
these effects.
For each of the following shocks, describe how monetary policymakers would respond (if at all)
to stabilize economic activity. Assume the economy starts at a long-run equilibrium. a.
Consumers reduce autonomous consumption. b. Financial frictions decrease. c. Government
spending increases. d. Taxes increase. e. Th
Suppose the President gets Congress to pass legislation that encourages investment in research
and the development of new technologies. Assuming this policy leads to a positive productivity
change for the U.S. economy, use aggregate demand and supply analysis to predict the effects on
inflation and output. Demonstrate
"The depreciation of the dollar from February 2009 to February 2014 had a positive effect on
aggregate demand in the United States." Is this statement true, false, or uncertain? Explain your
answer.
What are the arguments for and against policy rules?
During the 2007-2009 recession, the value of common stocks in real terms fell by more than
50%. How might this decline in the stock market have affected aggregate demand and thus
contributed to the severity of the recession? Be specific about the mechanisms through which the
stock market decline affected the economy.
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption
expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year
Ago," and download the data. Beginning in January 2012, the Fed formally announced a 2%
inflation goal over the "longer-term." a. Calcul
Suppose the central bank is following a constant-money-growth-rate rule and the economy is hit
with a severe economic downturn. Use an aggregate supply and demand graph to show the
possible effects on the economy. How does this situation reflect on the credibility of the central
bank if it maintains the money growth ru
Go to the St. Louis Federal Reserve FRED database, and find data on the GDP deflator
(GDPDEF) and the price of a barrel of oil (MCOILWTICO). For the GDP deflator, convert the
units setting to "Percent Change from Year Ago," and download the data. a. Calculate the
average percent change in the price of oil over the mos
As monetary policymakers become more concerned with inflation stabilization, the slope of the
aggregate demand curve becomes flatter. How does the resulting change in the slope of the
aggregate demand curve help stabilize inflation when the economy is hit with a temporary
negative supply shock? How does this affect out

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What is the area of the triangle shown in the following figure?

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What is a circular-flow diagram, and what does it demonstrate?

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What is meant by the General Arrangements to Borrow? Standby arrangements? Swap