BUS 1750 - Chapter 2 EOC Questions PDF

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Chapter 2 EOC Questions 1. How did the global economic crisis unfold? The global economic crisis unfolded through a series of many steps starting over a decade ago when the seeds of the crisis were planted in the unprecedented growth of the late 1990s. America’s economy rapidly grew until it took a turn for the worst after the dot-com bubble burst in 2000 and 9/11 terrorist attacks in 2001. When the stock dropped and unemployment rose, the Federal Reserve decreased interest rates in an effort to effort the recession they were predicting. These low interest rates started the subprime mortgage loans, who were given to people with low credit scores, high debt-to-income ratio, or other signs of reduced ability to repay the money they borrowed. They were attractive to both borrowers and lenders, so many were given out, but with lack of government regulation the financial institutions didn’t maintain sufficient reserves in case the mortgages lost value. After 2006 when the housing prices peaked, they began falling precipitously and many subprime loan borrowers found themselves upside down, meaning they owed more than the value of their house. This caused foreclosure rates to rise dramatically in 2009 and in 2010 the rates peaked. When these mortgage values dropped, financial institutions felt the pressure and began to face collapse, so they became unwilling to lend money to other institutions or clients, so businesses were unable to grow. Then the layoffs came leaving 2.6 million Americans out of jobs, which made 2008 the worst year for jobs since 1945. The unemployment continued to drop until late 2011, which was a hopeful sign that economic crisis was over. 2. What steps did the Federal government and the Federal Reserve take to mitigate the crisis? The Federal Government and the Federal Reserve took many steps to mitigate the crisis. In early 2008, the Federal Reserve staved off bankruptcy at Bear Stearns. In September of 2008, the Department of Treasury seized Fannie Mae and Freddie Mac, who owned about half of the Mortgage Market. Just a week later, the Federal Reserve bailed out the global insurance giant AIG. As the negative spiral continued, Congress passed a $700 billion economic bailout plan called TARP. By the end of the year, the Treasury had spent the first half investing money to banks. Then, the Treasury agreed to spend a portion of the remaining TARP money for a partial auto industry bailout to GM and Chrysler. When President Obama’s administration began, a $825 billion economic stimulus package was put into place, called the American Recovery and Reinvestment Act. By late 2011, the economy had begun to turn upward at a slow pace showing the Federal Government and the Federal Reserve’s actions had worked even though it would take a long time for the economy to be on a good track.

3. Compare and contrast microeconomics and macroeconomics. How do the two approaches interrelate? Use a specific example to explain. Microeconomics and macroeconomics both have an integral role in the global economic crisis, but they focus on different parts of the economy. Microeconomics focuses on smaller economic units, such as individual consumers, families, and individual businesses. Macroeconomics focuses on the country’s overall economic dynamics, such as the employment rate, the gross domestic product, and taxation policies. The two approaches interrelate because macroeconomic outcomes depend on microeconomic behavior and microeconomic behavior is affected by macroeconomic outcomes. In order to understand how an economy works, you have to understand both of these approaches. An example to show how they interrelate is when inflation increases (part of macroeconomics) it increases the prices of capital goods that businesses use to make goods, which increases the price of the product that the customer is purchasing (part of microeconomics). 4.What is the difference between fiscal and monetary policy? What role does politics play in shaping these policies? The difference between fiscal and monetary policy is fiscal policy is the government effort to influence the economy through taxation and spending, while monetary policy is the Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money. The role politics plays in shaping these policies is they are very closely tied. However, most economists agree on the basic principles regardless of the politics. These things include lower taxes can boost the economy by leaving more money in people’s pockets for them to spend or invest and that government spending can boost the economy in the short term by providing jobs. Politics play a role in finding the right balance between these two approaches. The Federal Reserve’s Board of Governors is set up with single 14-year terms that are staggered to have one expire every two years to ensure they act independently of political pressure. 5. What are the fundamental elements of the free market economic system? How can businesses thrive within this system? The fundamental elements of the free market economic system are the right to own a business and keep after-tax profits, the right to private property, the right to free choice, and the right to fair competition. A business can thrive within this system by having interplay with the buyers to determine the selection of products and their prices. Businesses can thrive in a free market enterprise system by offering value to their customers. Otherwise their customers will choose to go elsewhere. Businesses must also offer value to their employees and suppliers in order to attract top-quality talent and supplies. As companies compete to attract the best resources and offer the best values, quality goes up, prices remain

reasonable, and choices proliferate, raising the standard of living in the economy as a whole. 6. Describe the 4 degrees of competition within the free market system. Offer 2 to 3 examples of each type of competition. The 4 degrees of competition within the free market system are pure competition, monopolistic competition, oligopoly, and monopoly. Pure competition is a market structure with many competitors selling virtually identical products so barriers to entry are quite low. An example of pure competition is hard to find in today’s U.S. economy. The one example that comes the closest is agriculture because corn is basically corn making it virtually identical. Agriculture being pure competition is dwindling because of the growth of huge corporate farms and major cooperatives, new farm have trouble entering the market. Monopolistic competition is a market structure with many competitors selling differentiated products so barriers to entry are low. An example of monopolistic competition is the clothing, in particular tee shirt businesses. There are many businesses who sell tee shirts, it is easy to start your own tee shirt business, and the quality and price are all over the board making it a perfect example of monopolistic competition. Oligopoly is a market structure with only a handful of competitors selling products that can be similar or different, so barriers to entry are typically high. An example of oligopoly competition is the car manufacturing industry. Car companies offer quite different models and features. Breaking into the car manufacturing business can be very hard because it requires a huge upfront investment for an expensive facility. Monopoly is a market structure with one producer completely dominating the industry, leaving no room for any significant competitors, so barriers to entry tend to be virtually insurmountable. An example of monopoly is hard to find since most are illegal according to federal legislation because they can harm the economy. The closest example is Microsoft, who is an industry giant that ran afoul of anti monopoly because of its position and policies in the software business. However, Microsoft is not an actual monopoly, but is was convicted of “monopolistic practices” that undermined fair competition. 7. Why does quantity supplied tend to increase when prices go up and decrease when prices go down? Why does quantity demanded move in the opposite direction? Quantity supplied tends to increase when prices go up and decrease when prices go down because businesses seek to make as much profit as possible so they are likely to produce more of a product that commands a higher market price and less of a product that commands a lower price. Quantity demanded moves in the opposite direction because consumers generally seek to get the products they need or want at the lowest possible prices so they tend to buy more products with lower prices and fewer products with higher prices. 8. Describe the key principles of socialist and communist economic systems. Does more government control mean less economic opportunity? Why or why not? The key principles of socialist economic systems are the government owns and operates key

enterprises that directly affect public welfare including utilities, telecommunications and healthcare. Although the government tries to act in the best interest of the public, ineffectiveness and corruption often interfere. They tend to have higher taxes, which are designed to distribute the wealth more evenly through society. Tax revenues tend to fund services that citizens in free enterprise systems would have to pay for themselves in countries with lower tax rates. The key principles of communist economic systems are public ownership of virtually all enterprises, which are under the direction of a strong central government. More government control means less economic opportunity because of high taxes on the profit incentive. Potential entrepreneurs may migrate to other countries that allow them to keep more of their profits. The workers of businesses who already have abundant benefits may find themselves losing motivation. 9. Why do most countries have neither “pure” market nor “pure” planned economies? Is the trend toward the market end of the spectrum likely to continue? Why? Most countries have neither “pure” market nor “pure” planned economies because each of them would fall far short of meeting the needs of its citizens. A pure market economy wouldn’t make sufficient provision for the old, the young, the sick, and the environment while a pure planned economy would not create enough value to support its people over the long term. The trend toward the market end of the spectrum is likely to continue because the countries that have taken strides toward the market end of the spectrum have seen the payoff in rejuvenated growth rates that have raised the standard of living for millions of people. 10. How do gross domestic product, the employment rate, and the inflation rate relate to the business cycle? Why is it difficult to predict changes in the business cycle? Gross domestic product relates to the business cycle by measuring the total value of all final goods and services produced within a nation’s physical boundaries over a given period of time, adjusted for inflation. It is a vital measure of economic health, which is a key part of the business cycle. Business people, economists, and political leaders use GDP to measure the economic performance of individual nations and to compare the growth among nations. The GDP often is the factor in determining what part of the business cycle the economy is currently in especially for contractions. The employment rate relates to the business cycle by tracking employment levels of everyone age 16 and older who doesn’t have a job and is actively seeking one. The business cycle is affected by the overall level of employment, which the employment rate describes. When people have jobs, they have money, which allows them to spend and invest in businesses. The employment rate is a key part in deciding which part of the business cycle the economy is in. The inflation rate relates to the business cycle by showing how much the prices are, on average, rising. The rate of price changes across the economy is another basic measure of the economic well-being and the current phase in the

business cycle. A low level of inflation reflects healthy economy, people have money and they are willing to speed. Hyperinflation and deflation are signs of economic trouble. Consumer Price Index and Producer Price Index are the two major price indexes used by the government to evaluate inflation. Theses indexes are key to understanding the current phase in the business cycle. It is difficult to predict changes in the business cycle because the economy doesn’t contract and expand in a predictable patterns. Every time the economy cycles through the phases they are different each time they happen, so no one, not even the experts, can accurately predict when the changes will occur or how long they will last....