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QUESTION # 2

Place each of the following transactions in one of the four components


of expenditure: Consumption, investment, government purchases, and
net exports.
(a) Boeing sells an airplane to the Air Force.
(b) Boeing sells an airplane to American Airlines.
(c) Boeing sells an airplane to Air France.
(e) Boeing builds an airplane to be sold next year.

ANSWER:

(a) Boeing sells an airplane to the Air Force (Government purchases).


Government purchases are the goods and services bought by federal,
state, and local government.
(b) Boeing sells an airplane to American Airlines (Investment).
Investment consists of goods bought for future use. Investment is also
divided into three subcategories: business fixed investment, residential
fixed investment, and inventory investment.
(c) Boeing sells an airplane to Air France (Net export).
Net exports take into account trade with other countries. Net exports
are the value of goods and services exported to other countries minus
the value of goods and services that foreigners provide us.
(e) Boeing builds an airplane to be sold next year (Investment).

QUESTION # 3
What are the three functions of money? Which of the functions do the following items
satisfy? Which do they not satisfy?

a. A credit card
b. A painting by Rembrandt
c. A subway token

ANSWER:

Money functions as a store of value, a medium of exchange, and a unit of account.


Store of value
Money is a way to transfer purchasing power from the present to the future. Money is an
imperfect store of value: if prices are rising, the amount you can buy with any given
quantity of money is falling.
Medium of exchange
Money is what we use to buy goods and services.
Unit of account
Money provides the terms in which prices are quoted and debts are recorded.
a. First of all, credit card is not accepted as a way of payment everywhere (e.g.,
SUBWAY, etc.). Second, although credit cards can be used at some point of
sale to pay a merchant, it is not the card but the "borrowed" money that acts
as medium of exchange, and the "borrowed" money will be paid eventually by
a card holder' deposit account, which is medium of exchange.

Credit card is certainly not unit of account. A credit card is not a unit of
account – a VAN, for example, does not cost 5 VISA card!

Credit card cannot be used as store of value since it doesn't have much
intrinsic value and it is not a medium of exchange (like money). In fact, credit
card is, arguably, a (negative) store of value because you are in fact spending
on the future purchasing power in the present time! You are actually
accumulating debt rather than transferring assets over time with the credit
card.
b. A Rembrandt painting is a store of value only.

c. A subway token, within the subway system, satisfies all three functions of
money. Yet outside the subway system, it is not widely used as a unit of
account or a medium of exchange, so it is not a form of money.

QUESTION# 4
Is most unemployment long term or short term? Explain your answer.

ANSWER:
Unemployment can be long term or short term. It can be frictional,
Meaning someone is between jobs; or it may be structural, as when
someone’s skills are no longer demanded because of a change in
technology.
Whether we conclude that most unemployment is short term or long term
depends on how we look at the data. Most spells of unemployment are
short. Yet most weeks of unemployment are attributable to the small
number of long term unemployed. Consider the data for a typical year,
1974, during which the unemployment rate was 5.6 percent. In that year,
60 percent of the spells of unemployment ended within one month, yet 69
percent of the weeks of unemployment occurred in spells that lasted two
or more months. Example, suppose that 10 percent people are
unemployed for part of a given year. Of these 10 people, 8 are
unemployed for 1 month, and 2 are unemployed for 12 months, totaling
32 months of unemployment. In this example, most spells of
unemployment are short;8 of the10 unemployment spells, or 80 percent,
end in 1 month. Yet most months of unemployment are attributable to the
long term unemployed: 24 of the 32 months of unemployment, or 75
percent, are experienced by the 2 workers who are unemployed for 12
months. Depending on whether we look at spells of unemployment or
months of unemployment, most unemployment can appear to be short or
long term.