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SUGGESTED SOLUTIONS FOR BUSINESS

CASE QUESTIONS FOR THOUGHT


This section offers suggested answers to the Questions for Thought that conclude each
business case at the end of chapters.

Chapter 1
1. Explain how each of the twelve principles of economics
is illustrated in this case study.

Suggested Solution
1. Principle 1: People must make choices because resources
are scarce. Neither money nor time is unlimited; they are
both scarce resources. Priceline.com caters to customers
who have chosen to sacrifice some of their preferences
about convenience or quality in order to get a lower
price.
Principle 2: The opportunity cost of an itemwhat you
must give up in order to get itis its true cost. The true
cost of an empty airplane seat or an empty hotel bed is
the revenue the airline or hotel could have earned from
the next best use of that seat or bednamely, the revenue earned from a paying customer.
Principle 3: How much is a decision at the margin.
How much more a customer is willing to pay for a
ticket to a destination depends upon how much time
and inconvenience is saved by purchasing the higher
priced ticket.
Likewise, how much more a customer is willing to
pay for a ticket purchased well in advance of his travel
date depends upon how much more security he gains by
advance planning rather than waiting to purchase. The
same principle applies to decisions about the quality and
location of hotels, and so on.
Principle 4: People usually respond to incentives,
exploiting opportunities to make themselves better off.
Priceline.com was successful because its customers
travelers, airlines, and hotelswere exploiting opportunities to make themselves better off by using its services.
Priceline.com also responded to incentives to make itself
better off by expanding into new profitable markets
such as Europe.
Principle 5: There are gains from trade. Travelers gain
from using Priceline.coms networks of hotels to find a
hotel rather than doing the research themselves. They
gain from using Priceline.coms services to book a flight
rather than contacting each airline individually. Also,
travelers gain by using the services of airlines and hotels,
rather than transporting themselves or pitching a tent
overnight to sleep in. Hotels, particularly in Europe, gain
from using Priceline.coms network rather than trying to
contact potential customers directly.
Principle 6: Because people respond to incentives, markets
move towards equilibrium. Expedia and Orbitz moved
into the online travel service industry in order to exploit
opportunities that had been pioneered by Priceline.com.
In this way, the market for online travel services will move
towards equilibrium until there are no more opportunities for new travel service companies to exploit.

Principle 7: Resources should be used efficiently to


achieve societys goals. Priceline.com exploited an opportunity to use resources more efficiently. It is inefficient
to have empty hotel rooms and airline seats if someone is
willing to pay some price to use them on short notice.
Principle 8: Because people usually exploit gains from
trade, markets usually lead to efficiency. It is inefficient
to have planes flying with empty seats and hotels with
unoccupied beds. Thus, introducing a market for those
itemswhich is what Priceline.com didimproves
efficiency.
Principle 9: When markets dont achieve efficiency, government intervention can improve societys welfare. It
would have been inefficient to have major airlines fail
because of the publics temporary fear of flying. Vast
resources would have been wasted as pilots and support
staff lost their jobs, planes were mothballed, necessary
trips cancelled, and so on. It improved efficiency for the
government to step in and temporarily aid the airline
industry so that it could survive the temporary downturn.
Principle 10: One persons spending is another persons
income. In the aftermath of the attacks of September
2001, as people stopped spending on items like travel the
income of airline workers was severely reduced.
Principle 11: Overall spending sometimes gets out of line
with the economys productive capacity. The overall economy went into a slump after the attacks of September 2001
as the economys productive capacity exceeded its spending.
Principle 12: Government policies can change spending.
The $15 billion aid appropriation by Congress was spent
on stabilizing the airline industry and prevented major
airline failures.

Chapter 2
1. What is the opportunity cost associated with having a
worker wander across the factory floor from task to task
or in search of tools and parts?

Suggested Solution
1. The opportunity cost of a worker wandering across the
factory floor is forgone outputthe output that worker
could have produced in the time spent wandering around.
2. Explain how lean manufacturing improves the economys
efficiency in allocation.

Suggested Solution
2. Lean production (also known as lean manufacturing)
improves the economys efficiency in allocation because,
for example, an automaker can more quickly switch to
producing more of the types of cars that more consumers want and fewer of the types of cars that fewer consumers want.

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

3. Before lean manufacturing innovations, Japan mostly


sold consumer electronics to the United States. How did
lean manufacturing innovations alter Japans comparative advantage vis--vis the United States?

Suggested Solution
3. Before the innovations in lean production, Japan had a
comparative advantage vis--vis the United States in consumer electronics. After the innovations, Japans comparative advantage vis--vis the United States shifted to
auto production.
4. Predict how the shift in the location of Toyotas production from Japan to the United States is likely to alter
the pattern of comparative advantage in automaking
between the two countries.

Suggested Solution
4. The shift in the location of Toyotas production from
Japan to the United States means that it is likely that
Japan will no longer have a clear comparative advantage
in automaking vis--vis the United States.

Chapter 3
1. Before Uber, how were prices set in the market for rides
in New York City? Was it a competitive market?

Suggested Solution
1. Before Uber, prices for rides were set by city regulators.
This was not a competitive market because the price was
not set by supply and demand but by city regulators.
2. What accounts for the fact that during good weather
there are typically enough taxis for everyone who
wants one, but during snowstorms there typically arent
enough?

Suggested Solution
2. If everyone who wants to get a taxi during good weather
can typically get one, then this implies that the price
set by regulators is approximately equal to the marketclearing price on good weather days. But a snowstorm
is likely to produce two changes to supply and demand:
an increase in demand (rightward shift of the demand
curve) because more people want to ride in a taxi rather
than walk or wait for a bus at any given price; and a
decrease in supply as more taxi drivers want to stay
warm and dry at home at any given price. As a result
of these two shifts, the market-clearing price rises. But
because the actual price is set by regulators and cannot
increase, a shortage of taxis arises.
3. How does Ubers surge pricing solve the problem
described in the previous question? Assess Kalanicks
claim that the price is set to leave as few people possible
without a ride.

Suggested Solution
3. Ubers surge pricing solves this problem because it
allows drivers to charge higher prices until supply equals
demand. This increases the quantity of rides supplied
while reducing the quantity of rides demanded until

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market equilibrium is achieved. Kalanicks claim is true.


At any price lower than the equilibrium price, there is
a shortage of taxis and fewer people actually get rides;
at any price higher than the equilibrium price there are
fewer customers, so fewer rides are transacted.

Chapter 4
1. How does Medallion Financial benefit from the restriction on the number of New York taxi medallions?

Suggested Solution
1. Medallion Financial benefits from the restriction
on the number of taxi medallions because demand
for its loans and the amount of interest it earns on
them increase as the price of medallions goes up.
In addition, its loans are secured by the medallions
purchased by its borrowers; as a result, those loans
are worth more when medallion prices are high. And
since the fewer the medallions, the higher their price,
Medallion Finance benefits from the restriction on the
number of medallions.
2. What will be the effect on Medallion Financial if New
York companies resume widespread use of limousine
services for their employees? What is the economic motivation that prompts companies to offer this perk to their
employees? (Note that it is very difficult and expensive to
own a personal car in New York City.)

Suggested Solution
2. If more New Yorkers are using limousine services
instead of taking taxis, the demand for taxis falls,
leading to a fall in income for taxi drivers and a fall
in the value of a medallion. This will reduce both the
demand for Medallion Financials loans and the value
of its existing loans. So greater use of limousine services hurts Medallion Financial. By offering limousine
services to their employees as a perk, companies are
in effect getting around the restriction on the number
of taxis in the city by creating their own, companyspecific taxi fleets.
3. Predict the effect on Medallion Financials business if New
York City eliminates restrictions on the number of taxis.
That is, if the quota is removed.

Suggested Solution
3. Eliminating restrictions on the number of taxis would
destroy Medallion Financials business. The quota rents
that accrue to the owners of medallions would fall to
zero, leading the value of a medallion to fall to zero.
There would be no need to take out a loan to buy one.
In addition, the value of Medallion Financials existing
loans would fall significantly.

Chapter 5
1. Why do you think it was profitable for Li & Fung to go
beyond brokering exports to becoming a supply chain manager, breaking down the production process and sourcing
the inputs from various suppliers across many countries?

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

Suggested Solution
1. By sourcing inputs from various suppliers across many
countries, Li & Fung was able to allocate production to
where it is most cost effective.
2. What principle do you think underlies Li & Fungs decisions on how to allocate production of a goods inputs
and its final assembly among various countries?

Suggested Solution
2. Comparative advantage is the principle that underlies Li
& Fungs decisions. Inputs that require more skill or are
more capital-intensive can be produced in countries that
have relatively higher-skilled workers or are relatively
more abundant in capital, such as Hong Kong and Japan.
Similarly, inputs that are more labor-intensive can be
produced in countries that are relatively more abundant
in labor, like mainland China and Thailand.
3. Why do you think a retailer prefers to have Li & Fung
arrange international production of its jeans rather than
purchase them directly from a jeans manufacturer in
mainland China?

Suggested Solution
3. A retailer that purchased jeans directly from a manufacturer in mainland China would not benefit from the
gains from trade that arise from sourcing inputs from
different countries according to those countries comparative advantage.
4. What is the source of Li & Fungs success? Is it based on
human capital, on ownership of a natural resource, or on
ownership of capital?

Suggested Solution
4. The source of Li & Fungs success is human capital.
The company understands how to use the principle of
comparative advantage to exploit gains from trade in the
production process. In addition, it is skilled in providing
quality control and logistics.

Chapter 6
1. What caused the steep decline in department store sales
in the 1930s?

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Suggested Solution
2. After World War II, Montgomery Ward was betting on
stagnant growth and even a recession. If these events
occurred, they reasoned, consumers would be cautious and spending would remain at or near the Great
Depression levels.
3. Economists believe that improvements in our macroeconomic understanding over the course of the 1930s led to
better policies thereafter. If this is true, how did better
policies after World War II end up hurting Montgomery
Ward?

Suggested Solution
3. Better macroeconomic policies allowed the U.S. economy
to sustain longer business cycle expansions and minimize the frequency, depth, and length of recessions. As
Montgomery Ward contracted their operations, consumer spending surged, allowing more competitors to enter
the department store industry.

Chapter 7
1. Why do businesses care about GDP to such an extent
that they want early estimates?

Suggested Solution
1. Businesses care about GDP because its the prime indicator of the overall state of the economy. Macroeconomics
tells us that the overall state of the economy matters a
lot to individual firms: whats good or bad for the U.S.
economy as a whole is generally good or bad for each
individual company, too.
2. How do the methods of Macroeconomic Advisers and the
Institute for Supply Management fit into the three different ways to calculate GDP?

Suggested Solution
2. Macroeconomic Advisers looks at purchases to estimate
GDP; in effect, its using the method of calculating GDP
that derives the total value of output by adding up total
spending on domestically produced goods and services.
The Institute for Supply Management, by contrast, surveys
producers to find out how much theyre producing; it is, in
a sense, using the method of calculating GDP that adds up
the value of production of final goods and services.

Suggested Solution
1. The steep decline in department store sales during the
1930s occurred as the U.S. economy went through the
Great Depression. There was a significant decline in consumer spending during the Depression that then led to a
large drop in department store sales.
2. In terms of macroeconomics, what was the management
of Montgomery Ward betting would happen after World
War II?

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3. If private firms are producing GDP estimates, why do we


need the Bureau of Economic Analysis?

Suggested Solution
3. First, much of the data Macroeconomic Advisers uses
are provided by the U.S. government. Second, both
Macroeconomic Advisers and the Institute for Supply
Management have only partial data, relying on educated guesswork to fill in the blanks. Only the Bureau
of Economic Analysis has the scope and resources to
cover the whole field. The only way the private forecasters know if theyve gotten it right is by comparing their
results to the BEA data when they come in.

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

Chapter 8
1. Use the flows shown in Figure 8-7 to explain the role of
temporary staffing in the economy.

Suggested Solution
1. Figure 8-7 shows the flow of workers as they move from
employed to unemployed to not in the labor force. The
role of temporary staffing will increase the monthly flows
of workers going from unemployed to employed. Because
these jobs are temporary, we will also see an increase in
workers moving from employed to unemployed. Lastly, it
is also likely that the economy will experience an increase
in the number of workers moving back into the labor
force. Staffing companies make it easier to find a job,
albeit temporary, minimizing discouraged workers.
2. What is the likely effect of improved matching of jobseekers and employers through online services listings
on the unemployment rate?

Suggested Solution
2. Unemployed workers are classified into three different types of unemployment. A worker may be unemployed for frictional, structural, or cyclical factors.
The improved matching of job-seekers and employers
through online services will increase the efficiency of
the job market, reducing the time it takes for someone to
find a job. The increased speed of job matching will help
reduce frictional unemployment. A reduction in frictional unemployment will also reduce the natural rate of
unemployment in the long and short run.
3. What does the fact that temporary staffing fell sharply
during the 20082009 surge in unemployment suggest
about the nature of that surge?

Suggested Solution
3. As unemployment surged during the Great Recession,
employers were shedding both permanent and temporary
jobs. Temporary employment normally decreases during a recession, but the decrease in 20082009 was far
greater than previous recessions. This suggests that the
rise in unemployment was cyclical in nature as opposed
to an increase in the natural rate.

Chapter 9
1. A modern jet airliner does pretty much the same thing as
an airliner from the 1960s: it gets you there from here, in
about the same time. Wheres the technological progress?

Suggested Solution
1. The most notable technological progress is invisible to
the naked eye. Small but significant design improvements, achieved with the help of new computing
technologies, have made aircraft more aerodynamic.
Fundamental changes in engine design and airframe
construction make planes much lighter, leading to drastic improvements in fuel efficiency. Nearly half the airframe for the Boeing 787 is comprised of new composite
materials, including carbon fiber reinforced plastic,
resulting in a 20% reduction in weight.

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2. Do scientific advances play any role in the progress weve


described? Explain.

Suggested Solution
2. As discussed in the answer to the previous question,
scientific advances have allowed aircraft to become
more aerodynamic through the sophisticated use of new
computing technologies. Additionally, scientific advances
have led to the creation of carbon fiber materials that
allow airplanes to be significantly lighter when compared to the old aluminum frames.
3. Some travelers complain that the flight experience has
gone downhill. Does this refute the claim of technological progress?

Suggested Solution
3. Over the last fifty years, airline travel has become more
affordable. By utilizing newer technologies, airlines have
been able to pass along cost savings to passengers. A
decrease in the cost of air travel has resulted in many
more passengers flying today than in the past, when a
plane ticket cost more.
The common complaint of airline passengers about
cramped seating does not refute the claim of technological progress. In fact, one could argue that its actually
another result of technological progress. Airlines have
spent years developing the smallest and lightest seats
possible that also offer durability and some degree of
comfort. Seat designers are even using carbon fiber and
titanium technologies to replace the heavy metal seat
frames of the past, allowing airlines to save even more
on fuel.

Chapter 10
1. What market inefficiency is being exploited by Grameen
Bank? What is the source of this inefficiency?

Suggested Solution
1. Grameen Bank is exploiting the inefficiency that arises
from the fact that there are borrowers who want to borrow at a given interest rate and lenders who want to lend
at the same interest rate, but are unable to do so. The
source of this inefficiency is the requirements imposed
on borrowers by regular banks, such as credit history
and collateral, that borrowers cannot meet.
2. What tasks of a financial system does micro-lending
perform?

Suggested Solution
2. Micro-lending performs the tasks of reducing transactions costs for people who need fundsfor example, they
can borrow from Grameen rather than having to sell
possessions to raise needed funds. It reduces financial
risk, allowing borrowers to overcome financial uncertainty. And it provides liquid assets, by allowing lenders
to lend to borrowers but in a way that allows them to get
their funds back quickly if they need to.
3. What do you predict is the effect of Grameen Banks
lending on a community?

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

Suggested Solution
3. We would expect communities that received Grameen
Bank lending to have a higher growth rate and less
financial uncertainty than those without this lending.

Chapter 11
1. Why did a national slump that began with housing affect
companies like General Motors?

Suggested Solution
1. As we learned in the chapter, a fall in current disposable
income, as well as falls in wealth and expected future
disposable income, lead to a fall in consumer spending.
So the decline in housing, which reduced both wealth
and income, led to a broad decline in consumer spending
across America. The broad decline in consumer spending, in turn, hit auto companies particularly hard as
many Americans decided against making new car
purchases.
2. Why was it reasonable in June 2009 to predict that auto
sales would improve in the nearfuture?

Suggested Solution
2. It was a good bet that things would eventually improve
because recessions have always been followed by
recoveriesat least so far! So government officials
had good reason to believe that auto sales would be
considerably higher in the future than they were in the
first half of 2009. Looking at Figure 11-13 confirms
this belief. Auto sales started to rise in 2010 and have
continued to increase through 2013.
3. How does this story about General Motors help explain
how a slump in housinga relatively small part of the
U.S. economycould produce such a deep national
recession?

Suggested Solution
3. The story of GM illustrates how the multiplier process
takes place. The fall in housing led to a fall in consumer spending which hurt auto manufacturers like
GM. These companies, in turn, laid off workers, who
reduced their consumer spending, hurting local retailers among others. So the story shows how a fall in
investment spendingin this case, housing investment
spending can have an impact on the economy as a
whole that is larger than the initial decline.

Chapter 12
1. How did Maersks problem in 2011 relate to our analysis
of the causes of recessions?

Suggested Solution
1. In late 2010, Maersk faced sharply higher fuel prices,
a price spike that affected all other businesses and
consumers in the economy as well. In other words,
the economy experienced a negative supply shock: a
leftward shift of the short-run aggregate supply curve.
Other things equal, a negative supply shock increases

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the aggregate price level and, in the short run, leads to a


decrease in aggregate output as the economy experiences
a recessionary gap. As the short-run aggregate supply
curve shifts leftward, aggregate output decreases as the
economy moves along the aggregate demand curve. A
negative supply shock such as this is one of the causes
of recessions.
2. The Fed had to make a choice between fighting two evils
in early 2008. How would that choice affect Maersk compared with, say, a company producing a service without
expensive raw-material inputs, like health care?

Suggested Solution
2. The two evils the Federal Reserve had to fight were an
increase in the aggregate price level as the short-run
aggregate supply curve shifted to the left and a decrease
in aggregate output as a recessionary gap developed.
Determining policy in the face of a supply shock is difficult. To fight an increase in the price level, the Fed could
have reduced aggregate demandat the cost of further
reducing aggregate output. To fight the recessionary gap,
the Fed could have increased aggregate demandat the
cost of further raising the aggregate price level.
The Fed chose to pursue a policy of increasing aggregate demand, whichother things equalresults in a
further increase in the aggregate price level. A higher
price level, particularly higher prices for raw-material
inputs such as fuel, hits transport companies like Maersk
particularly hard. Although, eventually, all prices in the
economy rise after a negative supply shock, companies
that use more raw-material inputs, such as large shipping companies, are more immediately affected than
companies, such as health care providers, that dont rely
on those inputs. If the Fed had instead chosen to pursue
a policy of reducing aggregate demand, this would have
resulted in a decrease in fuel costs and a decrease in the
aggregate price level which would have benefited companies, like Maersk, that are more immediately affected by
raw-material prices. Of course, a decrease in aggregate
demand could also result in a drop in demand for shipping services.
3. In 2011 the world economy was holding up fairly well,
but Europe was sliding back into recession. What do you
think was happening to the business of intra-European
transport (which mainly goes by truck, not ship)? Why?

Suggested Solution
3. The trucking industry in Europe, which also relies on
fuel, experienced a similar fate as the shipping industry when fuel costs surged. But, unfortunately for the
trucking industry, it was also experiencing a decrease
in demand for its services. As Europe slid into a recession, aggregate demand shifted leftward as consumer
spending fell. The shipping industry, in contrast, was fortunate not to be hit by both rising fuel costs and falling
demand.

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

Chapter 13
1. How did the political reaction to government funding for
the Solana project differ from the reaction to more conventional government spending projects such as roads
and schools? What does the case tell us about how to
assess the value of a fiscal stimulus project? What does
the Solana story say about this view?

Suggested Solution
1. Unlike roads and schools, the Solana project was controversial because it meant that government funds were
paid to a non-American firm. it was also controversial
because the long-term viability of solar power depended
upon future government subsidiesagain, unlike roads
and schools. However, the Solana case shows that the
value of a fiscal stimulus project is a matter of whether
or not it creates jobs at the right time.
2. In the chapter we talked about the problem of lags in
discretionary fiscal policy. What does the Solana case
tell us about this issue?

Suggested Solution
2. Unfortunately, Solana is a good example of the problem of making discretionary fiscal policy react quickly.
It was a complicated project, which took time to put
together, and it didnt open until 2013, more than four
years after the financial crisis. This wasnt a big problem
in this case because recovery from the 20072009 recession was so slow, but the economy would have long since
recovered from an ordinary recession.
3. Is the depth of a recession a good or a bad time to undertake an energy project? Why or why not?

Suggested Solution
3. Assuming that a solar plant was a good thing to build,
it was a very good idea to do it while many construction
workers had nothing else to do and borrowing was very
cheap.

Chapter 14
1. Why are gift card owners willing to sell their cards for a
cash amount less than their facevalue?

up the face value of a card they can use for necessities than one usable only for non-necessities. So more
potential buyers compete to buy cards for necessities,
which drives their discount down compared to cards
for non-necessities.
3. Use your answer from Question 2 to explain why cash
never sells at a discount.

Suggested Solution
3. Cash can be used to purchase any good or service, necessity or non-necessity; it is accepted everywhere. Also, it
comes in any face value you want. So there will always be
an extremely large number of people willing to buy cash
because the price of a dollar will never be less than a dollar.
4. Explain why retailers prefer to reward loyal customers
with gift cards instead of rebatechecks.

Suggested Solution
4. Most customers who receive a rebate check deposit the
check into their checking account, withdraw the cash,
and use it to pay for purchases. However, those purchases
need not be from the issuer of the rebate check. In contrast, a gift card must be used at the retailer that issues
it. Also, cash doesnt expire, but gift cards often do. And
because gift cards have a predetermined face value, it is
more likely that a customer will not use it all upunlike
cash, which is always eventually spent. For all these reasons, a retailer can capture breakage on a gift card but
not on a rebate check. So retailers will prefer gift cards.
5. Recent legislation restricted retailers ability to impose
fees and expiration dates on their gift cards and
mandated greater disclosure of their terms. Why do
you think Congress enacted this legislation?

Suggested Solution
5. Retailers have an incentive to adopt policies that
increase breakage (the amount of a gift card that
accrues to the retailer rather than the cardholder),
such as imposing fees and expiration dates. Not telling
customers about these policies increases breakage. So
Congress has intervened to restrict these practices.

Suggested Solution
1. A gift card is not as liquid as cash. Cash can be turned
into merchandise in any store; a gift card can be used
only at its issuer.
2. Why do gift cards for retailers like Walmart, Home
Depot, and Whole Foods sell for a smaller discount than
those for retailers like the Gap and Aeropostale?

Suggested Solution
2. Retailers like Walmart, Home Depot, and Whole Foods
sell necessities, but the Gap and Aeropostale sell nonnecessities. There will be a larger pool of potential
buyers for cards from retailers of necessities than
from sellers of non-necessities because more people
have constrained budgets and so are shopping only for
necessities. In addition, because people shop repeatedly
for necessities, they know they are more likely to use

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Chapter 15
1. Why did PIMCOs view that unemployment would stay
high and inflation low lead to a forecast that policy interest rates would remain low for an extended period?

Suggested Solution
1. The Taylor rule suggests that the Fed sets interest rates
based on the unemployment rate and the inflation rate.
If unemployment stays high while inflation is low, this
would indicate that the Fed would keep policy rates
lowin fact, close to zero.
2. Why would low policy rates suggest low long-term

interest rates?

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ANSWERS TO BUSINESS CASE QUESTIONS FOR THOUGHT

Suggested Solution
2. Long-term rates largely reflect expectations about
future short-term rates. If investors expect short-term
rates to stay low for a long time, this should lead to low
long-term rates now.
3. What might have caused long-term interest rates to rise
in late 2010, even though the federal funds rate was still
zero?

Suggested Solution
3. Even though the federal funds rate stayed near zero in
late 2010, investors expected it to rise eventually, once
the economy had recovered. Increased optimism meant
that investors moved up their expectation of when the
federal funds rate might rise, leading to a rise in longterm rates.

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Chapter 19
1. Why would Abenomics lead to a weaker yen?

Suggested Solution
1. Weve seen that expansionary monetary policy weakens a
currency because lower interest rates induce investors to
move money to other countries, increasing the demand
for foreign exchange. Thats basically whats happening
here, although Abenomics depends in part on promises
to keep money loosethat is, to keep interest rates low
for longer than previously expectedrather than just
cutting rates now.
2.

Why is a weaker yen good for the profits of Japanese


auto companies?

Suggested Solution

Chapter 16
1. How can a government obtain revenue by printing

money when someone else actually prints the money?

Suggested Solution
1. If you think about it, seignorage doesnt really come
from printing currencyit comes from the ability to
issue currency. The fees De La Rues customers pay for
printing banknotes are presumably much less than the
face value of those notes.
2. Why, exactly, would Gaddafi have resorted to the print-

ing press in early 2011?

Suggested Solution
2. The embattled Gaddafi regime was in the classic position of governments that resort to the printing press:
it was faced with a severe need for funds to pay troops
and buy weapons, yet it was politically weak (so weak
that it didnt even control all of its own country), making it hard to raise taxes. And the regime presumably
couldnt borrow, both because it lacked credibility (for
good reason) and because many of the nations where it
might have raised funds were supporting the rebels.

2. When a company like Toyota or Subaru exports cars


from Japan, many of its costswages in particularare
presumably fixed in yen, while it is selling in markets
where competitors have costs fixed in dollars or euros.
So a fall in the yen gives the Japanese companies a cost
advantage, raising their profits.
3.

Why does Subaru gain more than Toyota?

Suggested Solution
3. For Toyota, the benefits of a weaker yen apply only to
the part of its production that is exported from Japan.
As far as its U.S. plants are concerned, it is, in effect,
an American company. So the benefits for Toyota are
limited. Subaru, on the other hand, is still mainly a
Japan-based producer, so it gets the full benefit of
a weaker yen.

3. Were there risks to the Libyan economy in releasing

those dinars to the new government?

Suggested Solution
3. By releasing the dinars to the new Libyan government, Britain was in effect putting that government in
the position of trying to extract substantial resources
through seignorage. This at least raised the possibility
that the new governmentwhich was, inevitably, fairly
weak at firstmight find itself presiding over high
inflation, maybe even hyperinflation.

KrugWellsEC4e_Macro_BCS.indd BCS-7

3/6/15 8:07 AM