Business Environment and Concepts

G. Government intervention
1. Firms that conduct business internationally must be concerned with fluctuations
in exchange rates, which can cause gains and losses. Firms can eliminate or reduce
this risk by hedging.
a. Forward exchange market hedges—Purchasing and selling currency
forward exchange contracts.
b. Money market hedges—Borrowing and lending funds of another country.
c. Currency futures market hedges—Purchasing and selling contracts to
deliver foreign currency at a specified price.
H. A firm that has international operations may use transfer-pricing strategy to
maximize income. Transfer pricing is the price at which services or products
are bought and sold across international borders between related parties. Firms
can minimize their overall tax burden by using transfer prices to minimize net
income in jurisdictions with higher tax rates.
I
PROBLEMS AND SOLUTIONS MACROECONOMICS
1. In a period of recession, actual GDP exceeds potential GDP. (True or
False?)
Answer - Potential GDP is the maximum amount of economic activity that can lake
place without putting pressure on the general price level. In a period of recession,
Potential GDP exceeds actual GDP. (False)
2. Cyclical unemployment can be reduced by training employees in new
skills. (True or False?)
Answer - Cyclical unemployment is caused by a downturn in the economy. It is
reduced by economic expansion. Structural unemployment is caused by a mismatch of
job requirements and employee skills in the economy. (False)
3. The most comprehensive measure of price-level in the economy is the
consumer price index. (True or False?)
Answer - The consumer price index measures the change in prices of goods
purchased by urban consumers. The wholesale price index measures the change in
prices of goods at the wholesale level. The GDP deflator measures the change in
prices for net exports, investments, government expenditures and consumer spending.
It is the most comprehensive measure of price level. (False)
4. If the marginal propensity to consume is .80 and the government increases
spending by $ 10 million, the increase in equilibrium GDP is $50,000,000. (True or
False?)
Answer - The multiplier measures the increase in GDP resulting from an increase in
spending. The multiplier is calculated as I/marginal propensity to save. The
marginal propensity to save is equal to one minus the marginal propensity to
consume. Therefore, the multiplier is equal to 5.0 (1.00/.20), and the resulting
increase in GDP is $50,000,000 ($10,000,000 x 5). (True)
5. Demand-pull inflation occurs at high-levels of economic activity. (True or
False?)
18 - Macroeconomics