Question & Answer

What are the economic arguments for larger ‘systemically important banks’ (SIBs) having an additional capital requirement?

Why are government bonds which still have 11 months to run regarded as liquid, whereas overdrafts granted for a few weeks are not?

1. If a bank buys a £500 000 Treasury bill at the start of its 91-day life for £480 000, at roughly what price could it sell it to another financial institution after 45 days Why is it not possible to predict that precise price when the bill is first purchased?

2. Suppose there were a sudden surge in demand for cash from the general public. Would the existence of inter-bank market loans help to meet the demand in any way?

Which of the above are examples of economies of scale?

What dangers are there in maturity transformation for (a) financial institutions; (b) society generally?

In terms of the broad definition of money, would a deposit account passbook count as money?

Why may money prices give a poor indication of the value of goods and services?

How is it that the cost of an investment to a firm will exceed the value of the output that the investment will yield? Surely that would make the investment unprofitable. (Clue: the increase in output refers to output over a specific time period, usually a year.)

How does the above argument about firms’ responses to a rise in demand relate to the shape of their marginal cost curves?

The present level of a country’s exports is £12 billion; investment is £2 billion; government expenditure is £4 billion; total consumer spending (not C_d) is £36 billion; imports are £12 billion and expenditure taxes are £2 billion. The economy is currently in equilibrium. It is estimated that an income of £50 billion is necessary to generate full employment. The mps is 0.1, the mpt is 0.05 and the mpm is 0.1

(a)  Is there an inflationary or deflationary gap in this situation?

(b)  What is the size of the gap? (Don’t confuse this with the difference between Y_e and Y_F.)

(c)  What would be the appropriate government policies to close this gap?

Give some other examples of changes in one injection or withdrawal that can affect others.

Assume that the rate of income tax is 15 per cent, the rate of expenditure tax is 12½ per cent, the mps is 1/20, the mpm is 1/8 and the mpc (from disposable income) is 16/17. What is the mpc_d? Construct a table like Table 17.4 assuming again that national income rises by £100 million.

1. What determines the slope of the E function?

2. How does the slope of the E function affect the size of the multiplier? (Try drawing diagrams with E functions of different slopes and see what happens when they shift.)

Why is the ‘withdrawals multiplier’ strictly speaking a negative figure?

Threshold Concept 15)  1. How might cumulative causation work at the level of an individual firm that is losing market share?

(Threshold Concept 15)  2. Are there any market forces that work against cumulative causation? For instance, how might markets help to arrest the decline of a depressed region in the economy and slow down the expansion of a booming region?

Try this simple test of the above argument. Draw a series of W lines of different slopes all crossing the J line at the same point. Now draw a second J line above the first. Mark the original equilibrium and all the new ones corresponding to each of the W lines. It should be quite obvious that the flatter the W line the more will Y have increased.

Using the Internet, find a comparison of income tax rates across states.  What state currently has the highest income tax rate?  In considering individual tax burdens across states, what other taxes should you consider?

Congress would like to increase tax revenues by 10 percent.  Assume that the average taxpayer in the United States earns $65,000 and pays an average tax rate of 15 percent.  If the income effect is in effect for all taxpayers, what average tax rate will result in a 10 percent increase in tax revenues? 
This is an example of what type of forecasting?

Lorenzo is considering starting a trucking company either in Texas or Oklahoma.  He will relocate his family, which includes his wife, children, and parents, to reside in the same state as his business.  What types of taxes may influence his decision of where to locate his business? 

Consider the following tax rate structure.  Is it horizontally equitable?  Why or why not?  Is it vertically equitable?  Why or why not?

Consider the following tax rate structure.  Is it horizontally equitable?  Why or why not?  Is it vertically equitable?  Why or why not?

Consider the following tax rate structure.  Is it horizontally equitable?  Why or why not?  Is it vertically equitable?  Why or why not?

Using the facts in problem 52, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?  This would result in what type of tax rate structure?

Using the facts in problem 52, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable based on the tax rate paid?  This would result in what type of tax rate structure?