Mgt606 Final Exam Answers

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- a. An open market purchase of securities by the Fed will result in an increase in reserves and an increase in the supply of money.

Money Multiplier = (1/RRR) = (1/0.1) = 10

If the Fed purchases 90 Billion dollars worth of securities in an open market the increase in the supply of money will be 90B * 10(Money multiplier) = 900 Billion

b. Increasing the RRR will decrease the money multiplier value. If done simultaneously with the purchasing of securities by the Fed in an open market it will still increase the supply of money but the change will not be as much as 900 Billion depending on the RRR increase.

- The crowding down effect is where public sector spending replaces, or drives down, private sector spending. A possible outcome of an expansionary fiscal policy is when a government starts spending more than the incoming tax which will result for the government to borrow funds from the Fed resulting in an increase in loan interest rates. This will make it more difficult for some companies from loaning money to improve or start a business.

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- a. Demand pull inflation is when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, price increases.

b. Cost push inflation is when the general price levels rise due to increases in the cost of wages and raw materials.

- Heckscher-Ohlin theorem states that countries export what they can most easily and abundantly produce and import what the country is struggling to produce. This model seeks to mathematically explain how countries should operate when resources are not distributed equally. These inequalities create comparative advantages and disadvantages for goods being produced in a given country.

- To counter expected dumping of LED television screens by producers to another nation. The government can impose an anti-dumping tariff. This tariff is put on a foreign import that the government sees as underpriced. This forces the price point on import products to be similar to domestic products which in turn saves local business.