Solutions to Class Discussion Questions

We study economics because there is a need to make economic choices. Some feel  
society's inability to make economic choices has caused the federal budget to 
be out of control. Many people fail to realize that they, and many people they know,
are receiving the benefit of government borrowing. A more complete understanding 
of this question may result from studying economics.

File 2 Class discussion questions

1. How should society allocate resources between the production of consumer and 
capital goods, and which of each should be produced?

This question introduces students to normative economics. Increasing investment 
in capital goods, which will lead to a better standard of living, requires 
lowering current consumption. Who should make the current sacrifices, and how 
large should they be? Who will receive the future benefits? Economics deals with 
the answers to these questions. 

File 3 Class discussion questions

1. How is the concept of creative destruction currently affecting the United States economy?
A. An increase in international trade is making the world economically efficient and 
benefiting American consumers. This increase in global competition lowers the profit 
of some American companies. Affected companies are often forced to lower wages.

B. The computer has become very efficient at tasks once performed by people. 
When combined with other forms of mechanization, computers are causing jobs to disappear. 

C. The result has been a decrease in high-wage manufacturing employment.

D. Preparing people for new, meaningful employment is an important challenge. 
The 1990's is a painful economic period. New efficient economic structures must
be developed to manage resources in a constantly changing business environment.

2. Explain how the concept of creative destruction has affected European politics 
in the recent past and how it may affect European politics in the near future.

A. Communism does not have a mechanism such as creative destruction. Old outmoded economic 
structures are not replaced by new efficient economic structures. Eventually communist 
countries become economically underdeveloped. Attempting to become a market economy  
will require that many years of creative destruction take place in a few years. 
The costs will be tremendous, and a generation will be required to make the 
necessary economic sacrifices.

B. Western Europe, unable to compete with the United States and Japan, has created an 
economic trading union to open the door of creative destruction. An interesting question 
concerns whether people will allow the creative destruction to work.

File 4 does not have Class Discussion Questions.

File 5 Class discussion questions

1. What options are currently available to United States citizens in reference to answering the key economic questions?

A. What goods to produce
      1. Which goods
            a. Consumer vs. capital goods, public vs. private goods
            b. Medical expenditures vs. education vs. infrastructure
      2. How many
            a. Who works (men, women, children, elderly)
            b. How long (when do they start working, retire)
 B. How to produce
       1. Do we encourage or discourage capital replacing people
       2. Do we restrict foreign companies from selling in the US

C. Who will receive production
      1. Determined by individual productive capabilities, willingness to be taxed,
      and the type of goods purchased with tax revenues (social security, Medicare,
      Medicaid, AFDC, defense, education, a national health plan)
      2. Do we spend for the present (social security, Aid to Families with Dependent Children) 
      or for the future (education, head start, infrastructure)
D. Adapting to a changing environment
      1. How involved does the government get with economic activity
      2. Do we aid or hinder the forces of creative destruction?

2. At what rate should the owners of expanding industries with high economic profits be taxed?

A. Historically, the relationship has been somewhat adversarial because government 
has to maintain competition by regulating business. The government also protects 
consumers from abuse of power by business.

B. When examining government and business relationships in Japan, Germany, and other 
industrial countries, one finds strong cooperation. This cooperation has raised a question. 
Should the United States have an "industrial policy" and relax anti- trust laws designed 
to make the companies more competitive? Some think she should. Others feel the marketplace 
is capable of making the necessary adjustments.

2. Do you agree with the philosophy of middle-class entitlements? Why do middle-class 
entitlements exist?

File 9 Class discussion questions

1. What structural changes (changes in the variables affecting economic activity) are 
occurring as the 20th century comes to an end?

B. While the average job requires more education than ever before, jobs requiring a 
   college degree are not expanding fast enough to absorb recent college graduates

C. Increases in the cost of fringe benefits are forcing many companies to limit new positions,
   eliminate existing positions (downsizing), and not provide retirees with the fringe benefits 
   previously agreed to

D. The free international movement of capital could cause high interest rates in countries 
   where governments borrow excessively

E. Downsizing the military will slow an already slow economy

2. How do the structural changes discussed in Question #1 compare with those of earlier periods?

The change from brawn to brain and the expansion of trade has been going on for thousands of years.
The rate of change is not constant and the current rate, like the rate during the latter part of 
the 19th century, may be substantially above average.

3. Name some instances of social unrest evident because of the world-wide recession of the early 1990's.

   A. Increased violence in US. cities (Los Angles during the summer of 1992)

   B. Increased hate crimes toward minorities

   C. Violence toward immigrants in Germany after reunification 

File 10, 11, & 12  do not have Class Discussion Questions.

File 13 Class discussion question

1. Explain the workings of the monetary multiplier for an infusion of reserve occurring
   when the Federal Reserve purchases a $1,000 treasury note from each of two individuals,
   both of whom open a DD in Bank A and Bank B respectively. Assume a reserve requirement
   of 12.5%.

Each bank has $875 in excess reserve $1,000 - (.125)($1,000). 
They could loan this excess reserve as demand deposits. The banking system could loan out (1/R)

excess reserve = (1/.125)($875) = 8($875) = $7,000. 

The expansion of the money supply will slow if individuals remove reserve from the system 
and if bankers do not loan their excess reserve. During the 1990-91 recession, many banks 
did not loan their excess reserves. Instead they bought intermediate term government bonds 
because interest rates on these bonds were a few points higher than the banks' cost of capital. 
This action increased bank profits and helped alleviate the existing banking crises. This action 
also slowed the economic recovery.

A. Decrease the following taxes to increase C and I, and therefore AD
      1. Personal income taxes
      2. Capital gains taxes paid on the profits from the sale of commercial real estate, a company,
      and financial assets (stocks and bonds)
      3. Investment tax credits which are a lowering of the tax liability of companies investing in 
      certain approved types of plant and equipment

B. Increase government spending

C. A and B combined are referred to as deficit spending

2. What fiscal measures were taken, or not taken, to diminish the effects of the 1991 recession 
   and were those taken successful?  

The government did little to stop the 1990-91 recession because economists could not agree 
the country was in a recession. When most agreed, others were declaring the recession over. 
Withholding taxes were delayed and unemployment payment were extended. But, that was about it. 
Some economists feel the 1990 tax accord, which increased taxes, was a fiscal restraint when 
a fiscal stimulus was needed.

C. Determining excess reserve
      1. The reserve ratio determines required reserves, thus determining excess reserves. 
      Excess reserves determine potential demand deposits, part of the money supply.
      2. Open-market operations, the buying and selling of government bonds, determine 
      excess reserves as the Federal Reserve pays with reserves and receives reserves 
      in payment 3. The discount rate is the rate charged by the Federal Reserve on 
      loans to member banks that are short of reserve. It is a determinate of member 
      banks' willingness to loan excess reserve.

2. What fiscal measures were taken, or not taken, to diminish the effects of the 1991 
   recession and were those taken successful?  

The government did little to stop the 1990-91 recession because economists could not agree 
the country was in a recession. When most agreed, others were declaring the recession over. 
Withholding taxes were delayed and unemployment payment were extended. But, that was about it. 
Some economists feel the 1990 tax accord, which increased taxes, was a fiscal restraint when 
a fiscal stimulus was needed.

The people are becoming older, healthier, and wealthier. Some feel these improvements 
are not being shared equally by all citizens, especially minorities.

1. Critique the functional finance school of government budgeting.
 
Functional finance makes little attempt to distinguish between debt acquired for current 
consumption and that acquired for economic growth. Functional finance does not acknowledge 
that high debt may make it impossible to refinance debt at reasonable interest rates.

File 18 Class discussion questions 

1. How much should the citizens of the United States invest for the future?
     How should this investment be allocated between public and private investments?  
     Who should make these investment decisions?