Solutions to Class Discussion Questions


Chapter 1 & 2 Class discussion questions

1. What do scarcity and choice have to do with recent United States federal budget problems?

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.

2. What are the economics goals of the United States and how is she doing?

   economic growth from 2000 to 2010 was very slow

   full employment no new jobs for last 10 years, unemployment stays higher after each recession, fewer men in the work force

   price stability very good, not a problem since we borrowed heavily to pay for Vietnam and the two oil shocks of the 1970's

   positive balance of payments not very well at as people question the overall affect of free trade given the rise of China,
   South Korea, and the decline of non-government unions.

  economic freedom continues to be high as minorities (blacks and women) make some progress though many would say it has been too slow.
  Gays are now recognized by many as a minority.

  equitable distribution of income the middle class has not gained much in the last 20 years as the wealthy get a larger and larger share

   For more data visit

3. Are the following subjects Macro or Microeconomic in nature?

    A. The Price of a new car.  micro

    B. The number of people working. macro

   c. The Green Revolution  micro

Chapter 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. 

Chapter 3 Class discussion questions

A. How is the concept of creative destruction currently affecting the United States economy?
1. 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.

    2. 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. 

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

    4. Preparing people for new, meaningful employment is an important challenge. 
       The new century has been a painful economic period. New efficient economic structures
       must be developed to manage resources in a constantly changing business environment.

B. 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.

     1. 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  
        has required 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.

    2. Peripheral 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. In 2015 Greece
        is fighting the austerity being force Creative Destruction.

   C. Read the John Adams section of Presidential Courage
        How were the economic and political issues faced by President Adams at the
        turn of the 18th century similar to those face by the U.S. early in the 21st Century.

        1. Adams never shared the ultra-Federalist zeal to face down the French and President Obama seems to feel the War on Terror
            is taking resources away from more pressing needs.
        2. A British political cartoon depicted a weak America as U.S. is represented by the woman, who is being plundered by five Frenchmen.
            President Obama is being seen as weak in relation to the Syrian Civil War and the Islamic State. Like the ultra-Federalist zealots,
            many see the answer as American armed forces.
        3. Congress passed the notorious
Alien and Sedition Acts giving Adams the power of deportation and today
            government feels The War on Terror can only be won if civil liberties related to phone conversations are ignored.
        4. By the 1800 even the most self-absorbed Treasury Secretary Hamilton understood that the country's politics was
            becoming a struggle "between the rich and the poor."  Today many feel the wages of the top 1% seem too high as
            middle class wages stagnant.

        5. Hamilton fought his fatal duel with Vice President Aaron Burr showed that government hostility was a bit more than the bitterness existing today.

D. President Obama been accused of being a Socialist?
          Begin with a nominal definition of relevant political and economic terms explored in this chapter and relate them to current economics and politics.
Democratic Socialism as practiced in Western Europe, has public ownership of key industries such as transportation and communication. 
          The economic systems of Europe began moving away from socialism when  Margaret Thatcher then prime minister of England started
               this trend toward market capitalism in the 1970's. Many government owned industries were sold
. Ronald Reagan agreed and stressed
               the market system during his presidency though there were few government owned industries so he pushed for deregulation.
See Social democracy

             Historically, how has America accepted are political and economic concepts?
Republics are a form of government in which power resides in the people while democracies differ i n degree. 
             Direct democracy also known as pure democracy is when voters decide (e.g. vote on, form consensus on) policy initiatives directly
             while an
indirect democracy or representative democracy like the U.S. where citizens elect officials to make
laws on their behalf.
             Some want the U.S. president to be elected directly an d eliminate the electoral college.

             Government officials of states are not granted primarily based upon family, military or business connections.
             Some people think modern capitalism seems to have much of this king of mixing of money and politics but
             most of the founding fathers were wealthy and members of Eastern or Southern Oligarchs.
            The question got a little clearer due to
United States v. Cruikshank (1875) when the court ruled that the "equal
            rights of citizens" were inherent to the idea of a republic.

            In a
All eligible citizens have an equal say in the political decisions that
            affect their lives and majority’s power is absolute and unlimited. Again money makes the equal a question. Always has!


            What did suffrage have to do with this accusation. 
            Manhood suffrage occurred in 1868 and Women's suffrage in the United States in 1920 though state
            and local suffrage had been occurring for years.
Comparing a Republic with a Democracy yields
            sovereignty of the individual vs. the group as a consideration and this combined with who actually
            votes provides a peak into the accusation.

             See Presidential Politics: Party Politics and Presidential Elections from 1788 to 2012
and     20th Century U.S. Political Economy: an interaction of politics and economics.

        E. Give examples of current political discussions designed to move the U.S. toward or from a Republic.
             Some states are passing laws to make voting more difficult while the current Democratic administration
             is trying to make illegal immigrants legal which would make these residents citizens.

         F. Class Project: Something happened over 20 years ago to disconnected wage growth from productivity growth.
            1. Competition from Asia put the squeeze on corporate profits.
                 a. "... the expansion of Japanese car companies into foreign markets in
                     the 1970s further accelerated [Japanese] growth. Passenger car exports
                     rose from 100,000 in 1965 to 1,827,000 in 1975." 
                     See Automotive industry in Japan 1960s to today
From 1955 to 1965, Japan experienced a nominal growth rate of 10–20%
                     annually and real growth rates (adjusted for inflation) of 5–12%. In 1968,
                     it surpassed the Federal Republic of Germany  (FRG) to stand second
                     after the United States among non-Communist nations in total value of GNP.
                     Editor's note: One of the few major failings of U.S. industry was its slow
                     response to the Japanese miracle, but like politicians, they didn't act until
                     there job was on the line. From
                     In the 21st Century China has replaced Japan as the largest cheap labor source.
                 c.  Industrial sunset making north America's rust belt-1969-1984 
                 d. See
New Normal  for wages because of the Competitive Adjustment from chapter 23. 
. Energy prices increased dramatically and companies that could not pass
                  the higher cost to customers felt a profit squeeze. Fracking is changing this.
                  A. Companies affected had three choices and labor lost.
                      1. Going out of business was the last choice.
                      2. Lower profits mean lower returns and was the next-to-last choice.
                      3. Cutting cost was the only choice as higher revenue due to competition was off the table.           
                          a. Cutting cost comes from higher productivity and lower wages
     b. Germany, Japan, South Korea and now China could and did increased productivity
c. America's rust belt procrastinated to maintain profits and salaries as long as possible.
  B. Wages stagnated and a political problem emerged.
The World Changed Causing Many Good Jobs to Disappear and
              3. How is capitalism and democracy designed to return to normal growth in wages?
                   Creative Destruction and the purely competitive adjustment will solve the problem
                   but theses take time and some think government should lower the resulting pain.
                   Political correctness has most wanting more spent on education but some disagree.
Recent Educational Observations of Top Education, Business, Economic and Political Leaders.

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?

Interesting question given the money involved (the Walton family of Wal-Mart fame has 
accumulated 25 billion dollars over the last few decades). Society needs entrepreneurs 
who in turn need society. One question concerns the tax rate at which entrepreneurs stop 
creating the wealth everyone shares. Another question concerns the long-term negative 
effects of the growing income disparity between the rich and the poor.

File 6 Class discussion questions 

1. What is the economic relationship between the federal government and American 
   business and should it change? Why?

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?

Most students do not realize the many entitlements they (and their families) receive 
because of government tax policies. Class discussion may center on those receiving
benefits as opposed to those who do not, and the resulting inequality. 

3. Do governments do an adequate job measuring the benefits received from their 
economic activities, especially as the benefits relate to costs incurred?

The gains from cleaner air and a better-educated workforce tend to be subjective and 
difficult to measure. People complain about the high cost of social security and Medicare, 
but seem to ignore the increase in longevity and quality of life enjoyed by many older 
Americans. In addition, many elderly people are not dependent upon their children as they 
were years ago. Few children or parents acknowledge this benefit. This is one of many 
unrecognized economic benefits that exists in the US.

File 7 & 8 do not have Class Discussion Questions.

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?

A. Increased international trade is forcing down US wage rates

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
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.

File 14 Class discussion questions

1. What traditional fiscal policy measures are designed to diminish the impact of a recession?

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.

3. What were the political effects of the 1991 recession?

George Bush lost the presidential election and the country had only its fourth democratic 
president since the Korean War.

File 15 Class discussion questions

1. Explain the procedure used by the Federal Reserve to change the money supply to affect
interest rates, investment, and Real GDP.

A. The Federal Reserve determines the amount of excess reserve in the banking system. 
   This reserve determines the potential money supply (M1)

B. The money supply affects interest rates. Interest rates affect investment, a key 
   determinate of aggregate demand and real GDP. 

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.

D. Increasing investment and economic activity  
      The Federal Reserve increases excess reserve, which if loaned, increases the money 
   supply and lowers interest rates. Low interest rates increase investment causing an 
   increase in real GDP.

E. To slow inflation the process is reversed

2. What fiscal measures were taken, or not taken, to diminish the effects of the
   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.

3. What were the political effects of the 1991 recession?

George Bush lost the presidential election and the country had only its fourth 
democratic president since the Korean War.

File 16 Class discussion questions

1. Have Americans lost their willingness to take economic risks? Data indicates that more 
US residents than ever before own their own business (page 16) but at the same time, the 
federal government has added many insurance programs to protect people from financial
loss. Student attitudes toward the risk and reward nature of capitalism should prove 

2. How will demographic factors affect economic activity over the next decade or two?  

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

3. Are Americans receiving a good return on their investment in regulation? Do they 
appreciate these benefits? Would they rather have the money? (for a more complete 
analysis of government regulation see Chapters 30-32)

Student opinions will vary, and prejudice will abound.

File 17 Class discussion question

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?

Determination of the amounts and distribution of these variables are a function 
of a country's economic and political system. A similar question was asked on page
File 1 class discussion questions
. Students might enjoy comparing responses.

2. Explain the consequences of the recent decline in industrial, nonsupervisory 
(blue collar) wages in comparison to the rest of the workforce.

Historically, social unrest and change have been the consequences 

3. What did World War II have to do with the output growth rates of industrial countries?

Comparing relative growth rates is not useful because most industrial countries started 
at a much lower base than the United States. Comparing trends is interesting but 
extending them into the future is inappropriate as variable inputs will change.

4. Analyze the growth of per capita DPI summarized on file 18..

To the surprise of many, the numbers are up dramatically for over 40 years.
Maybe Beaver Clever didn't have it so good after all.