Questions:
1. Brewster Industries (BI) makes turn signals for automobiles. BI's brilliant founder, Dr. Ava P. Brewster, has recently discovered a way to lower BI's materials cost by 45% through the use of nanotechnology. What will this breakthrough do to the quantity of turn signals supplied and the price of turn signals? Be sure to stipulate if this is represented by a shift of the supply curve (change in supply determinant) or a movement along the supply curve (change in quantity supplied). How will this change impact the quantity of turn signals demanded, if at all? Be sure to stipulate if this is represented by a shift of the demand curve (change in demand determinant) or a movement along the demand curve(change in quantity demanded). BI's longtime competitor, Rosebud Enterprises, has been unable to match BI's technological breakthrough and is evaluating its best response to the change in the market. In addition to the new supply and demand curves and BI's new price for its turn signal, name two other pieces of information Rosebud needs to make a sound evaluation. If, after its evaluation of the market, Rosebud concludes that it has fallen too far behind BI technologically to compete and therefore decides to withdraw entirely from the turn signal market, what will happen to the quantity of turn signals supplied and the price of turn signals? Be sure to stipulate if this is represented by a shift of the supply curve or a movement along the supply curve.
2. The government decides to embark upon a new initiative to conserve the country's forested lands. Congress doesn't want to establish bureaucratic oversight of such a large project though. Sensing that there is a national consensus supporting forest conservation, Congress passes legislation it names the Save America's National Timber Areas (SANTA) act. Under SANTA, the government will send each U.S. citizen $250 that it hopes will be spent on planting trees, but there are no binding requirements for any citizen to spend it thus. To finance this ambitious conservation project, the government must issue (sell) bonds. Explain what will happen, as a result of this government borrowing and spending, to interest rates, the budget deficit, and the government purchases (G) component of GDP. Explain what will happen to prices and output as a result of SANTA, assuming the economy has much unused capacity and therefore the Aggregate Supply curve is in the Keynesian range (i.e., horizontal AS curve). Explain what will happen to prices and output assuming the economy is operating at its long-run potential output and therefore the Aggregate Supply curve is in the Classicist range (i.e., vertical AS curve).
3. If governments know that increases in the money supply lead toinflation, why do some countries increase the money supply by significant amounts anyway? Who suffers from the resulting inflation?What is the relationship between inflation and nominal interest rates? What is the relationship between inflation and nominal exchange rates?
4. What has happened to the value of the U.S. dollar relative to the Japanese yen over the past six months? What fiscal and/or monetary policies have caused this to happen? What does this mean for the U.S. trade balance with Japan? What does it mean for Japanese investment in U.S. assets?