Solutions: Ch31 Impacts - Government Borrowing

Ch31 Impacts - Government Borrowing

Multiple Choice Questions

1. When governments are borrowers in financial capital markets, which of the following is least likely to be a possible source of the funds from a macroeconomic point of view?

A. central bank prints more money

B. increase in household savings

C. decrease in borrowing by private firms

D. foreign financial investors

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

2. A country's economic data indicates that there has been a substantial reduction in the financial capital available to private sector firms. Which of the following most likely had the greatest influence on this economy?

A. especially large and sustained household saving

B. increased borrowing by private firms

C. reduction in influx of funds for foreign financial investors

D. especially large and sustained government borrowing

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

3. If a country's economic data shows private savings of $300 million, government spending of $350 million, tax revenue of $400 million, and a trade surplus of $75 million, then what does investment equal?

A. $775 million

B. $475 million

C. $275 million

D. $700 million

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

4. If a country's economic data shows private savings of $500 million, government spending of $300 million, tax revenue of $400 million, and a trade surplus of $100 million, then what does investment equal?

A. $600 million

B. $500 million

C. $700 million

D. $900 million

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

5. If a country's economic data shows private savings of $400 million, government spending of $250 million, tax revenue of $400 million, and a trade surplus of $175 million, then what does investment equal?

A. $550 million

B. $425 million

C. $800 million

D. $375 million

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

6. If a country's economic data shows that private savings equal $250 million, government spending equals $400 million, taxes equal $350, and the trade surplus equals $150 million, then what does investment equal?

A. $50 million

B. $75 million

C. $450 million

D. $350 million

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

7. If a country's economic data shows that private savings equal $300 million, government spending equals $400 million, taxes equal $300, and the trade surplus equals $100 million, then what does investment equal?

A. $150 million

B. $175 million

C. $200 million

D. $100 million

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

8. If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal?

A. $50 million

B. $150 million

C. $425 million

D. $600 million

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

9. In the national savings and investment identity framework, an inflow of savings from abroad is, by definition, equal to:

A. private sector investment.

B. the trade surplus.

C. the trade deficit.

D. domestic household savings.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

10. From a macroeconomic point of view, which of the following is a source of demand for financial capital?

A. savings by households and firms

B. foreign financial investment

C. domestic household private savings

D. government borrowing

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

11. The U.S. economy has two main sources for financial capital; _______________________ and ____________________________.

A. private savings from U.S. households and firms; inflows of foreign financial investment.

B. private sector investment; government borrowing

C. private savings from U.S. households and firms; government borrowing

D. private sector investment; inflows of foreign financial investment from abroad

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

12. If the quantity of financial capital supplied is equal to the quantity of financial capital demanded then, the national savings and investment identity is written as:

A. (M - X) - S = (G + T) - I

B. S + (M - X) = I + (G - T)

C. S + (G - T) = I - (X - M)

D. S = (X - M) - (G - T)

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

13. When a government records a budget surplus, the national savings and investment identity is written as:

A. S = I + (G - T) + (X - M)

B. S + (M - X) + (T - G) = I

C. S - (G - T) = I - (X - M)

D. S + (T - G) = 1 + (X - M)

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

14. When a government records a trade surplus, the national savings and investment identity is written as:

A. S = (G - T) + (X - M) - I

B. S - (G - T) = I - (X - M)

C. S = I + (G - T) + (X - M)

D. S + (G - T) = I - (X - M)

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

15. A __________________ often results in an outflow of financial capital leaving the domestic economy and being invested in the global economy?

A. trade surplus

B. trade deficit

C. fiscal deficit

D. twin surplus

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

16. A prolonged period of budget deficits may lead to ___________________.

A. outflows of financial capital abroad

B. lower inflation

C. lower economic growth

D. increasing exchange rates

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

17. A ___________________________________ can lead to disruptive economic patterns and heavy strains on a country’s banking and financial system.

A. prolonged period of trade surpluses

B. sustained pattern of large trade deficits

C. prolonged period of budget surpluses

D. sustained pattern of large budget deficits

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

18. Which of the following is least likely to be the result of economic disruptive patterns caused by a prolonged period of government budget deficits?

A. high inflation

B. substantial inflows of foreign financial capital

C. increasing exchange rates

D. strains on a country's financial system

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

19. An increase in government borrowing can:

A. allow private investment to expand.

B. crowd out private investment in physical capital.

C. increase the incentive to invest in technology.

D. cause a substantial decrease in interest rates.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

20. A reduction in government borrowing can:

A. decrease the incentive to invest.

B. increase the interest rate.

C. crowd out private investment in human capital.

D. give private investment an opportunity to expand.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

21. When the interest rate in an economy increases, it is likely the result of either:

A. a decrease in the government's budget surplus or an increase in its budget deficit.

B. a decrease in the government budget surplus or its budget deficit.

C. an increase in the government budget surplus or a decrease in its budget deficit.

D. an increase in the government budget surplus or its budget deficit.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

22. When the interest rate in an economy decreases, it is most likely as a result of:

A. an increase in the government budget surplus or its budget deficit.

B. a decrease in the government budget surplus or its budget deficit.

C. an increase in the government budget surplus or a decrease in its budget deficit.

D. a decrease in the government budget surplus or an increase in its budget deficit.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                    

23. An increase in the government’s budget surplus will cause the interest rate to:

A. either increase or decrease.

B. remain the same.

C. increase.

D. decrease.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                    

24. A decrease in the government’s budget surplus will cause the interest rate to:

A. decrease.

B. increase.

C. either increase or decrease.

D. remain the same.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

25. If the government initiates an expansionary monetary policy at the same time that its budget deficit decreases, then the interest rate will ______________________.

A. increase

B. either increase or decrease

C. decrease

D. remain unchanged

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

26. If the government initiates an expansionary monetary policy at the same time that its budget deficit increases, then the interest rate will __________________.

A. remain unchanged

B. either increase or decrease

C. increase

D. decrease

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

27. A ____________________________ is one economic mechanism by which government borrowing can crowd out private investment.

A. deficit decrease

B. smaller trade surplus

C. larger trade surplus

D. higher interest rate

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

28. If a government's budget deficits are increasing aggregate demand when the economy is already producing near potential GDP, causing a threat of an inflationary increase in price levels, then the central bank may react with:

A. a contractionary monetary policy.

B. an expansionary monetary policy.

C. a discretionary monetary policy.

D. a loose monetary policy.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

29. If the U.S. economy is producing at a level that is substantially less than potential GDP and the government's budget deficits are increasing aggregate demand, then ____________________________ is not much of a danger.

A. a tight monetary policy

B. an inflationary increase in the price level

C. international financial investment

D. the central bank's contractionary monetary policy

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

30. If the U.S. government's budget deficits are increasing aggregate demand, and the economy is producing at a level that is substantially less than potential GDP, then:

A. higher interest rates will crowd out private investment.

B. government borrowing is likely to crowd out private investment.

C. an inflationary increase in the price level is a real danger.

D. the central bank might react with an expansionary monetary policy.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

31. If the government’s budget deficit increases while the economy is producing substantially less then potential GDP and expansionary monetary policy is implemented, then any ________________ from government borrowing would be _____________________________ from that monetary policy.

A. higher interest rates; largely offset by the lower interest rates

B. lower interest rates; largely offset by the higher interest rates

C. increase in interest rates; reduced by private sector investment

D. inflationary increase in price level; crowding out private investment

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

32. If a government decides to finance an investment in ________________ with higher taxes or ____________________ in other areas, it need not worry that it is crowding out private investment.

A. roads and bridges; increased borrowing

B. water supply and sewers; by raising capital spending

C. public physical capital; lower government spending

D. hydroelectric dams and windmills; government R&D

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

33. In most developed countries, the government plays a large role in society’s investment in human capital through _________________________.

A. direct spending

B. the education system

C. tax incentives

D. private sector R&D

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

34. In a market-oriented economy, private firms will undertake most of the _____________________________, and ________________ should seek to avoid a long series of large budget deficits that might crowd out such investment.

A. economic growth activities; monetary policy

B. economic growth activities; fiscal policy

C. investment in human capital; monetary policy

D. investment in physical capital; fiscal policy

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

35. When a business firm makes an investment in physical capital, what is that investment subject to?

A. state and local government incentives

B. economic output and productivity

C. political orientated incentives

D. the discipline of the market

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

36. Because of the difference between the discipline imposed by market competition and the discipline imposed by political decisions, which of the following is most likely?

A. reduced government borrowing to avoid crowding out private investment

B. difficulty managing public investment so it’s done in a cost effective way

C. government budgets will exactly shadow the rate of private investment

D. tax budgets increase without a corresponding drop in private investment

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

37. An additional investment in human capital, especially for the low-income nations of the world, will likely directly increase which of the following?

A. productivity and economic growth

B. increased levels of R&D spending

C. consumer orientated spin-offs

D. highly qualified teachers

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

38. A government will likely ____________________________ to encourage investment in technology R&D by private firms?

A. reduce R&D grants to nonprofit organizations

B. reduce R&D grants to universities

C. spend more on R&D in government laboratories

D. implement fiscal policy establishing tax incentives

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

39. Which of the following is least likely to benefit the civilian economy?

A. R&D carried out in government laboratories

B. R&D aimed at producing new weapons

C. direct private sector R&D spending

D. tax policy promoting civilian R&D spending

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

40. If David Ricardo's theory holds completely true, then any change in budget deficits or budget surpluses would be completely offset by which of the following?

A. a change in currency exchange rates

B. a sustained pattern of trade imbalances

C. a corresponding change in private saving

D. a dependence on inflows of capital

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

41. Ricardian equivalence means that:

A. changes in private savings offset any changes in the government deficit.

B. changes in exports offset any changes in the government deficit.

C. changes in imports offset any changes in the government deficit.

D. changes in investment offset any changes in the government deficit.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

42. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget deficit increases by 50, then:

A. investment will increase by 50

B. investment will decrease by 50

C. private savings will decrease by 50

D. private savings will increase by 50

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

43. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true.  If the budget surplus increases by 100, then:

A. private savings will increase by 100.

B. private savings will decrease by 100.

C. investment will increase by 100.

D. investment will decrease by 100.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

44. A government deficit has increased from 30 to 50. The country's trade deficit is 100 and private savings equal 65 and investment equal 90. If Ricardian neutrality holds true, after this change in the government's budget, private savings will equal:

A. 40.

B. 105.

C. 95.

D. 85.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

45. A government deficit has decreased from 100 to 60. The country's trade deficit is 120 and private savings equal 80 and investment equals 100. If Ricardian neutrality holds true, after this change in the government's budget, private savings will equal:

A. 120.

B. 70.

C. 40.

D. 140.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

46. If an economy has a budget surplus of 400, private savings of 1,200, and investment of 1,600, what will the balance of trade in this economy equal?

A. 0

B. deficit of 1,600

C. deficit of 1,200

D. deficit of 400

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

47. If an economy has a budget surplus of 1,500, private savings of 3,000, and investment of 5,000, what will the balance of trade in this economy equal?

A. deficit of 500

B. surplus of 500

C. surplus of 1,500

D. deficit of 1,500

Answer: B  Reference:

Explanation:

Type: Multiple Choice                    

48. If an economy has a budget deficit of 600, private savings of 2,000, and investment of 800.  What is the balance of trade in this economy?

A. deficit of 600

B. deficit of 2000

C. surplus of 2000

D. surplus of 600

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

49. When government policy moves from a budget deficit to a budget surplus and the trade deficit remains constant:

A. savings will increase if investment remains constant.

B. investment will increase if savings remain constant.

C. savings will decrease, no matter what happens to investment.

D. investment will decrease if savings remain constant.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

50. When government policy moves from a budget surplus to a budget deficit and the trade deficit remains constant:

A. savings will decrease no matter what happens to investment.

B. savings will decrease if investment remains constant.

C. investment will increase if savings also remains constant.

D. investment will decrease if savings also remains constant.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

51. A government bu with a budget deficit and a trade deficit. During the year, the government changed its policy and is now running a budget surplus. If all other factors hold constant, this change in policy will cause:

A. the exchange rate to decrease and the trade deficit to increase.

B. the exchange rate to increase and the trade deficit to decrease.

C. the exchange rate and the trade deficit to decrease.

D. the exchange rate and the trade deficit to increase.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

52. A government began 2013 with a budget surplus and a trade deficit. Due to the onset of recession, the government changed its policy and is now running a budget deficit. If all other factors hold constant, this change in policy will cause:

A. the exchange rate and the trade deficit to increase.

B. the exchange rate and the trade deficit to decrease.

C. the exchange rate to decrease and the trade deficit to increase.

D. the exchange rate to increase and the trade deficit to decrease.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

53. Which of the following is not a consequence of an increase in the government's budget deficit?

A. private savings increases while holding everything else constant

B. exports increase while imports and all other variables are held constant

C. imports increase while exports and all other variables are held constant

D. investment falls while holding everything else constant

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

54. If a government experiences an increase in its budget surplus, which of the following possible outcomes will likely result?

A. investment falls while everything else holds constant

B. exports decrease while imports and all other variables are held constant

C. imports increase while exports and all other variables are held constant

D. private savings decrease while everything else holds constant

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

55. A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern.

A. combination of less foreign capital and banks that are bankrupt

B. moderate increase in a trade deficit and a moderate appreciation of the exchange rate

C. a series of large budget deficits

D. shift in aggregate demand so far to the right that it causes high inflation

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

56. In the U.S. economy, the offsetting effects of private saving compared to government borrowing are typically noted as being represented by which of the following ratios?

A. much less than one-to-one

B. slightly less than one-to-one

C. slightly more than two-to-one

D. much more than two-to-one

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

57. _______________________________ can set the stage for international financial investors first to send their funds to a country and cause an appreciation of its exchange rate and then to pull their funds out and cause a depreciation of the exchange rate and a financial crisis as well.

A. Trade balance

B. Twin deficits

C. Trade deficits

D. Crowding out

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

Solved: Ethical Culture, GM Case Study

Ethical Culture, GM Case Study

Student's Name

Institutional Affiliation

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INTRODUCTION

About 800, 000 of general motor's cars had engine shut down due to failure of the ignition switches. It often occurred when the vehicles were in motion hence most accidents were caused resulting into several deaths. For years, general motors never discovered that the problem was with their ignition switches. A lot of funds were compensated for the deaths caused. Despite GM discovering the cause for the accidents caused were due to faulty ignition switches, the information was disclosed for about fifteen years. Research reveals that the cause for the information disclosure was dur to ethical lapse in the corporate company. It took more than a decade for the government to discover that more than 2.6 million cars got damaged and caused accident due to faulty ignition switches. There was liaise with the federal prosecutors to announce a fine of 900 million US dollars to end the criminal investigations. Besides, they were to adhere to some terms and conditions for the coming three years. There are main events that occurred during the recall

Key instances of the recall

 In February 2002, Engineer Ray DeGiorgio who specialized in ignition switches designed an ignition switch. According to the quality assurance team the standards of the gadget did not meet GM's specifications. However, the switch was later used in Saturn Ion and later in Chevrolet Cobalt despite it being identified that it was below the standards. The switch was then used in Saturn Sky, Chevrolet HHR, PontiacG5 and Solstice. In 20005 a Chevrolet Cobalt owner, Amber Rose, got involved in an accident and died. Investigations showed that the frontal crash resulted from faulty switches which changed positions from the run to accessory hence resulting into cut off power to the airbags, steering and brakes. It led to a fatal accident. To resolve the situation, Engineer Ray signed a redesign of the ignition switch but in his redesign the part number is not changed. It led to uncertainties as to whether the changes were made or not. The alleged redesigned switch was used in cars from 2007. In 2013 the National Highway Traffic Safety Administration (NHTSA) declined to open investigations as to why Cobalt and Ion did not have proper air bags regarding several accidents that occurred during that period. NHTSA claimed that GM concealed important information hence preventing them from going further with the investigations.

A new CEO, Mary Barra, discovered in 2013 that there was an issue with the ignition switches in GM. Around February 2013, GM recalled 1.6 million cars to repair spoiled ignition switches, the number later grew to 2.6 million cars. General Motors received a fine of $35 million by US government for failing to reveal the cause of the problem early enough. GM paid then fine and admitted to give a report on the government's demands and its safety operations in good time. In June 2014, Barra released a report which were investigations conducted by prosecutor Anton. Barra stated that regarding the investigations, 15 employees were retrenched and five have undergone penalties due to their actions. The CEO agreed to compensate fund to victims who reported companies as from the first day of August. It was discovered that defective switches resulted into 275 injuries and 124 deaths and each victim's family will be compensated at least 1 million dollars. The company had 625 million dollars for the compensation process.

General Motor's actions towards the issue

Read: Paleo Hero Market Analysis 

General Motor's issue on defective ignition switches not only costed the company a lot of money but also tarnished its name to the public. Since the issues were related to ethics and culture, the company decided to review and publish its ethical codes. All employees were required to read, sign and follow the ethical codes of conduct failure to which punishments will be applied. By GM resorting to admit they had faulty switches, they chose on the engineering code of ethics other than profitability. Regarding GM's failure in culture and leadership, the code of ethics had to cover the entire stakeholders involed in the company's operations from the junior most to senior most positions. Their code of ethics addressed issues on integrity and the company's terms and values.

Among the code's listed was the significance of speaking up in case there are corruption or misconduct issues. The company majors on safety, identification and resolving the problems encountered. Among the issues listed are accountability, conflict resolution, management of resources and reporting of misbehavior such as theft, violence and fraud. The speak up policy was meant to encourage the employees to report any misconduct they observe without fear of being harmed or retrenched. The company also resorted to improving vehicle safety. The employees had to understand the codes of ethics including the repercussions of committing crimes. They resorted that their first priority as a company will be safety.

Recommendations of possible solutions to GM's problem

Studies show that ethics is controlled by culture. A large number of employees at GM decided to remain silent about the ignition switches which resulted to several deaths, this clearly shows that a company can have well laid out codes of ethics but no satisfiable integrity. It is not only enough to pass good laws regarding some policies in the company, but also important for employees to use their common sense and have a sense of humanity in them. Employees need to have good morals and the desire to do the right thing and be accountable. The leaders should be ready for any crisis and also be able to lead under the company under turbulence for the sake of positive transformation of the employees.

Corruption is secretive, culture change is gradual. Problem acceptance is an important way of solving ethical issues in an organization. Deploying other stakeholders to investigate the company's problems also helps identify the issues. Valukas' report regarding the switch issues in GM shows a problem of silence and concealment. After it was discovered that the switches designed by engineer ray has a lower torque spec. the engineer was under pressure to deliver a less costly ignition switch and culture encouraged this behavior. In conducting investigations, witnesses from top most executive positions also need to be spotted.

            General Motors learned a lot of lessons from the ordeal, they realized that a lot of effort and resources should be geared towards ensuring that the environment is ethically heathy and that employees have the right morals. Leaders living on assumptions that their employees will always do the right thing can result into discovery of misconducts later after a damage is made. Organizational leaders need to know their organizational culture, this can only be identified through proper communication. When communication is functional from the junior employees and up through the senior, discovering a problem would be easier. There could be information that a lot of employees are aware of but the CEO has no idea about them. Such matters can only be addressed through constant communication through meetings and emails.

Employees also need to communicate any misconduct happening in the organization. A culture of integrity and honesty need to be nurtured in organizations. The only way this can be done is when the leaders do thorough inspection in the company and interact with employees at personal level. By creating a conducive environment and being approachable, knowing what is happening in the business will be made easier. After a mistake is identified, leaders should learn and adapt to the current situations of the organization. They ought to quickly notice possibilities and solutions to the crisis. They need to only expect trustworthiness if it is more inclined to viewing the positive side of the crisis.

Conclusion

It took about fifteen years for managers to release bad news about the faulty ignition switches in general motors. For the news to be out, the managers had to go back to history and understand how it all began. Emphasis of employees doing the right thing and being honest helps eliminate the chances of nurturing bad culture into the business environment. Organizations should concentrate more on their consumers safety other than profitability. They need not to wait until several cases are reported on the consequences of their actions for them to release their reports. Managers should be well prepared for tragedy and crisis and be able to survive through such atmosphere.