On December 31, 2013, WOR Productions reported $100,000 of contributed capital and $20,000

of retained earnings. During 2014, the company had the following transactions. Prepare a
statement of shareholders' equity for the year ended December 31, 2014. a. Issued shares for
$50,000. b. Declared and paid a cash dividend

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Regis Corporation operates hair salons under various brand names including Supercuts, Mia &
Maxx, and Style America. Assume the following is a simplified list of accounts and amounts (in
millions) reported in the company's accounts for the year ended June 30, 2014. Required 1.
Prepare an adjusted trial balance at Jun

Refer to M4-9. Prepare a statement of retained earnings for 2014. Data from M4-9,

1. Calculate the debt-to-assets ratio at December 29, 2013, and December 30, 2012. Based on
these calculations, has Rona's financing become more or less risky over these two years? 2.
Calculate the asset turnover ratio for the December 2013 and 2012 year-ends. Rona's total assets
at the end of fiscal 2011 were $2,770,

L. Smart Company prepared its annual financial statements dated December 31, 2014. The
company used the FIFO inventory costing method, but it failed to apply the LC&NRV to the
ending inventory. The preliminary 2014 income statement follows: Inventory write-downs do not
affect the cost of goods available for sale. Inst

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In January 2014, Tongo Inc., a branding consultant, had the following transactions. Indicate the
accounts, amounts, and direction of the effects on the accounting equation under the accrual
basis. The solution for transaction (a) is provided. a. Received $9,500 cash for consulting
services rendered in January. b. Iss

Diana Mark is the president of TempEmp, Inc., a company that provides temporary employees
for not-for-profit companies. TempEmp has been operating for five years; its revenues have
increased each year. You have been hired to help Diana in analyzing the following transactions
for the first two weeks of April 2014: Apri

G. Douglas Corporation prepared the following two income statements: During the third quarter,
the company's internal auditors discovered that the ending inventory for the first quarter should
have been $4,400. The ending inventory for the second quarter was correct. Required: 1. What
effect would the error have on

Partial income statements for Murphy & Murphy (M & M) reported the following summarized
amounts: After these amounts were reported, M & M's accountant determined that the inventory
on December 31, 2013, was understated by $3,000. The inventory balance on December 31,
2014, was accurately stated. Required: 1. Restate

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Complete the blanks in the following comparative income statements, statement of share-
holders' equity, and balance sheets (on this and the next page).

The December 2014 bank statement and cash T-account for Stewart Company follow: There
were no deposits in transit or outstanding cheques at November 30. Required 1. Identify and list
the deposits in transit at the end of December. 2. Identify and list the outstanding cheques at the
end of December. 3. Prepare a ba

Refer to the adjusted trial balance in M4-9. Prepare closing journal entries on December 31,
2014. Data from M4-9, Prepare closing journal entries on December 31, 2014.

Cactus Company's annual accounting year ends on June 30. It is June 30, 2014, and all of the
2014 entries except the following adjusting journal entries have been made: a. The company
earned service revenue of $2,000 on a special job that was completed June 29, 2014. Collection
will be made during July 2014; no entry

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Supply the missing dollar amounts for Clark Retailers's income statement for each of the
following independent cases:

Hordichuk Painting Service Company was organized on January 20, 2014, by three individuals,
each receiving 5,000 shares from the new company. The following is a schedule of the
cumulative account balances immediately after each of the first nine transactions, ending on
January 31, 2014. Required 1. Analyze the change

E&Z Reader was founded in January 2014 to provide text reading and recording services.
Selected transactions for E&Z Reader's first month of business are as follows: a. Issued shares to
investors for $50,000 cash. b. Billed customers $10,500 for services performed in January. c.
Purchased car for $24,500 for use in

The information in E5-5 indicated that the Cendant Corporation press release was issued on
February 13, yet the company's year-end was six weeks earlier on December 31. Why did the
company wait so long to issue the press release? Why weren't the financial results announced on
January 1?

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The April 30, 2014, bank statement for KMaxx Company and the April ledger account for cash
are summarized here: No outstanding checks and no deposits in transit were noted in March.
However, there are deposits in transit and cheques outstanding at the end of April. The electronic
funds transfer (EFT) involved an autom

Progolf Corp. sells a variety of products, including golf balls and golf shoes. Assume that, like
many other companies, Progolf reported a drop in net sales from $8.6 million in 2013 to $7.6
million in 2014, and a drop in gross profit from $4.0 million in 2013 to $3.6 million in 2014.
Based on these numbers, determine

Service Pro Corp (SPC) determined that its unadjusted net income was $10,000 for the year
ended September 30, 2015. For the following transactions and events, show the September 30,
2015, adjusting entries that SPC would make. a. Prepaid Insurance shows a balance of zero at
September 30, but Insurance Expense shows a

Sunny Valley Stables Inc. was established on April 1, 2014. The company provides stables, care
for animals, and grounds for riding and showing horses. You have been hired as the new
assistant financial controller. The following transactions for April 2014 are provided for your
review. a. Received contributions from fi

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Assume you recently were hired for a job in Evansville, Indiana, at the head office of Escalade,
Inc.-the company that makes GoalrillaTM and Goaliath® basketball systems, and is the exclu-
sive supplier of Ping Pong® and Stiga® equipment for table tennis. Your first assignment is
to review the company's lengthy adju

The following ratios for Kool's Corporation and its competitor Willant's, Inc., were obtained
from independent sources. Compare the two companies based on the following ratios: Required:
1. Which company appears to rely more on debt for financing? Describe the ratio that you used
to reach this decision, and explain w

Supply the missing dollar amounts for Lewis Retailers's income statement for each of the
following independent cases:

What aspect(s) of the changes made to corporate governance in Canada might reduce the
opportunities for fraud?

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Refer to C5-2. The December 31, 2014 and 2013 adjusted trial balances for Sportlife Gym
Corporation are shown. Required: 1. Prepare a comparative classified statement of financial
position, as typically presented using IFRS. 2. Prepare a comparative statement of
comprehensive income. Use Exhibit 5.7 as a guide, ex

1. Calculate the debt-to-assets ratio for The Home Depot at February 2, 2014. Based on this
calculation, was The Home Depot's financing more or less risky than Rona's at fiscal year-end
2013? 2. Calculate the asset turnover ratio for The Home Depot for the year ended February 2,
2014. Based on this calculation, did Th

August 2014 bank statement and cash T-account for Martha Company follow: No deposits were
in transit and no cheques were outstanding at the end of July. Required 1. Identify and list the
deposits in transit at the end of August. Put a check mark beside each item that appears on both
the bank statement and what's al

Gladstone Limited tracks the number of units purchased and sold throughout each accounting
period but applies its inventory costing method at the end of each period, as if it uses a periodic
inventory system. Assume its accounting records provided the following information at the end
of the annual accounting period, De

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Jacquie's Greenhouse Corporation is a local greenhouse organized ten years ago as a corporation.
The greenhouse is in an excellent location, and sales have increased each year. At the end of
2014, the bookkeeper prepared the following statement (assume that all amounts are correct, but
note the incorrect terminology an

Mint Cleaning Inc. prepared the following unadjusted trial balance at the end of its second year
of operations, ending December 31, 2014. To simplify this exercise, the amounts given in the
unadjusted trial balance are in thousands of dollars. Other data not yet recorded at December 31,
2014: a. Insurance expired dur

Mobol, a wireless phone carrier, completed its first year of operations on December 31, 2013.
All of the 2013 entries have been recorded, except for the following: a. At year-end, employees
earned wages of $6,000, which will be paid on the next payroll date, January 13, 2014. b. At
year-end, the company had earned in

THQ Inc. is among the biggest video game makers in the world. Assume that THQ made the
following announcement: Required 1. Does the reason given for the change in year-end indicate
that this change will make THQ's financial statements more useful to users? Can you think of a
reason that the change in year-end ultimat

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Refer to E4-6. Fesel Company is making adjusting journal entries for the year ended December
31, 2014. In developing information for the adjusting journal entries, you learned the following:
a. A two-year insurance premium of $7,200 was paid on January 1, 2014, for coverage beginning
on that date. As of December 31,

Assume a recent annual report of Dow Jones & Company, the world leader in business and
financial news and information (and publisher of The Wall Street Journal), included the
following accounts. Dollars are in millions. Required 1. For each T-account, describe the typical
transactions that cause it to increase and de

You have been hired as the new assistant financial controller for Autobody Corp., an auto body
repair shop. Prepare journal entries for the following transactions, which occurred during August
2014. a. At the end of the month, prepaid a two-year insurance policy for $5,000. b. Received
contributions from three invest

Macro Company had the following adjusted accounts and balances at year-end (June 30, 2014):
Required Prepare an adjusted trial balance for Macro Company at June 30, 2014?

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Refer to E4-8. Nickleby's Ski Store is completing the accounting process for its first year ended
December 31, 2014. The transactions during 2014 have been journalized and posted. The
following data are available to determine adjusting journal entries: a. The unadjusted balance in
Office Supplies was $850 at December

Hills Company's June 30, 2014, bank statement and the June ledger account for cash are
summarized here: Required: 1. Prepare a bank reconciliation. A comparison of the cheques
written with the cheques that have cleared the bank shows outstanding cheques of $700. Some of
the cheques that cleared in June were written p

1. How much does Rona have recorded as prepaid expenses on the balance sheet as of December
29, 2013? Give a couple of examples of items that could make up this prepaid expense amount.
2. How much did Rona owe for accounts payable and accrued liabilities at December 29, 2013?
Was this an increase or decrease from the

The following amounts (in millions) were reported in the SnarkShark income statement and
balance sheet. 1. Compute the asset turnover and net profit margin ratios for 2014 and 2013. 2.
Would analysts be more likely to increase or decrease their estimates of share value on the basis
of these changes? Explain what the

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Lonny's Building Supplies (LBS) is a locally owned and operated hardware store. LBS uses a
perpetual inventory system. The following transactions (summarized) have been selected from
2014: Required 1. Compute Sales Revenue, Net Sales, and Gross Profit for LBS. 2. Compute the
gross profit percentage (using the formul

The September 30, 2014, bank statement for Cadieux Company and the September ledger
account for cash are summarized here: No outstanding cheques and no deposits in transit were
noted in August. However, there are deposits in transit and cheques outstanding at the end of
September. The NSF cheque and electronic funds t
One of the few companies to ever report the extent of sales discounts and returns was sun- glass
maker Oakley, Inc. Assume that in the Management Discussion and Analysis section of its 2014
annual report, Oakley reported the following information about its Sales Discounts and Returns.
Required 1. For each year, calcu

During the month of September, the Bridge City Go-Kart Company had the following business
activities: a. On September 1, paid rent on the track facility for six months at a total cost of
$12,000. b. On September 1, received $60,000 for season tickets for 12-month admission to the
racetrack. c. On September 1, booke

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Mid-county Manufacturing purchased a three-year insurance policy for $30,000 on January 2,

2013. Prepare any journal entries, adjusting journal entries, and closing journal entries required
on January 2, 2013, December 31, 2013, and December 31, 2014. Summarize these entries in T-
accounts for Prepaid Insurance, Insuran

Pirate Pete Moving Corporation has been in operation since January 1, 2014. It is now December
31, 2014, the end of the annual accounting period. The company has not done well financially
during its first year, although revenue has been fairly good. Three share- holders manage the
company, but they have not given much

What aspect(s) of the changes made to corporate governance in Canada might allow honest
employees to prevail?

For each of the following transactions for the SkyBlue Corporation, give the accounting equation
effects of the adjustments required at the end of the month on December 31, 2014: a. Received a
$600 utility bill for electricity usage in December to be paid in January 2015. b. Owed wages to
10 employees who worked thre

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Refer to PB4-2. Cactus Company's annual accounting year ends on June 30. It is June 30, 2014,
and all of the 2014 entries except the following adjusting journal entries have been made: a. The
company earned service revenue of $2,000 on a special job that was completed June 29, 2014.
Collection will be made during Jul

Explain briefly the application of the LC&NRV rule to ending inventory. Describe its effect on
the balance sheet and income statement when the net realizable value is lower than cost?

M&H, an international retail clothing company headquartered in Sweden, began its 2014 fiscal
year with assets totalling 41,734 (in millions of Swedish krona) but ended the year (on
November 30, 2014) with 51,243 in total assets. Account balances on November 30, 2014, are
listed below (in millions of Swedish krona). Re
Fesel Company is making adjusting journal entries for the year ended December 31, 2014. In
developing information for the adjusting journal entries, you learned the following: a. A two-
year insurance premium of $7,200 was paid on January 1, 2014, for coverage beginning on that
date. As of December 31, 2014, the unadju

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1. What amount of Net Sales does the company report during the year ended December 29,
2013? 2. The company's Cost of Goods Sold for this year end was $3,095,095,000. Compute the
company's gross profit percentage for the year ended December 29, 2013, and explain what this
means. 3. Assume that Rona experienced no shr

MacPC Inc., is a direct marketer of computer hardware, software, peripherals, and electronics. In
a recent annual report, the company reported that its revenue is recognized upon receipt of the
product by the customer and that its inventory include goods in transit to customers. Required: 1.
Indicate whether MacPC In

Silver Star Mountain Resort is a ski resort northeast of Vernon in British Columbia. Besides
maintaining well-groomed ski runs, the company sells lift tickets, ski lessons, and ski equipment.
It operates several restaurants and rents townhouses to vacationing skiers. The following
hypothetical December 2014 transaction

Refer to M4-9. Prepare a classified balance sheet at December 31, 2014. Are the SkyBlue
Corporation's assets financed primarily by debt or equity? Data from M4-9, The SkyBlue
Corporation has the following adjusted trial balance at December 31, 2014.

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1. Did Rona Inc.'s sales revenues increase or decrease in the year ended December 29, 2013, as
compared to the previous year? By how much? Calculate this change as a percentage of the
previous year's sales revenues by dividing the amount of the change by the previous year's sales
revenues and multiplying by 100. 2. Ro

Biz Zing Inc. (BZI) provides life and work counselling to companies. At the end of 2013, BZI's
total assets were $1,120. BZI's unadjusted trial balance includes the following for the twelve
months ended December 31, 2014. Other information: a. Only six months of depreciation have
been recorded so far. b. BZI has pro

1. How much inventory does the company hold on December 29, 2013? Does this represent an
increase or decrease in comparison to the prior year? 2. Does the company follow the lower of
cost and net realizable value rule? What method(s) does the company use to determine the cost
of its inventory? Describe where you found
Assume the 2014 ending inventory of Shea's Shrimp Shack was understated by $10,000. Explain
how this error would affect the amounts reported for cost of goods sold and gross profit for 2014
and 2015?

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For each of the following transactions for the SkyBlue Corporation, give the accounting equation
effects of the adjustments required at the end of the month on December 31, 2014: a. Collected
$2,400 rent for the period December 1, 2014, to February 28, 2015, which was credited to
Unearned Revenue on December 1, 2014.

Repeat M7-14, except assume the 2014 ending inventory was overstated by $100,000. Refer to
M7-14, Assume the 2014 ending inventory of Shea's Shrimp Shack was overstated by $10,000.
Explain how this error would affect the amounts reported for cost of goods sold and gross profit
for 2014 and 2015.

1. Did The Home Depot's sales revenues increase or decrease in the year ended February 2,
2014, as compared to the previous year? By how much? Calculate this change as a percentage of
the previous year's sales revenues. Is the trend in The Home Depot's sales revenues more or less
favourable than Rona's? 2. State the a

Nordstrom, Inc., started in business in 1901. It took only 100 years, but eventually the company
changed from a periodic inventory system to a perpetual inventory system (in 2002). Write a
brief report describing how this change would improve the company's inventory control.

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1. How much did The Home Depot owe for salaries and wages at February 2, 2014? Was this an
increase or decrease from the previous year? What factors could cause these two numbers to be
different? 2. Refer to the Revenues note in the Summary of Significant Accounting Policies that
follows The Home Depot's statements of

The following transactions are February 2014 activities of InGolfHelp, which offers indoor
golfing lessons. You have been hired to analyze the following transactions for a week in
February 2014: February 15 .... InGolfHelp collected $15,000 from customers for lessons given
in February. February 15 .... InGolfHelp sol

Glidden Consulting provides marketing research for clients in the retail industry. The company
had the following adjusted balances at December 31, 2014 (listed alphabetically): Required 1.
Prepare an adjusted trial balance listing the accounts in proper order at December 31, 2014.
Solve for the "?" in Retained Earnin

Before spinning off its businesses in 2006, Cendant Corporation owned and operated Super 8
Motels, Ramada, Howard Johnson, Century 21, Orbitz.com, Avis, and Budget. Cendant also was
notorious for committing a $3.3 billion accounting fraud in the late 1990s, which sent its former
vice-chairman to prison for ten years. A

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Assume that you have been hired by Big Sky Corporation as a summer intern. The company is in
the process of preparing its annual financial statements. To help in the process, you are asked to
prepare an income statement for internal reporting purposes and an income statement for external
reporting purposes. Your boss h

The SkyBlue Corporation has the following adjusted trial balance at December 31, 2014. Prepare
an income statement for the year ended December 31, 2014. How much net income did the
SkyBlue Corporation generate during 2014?

In its 2011 annual report, American Eagle Outfitters states that its "e-commerce operation
records revenue upon the estimated customer receipt date of the merchandise." Is this FOB
shipping point or FOB destination? If American Eagle was to change to the other terms of
shipment, would it report its Sales Revenues earli

Grizzly World Wide Inc. prides itself as being the world's leading marketer of Canadian branded
non-athletic footwear. The following data (in millions) were taken from its annual report for the
fiscal year ended January 3, 2014: Required: 1. Based on these data, prepare a multi-step income
statement. 2. How much wa

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Campus Co-Op, which is operated by students, uses a perpetual inventory system. The following
transactions (summarized) have been selected from 2014: 1. Compute Sales Revenue, Net Sales,
and Gross Profit for Campus Co-Op. 2. Compute the gross profit percentage (using the formula
shown in this chapter). 3. Prepare jo

ElecBooks Corporation provides an online bookstore for electronic books. The following is a
simplified list of accounts and amounts reported in its accounting records. The accounts have
normal debit or credit balances. Amounts in the list of accounts are rounded to the nearest
thousand dollars. Assume the year ended on

1. Does The Home Depot report higher or lower Net Sales than Rona during the year ending
February 2, 2014? 2. Assuming that Cost of Sales is the same thing as Cost of Goods Sold,
compute The Home Depot's gross profit percentage for the most recent year. Is it greater or less
than Rona's? Based on this, where are consu

Brothers Harry and Herman Hausyerday began operations of their machine shop (H & H Tool
Co.) on January 1, 2010. The annual reporting period ends December 31. The trial balance on
January 1, 2014, appears below (the amounts are rounded to thousands of dollars to simplify).
Transactions during 2014 (summarized in thous

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Carnival Cruise Lines prides itself on delivering memorable vacations to its guests by offering a
wide array of quality cruises. Assume the company began its 2014 fiscal year with assets
totalling 33.4 million U.S. dollars but ended the year (on December 31, 2014) with 36.8 million
U.S. dollars of total assets. Account

In response to problems in financial markets and a slowing economy, the Federal Open Market
Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in
September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of
steps. Economist Price Fishback of the Univ

Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/
fred2/) and find the most recent values for the following four variables: (1) M1 Money Stock
(M1), (2) the Currency Component of M1 (CURRENCY), (3) Total Checkable Deposits (TCD),
and (4) Travelers Checks Outstanding (WTCSL). W

Each year, the president's Council of Economic Advisers prepares and sends to Congress The
Economic Report of the President. The report published in February 2008 contained the
following summary of the economic situation: "Economic growth is expected to continue in
2008. Most market forecasts suggest a slower pace in t

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In explaining why monetary policy did not pull Japan out of a recession in the early 2000s, an
official at the Bank of Japan was quoted as saying that despite "major increases in the money
supply," the money "stayed in banks." Explain what the official meant by saying that the money
stayed in banks. Why would that be a

Mojohava Industries tracks the number of units purchased and sold throughout each accounting
period but applies its inventory costing method at the end of each period, as if it uses a periodic
inventory system. Assume its accounting records provided the following information at the end
of the accounting period, January

If the money supply is growing at a rate of 6 percent per year, real GDP is growing at a rate of 3
percent per year, and velocity is constant, what will the inflation rate be? If velocity is increasing
1 percent per year instead of remaining constant, what will the inflation rate be?

What are the key differences between how we illustrate an expansionary fiscal policy in the basic
aggregate demand and aggregate supply model and in the dynamic aggregate demand and
aggregate supply model?
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Use an aggregate demand and aggregate supply graph to illustrate the situation where
equilibrium initially occurs with real GDP equal to potential GDP and then the aggregate
demand curve shifts to the left. What actions can Congress and the president take to move real
GDP back to potential GDP? Show the results of thes

In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote: If the
Treasury were to f ill old bottles with banknotes, bury them at suitable depths in disused coal
mines which are then filled up to the surface with town rubbish, and leave it to private
enterprise ... to dig the notes up again .

Briefly explain whether you agree with the following statement: "The Fed has an easy job. Say it
wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that
amount."

Another infrastructure project in northern California funded in part by ARRA funds involved
expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for
the California state agency in charge of the project mentioned that the Caldecott Tunnel project
would have a "ripple effect" on employm

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What is the federal funds rate? What role does it play in monetary policy?

What is a monetary policy target? Why does the Fed use policy targets?

Recall that securitization is the process of turning a loan, such as a mortgage, into a bond that can
be bought and sold in secondary markets. An article in the Economist notes: That securitization
caused more subprime mortgages to be written is not in doubt. By offering access to a much
deeper pool of capital, securi

In an interview, Paul Volcker, chairman of the Federal Reserve's Board of Governors from 1979
to 1987, was asked about the Fed's use of monetary policy to reduce the rate of inflation. Volcker
replied: The Federal Reserve had been attempting to deal with ... inflation for some time. ... By
the time I became chairman .

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What are the key differences between how we illustrate a contractionary fiscal policy in the basic
aggregate demand and aggregate supply model and in the dynamic aggregate demand and
aggregate supply model?
The federal government collected less in total individual income taxes in 1983 than in 1982. Can
we conclude that Congress and the president cut individual income tax rates in 1983? Briefly
explain.

Which can be changed more quickly: monetary policy or fiscal policy? Briefly explain.

Why does a higher income tax rate reduce the multiplier effect?

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Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in
macroeconomic equilibrium from 2019 to 2020, assuming that the economy experiences
deflation during 2020. In order for deflation to take place in 2020, does the economy also have to
be experiencing a recession? Briefly explain.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the
money supply does not increase? Briefly explain.

In discussing the Taylor rule, John Taylor wrote, "I realize that there are differences of opinion
about what is the best rule to guide policy and that some at the Fed (including Janet Yellen) now
prefer a rule with a higher coefficient [on the output gap]." a. If Fed policy were guided by a
Taylor rule with a coeffic

A political commentator argues: "Congress and the president are more likely to enact an
expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are
popular and contractionary policies are unpopular." Briefly explain whether you agree.

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Briefly discuss how an increase in interest rates affects each component of aggregate demand.

An article in the Economist notes that the government of Venezuela running a large budget
deficit "caused the money supply almost to quadruple in two years and led to the world's highest
inflation rate, of over 60% a year." a. Why would running a large budget deficit cause the money
supply in Venezuela to increase so

An investment blog said about Fed Chair Janet Yellen, "She is arguably the world's most
powerful woman, and perhaps the most powerful person in the world. Can you name anybody
with more might?" Do you agree with this assessment? Briefly explain.

If Congress and the president decide that an expansionary fiscal policy is necessary, what
changes should they make in government spending or taxes? What changes should they make if
they decide that a contractionary fiscal policy is necessary?

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In 2015, in proposing a $478 billion increase in federal spending on infrastructure, President
Obama argued that the spending would increase total employment in the United States. a. Will
increases in federal spending always increase real GDP and employment in the short run? Briefly
explain. b. Are there circumstance

Suppose that real GDP is currently $17.1 trillion, potential GDP is $17.4 trillion, the government
purchases multiplier is 2, and the tax multiplier is 21.6. a. Holding other factors constant, by how
much will governments purchases need to be increased to bring the economy to equilibrium at
potential GDP? b. Holding

An article in the Wall Street Journal discussing the Federal Reserve's monetary policy included
the following observation: "Fed officials have been signaling since last year that they expected to
raise rates in 2015 ... pushing up the value of the currency and contributing to the economic
slowdown officials now confro

During the German hyperinflation of the 1920s, many households and firms in Germany were
hurt economically. Do you think any groups in Germany benefited from the hyperinflation?
Briefly explain.

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In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve
Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system
changed fundamentally during the boom. ... The non-bank financial system grew to be very
large. ... The institutions in this parall

During the Civil War, the Confederate States of America printed large amounts of its own
currency-Confederate dollars-to fund the war. By the end of the war, the Confederate
government had printed nearly 1.5 billion paper dollars. How would such a large quantity of
Confederate dollars have affected the value of the Con

In 2015, Richard Fuld, the last CEO of Lehman Brothers, gave a talk in which, according to an
article in the Wall Street Journal, "He outlined what he called the 'perfect storm' of events that
led to the financial crisis, saying 'it all started with the government' and policies that subsidized
cheap loans for people to

Beginning in 2008, the Federal Reserve and the U.S. Treasury Department responded to the
financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize the
actions of the Fed and the Treasury.

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In the summer of 2015, many economists and policymakers expected that the Federal Reserve
would increase its target for the federal funds rate by the end of the year. Some economists
argued, though, that it would be better for the Fed to leave its target unchanged. At the time, the
unemployment rate was 5.3 percent, cl

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target.
Why doesn't the Fed target the money supply at the same time?

According to a Congressional Budget Office (CBO) report: During the next decade alone, the
number of people age 65 or older is expected to rise by more than one-third, and the share of the
population age 65 or older is projected to grow from the current 15 percent to 21 percent in 2040.
Why is the over-65 population

What is a bank panic? Why are policymakers more concerned about bank failures than failures
of restaurants or clothing stores?

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Briefly explain whether you agree with the following statement: Real GDP is currently $17.7
trillion, and potential GDP is $17.4 trillion. If Congress and the president would decrease
government purchases by $300 billion or increase taxes by $300 billion, the economy could be
brought to equilibrium at potential GDP.

Briefly explain whether you agree with the following statements: "An expansionary fiscal policy
involves an increase in government purchases or an increase in taxes. A contractionary fiscal
policy involves a decrease in government purchases or a decrease in taxes."

In late 2012, the U.S. Treasury sold the last of the stock it had purchased in the insurance
company AIG. The Treasury earned a profit on the $22.7 billion it had invested in AIG in 2008.
An article in Wall Street Journal noted, "This step in AIG's turnaround, which essentially closes
the book on one of the most contro

Suppose that the equilibrium real federal funds rate is 2 percent and the target rate of inflation is
2 percent. Use the following information and the Taylor rule to calculate the federal funds rate
target: Current inflation rate = 4 percent Potential GDP = 17.0 trillion Real GDP = 17.17 trillion

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In 2009, Congress and the president enacted "cash for clunkers" legislation that paid up to $4,500
to people buying new cars if they traded in an older, low-gas-mileage car. Was this legislation an
example of fiscal policy? Does your answer depend on what goals Congress and the president
had in mind when they enacted t

Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find the most recent values and values for the same quarter in
1985 for the following three variables: (1) Nominal Gross Domestic Product (GDP), (2) the
Velocity of M1 Money Stock (M1V), and (3) the Velocity of M2 M
Explain whether you agree with this argument: If the Fed actually ever carried out a
contractionary monetary policy, the price level would fall. Because the price level has not fallen
in the United States over an entire year since the 1930s, we can conclude that the Fed has not
carried out a contractionary policy sinc

The hypothetical information in the following table shows what the situation will be in 2019 if
the Fed does not use monetary policy. a. If the Fed wants to keep real GDP at its potential level
in 2019, should it use an expansionary policy or a contractionary policy? Should the trading desk
be buying T-bills or sellin

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A report from the Congressional Budget Office (CBO) notes, "Potential GDP is CBO's estimate
of the maximum sustainable output of the economy." In early 2015, the CBO estimated that the
gap between real GDP and potential GDP would fall from 2.9 percent in 2014 to zero in 2017. In
2014, real GDP was $16.3 trillion, and t

An article in the New York Times in 1993 stated the following about Fed Chairman Alan
Greenspan's decision to no longer announce targets for the money supply: "Since the late 1970's,
the Federal Reserve has made many of its most important decisions by setting a specific target
for growth in the money supply ... and oft

Use the graph to answer the following questions. a. If the Fed does not take any policy action,
what will be the level of real GDP and the price level in 2019? b. If the Fed wants to keep real
GDP at its potential level in 2019, should it use an expansionary policy or a contractionary
policy? Should the trading desk

What are the key differences between how we illustrate an expansionary monetary policy in the
basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and
aggregate supply model?

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What is a mortgage? What were the important developments in the mortgage market during the
years after 1970?

If the short-run aggregate supply (SRAS) curve were a horizontal line at the current price level,
what would be the effect on the size of the government purchases and tax multipliers? Briefly
explain.

If the Fed believes the economy is headed for a recession, what actions should it take? If the Fed
believes the inflation rate is about to sharply increase, what actions should it take?

What is hyperinflation? Why do governments sometimes allow it to occur?

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What are the key differences between how we illustrate a contractionary monetary policy in the
basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and
aggregate supply model?

What do economists mean by the demand for money? What is the advantage of holding money?
What is the disadvantage? Why does an increase in the interest rate decrease the quantity of
money demanded?

A student says the following: "I understand why the Fed uses expansionary policy, but I don't
understand why it would ever use contractionary policy. Why would the government ever want
the economy to contract?" Briefly answer the student's question.

What is the difference between federal purchases and federal expenditures? Are federal
purchases higher today as a percentage of GDP than they were in 1960? Are federal expenditures
as a percentage of GDP higher?

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Define government purchases multiplier and tax multiplier.

In what sense does the Fed have a "dual mandate"?

Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find the most recent monthly values and values from the
same month 5 years and 10 years earlier for the M1 Money Stock (M1SL) and the M2 Money
Stock (M2SL). a. Using these data, calculate M1 as a proportion of M2 fo

When Congress established the Federal Reserve in 1913, what was its main responsibility? When
did Congress broaden the Fed's responsibilities?

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Suppose you buy a house for $150,000. One year later, the market price of the house has risen to
$165,000. What is the return on your investment in the house if you made a down payment of 20
percent and took out a mortgage loan for the other 80 percent? What if you made a down
payment of 5 percent and borrowed the othe

William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was once
quoted as saying, "The role of the Federal Reserve is to remove the punchbowl just as the party
gets going." What did he mean?

Briefly explain whether each of the following is (1) an example of a discretionary fiscal policy,
(2) an example of an automatic stabilizer, or (3) not an example of fiscal policy. a. The federal
government increases spending on rebuilding the New Jersey shore following a hurricane. b. The
Federal Reserve sells Treas

In the following graph of the money market, what could cause the money supply curve to shift
from MS1 to MS2? What could cause the money demand curve to shift from MD1 to MD2?

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Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find the most recent values and values from the same month
one year before for the following three measures of the price level: (1) the Consumer Price Index
for All Urban Consumers: All Items (CPIAUCSL), (2) the Pers

The hypothetical information in the following table shows what the situation will be in 2019 if
Congress and the president do not use fiscal policy: a. If Congress and the president want to keep
real GDP at its potential level in 2019, should they use an expansionary policy or a
contractionary policy? In your answer,

According to an article in the Wall Street Journal, "Brazil's economy grew just 2.3% in 2013,
compared with 7.5% in 2010. The country also has struggled with persistently high inflation,
which has forced its central bank to raise interest rates." a. Why would the Brazilian central bank
have been "forced" to raise inte

a. Using these data, calculate the average annual rate of change in both real GDP and M2 over
this 10-year period. b. If we assume that velocity was constant during this period, what was the
average annual inflation rate? c. Using the GDP Price Deflator data, calculate the average annual
inflation rate over this 10-y

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Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find the most recent value for Real Gross Domestic Product
(GDPC1) and the value from the same quarter eight years in the future for Real Potential Gross
Domestic Product (GDPPOT). a. Using these data, calculate the

While serving as the president of the Federal Reserve Bank of St. Louis, William Poole stated,
"Although my own preference is for zero inflation properly managed, I believe that a central
bank consensus on some other numerical goal of reasonably low inflation is more important than
the exact number." Briefly explain wh

Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2/) and find the most recent values for the following four variables:
(1) M2 Money Stock (M2), (2) the Total Savings Deposits at all Depository Institutions
(SAVINGS), (3) Retail Money Funds (WRMFSL), and (4) Small Time Depo
Go to www.federalreserve.gov, the Web site for the Federal Reserve Board of Governors, and
read the most recent Federal Open Market Committee (FOMC) press release. At the Web site,
select "Monetary Policy" at the top of the screen and then select "Federal Open Market
Committee" on the far left of the screen. Select "Me

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Use the graph to answer the following questions. a. If the government takes no policy actions,
what will be the values of real GDP and the price level in 2019? b. What actions can the
government take to bring real GDP to its potential level in 2019? c. If the government takes no
policy actions, what will the inflati

An article in the Wall Street Journal quoted a Federal Reserve economist as referring to "the
Fed's existing dual mandate to achieve maximum sustainable employment in the context of price
stability." a. Does "maximum sustainable employment" mean a zero percent unemployment rate?
Briefly explain. b. Does "price stabil

A newspaper article in the fall of 2007 stated, the luxury-home builder Hovnanian Enterprises
reported its fourth consecutive quarterly loss on Thursday, citing continuing problems of credit
availability and high inventory. Why was Hovnanian suffering losses? What does the article
mean by "credit availability"? How wou

An article in the Wall Street Journal in 2015 reported that the interest rate on five-year German
government bonds had become negative: "The negative yield means investors are effectively
paying the German state for holding its debt." The article quoted an investment analyst as saying:
"The negative yield is not scarin

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In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-
point increase in the Fed's range for overnight target rates," while another article noted, "the U.S.
central bank's discount rate ... has been set at 0.75% since February 2010." a. What is the name
of the Fed's "target r

October 2015 was the forty-second consecutive month that the rate of inflation as measured by
the personal consumption expenditures (PCE) price index was below the Federal Reserve's target
of 2 percent. a. Briefly explain why using the consumer price index (CPI) might yield a rate of
inflation different from that foun

Why can a $1 increase in government purchases lead to more than a $1 increase in income and
spending?

Economist Mark Thoma wrote, "One of the difficulties in using fiscal policy to combat
recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers
bypass this difficulty by doing exactly what their name implies." What are automatic stabilizers?
Name two examples of automatic stabiliz

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The Federal Reserve releases transcripts of its Federal Open Market Committee (FOMC)
meetings only after a five-year lag in order to preserve the confidentiality of the discussions.
When the transcripts of the FOMC's 2008 meetings were released, one member of the Board of
Governors was quoted as saying in an April 2008

The following is from a Federal Reserve publication: In practice, monetary policymakers do not
have up-to-the-minute, reliable information about the state of the economy and prices.
Information is limited because of lags in the publication of data. Also, policymakers have less-
than-perfect understanding of the way the