Spring_2011_Problem_Set_1 - Department of Economics Lehigh...

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Department of Economics Professor O’Brien Lehigh University Spring 2011 Eco 29 Problem Set 1 1. If you suspect that a company will not make any profits over the next ten years, which would you rather hold, bonds issued by the company or common stock issued by the company? Briefly explain. 2. The English economist Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zélie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoanuts, and “considerable quantities of bananas, lemons, and oranges.” She estimated that all of this would have had a value in France of four thousand francs. According to Jevons, “as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit.” Do the goods Mademoiselle Zélie received as payment fulfill the three functions of money? Why or why not? 3. In the late 1940s, the Communists under Mao Tse-tung were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value and most businesses refused to accept it. At the same time there was a paper shortage in Japan. During these years Japan was still under military occupation by the United States, following its defeat in World War II. Some of the American troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or a fiat money? Briefly explain. 4. Beginning at least at the time of the Roman Empire, governments would often raise revenue by “debasing the coinage.” This involved replacing existing coins with new coins that contained less gold or silver in them. What effect is doing this likely to have on the economy? Does the effect depend on whether most people realize that the new coins contain less gold or silver? 5. Briefly explain whether each of the following is counted in M1. a. The coins in your pocket b. The funds in your checking account c. The funds in your savings account d. The traveler’s check that you have left over from a trip e. Your Citibank Platinum MasterCard 6. Suppose you have $2,000 in currency in a shoebox in your closet.
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This note was uploaded on 02/22/2011 for the course ECO 029 taught by Professor Anthonyp.o'brien during the Spring '08 term at Lehigh University .

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Spring_2011_Problem_Set_1 - Department of Economics Lehigh...

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