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1. Expansionary (looser) monetary policy to lower interest rates would stimulate both investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, increased government spending, increased welfare transfers) would stimulate aggregate demand directly. 2. a.Gold Mining . Gold traditionally is viewed as a hedge against inflation. Expansionary monetary policy may lead to increased inflation, and thus could enhance the value of gold mining stocks. b. Construction . Expansionary monetary policy will lead to lower interest rates which ought to stimulate housing demand. The construction industry should benefit. 3. a.Lowering reserve requirements would allow banks to lend out a higher fraction of deposits and thus increase the money supply. b. The Fed would buy Treasury securities, thereby increasing the money supply. c.The discount rate would be reduced, allowing banks to borrow additional funds at a lower rate. 4. a.Expansionary monetary policy is likely to increase the inflation rate, either because it may over stimulate the economy, or ultimately because the end result of more money in the economy is higher prices. b. Real output and employment should increase in response to the expansionary policy, at least in the short run. c.The real interest rate should fall, at least in the short-run, as the supply of funds to the economy has increased. d. The nominal interest rate could either increase or decrease. On the one hand, the real rate might fall [see part (c)], but the inflation premium might rise [see part (a)]. The nominal rate is the sum of these two components. 5. A depreciating dollar makes imported cars more expensive and American cars less expensive to foreign consumers. This should benefit the U.S. auto industry. 17-1
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6. Supply side economists believe that a reduction in income tax rates will make workers more willing to work at current or even slightly lower (gross-of-tax) wages. Such an effect ought to mitigate cost pressures on the inflation rate. 7. a.The robotics process entails higher fixed costs and lower variable (labor) costs. Therefore, this firm will perform better in a boom and worse in a recession. For example, costs will rise less rapidly than revenue when sales volume expands during a boom. b. Because its profits are more sensitive to the business cycle, the robotics firm will have the higher beta. 8. a.Housing construction (cyclical but interest-rate sensitive): (iii) Healthy expansion b. Health care (a non-cyclical industry): (i) Deep recession c.Gold mining (counter-cyclical): (iv) Stagflation d. Steel production (cyclical industry) (ii) Superheated economy 9. a. Oil well equipment: Relative decline (Environmental pressures, decline in easily-developed new oil fields) b. Computer hardware: Consolidation c. Computer software: Consolidation d. Genetic engineering: Start-up e. Railroads: Relative decline 10. a.General Autos.
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This note was uploaded on 03/10/2011 for the course FMIS 3601 taught by Professor Vizanko during the Spring '08 term at University of Minnesota Duluth.

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