Grantham University The Origin of Economics & Federal Reserve System Essay

I’m stuck on a Business question and need an explanation.

Each question should be 75-150 words in length.

1. The origin of economics as a science dates back to the publication of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith in 1776.  Smith believed a market economy would generally bring individual self-interest and the public interest into harmony.

Based upon those notions of self-interest and public interest and the bringing of both into harmony, according to Adam Smith, how would a market economy accomplish that harmony about which he describes?  What is government’s place in that market economy?

Think about society’s need to choose amongst competing resources and goals.  How does personal gain affect choices by individuals and government?  Opportunity costs.  While we want to do one thing, we can’t do others based upon scarcity and opportunity costs.  Resources are finite.  What about incentives as opposed to free offerings?  What about trade? 

2. Markets seek equilibrium, and the demand for goods and services will come to an equilibrium with supply of goods and services.  When markets are not in equilibrium, surpluses and shortages, as well as underground markets, can exist.  Sometimes, the government may want to intervene in markets to try to help reduce economic hardships.         

What is the difference between a price floor and price ceiling?  According to the laws of demand and supply and how market equilibrium, efficiency, and equity are reached, do attempts to repeal those laws and market results with price floors and price ceilings justify legislative bodies to implement price controls?

3. Politicians have a strong incentive to follow a strategy that will enhance their chances of getting elected and re-elected.  Political competition more or less forces them to focus on how their actions influence their support among voters and political contributors.

Are voters likely to be well informed on issues and the positions of candidates?  Why or why not?

4. Gross domestic product (GDP) is a measure of the market value of final goods and services produced within the borders of a country during a specific time period, usually a year. 

What is the GDP deflator?  How does the GDP deflator relate to real GDP? 

5. It is important to distinguish between changes that are anticipated and unanticipated because the impact on the economy will differ between the two.  The economy is in long-run equilibrium when the short-run aggregate supply curve, aggregate demand curve, and long-run aggregate supply curve are in equilibrium.   

What are the major factors causing a shift in aggregate demand (inward or outward)?  What are the major factors that will affect short-run aggregate supply?  Long-run aggregate supply?

6. When the economy is in a recessionary mode, aggregate demand shifting inward is often the culprit.  Deflationary pressures on prices ensue, and output falls, causing problems like higher unemployment and contraction of the economy.   

When the economy is in a recessionary mode, what will likely be the actions by government using fiscal policy?  Is it better to concentrate on aggregate demand or aggregate supply?  Why? 

7. The Federal Reserve System was established to provide a stable monetary system for the entire economy.  The Federal Reserve Bank (the Fed) has three major tools to control the money supply: 1) reserve requirements, 2) discount window for loans to member banks, and 3) open market operations.

When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy?  Suppose the Federal Reserve purchases a $100,000 bond from John Doe, who deposits the proceeds in the Manufacturer’s National Bank; what will be the impact of this transaction on the supply of money?

How do each of the Fed’s tools work?  What is the fractional reserve system, and how does it work in relation to the Fed?

8. Imports increase the domestic supply and lead to lower prices for consumers.  Exports reduce the domestic supply and push price upward.  The net effect of international trade is an expansion in total output and higher income levels for both trading partners (law of comparative advantages).

“The United States is suffering from an excess of imports.  Cheap foreign products are driving American firms out of business and leaving the U.S. economy in shambles.”  Evaluate this view.