Answers to Fill-In Questions
1. I (investment)
2. over 30 million
3. two or more
4. limited liability (perpetual life is also important)
5. high corporate income taxes and the costs of incorporating
6. common stockholders and preferred stockholders
7. common stockholders
8. bondholders
9. $25 million
10. inventory
11. depreciation
12. workers; capitalists
13. reserve army of the unemployed
14. 70
15. expected profits by the amount invested
16. interest rate
17. inventory investment, investment in plant and equipment, and residential housing investment
Answers to Problems
1. (a) $100 million + $150 million + $250 million = $500 million.
(b) $75 million plus $1.
(c) $7.5 million–$15 million
2. Gross investment ($150 million) – Depreciation ($40 million) = Net investment ($110 million).
3. –$15 million
4. Disposable
Income Consumption Saving Investment
(a) 1,000 1,000 0 400
(b) 2,000 1,200 800 400
(c) 3,000 1,400 1,600 400
5. (a) $7 billion
(b) $1 billion plus $1
(c) $100 million–$200 million
6. 575
7. $.3 billion or $300 million
8.
9. (a) $100,000,001
(b) $10 million–$20 million
Answers For Questions For Further Thought And Discussion
1. What are the advantages and disadvantages of the corporation as a form of business organization?
Advantages: Unlimited liability; perpetual life; ease in raising capital by selling stock to the public.
Disadvantages: Going to the trouble and expense of having papers drawn up and getting a charter; paying federal, and possibly state corporate income tax.
2. Explain how the capacity utilization rate and the interest rate affect the level of investment.
If the capacity utilization rate is high, then business firms are more likely to invest in new plant and equipment. But if that rate is low, then firms would need to use all that excess capacity before investing in still more plant and equipment.
A high interest rate will discourage investment, since it would add to costs and reduce profits. A low interest rate would encourage investment.
3. Explain why building up capital takes a great deal of sacrifice.
To raise money for capital, you would need to cut back on your own consumption, work harder and longer, or both. Each of these involves sacrifice. For a nation, it could produce less consumer goods and more capital goods, again sacrificing some consumption and possibly working longer hours to produce more capital goods.
4. The Carolina Textile Corporation is capitalized at $200 million. If you wanted to buy control of this company, how much money would you have to invest? Since you don't have nearly enough information to make this decision, just make some reasonable assumption about its bonds, preferred stock, and common stock.
We'll assume the company has $100 million in bonds, $50 million in preferred stock, and $50 million in common stock. To control the company you would probably need about 5–10% of the common stock. That would require an investment of $2.5–$5 million.
5. What has happened to our personal savings rate in recent years and how has that affected our level of investment?
Our personal savings rate, which had long been below 10%, fell below 5% in 1996, and is currently less than 3%. This proves to depress our level of investment. However, this decline has been more than compensated for by the rapid decline of the federal government budget deficit and the currently growing surplus, as well as by a huge inflow of dollars from foreigners.
6. If you owned a business and were considering increasing your level of investment, what would be the most important factor you would consider in determining how much you planned to invest? Explain why you chose that factor.
Three factors you should definitely consider are the expected rate of profit, the interest rate, and your expected sales. Which is the most important factor? I would say, the expected rate of profit. If it were below about 4%, you would not want to increase your level of investment no matter how low the interest rate and no matter how high expected sales. Were the expected rate of profit, say, 20%, then you would probably want to invest as much as you could, assuming, of course, that the interest rate would much lower than 20%.
7. Why are virtually all large business firms corporations?
They are large because of the three advantages mentioned in the answer to question 1. It would be virtually impossible to run a large corporation if the owners were liable to law suits, if it could not sell stock to the public, and if it needed to reorganize each time an owner died.
8. The Swanson Company, a partnership, was formed in 1999 by Jill Swanson, Jenne Swanson, Duke Swanson, Gage Swanson, and Maggie Swanson. In 2000, Holly Swanson and Missy Swanson were taken into the partnership. In 2001, Duke Swanson left the partnership and Brenda Swanson and Jerry Swanson joined it. In 2002, Jill Swanson left the partnership and Buddie Swanson joined it. In 2003, Forrest Swanson joined the partnership. Explain why it would have been easier for this company to have begun as a corporation rather than as a partnership.
The Swanson Company has a fairly large number of partners, with at least one partner joining or leaving each year. Each time a new partner joins or a partner leaves, the partnership must be dissolved and a new one formed. Had the company incorporated, it would have been a permanent entity, not subject to frequent dissolutions and reformations.
9. Practical Application: You and three friends have saved $100,000 and decided to form a computer repair business. Would you form a partnership or a corporation? Explain why you made this choice.
Although it would be very easy to form a partnership, doing so would leave you with two problems. You would not have limited liability, and if one of the partners left the business or a new one joined, the partnership would have to be dissolved and a new one formed. In most states a corporation could be formed quickly, easily and cheaply. So if I were you, I'd incorporate.
10. Practical Application: You own a furniture manufacturing company that employs 200 people, many of whom have worked for you for over 20 years. Although your company is profitable, you could raise your profits by 20 – 30 percent by shifting your production to Southeast Asia. Will you move your operations abroad? Explain why or why not.
You would, of course, be tempted to raise your profits by shifting or off-shoring your production to Southeast Asia. But on the other hand, you would feel guilty about laying off your loyal employees, even possibly about the effect this would have on your locality—and on the American economy. It's your call.
11. Web Application: Which is the most profitable company in the United States? How much were its profits? Go to www.fortune.com, click on Fortune 500 , and then click on Full List.
Answers will vary.
chapter 7
Answers toMultiple-Choice Questions
1. b
2. a
3. b
4. a
5. c
6. b
7. a
8. c
9. b
10. b
11. b
12. d
13. d
14. a
15. d
16. c
17. c
18. a
19. a
20. c
21. a
22. d
23. d
24. d
25. d
26. b
27. d
28. c
29. a
Answers to Fill-In Questions
1. 1933
2. spend, tax, regulate the economy, provide public goods, economic stabilization, and income redistribution
3. October 1, 2006
4. Social Security
5. taxes paid by taxable income
6. rich
7. sales, Social Security, excise
8. 6.2
9. personal income tax
10. 35
11. $1,530
12. big
13. rises
Answers to Problems
1. $4,960
2. $620
3. ATR = Taxes paid/Taxable income = $1,000/$20,000 = .05 = 5 percent.
4. $2,800
5. 15 percent
6. $5,000 × 0.1 = $500
7. $100,000,000 × .35 = $35,000,000
8. MTR = change in taxes paid/change in taxable income = $2,500/$10,000 = .25
9. ATR = taxes paid/taxable income = $5,000/$40,000 = 1/8 = .125.
10. $30,000 × 10 = $300,000. $300,000 × .0765 = $22,950.
11. Social Security: $100,000 x 0.62 = $6,200. Medicare: $100,000 × .0145 = $1,450. Total = $7,650.
12. The standard or itemized deductions, exemptions, and child care tax credits would mean that none of the $15,000 is taxable. The Social Security and Medicare tax would be $15,000 x .0765 = $1,147.50.
13. (a) You would pay no federal income tax (b) $15,000 x .0765 = $1,147.50.
14. The lowest tax bracket is 10%. If you paid only $1,000 in taxes, you would be in that bracket. So your MTR and your ATR would both be 10%.
15. (a) $106,800 x 0.62 = $6,621.60; (b) $1,000,000 x 0.0145 = $14,500; (c) 35%
16. The first $106,800 of your earned income is subject to 6.2 percent Social Security tax, so you would pay a maximum of $6,621.60. Your entire earned income is subject to a 1.45 percent Medicare tax. So how much income would you be earning if you paid $6,621.60 in Medicare tax? Let's let x = that income. Then we could use this equation:
0.0145x = $6,621.60
0.0145x = $6,621.60
0.0145 0.0145
X = $456,662.07
Answers To Questions For Further Thought And Discussion
1. If a political candidate said that if she were elected to Congress, she would work toward cutting federal government spending by one-third over the next four years, would she stand much chance of fulfilling her promise? Why not?
At least three-quarters of the federal budget consists of items that cannot be cut, either for legal or political reasons—Social Security, defense, interest on the national debt, and Medicare. So where do you cut? Even if she voted for such cuts, there would not be enough votes to pass them.
2. When you retire, will you be able to collect Social Security benefits? Give the reasons why you might not be able to collect?
The Social Security trust fund, according to actuaries, will run out of money by the year 2040, unless Congress acts fairly soon. The money in this fund is in the form of U.S. Treasury securities. So, in effect, the trust fund is money owed by the U.S. Treasury to retirees. As long as the U.S. government is solvent, those securities are sound. But what if the federal government starts running deficits again and the national debt shoot up, especially as the ratio of workers to retirees continues to fall? So if you plan on retiring before 2040, you'll probably be able to collect benefits, but there is no question the Social Security system will need to be fixed well before then.
3. Discuss the pros and cons of having a high cigarette tax.
Pros: A high tax raises tens of billions in government revenues every year and it discourages people, especially teenagers, from smoking.
Cons: It is a regressive tax and it places the government in the position of punishing us for our sins.
4. Make up a numerical example to show why the Social Security tax is regressive.
Income Tax rate Taxes Paid Taxes as a percentage of income
$10,000 6.2% $620 6.2%
100,000 6.2%
5. If Adam Smith were alive today, to what degree would he approve of the present economic role of the American government?
Although he wouldn't be at all happy with the myriad federal economic rules and regulations or with attempts to use the level of government spending and taxation to smooth out the business cycle, he might agree with much of the provision of public goods and services—certainly defense, and very likely police and fire protection, streets, highways, and parks.
6. What additional goods and services do we expect from government today as opposed to 60 years ago?
We expect an extensive national defense, Social Security, universal education at least through high school, some form of medical insurance, and the maintenance of a national highway network.
7. Some politicians say that Americans pay too much in taxes. Explain why you agree or disagree with them.
Compared to other industrial nations, taxes in the U. S. are extremely low. Nevertheless, it could be argued that taxes are still too high in the U.S., and that they are ridiculously high in other countries.
8. Describe the growth of the economic roles of the federal government since the 1930s.
In the 1930s the federal government, under the New Deal, began to regulate the banks through the Federal Deposit Insurance Corporation (FDIC), and to intervene in the economy to put people to work in jobs programs. Social Security and public assistance were also launched. In the 1940s the government spent hundreds of billions of dollars fighting World War II. After the war, although military spending was slashed, it never fell to prewar levels, and it rose to about $300 billion (in 2001 dollars) in the early 1980s, never falling much below that level. In the 1960s the Medicare, Medicaid, and food stamp programs were started, and expenditures of each has risen exponentially since then.
9. Explain the difference between government spending and government purchases of goods and services.
The federal, state, and local governments spend about half of their receipts on the purchase of goods and services, like highways, teachers' salaries, defense, and the justice system. The other half goes for Social Security benefits, public assistance, pensions for government retirees, and other transfer payments. So government spending includes government purchases of goods and services and well as transfer payments.
10. Give two examples of public goods or services that you use.
Streets, highways, police protection, fire protection, the courts
11. Practical application: If you could order a cut of $100 billion in federal spending, which programs would you cut and why would you cut them?
My two favorites for cutting would be defense and agriculture. Do we need to spend as much on defense as the rest of the world put together? With the disappearance of the Soviet Union, surely there is less need for a huge military establishment. And why must we pay farmers tens of billions of dollars a year to not grow certain crops, or to support the prices of crops they grow?
12. Practical Application: In what ways is our tax system—federal, state, and local –
too regressive? How would you make it less regressive without reducing tax revenue?
The Social Security tax – and to a somewhat lesser degree, the Medicare tax – are regressive because they are a much greater burden to the poor and the working class than they are to the relatively well off. The Social Security tax is a flat tax of 6.2 percent on the first $106,800 of earned income, so those earning over that ceiling pay a smaller percentage of their income than those earning below that ceiling. The Medicare tax is a flat 1.45 percent of one's income, but it is still a greater burden on the poor than on the rich.
Nearly all states – and to a lesser degree, localities – have sales taxes, which fall disproportionately on the poor and working class. These groups spend virtually all of their incomes, whereas the rich, on average, save a substantial part of their incomes. So lower income people generally pay a higher percentage of their income on sales taxes than the rich.
13. Practical Application: About how much personal income tax would you have to
pay on a job that paid $100 million? See if you can come up with the correct answer in less than 10 seconds.
In 2010 the top marginal tax rate was 35 percent, so you would have to pay about $35 million.
13. Web Activity: On January 1 of each year, the Social Security wage base rises. To
find the wage base for the current year, go to www.google.com, type in "Social Security Wage Base," and click on the first listing.
Answers will vary.
14. Web Activity: Which states have no sales tax? Go to www.taxadmin.org and click
on "State Comparisons" at the top left of the left column.
As of 1/1/10 just five states -- Alaska, Delaware, New Hampsire, Montana, and Oregon -- had no sales tax.
Chapter 8Answers to Multiple-Choice Questions
1. c
2. a
3. b
4. d
5. c
6. d
7. a
8. b
9. a
10. b
11. b
12. b
13. a
14. c
15. c
16. d
17. a
18. b
19. c
20. b
21. c
22. c
23. c
24. b
25. c
26. b
27. a
28. c
29. b
30. c
31. c
32. d
33. c
34. a
35. a
36. d
37. b
Answers to Fill-In Questions
1. export - imports
2. the United States, Canada, Mexico
3. 392
4. agricultural subsidies
5. 10%
6. Mercosur
7. more competition from low-wage Third World workers
8. Germany (may be China in more recent years)
Answers to Questions for Further Thought and Discussion
1. Explain how and why trade barriers have come down in recent decades.
The main reason why trade barriers have come down is the formation of GATT, and its successor, the WTO. These organizations, to which nearly all of the world's nations have belonged, have progressively reduced tariffs and other trade barriers among its members. Regional trade organizations such at NAFTA, Mercosur, and the European Union have had even more success. All of this has been made possible by the widespread belief that trade and globalization are beneficial to every nation. However, that belief is hardly universal, as evidenced by the massive protests in Seattle, Prague, and other cities.
2. Do you think we should have joined NAFTA? Try to argue this question from both sides.
Pro: Trade between nations always benefits both nations. The U.S. concentrates on producing the goods and services that it produces most efficiently and sells them to Mexico. And Mexico does the same with us. This pushes up the standard of living of both nations.
Con: American manufacturers have moved factories to Mexico costing American workers hundreds of thousands of jobs. The Mexican factories pay their workers only a dollar an hour and the factories do not uphold the higher environmental
standards of those in the U.S. Furthermore, by buying products from Mexico and other poorer nations, American consumers are encouraging the exploitation of low-paid workers, many of whom are children.
3. List the reasons why our trade deficit has grown so quickly since the mid-1990s. What can we do to help bring it down?
(1) Our economy has grown more rapidly than those of our major trading partners, especially Canada and Western Europe.
(2) Americans have been on a buying binge.
(3) The dollar has risen relative to other currencies, making imports cheaper to American consumers and making our exports more expensive to foreign consumers.
The federal government can make savings more attractive by making more savings tax-free, and state sales taxes and federal excise taxes can be raised.
The Treasury can push the value of the dollar down by selling dollars in exchange for foreign currencies.
4. Identify the goods and services that you purchase that are imported. How would your lifestyle change if these imports were unavailable?
Everyone's answer will differ. I drive a Toyota Camry, own a Sony T.V. and VCR, and have a Nikon camera. Most of my clothing is imported, I often watch foreign movies, and I sometimes travel abroad. My lifestyle would suffer if I were to substitute American for foreign goods and services. Indeed, we've pretty much stopped making TVs, VCRs, and cameras in the United States, and the American goods and services that I would substitute would, at least in my mind, be inferior to those originating abroad.
5. How would your life change if the U.S. were no longer the world's leading exporter?
If you worked for a major exporter like Boeing or Chase Bank, you might be out of a job, or perhaps you would earn less money. Or, even if you didn't , you might find that all those people who lost their jobs at Boeing, Chase, and other leading exporters might, in effect, bid salaries down, and you would end up making less money.
6. Explain how international trade (exports and imports) affects a nation's output, employment, and income.
A nation will produce more because it will concentrate on providing those goods and services which it can produce most efficiently. Its employment may be higher, since workers in our major exporting firms will be more productive (although even without trade, these people would probably still be working at less well-paying jobs). Income would be higher since we would be producing more. This, in turn, would enable us to consume more.
7. Practical Application: Should the U.S. pull out of NAFTA? Explain why we should or should not.
On balance I think we should stay in NAFTA. American, Canadian, and Mexican consumers benefit from free trade and a facilitated flow of goods among the three countries. There is the added fear that if we were to make it harder for Mexicans to sell us their goods, there would be an even greater flow of illegal immigration.
But there has been a definite downside to NAFTA. Since its inception our trade deficits with Mexico and Canada have shot up, while our heavily subsidized farmers—especially those growing corn—have put hundreds of thousands of Mexican farmers out of business. And finally, taking advantage of very low wage rates, American manufacturers have moved hundreds of thousands of factory jobs to Mexico.
8. Practical Application: A group at your school has called a meeting to discuss a
boycott of the college bookstore if it continues selling clothing made with sweatshop labor. Would you support such a boycott? Explain why you would or why you would not.
Much of the clothing sold in college bookstores is made with sweatshop labor, so there is good reason to oppose its sale. A boycott might lead to better working conditions and higher pay. But jobs in sweatshops are almost always better than whatever other work is available. So a boycott might leave these workers worse off than they would have been if the college bookstore continued buying this clothing.
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