NameStudent Number Spanish III Part I Midterm Exam.docx

Name/Student Number:
Spanish III Part I Midterm Exam
Short Answer – Write your answers below each question. Use
complete sentences. Answers
should be in Spanish.
1. ¿Qué es lo que más te gusta hacer en una excursión a un
parque nacional? ¿Qué es lo que
menos te gusta?
2. ¿A qué eventos deportivos te gusta asistir?
3. ¿Por qué viajan muchos peregrinos a Santiago de
Compostela hoy en día?
4. ¿Por qué se oyen ruidos a veces desde muy dentro del
Popocatépetl?
5. ¿Qué obras de arte o de literatura influyen en tu vida?
6. ¿Cuál es tu opinión sobre las obras de Joan Miró?

7. ¿Qué hago para ponerme en forma?
8. ¿Qué me recomiendas para no sufrir de estrés?
9. ¿Cuándo te preocupas?
Una chica está hablando con su amiga sobre sus relaciones con
gente de la escuela y su
familia. Le dice lo que piensa y su amiga le responde,
expresando una opinión. Escribe las
respuestas de la amiga, usando la expresión entre paréntesis.
Modelo Algunas personas de nuestra escuela no guardan
secretos. (Temo que)
Temo que algunas personas de nuestra escuela no guarden
secretos.
10. José está enojado con Juan. (Siento que)
_____________________________________________________
_______
11. En las carreras, ¿prefieres observar o participar? ¿Por qué?
12. En tu opinión, ¿cómo es la música de la salsa?

13. ¿Quién te aconseja cuando te sientes fatal?
14. ¿Qué le aconsejas a un amigo que come mucha comida mala
para la salud?
15. ¿Cómo te reconcilias con tus padres después de una pelea?
16. ¿Adónde te gusta ir de cámping? ¿Por qué?
17. ¿Qué deportes jugabas cuando eras niño(a)?
18. ¿Qué obra de arte has visto que te ha impresionado más?
¿Por qué?
19. ¿Qué comes para seguir una dieta nutritiva?
20. ¿Cuáles son algunos temas que muchos poetas hispanos
usan en sus poesías? Nombra 2 o
más temas, por lo menos.

Case StudiesCase Studies
INTERNATIONAL FINANCE
Case Study 20.1: The Big Mac Index
As you have already learned, the PPP theory predicts that in the
long run the exchange rate between two cur-
rencies should move toward equalizing the cost in each country
of an identical basket of internationally traded
goods. A light-hearted test of the theory has been developed by
The Economist magazine, which compares prices
around the world for a “market basket” consisting simply of one
McDonald’s Big Mac—a product that, though not
internationally traded, is essentially the same in more than 100
countries. The Economist begins with the price of a
Big Mac in the local currency and then converts that price into
dollars based on the exchange rate prevailing at the
time. A comparison of the dollar price of Big Macs across
countries offers a crude test of the PPP theory, which predicts
that prices should be
roughly equal in the long run.
This chart lists the dollar
price of a Big Mac in March
2010, in 22 surveyed
countries plus the euro zone

average. By comparing the
price of a Big Mac in the
United States (shown as
the green bar) with prices
in other countries, we can
derive a crude measure of
whether particular curren-
cies, relative to the dollar,
are overvalued (red bars) or
undervalued (blue bars). For
example, because the price
of a Big Mac in Norway,
at $6.87, was 92 percent
higher than the U.S. price of
$3.58, the Norwegian krone
was the most overvalued
relative to the dollar of the
countries listed. But Big

Macs were cheaper in most
of the countries surveyed.
The cheapest was in China, where $1.83 was 49 percent below
the U.S. price. Hence, the Chinese yuan was the most
undervalued relative to
the dollar.
Thus, Big Mac prices in March 2010 ranged from 92 percent
above to 49 percent below the U.S. price. The euro was 29
percent overval-
ued. The price range lends little support to the PPP theory, but
that theory relates only to traded goods. The Big Mac is not
traded internation-
ally. Part of the price of a Big Mac must cover rent, which can
vary substantially across countries. Taxes and trade barriers,
such as tariffs and
quotas on beef, may also distort local prices. And wages differ
across countries, with a McDonald’s worker averaging about $8
an hour in the
United States versus more like $1 an hour in China. So there are
understandable reasons why Big Mac prices differ across
countries.
SOURCES: “The Big Mac Index: Exchanging Blows,” The
Economist, 17 March 2010; David Parsley and Shang-Jin Wei,
“In Search of a Euro Effect: Big Lessons from a Big Mac
Meal?” Journal of International Money and Finance, 27 (March
2008): 260–276; Ali Kutan et al., “Toward Solving the PPP

Puzzle: Evidence from 113 Countries,” Applied Economics,
41 (Issue 24, 2009): 3057–3066; and the McDonald’s
Corporation international Web site at
http://www.mcdonalds.com.
QUESTION
1. The Big Mac Index computed by The Economist magazine
has consistently found the U.S. dollar to be undervalued against
some curren-
cies and overvalued against others. This fi nding seems to call
for a rejection of the purchasing power parity theory. Explain
why this index
may not be a valid test of the theory.
Cost of a Big Mac by Country
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00
Norway
Switzerland
Euro zone
Canada
Australia
Hungary
Turkey
United States
Japan
Britain
South Korea

United Arabs Emirates
Poland
Saudi Arabia
Mexico
South Africa
Russia
Egypt
Taiwan
Indonesia
Thailand
Malaysia
China
6.16
4.62
4.06
3.98
3.75
3.71
3.58
3.54
3.48
3.00
2.99
2.86

2.67
2.56
2.44
2.39
2.37
2.28
2.36
2.12
2.16
1.83
Big Mac prices converted to U.S. dollars
$7.00
6.87
20
22212_CS_01-43.indd 4022212_CS_01-43.indd 40 11/11/11
8:06 PM11/11/11 8:06 PM
Case Study 20.2: What About China?
The U.S. trade defi cit with China of $227 billion in 2009
exceeded America’s combined defi cits with the European
Union, OPEC countries, and
Latin America. The defi cit with China grew about 15 percent
annually between 2007 and 2010. Americans spend four times

more on Chinese
products than the Chinese spend on American products.
Between 2007 and 2010, China’s holdings of U.S. Treasury
securities more than
doubled from $400 billion to $900 billion.
Many economists, politicians, and union offi cials argue that
China manipulates its currency, the yuan, to keep Chinese
products cheaper
abroad and foreign products more expensive at home. This
stimulates Chinese exports and discourages imports, thereby
boosting Chinese
production and jobs. At the same time, the average Chinese
consumer is poorer because the yuan buys fewer foreign
products.
As we have seen, any country that establishes a fi xed exchange
rate that undervalues or overvalues the currency must intervene
continu-
ously to maintain that rate. Thus, if the offi cial exchange rate
chronically undervalues the Chinese yuan relative to the dollar,
as appears to be
the case, then Chinese authorities must continuously exchange
yuan for dollars in foreign exchange markets. The increased
supply of yuan
keeps the yuan down, and the increased demand for dollars
keeps the dollar up.
But the charge that China manipulates its currency goes beyond

simply depressing the yuan and boosting the dollar. China’s
trading part-
ners increasingly feel they are being squeezed out by Chinese
producers without gaining access to Chinese markets. China
seeks every trade
advantage, especially for the 125 state-owned enterprises run
directly by the central government. For example, China offers
some domestic
producers tax rebates and subsidies to promote exports, while
imposing quotas and tariffs to discourage imports, such as a 25
percent tariff on
auto-parts imports.
China has tried to soothe concerns about the trade defi cit. Most
importantly, Chinese authorities in 2005 began allowing the
yuan to rise
modestly against the dollar. As a result, the yuan rose a total of
20 percent against the dollar between July 2005 and July 2010.
China also
announced plans to cut tax rebates paid to its exporters and to
lower some import duties. But these measures seemed to have
had little effect
on America’s monster defi cit with China.
Prior to an international fi nance meeting in June 2010, a key
European Central Bank offi cial said “the rigidity of the
Chinese monetary
regime had slowed down the recovery in the developed world.”

Facing political pressure to do something, China announced that
it would allow
the exchange rate to become more fl exible. We’ll see.
SOURCES: Lee Branstetter and Nicholas Lardy, “China’s
Embrace of Globalization,” NBER Working Paper 12373 (July
2006); Jason Dean and Shen Hong, “China Central Bank
Tames Yuan Appreciation Hopes,” Wall Street Journal, 22 June
2010; Yujan Zhang, “China Steel Group Accuses U.S.
Lawmakers of Protectionism,” Wall Street Journal, 5 July 2010;
and Michael Casey, “Showdown Looms Over China’s Currency
at G-20,” Wall Street Journal, 11 June 2010.
QUESTION
1. Why would China want its own currency to be undervalued
relative to the U.S. dollar? How does China maintain an
undervalued currency?
22212_CS_01-43.indd 4122212_CS_01-43.indd 41 11/11/11
8:07 PM11/11/11 8:07 PM
PUBLIC GOODS AND PUBLIC CHOICE
Case Study 16.1: Farm Subsidies
[Note: This is a more detailed look at farm subsidies than the
similar material in Chapter 16 of the text]
The Agricultural Marketing Agreement Act became law in 1937
to prevent what was viewed as “ruinous competi-

tion” among farmers. At the time, one in four Americans lived
on a farm. In the years since, the government intro-
duced a variety of policies that set fl oor prices for a wide range
of farm products. Now, only one in fi fty Americans
lives on a farm, but this program is still with us. Subsidies in
the 2008 Farm Act cost U.S. taxpayers $15.4 billion
in 2009. Worse still, the U.S. government often sells surplus
crops overseas for lower prices. That sounds altruistic,
but U.S. exports put some poor farmers around the world out of
business. U.S. farm subsidies continue to be a sticking point in
negotiating
freer international trade agreements.
Let’s see how price supports work in the dairy industry, using a
simplifi ed example. The exhibit below presents the market for
milk. Without
government intervention, suppose the market price of milk
would average $1.50 per gallon for a market quantity of 100
million gallons per
month. In long-run equilibrium, dairy farmers would earn a
normal profi t in this competitive industry. Consumer surplus is
shown by the blue-
shaded area. Recall that consumer surplus is the difference
between the most that
consumers would be willing to pay for that quantity and the
amount they actually pay.

Now suppose the dairy lobby persuades Congress that milk
should not sell for
less than $2.50 per gallon. The higher price encourages farmers
to increase their
quantity supplied to 150 million gallons per month. Consumers,
however, reduce their
quantity demanded to 75 million gallons. To make the fl oor
price of $2.50 stick, the
government every month must buy the 75 million gallons of
surplus milk generated
by the fl oor price or somehow get dairy farmers to cut output to
only 75 million gal-
lons. For example, to reduce supply, the government spent about
$1 billion on milk
products in 2009 under one federal program.
Consumers end up paying dearly to subsidize farmers. First, the
price consumers
pay increases, in this example by $1 per gallon. Second, as
taxpayers, consumers
must also pay for the surplus milk or otherwise pay farmers not
to produce that milk.
And third, if the government buys the surplus, taxpayers must
then pay for storage.

So consumers pay $2.50 for each gallon they buy on the market,
pay another $2.50 in higher taxes for each surplus gallon the
government
must buy. Instead of paying a freemarket price of just $1.50 for
each gallon consumed, the typical consumer-taxpayer in effect
pays $5.00 for
each gallon actually consumed.
How do farmers make out? Each receives an extra $1 per gallon
in revenue compared to the free-market price. As farmers
increase their
quantity supplied in response to the higher price, however, their
marginal cost of production increases. At the margin, the higher
price just offsets
the higher marginal cost of production. The government subsidy
also bids up the price of specialized resources, such as cows and
especially
pasture land. Anyone who owned these resources when the
subsidy was introduced would benefi t. Farmers who purchased
them after that (and,
hence, after resource prices increased) earn only a normal rate
of return on their investment. Because farm subsidies were
originally introduced
more than half a century ago, most farmers today earn just a
normal return on their investment, despite the billions spent
annually on subsidies.
If the extra $1 per gallon that farmers receive for milk were
pure profi t, farm profi t would increase by $150 million per

month under the
government program. But total outlays by consumer-taxpayer
jumped from $150 million per month for 100 million gallons to
$375 million per
month for 75 million gallons. Thus, cost to consumer-taxpayers
increases by $225 million, though they drink 25 million fewer
gallons. Like
other special-interest legislation, farm subsidies have a negative
impact on the economy, as the losses outweigh the gains. The
real winners
are those who owned specialized resources when the subsidy
was fi rst introduced. Young farmers must pay more to get into
a position to reap
the subsidies. Ironically, subsidies aimed at preserving the
family farm raise the costs of farming.
SOURCES: Barratt Kirwan, “The Incidence of U.S. Agricultural
Subsidies on Farmland Rental Rates,” Journal of Political
Economies, 117 (February 2009): 138–164; Ani Katchova,
“A Comparison of Economic Well-Being of Farm and Nonfarm
Households,” American Journal of Agricultural Economics, 90
(August 2008): 733–747; Bill Egbert, “Councilman
Eric Gioia Having a Cow Over Milk Prices: $6 A Gallon Is Too
High, He Says,” New York Daily News, 5 July 2009; Calitza
Jimenez, “USDA Pulls Plug on Some Farm Subsidy Data,”
Center for Public Integrity, 21 May 2010, at
http://www.publicintegrity.org/data_mine/entry/2100/; and
Joseph Glauber, “Statement Before the Senate Judiciary
Committee,” 19
September 2009, at
http://www.usda.gov/oce/newsroom/archives/testimony/2009/Ve

rmontDairy.pdf.
QUESTIONS
1. “Subsidizing the price of milk or other agricultural products
is not very expensive considering how many consumers there
are in the
United States. Therefore, there is little harmful effect from such
subsidies.” Evaluate this statement.
2. Subsidy programs are likely to have a number of secondary
effects in addition to the direct effect on dairy prices. What
impact do you sup-
pose farm subsidies are likely to have on the following?
a. Housing prices
b. Technological change in the dairy industry
c. The price of dairy product substitutes
16
S
Millions of
gallons per month
$2.50
1.50
0 75 100 150
Excess quantity supplied

D
o
ll
a
rs
p
e
r
g
a
ll
o
n
D
Effects of Milk Price Supports
22212_CS_01-43.indd 3222212_CS_01-43.indd 32 11/11/11
8:04 PM11/11/11 8:04 PM
Case Study 16.2: Campaign Finance Reform
Critics have long argued that American politics is awash in
special-interest money. Most Americans seem to agree. Two-
thirds of those
surveyed support public fi nancing of campaigns if it eliminates
funding from large private donations and organized interest

groups. Since the
1970s, presidential campaigns, but not congressional races,
have been in part publicly funded. Candidates who accept public
funds must abide
by campaign spending limits. But by rejecting public funds,
candidates can ignore spending limits.
Senators John McCain and Russ Feingold proposed a ban on so-
called soft-money contributions to national parties. Soft money
allows
political parties to raise unlimited amounts from individuals,
corporations, and labor unions and to spend it freely on party-
building activities,
such as get-out-the-vote efforts, but not on direct support for
candidates. Hard money is the cash parties raise under rules that
limit individual
contributions and require public disclosure of donors. The
McCain-Feingold measure was approved as the Bipartisan
Campaign Reform Act
of 2002. The act bans the solicitation of soft money by federal
candidates and prohibits political advertising by special interest
groups in the
weeks just before an election. The contribution limit is $2,300
for the primary and $2,300 for the general election, or a
combined $4,600 for
both.
Limits on special-interest contributions may reduce their infl

uence in the political process, but such caps also increase the
advantage of
incumbents. Although there was anti-incumbent sentiment in the
2010 congressional election, historically about 95 percent of
congressional
incumbents usually get reelected. Incumbents benefi t from a
taxpayer-funded staff and free mailing privileges; these
mailings often amount to
campaign literature masquerading as offi cial communications.
Limits on campaign spending also magnify the advantages of
incumbency by re-
ducing a challenger’s ability to appeal directly to voters. Some
liberal and conservative thinkers agree that the supply of
political money should
be increased, not decreased. As Curtis Gans, director of the
Committee for the Study of the American Electorate argued,
“The overwhelming
body of scholarly research . . . indicates that low spending
limits will undermine political competition by enhancing the
existing advantages of
incumbency.” Money matters more to challengers because the
public knows less about them. Challengers must be able to
spend enough to get
their message out. One study found a positive relationship
between spending by challengers and their election success but
found no relation-
ship between spending by incumbents and their reelection

success. So campaign spending limits favor incumbents.
The U.S. Supreme Court in 2010 ruled that the federal
government may not ban certain types of political spending by
corporations and
labor unions, ruling that: “When governments seek to use its
full power, including the criminal law, to command where a
person may get his or
her information, . . . it uses censorship to control thought.”
Barack Obama and John McCain together spent a little more
than $1 billion in the 2008 presidential race (with most of that
spent by
Obama). More than a billion dollars sounds like a lot of money,
but Coke spends at least twice that on advertising each year.
The point is that
even well-meaning legislation often has unintended
consequences. Efforts to limit campaign spending may or may
not reduce the infl uence of
specialinterest groups, but by reducing a challenger’s ability to
reach the voters, spending limits increase the advantage of
incumbency, thus
reducing political competition.
SOURCES: Michael Ensley, “Individual Campaign
Contributions and Candidate Ideology,” Public Choice, 138
(January 2009): 229–238; Jess Bravin, “Supreme Court
Reverses
Limits on Campaign Spending,” Wall Street Journal, 21 January
2010; Jonathan Salant, “Spending Doubled as Obama Led

Billion-Dollar Campaign,” Bloomberg News, 27
December 2008, at
http://www.bloomberg.com/apps/news?pid=20601087&sid=apxz
rZEHqU1o&refer=home#; the Federal Election Commission at
http://www.fec.gov/; and
Common Cause at http://www.commoncause.org.
QUESTION
1. The motivation behind campaign fi nance reform was to limit
the infl uence of special interests. In what sense could that
legislation have the
opposite effect?
22212_CS_01-43.indd 3322212_CS_01-43.indd 33 11/11/11
8:04 PM11/11/11 8:04 PM
INTERNATIONAL FINANCE
Case Study 19.1: The Big Mac Index
As you have already learned, the PPP theory predicts that in the
long run the exchange rate between two cur-
rencies should move toward equalizing the cost in each country
of an identical basket of internationally traded
goods. A light-hearted test of the theory has been developed by
The Economist magazine, which compares prices
around the world for a “market basket” consisting simply of one

McDonald’s Big Mac—a product that, though not
internationally traded, is essentially the same in more than 100
countries. The Economist begins with the price of a
Big Mac in the local currency and then converts that price into
dollars based on the exchange rate prevailing at the
time. A comparison of the dollar price of Big Macs across
countries offers a crude test of the PPP theory, which predicts
that prices should be
roughly equal in the long run.
This chart lists the
dollar price of a Big Mac in
March 2010, in 22 surveyed
countries plus the euro zone
average. By comparing the
price of a Big Mac in the
United States (shown as
the green bar) with prices
in other countries, we can
derive a crude measure of
whether particular curren-

cies, relative to the dollar,
are overvalued (red bars) or
undervalued (blue bars). For
example, because the price
of a Big Mac in Norway,
at $6.87, was 92 percent
higher than the U.S. price of
$3.58 the Norwegian krone
was the most overvalued
relative to the dollar of the
countries listed. But Big
Macs were cheaper in most
of the countries surveyed.
The cheapest was in China, where $1.83 was 49 percent below
the U.S. price. Hence, the Chinese yuan was the most
undervalued relative to
the dollar.
Thus, Big Mac prices in March 2010 ranged from 92 percent
above to 49 percent below the U.S. price. The euro was 29
percent overval-

ued. The price range lends little support to the PPP theory, but
that theory relates only to traded goods. The Big Mac is not
traded internation-
ally. Part of the price of a Big Mac must cover rent, which can
vary substantially across countries. Taxes and trade barriers,
such as tariffs and
quotas on beef, may also distort local prices. And wages differ
across countries, with a McDonald’s worker averaging about $8
an hour in the
United States versus more like $1 an hour in China. So there are
understandable reasons why Big Mac prices differ across
countries.
SOURCES: “The Big Mac Index: Exchanging Blows,” The
Economist, 17 March 2010; David Parsley and Shang-Jin Wei,
“In Search of a Euro Effect: Big Lessons from a Big Mac
Meal?” Journal of International Money and Finance, 27 (March
2008): 260–276; Ali Kutan et al., “Toward Solving the PPP
Puzzle: Evidence from 113 Countries,” Applied Economics,
41 (Issue 24, 2009): 3057–3066; and the McDonald’s
Corporation international Web site at
http://www.mcdonalds.com.
QUESTION
1. The Big Mac Index computed by The Economist magazine
has consistently found the U.S. dollar to be undervalued against
some curren-
cies and overvalued against others. This fi nding seems to call
for a rejection of the purchasing power parity theory. Explain
why this index
may not be a valid test of the theory.

19
Cost of a Big Mac by Country
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00
Norway
Switzerland
Euro zone
Canada
Australia
Hungary
Turkey
United States
Japan
Britain
South Korea
United Arabs Emirates
Poland
Saudi Arabia
Mexico
South Africa
Russia
Egypt
Taiwan
Indonesia

Thailand
Malaysia
China
6.16
4.62
4.06
3.98
3.75
3.71
3.58
3.54
3.48
3.00
2.99
2.86
2.67
2.56
2.44
2.39
2.37
2.28
2.36
2.12
2.16
1.83

Big Mac prices converted to U.S. dollars
$7.00
6.87
26692_CS_01-42.indd 3926692_CS_01-42.indd 39 11/11/11
6:17 PM11/11/11 6:17 PM
Case Study 19.2: What About China?
The U.S. trade defi cit with China of $227 billion in 2009
exceeded America’s combined defi cits with the European
Union, OPEC countries, and
Latin America. The defi cit with China grew about 15 percent
annually between 2007 and 2010. Americans spend four times
more on Chinese
products than the Chinese spend on American products.
Between 2007 and 2010, China’s holdings of U.S. Treasury
securities more than
doubled from $400 billion to $900 billion.
Many economists, politicians, and union offi cials argue that
China manipulates its currency, the yuan, to keep Chinese
products cheaper
abroad and foreign products more expensive at home. This
stimulates Chinese exports and discourages imports, thereby
boosting Chinese

production and jobs. At the same time, the average Chinese
consumer is poorer because the yuan buys fewer foreign
products.
As we have seen, any country that establishes a fi xed exchange
rate that undervalues or overvalues the currency must intervene
continu-
ously to maintain that rate. Thus, if the offi cial exchange rate
chronically undervalues the Chinese yuan relative to the dollar,
as appears to be
the case, then Chinese authorities must continuously exchange
yuan for dollars in foreign exchange markets. The increased
supply of yuan
keeps the yuan down, and the increased demand for dollars
keeps the dollar up.
But the charge that China manipulates its currency goes beyond
simply depressing the yuan and boosting the dollar. China’s
trading part-
ners increasingly feel they are being squeezed out by Chinese
producers without gaining access to Chinese markets. China
seeks every trade
advantage, especially for the 125 state-owned enterprises run
directly by the central government. For example, China offers
some domestic
producers tax rebates and subsidies to promote exports, while
imposing quotas and tariffs to discourage imports, such as a 25
percent tariff on
auto-parts imports.

China has tried to soothe concerns about the trade defi cit. Most
importantly, Chinese authorities in 2005 began allowing the
yuan to rise
modestly against the dollar. As a result, the yuan rose a total of
20 percent against the dollar between July 2005 and July 2010.
China also
announced plans to cut tax rebates paid to its exporters and to
lower some import duties. But these measures seemed to have
had little effect
on America’s monster defi cit with China.
Prior to an international fi nance meeting in June 2010, a key
European Central Bank offi cial said “the rigidity of the
Chinese monetary
regime had slowed down the recovery in the developed world.”
Facing political pressure to do something, China announced that
it would allow
the exchange rate to become more fl exible. We’ll see.
SOURCES: Lee Branstetter and Nicholas Lardy, “China’s
Embrace of Globalization,” NBER Working Paper 12373 (July
2006); Jason Dean and Shen Hong, “China Central Bank
Tames Yuan Appreciation Hopes,” Wall Street Journal, 22 June
2010; Yujan Zhang, “China Steel Group Accuses U.S.
Lawmakers of Protectionism,” Wall Street Journal, 5 July 2010;
and Michael Casey, “Showdown Looms Over China’s Currency
at G-20,” Wall Street Journal, 11 June 2010.
QUESTION
1. Why would China want its own currency to be undervalued

relative to the U.S. dollar? How does China maintain an
undervalued currency?
26692_CS_01-42.indd 4026692_CS_01-42.indd 40 11/11/11
6:17 PM11/11/11 6:17 PM
MONEY AND THE FINANCIAL SYSTEM
Case Study 14.1: Mackerel Economics in Federal Prisons
The economist R.A Radford spent several years in prisoner-of-
war camps in Italy and Germany during World War II,
and he wrote about his experience. Although economic activity
was sharply limited, many features of a normal
economy were found in the prison life he observed. For
example, in the absence of any offi cial currency behind
bars, cigarettes came to serve all three roles of money: medium
of exchange, unit of account, and store of value.
Cigarettes were of uniform quality, of limited supply (they
came in rations from the International Red Cross),
reasonably durable, and individually could support small
transactions or, in packs, larger ones. Prices measured in
cigarettes became fairly uniform and well known throughout a
camp of up to 50,000 prisoners of many nationalities.

Now fast-forward half a century to the U.S. federal prison
system. Prisoners are not allowed to hold cash. Whatever money
sent by relatives
or earned from prison jobs (at 40 cents an hour) goes into
commissary accounts that allow inmates to buy items such as
snacks and toiletries.
In the absence of cash, to trade among themselves federal
prisoners also came to settle on cigarettes as their commodity
money (despite offi -
cial prohibitions against trade of any kind among inmates).
Cigarettes served as the informal
money until 2004, when smoking was banned in all federal
prisons.
Once the ban took effect, the urge to trade created incentives to
come up with some
other commodity money. Prisoners tried other items sold at the
commissary including
postage stamps, cans of tuna, and Power Bars, but none of that
seemed to catch on.
Eventually prisoners settled on cans of mackerel, a bony, oily fi
sh. So inmates informally use
“macks”—as the commodity money came to be called—to settle
gambling debts, to buy
services from other inmates (such as ironing, shoe shining, and
cell cleaning), and to buy

goods from other inmates (including special foods prepared with
items from the commissary
and illicit items such as home-brewed “prison hooch”). At those
federal prisons where the
commissary opens only one day a week, some prisoners fi ll the
void by running mini-com-
missaries out of their lockers.
After wardens banned cans (because they could be refashioned
into makeshift knives),
the commodity money quickly shifted from cans of mackerel to
plastic-and-foil pouches of
mackerel. The mack is considered a good stand-in for the dollar
because each pouch costs
about $1 at the commissary, yet most prisoners, aside from
weight-lifters seeking extra
protein, would rather trade macks than eat them.
Wardens try to discourage the mackerel economy by limiting
the amount of food prison-
ers can stockpile. Those caught using macks as money can lose
commissary privileges, can
be reassigned to a less desirable cell, or can even spend time in
the “hole.” Still, market
forces are so strong that the mackerel economy survives in
many federal prisons.

SOURCES: R. A. Radford, “The Economic Organization of a
P.O.W. Camp,” Economica, 12 (November 1945): 189–201: and
Justin Scheck, “Mackerel Economics in Prisons Leads
to Appreciation of the Oily Fillets,” Wall Street Journal, 2
October 2008.
QUESTION
1. How well do pouches of mackerel satisfy the six properties
of ideal money (durable, portable, divisible, uniform quality,
low opportunity cost,
stable value)?
14
26692_CS_01-42.indd 2826692_CS_01-42.indd 28 11/11/11
6:09 PM11/11/11 6:09 PM
Case Study 14.2: The Hassle of Small Change
About 8 billion U.S. pennies were minted in 2009, and about
150 billion pennies circulated. That’s about 500 pennies per
U.S. resident. Most
pennies are resting in change jars, drawers, or other gathering
places for the lowly coin. Pennies are abandoned in the tiny
bins and donation
cans at store counters. Many people won’t bother to pick one up
on the sidewalk (as evidenced by the number you fi nd there).
The penny, like
all U.S. currency, has over time been robbed of its exchange

value by infl ation. Today’s penny buys only one-seventh as
much as it did in the
1950s. Pennies can’t be used in parking meters, vending
machines, or pay telephones, and penny candy is long gone. To
avoid the hassle of
small change, some restaurants, such as the Vanilla Bean Café
in Pomfret, Connecticut, charge prices exactly divisible by 25
cents. That way,
pennies, nickels, and dimes aren’t needed for any transaction.
The exchange value of the penny has declined as the cost of
minting it has risen. For more than a century, the penny was 95
percent
copper. In 1982, copper prices reached record levels, so the
U.S. Mint began making pennies from zinc, with just a thin
copper fi nish. Then the
price of zinc rose, boosting the metal cost of a penny in 2009 to
0.8 cents. Add to that the 0.8-cent minting cost per penny, and
you get
1.6 cents per coin. So the government loses 0.6 cents on each
penny minted, or $14.4 million on the pennies minted in 2009.
Nickels, which
are mostly copper, are also money losers; in 2009 they cost 6
cents to make.
Has the penny outlived its usefulness? In the face of rising
metal prices, the government has some options. First option:
mint them from a

lower-cost alloy. This would buy some time, but infl ation
would eventually drive the metallic cost above the exchange
value of the coin. Second
option: abolish the penny. Take it out of circulation. Countries
that have eliminated their smallest coins include Australia,
Britain, Finland, Hong
Kong, and the Netherlands. New Zealand eliminated its 5-cent
coin, as well as its 2-cent and 1-cent coins. The United States
abolished the
half-cent coin in 1857, at a time when it was worth 8 cents in
today’s purchasing power.
Third option: decree that the penny is worth fi ve cents, the
same as
a nickel. At the same time, the government could withdraw
nickels from
circulation. With pennies worth so much more, there would be
no incentive
to hoard them for their metallic value (a current problem), and
it would likely
be decades before the metallic value caught up with the
exchange value.
Rebasing the penny to 5 cents would increase the money supply
by about $6
billion, a drop in the bucket compared to a total money supply
of $1.7 trillion,

so the move would have virtually no effect on infl ation.
If the penny gets so little respect, why did the Treasury mint 2.4
billion
in 2009? As noted, some people are hoarding pennies, waiting
for the day
when the metallic value exceeds the exchange value. Another
source of
demand is the sales tax, which adds pennies to transactions in
44 states.
Charities also collect millions from change cans located at
check-out coun-
ters. And zinc producers lobby heavily to keep the penny around
as a major
user of the metal. Thus, the penny still has its boosters. That’s
why retailers
continue to order pennies from their banks, these banks order
pennies from the Fed, the Fed orders them from the U.S. Mint,
and the Mint
presses yet more pennies into idle service.
SOURCES: Austan Goolsbee, “Now that the Penny Isn’t Worth
Much, It’s Time to Make It Worth 5 Cents,” New York Times, 1
February 2007; Elizabeth Williamson, “Will Nickel-Free
Nickels Make a Dime’s Worth of Difference,” Wall Street
Journal, 10 May 2010; and Thomas Sargent and Francois Velde,
The Big Problem of Small Change (Princeton, NJ: Princeton
University Press, 2002). View the rounded prices on Vanilla

Bean Café’s menu at http://www.thevanillabeancafe.com/.
QUESTION
1. In countries where the monetary system has broken down,
what are some alternatives to which people have resorted to
carry out
exchange?
26692_CS_01-42.indd 2926692_CS_01-42.indd 29 11/11/11
6:11 PM11/11/11 6:11 PM
Microeconomics (Week 6)
1. Suppose seven people are trying to decide whether to get a
pizza with pepperoni, a pizza with sausage and pepperoni, or a
pizza with everything on it. Four people want everything, one
wants pepperoni and sausage, and two want pepperoni only.
Assume that each person prefers a pizza closer to his or her first
choice to a pizza that is unlike the first choice. What is the
preference of the median voter? Which pizza will be selected if
the majority rules?
2. What dilemma faces regulators trying to regulate natural
monopolies?
3. Distinguish among private goods, public goods, natural
monopoly, and open-access goods.
4. Political corruption is epidemic in Russia today. What effect
does this have on the Russian economy? Compare and contrast
bureaus and business firms.
5. How does social regulation differ from economic regulation?
6. Additional Question: Answer in as many words as it takes to
answer - Has airline deregulation been a success? Be sure to
take into account the accessibility and flight amenities, as well
as price. What, if any, effects do you think rising fuel costs will
have on airline regulation/deregulation?

Microeconomics (Week 7)
1. Explain how welfare creates work disincentives.
2. Discuss the factors that cause the average income of
nonwhites to be lower than the average income of whites.
3. Education is often used as an example of a positive
externality. Are the external benefits greater for elementary,
secondary, or college education? Explain.
4. Explain why the optimal level of pollution is not zero.
According to an EPA study, the health hazards of Superfund
sites have been greatly exaggerated and air pollution tends to be
a bigger health hazard than toxic waste dumps. Why is more
attention focused on toxic waste dumps than on air pollution?
5. Explain the changes in welfare caused by the "Personal
Responsibility and Work Reconciliation Act" of 1996.
6. To what extent do you think U.S. income distribution is
determined by economic factors? Use the material developed in
this unit to inform your (positive) position. To what extent do
you think the U.S. income distribution should be determined by
economic factors? Use the material developed in this unit to
inform your (normative) position.
Each question (1-5 for both) need to be answered in 75 words or
greater. The additional question (6 for both) can be answered in
as many words as it takes to answer the question. I need the
book that is being used to be referenced in APA format. The
book being used is ECON MICRO 3 by William McEachern. I
need these back Tuesday (4/9) by 7:00pm so that I have time to
read over and submit them. 7:00 EST.
Macroeconomics (Week 6)
1. Explain how banks are financial intermediaries. What are
reserves? What are excess reserves? Explain how the Fed can
affect the quantity of excess reserves in the banking system.
2. What are the three functions of money, and why are they
important?
3. What are the differences between M1 and M2?

4. Discuss the factors that led to deregulation of U.S. financial
markets in the 1980s.
5. How can the Fed affect the money supply by using the
discount rate?
answer - The chapter traces out the evolution of money from
commodity moneys to unbacked fiat moneys. How is money
likely to change during this century?
Macroeconomics (Week 7)
1. Explain how the short-run Phillips curve, the long-run
Phillips curve, the short-run aggregate supply curve, the long-
run aggregate supply curve, and the natural rate hypothesis are
all related. How do active and passive views of these concepts
differ?
2. What is meant by the demand for money? Which way does
the demand curve for money slope? Why?
3. Explain why the Fed can attempt to target either changes in
the money supply or changes in interest rates, but not both.
4. Explain how an active policy differs from a passive policy.
5. How does monetary policy affect aggregate demand in the
short run? How does monetary policy affect aggregate demand
in the long run?
answer - What are the major similarities and major differences
between the direct and indirect channels of monetary policy?
Each question (1-5 for both) need to be answered in 75 words or
greater. The additional question (6 for both) can be answered in
as many words as it takes to answer the question. I need the
book that is being used to be referenced in APA format. The
book being used is ECON MACRO 3 by William A. McEachern
I need these back Tuesday (4/9) by 7:00pm so that I have time
to read over and submit them. 7:00 EST.

NameStudent Number Spanish III Part I Midterm Exam.docx

NameStudent Number Spanish III Part I Midterm Exam.docx

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Ähnlich wie NameStudent Number Spanish III Part I Midterm Exam.docx

Ähnlich wie NameStudent Number Spanish III Part I Midterm Exam.docx (18)

Mehr von MARRY7

Mehr von MARRY7 (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

NameStudent Number Spanish III Part I Midterm Exam.docx