Economics

Introduction
National debt refers to the money owed by the government. National debt can be internal or external. Internal debts are owed to the people and organizations within the country. External debts are owed to foreign lending organizations. Government borrows on short term (for a short duration) or on long-term basis. There are various tools of borrowing internally, for example, bonds, securities, direct borrowing among others (Davis, p. 32). Due to the increasing effects of global economic recession that was experienced recently, governments are increasing their national debts to cater for the increasing expenditure on unemployment benefits and to reconstruct industries which collapsed during the period. The reduced tax receipts have forced governments to increase their national debts to fill the gap created by the reduction in tax payment (Wormell, p. 239).

The problems of having a national debt which keeps getting bigger
Increasing national debt increases the tax burden to the taxpayers. National debt is repaid from the income collected from taxpayers. Taxes create a huge burden to the citizens of a country. Increasing the debts creates an additional burden to the tax payers. Citizens to a country may lack confidence with the government when taxes increase. A good tax system should not over burden the tax payers (Taylor, p. 314).

National debts affect the value of the currency used in the economy. When a country borrows money, it spends it in financing national projects. This increases the money in circulation within the economy. Inflation increases as the prices of commodities persistently increase. Increasing national debt causes devaluation of the national currency. This is caused by the increase in value of the currencies from other nations operating in the global money market. Devaluation of the currency affects the performance of national activities and the burden of the debts increases (Harris, p. 191).

Trade deficits increase with increase in national debts. Trade deficit is the difference between the exports and imports. When a country increases its national debts, it uses most of its income from exports to repay the debts. This decreases the value of the exports and increases the value of imports. Increase in trade deficits affects the balance of payments to a nation. National debts affect the international trade since countries have a restriction on the amount to borrow and the payment patterns (Wormell, p. 233).

Increase in national debt increases the interest expense paid to the creditors (Carvounis, p. 197). The debts should be paid at a given interest at a given period of time. The interest expense is computed as expenditure in the national budget. This expense withdraws money from the economy since it is not a direct expense. The people of a country do not benefit from the interest expense but increases the tax burden. Increasing national debts increases tax burden to the taxpayers (Harris, p. 211).

Many countries have experienced debt crisis due to the increase in the national debt. Dubai crisis has been created by over reliance on national debt to finance national projects. The country has encountered a national crisis since the economy has been unable to repay the debts. The creditors have declined the offer to freeze repayment of the debt for six years. Most of the economic activities have been adversely affected. Unemployment has increased due to low national investment (Taylor, p. 312).

Conclusion
National debts should be used only when there is a crisis in the economy. There are many bad effects of national debts than the benefits to a country. The government should use other tools of funding activities since national debt create a big problem to the national economy.

Covering a broad range of distinctive cultural, political and economic trends, globalisation has rapidly become one of the most fashionable words in the contemporary academic and political debate. In common discourse, the term globalisation is usually applied as a synonym for several phenomena. In the post WWII era, globalisation has become one of the major factors leading to increased trade and direct investment in the global economy. Besides globalisation, there are also several other factors which have played a major role in increasing trade and direct investments in the global economy. Some of these factors include advancements in technology, global competition and international media, and various amendments of laws in order to facilitate trade and foreign direct investments across international borders.

Globalisation
After WWII, international trade was seen to increase tremendously because of the globalisation issues. Following the defeat of the Nazis and the end of the second global conflict in 1945, the pace of globalisation increased leading to integration of people throughout the world. The entire world became more unified into a large single society that was functioning as one, especially business wise, due to the influence of globalisation. It included the combination of political, socio-cultural, technological and economic forces around the globe to work as a single unified system. Overtime, globalisation has increased the pace of economic integration of many economies around the world. Several trading blocs such as the European Union have been created because of globalisation thus enhancing the pace at which the different nations were trading and foreign direct investments were being made. The spread of technology, migration of people, capital flows and foreign direct investments, which have all played a crucial role in increasing the pace of growth of the global economy in the post WWII era, have been greatly enhanced by globalisation.

It is in no doubt that globalisation has greatly enhanced free trade around the world. This is a concept in business which promotes the liberty of individuals and organisations to sell and buy from whichever markets they prefer since competitive in the market increases business quality. This includes buying and selling commodities that are manufactured in foreign nations. Multinationals are thus less limited when it comes to the free markets, since they are able to target the international markets in which they can offer their services and products and compete with other players offering similar services and products from other regions around the world. In this respect, globalisation has played a major role in ensuring that free trade is accepted by several nations all over the world. Thus markets across the globe become more and more integrated.

Over the last 60 years, globalisation has greatly increased the rate at which people move across borders of several nations across the world. This has led to a massive transfer of several factors that are very crucial as far as increasing the growth of trade and foreign direct investment is concerned. Ever since the close of WWII, there is virtually no single nation around the world that can claim that all its residents are purely its citizens by birth. The massive movement of people across international borders has greatly increased the pace at which trade is carried out between nations as well as foreign direct investments. Following these migrations, individuals and organisations were now in a position of making trade decisions in a global perspective and the physical national borders of their countries no longer acted as barriers but as facilitators of international commerce. Individuals and organisations were in a position of investing in nations where they felt they can easily break even and attain their main objectives.

Technology and Communication
Technology has been a major factor that has led to the growth of trade and foreign direct investments in the global economy. One major aspects of technology that has led to increased global commerce and foreign direct investments in the post WWII era is increased speed of carrying out various transactions. The improvements that have been achieved in the transport world have made it quite easy for people and products to be transported from one nation to another. In the last half of the twentieth century, there were enormous advancements in the world of transportation. The two main modes of transport that have achieved economies of scale which have led to increased trade and foreign direct investments were air and water transport. The vessels which are used in these modes of transport were greatly improved in terms of capacity and speed, leading more people and products being ferried across nations within a relatively short period of time.
 
There were also substantial technological advancements in the world of communication. Comparing the modes of communication that existed before the ones that were utilized in post WWII, there is a great difference. Television displaced radio as the primary means of instant global communications, bringing knowledge about other places and peoples to every community.  This eventually led to a lot of growth on foreign direct investments and commerce in the global economy. The later invention of cell phones and their subsequent use as the preferred mode of communication by millions of people around the world has had great impact on the international trade in several aspects. It made it possible for people to easily communicate with each other irrespective of ones location in the globe. This demonstrated that people could access cell phone services which are not very expensive for most people.

During the same time period, there came the information technology (IT) revolution which accelerated the processing and distribution of information and helped reshape the entire world to be more or less a global village. With the recent emergence of Internet technology, it has become very easy for people across the world to learn about and obtain the services and goods that are available in the international markets as well as advertise their own. Internet technology has had a great impact on the rate at which people learn about various opportunities existing in foreign nations that they can utilize to achieve their own objectives. With millions of people around the world accessing the Internet on a daily basis, this form of technology has proved to be a great factor in increasing growth in trade and foreign direct investments in the global economy in the modern world.

The advancements in the world of communication over the last half century have made it possible for people around the world to learn about the cultures and traditions of other people, and thus manufacture goods and develop services tailored for those markets. This has led to further integration of peoples cultures and traditions making the international society to be more or less one community.  For example, world English has become the de facto standard for global business communication.  Individuals and organisations participating in the international community can more easily trade higher volumes of products in international markets since they are able to offer and deliver preferred products in such markets. Thanks to the advancements in financial markets made possible by innovations in the IT world, individuals and organisation can easily make international payments through various high-tech services offered on high-speed networks.  As a result, making foreign direct investments to several nations around the world is quite easy.  One does not necessarily have to travel physically to the nations he or she intends to invest their money in.

Trade Laws and Markets
In order to make international commerce and foreign direct investments a reality, governments all over the world have passed laws aimed at facilitating the necessary processes. Enactment of successive legislative steps over the last 60 years has greatly facilitated the rate at which organisations and individuals can make foreign direct investments in nations where they wish to invest their money. As an example, the euro became the single currency of the European Union in 2002 and is commonly used in 16 of the 27 member states.  Such changes in laws have also made it easier for multinational companies to trade in several nations without violating the laws of such nations. Most nations have passed laws that have made it possible for their markets to be liberalised.  Therefore, the prices of goods and services offered in such markets are largely determined by the forces of demand and supply and not the government interventions.

In nations that are very keen on attracting foreign direct investments to increase their economic growth, they have passed laws ensuring that very few licences are required by the foreign investors while investing in such countries. This practice and others have been adopted in many developing nations to make it easier for individuals and organisations to invest in foreign nations. Countries also ensured that it was also easier for the international traders to import and export various products. Through such practices, it became quite easy for people around the world to be supplied with the raw materials and products that are not locally available in their nations as well as export the excess of the same to other markets outside their nations.

International markets have also become major factors in promoting trade and direct foreign investments in the global economy and the strong performance of several multinational corporations all over the world.. The international markets provide the multinational companies with massive concentrated markets through which they can gain a lot more revenue and at the same time increase their profitability.  This would not have been possible with the small limited local markets which existed before the second global conflict.

Competition and Media
Increased competition has played a major role in increasing the pace at which the international trade and foreign direct investments were growing in the global economy. Ever since WWII, nations, corporations and individuals have focused much of their resources in ensuring that they offer goods and services that meet the international standards so that they can be competitive in these markets. The ever increasing competition ensures that corporations all over the world are very keen on innovations and creativity to ensure that their products always meet the highly dynamic needs of the international society. Corporations have been subjected to intense competition arising from both the local manufacturers as well as the international ones.  Therefore they have to ensure that they produce superior goods and services which will be competitive in the international markets. This has led virtually all corporations around the world to employ various research techniques which ensure that their products are not only of a high quality, but they are also affordable to their targeted consumers.

The international media has greatly evolved in the last 60 years. It has led to a generation of highly knowledgeable people with instant access to various events that are taking place around the world. Trade and investment opportunities in several parts of the world emerge every day. The international media has played a great role in creating awareness around the world of such opportunities as well as how individuals and corporations from any part of the world can take advantage of such opportunities. Without the international media, it could have been very difficult for individuals and corporations to know the availability of various opportunities and they would therefore make lesser investments away from the regions where they are physically located.

The international media has also been a major tool through which the international traders and investors can advertise their products and thus increase their market share in the international markets. The knowledge that is gained by various international traders and investors has been a major contributor to the growth of trade and direct foreign investments in the global economy. The international media has prompted competing organisations all over the world to compare themselves with the market and technological leaders in the market in which they are operating. Such comparisons lead such corporations to implement various changes and policies, which enable them to also contribute immensely to international trade and foreign direct investments.

Conclusion
As globalisation, technology, competition, international markets and media houses intensify their roles in the global economy, it will continue to grow. These factors have greatly enhanced the pace at which international trade and direct foreign investments take place. However, globalisation and technology have been the major forces behind the dramatic increase in growth of the international trade and foreign direct investments, although other factors cannot be ignored for they have also made smaller contributions. Multinationals continue to place themselves in suitable positions in order to take full advantage of the ever increasing global economy as the international markets become more and more integrated.

The current economic scenario of the world economy is a result of a financial crisis that is compounded by a grave recessionary pressure in some of the major manufacturing industries of the world. When we speak about what the governments of the world can do to sort this scenario and especially what central banks should do with monetary policy we come across different options. The article specifically suggests inflationary methodology to counter some of the financial constraints faced by banks with large mortgage based debts. Other options include controlling government expenditure that means spending more on infrastructure (stimulus spending) and ensuring that the cost of borrowing is lower for businesses and prudent supply side policies.

When we look at the developed world which is largely affected by this significant recession we see that a rapid decline in output levels of firms and failing banks have led to higher unemployment numbers. This leads us to the comparison between what is the bigger public enemy at this present situation in developing versus developed countries. With countries like India, China and brazil continuing to grow (at a slower pace) in the recessionary years we see that the developing countries still want to reduce poverty as it is the major problem faced whereas developed world with this looming recession and crunch credit is facing grave jobless rates and a declining output in the manufacturing sector and lower retail sales levels.

How to Control the Financial Meltdown
The article talks about a number of options that could be potentially used to control the financial meltdown and bring back major economies to stability. We must understand that certain banks and financial institutions must be allowed to fail because unless that is done we will not get to the bottom of this crisis and governments will not have to fill gaps through debt given the fact that major economies worldwide already have launched multi-100 billion dollar packages to rescue their ailing financial and other sectors. This decision would be difficult for certain countries as they have deemed a few organizations as too big to be allowed to fail against some others which continue to go bankrupt. Governments will have to adopt stronger communications policies to counter such issues as debates on which companies should fail and which shouldnt.

Another way of looking at things is that because financial institutions and investment companies are so interwoven, dependent on each other that to solve these messes governments needs to come up with industry wide solutions rather than company specific solutions. For instance governments should look to tighten up credit-default swap markets and other types of derivative markets which have caused a downward spiral in the debt portfolio of banks and other institutions.

What also should be looked at is the fact that depositors should be given greater protection so that the confidence in the banking industry is restored and strengthened such that there is no possibility of run on banks or losses for depositors in case a particular bank defaults. Banks should also look to diversify their bases in terms of lenders and profit making products so that unsystematic risk could be further reduced in the future.

Role of Inflation as a Policy Instrument to Control the Economic Recession
A lot of economists have termed inflation as the necessary evil such that governments need to provide their economies with a burst of moderate inflation to stimulate growth and production. There are certain advantages of inflation which include business growth, rising value of assets, greater present day spending, and falling debt values. In this current scenario the rising level of debt through the economies of the world means that future consumption might be depressed as lesser money would be used to spend in the future while more money would be used to pay off current debt. This means that if governments decide to allow moderate inflation by encouraging central banks to print money and buy government debt than we might have a scenario where the real value of debt would start to decline (Ezine Articles, n.d).

This would positively affect many indebted businesses as well especially the mortgage house market which must lose more value in terms of real price levels. The article suggests that the prices in the housing market should still fall by 15 (article published in 2008) so if that is the case than a rise in inflation would require housing prices to fall by less than 15.

An advantage of printing money is that governments can earn seigniorage revenue which means that governments can earn from the net benefit from the difference between cost of producing money and its actual value. This difference could be used to fund government expenditure, without charging any more additional taxes.

We should also look at the advantage of better business growth in a moderate inflationary time period. This occurs because as prices rise people would start purchasing more today because the value of their income would be lesser in future because of inflation secondly businesses would also have the incentive of higher prices to produce more goods and services hence supply would also rise. The prices of stocks would also increase allowing investors to come back to capital markets and increase the opportunity for businesses to expand through IPOs or rights issue this is an important way (raising capital from the public) of generating newer projects and jobs.

Central banks and governments must be careful with inflation because they dont want to be in a situation where the economy is choked by unsustainable inflation levels of 20 or 30. If inflations gets out of control than the situation can go horribly wrong simply because spending would be significantly curtailed in terms of buying goods that are not necessary. Central banks must look to balance the inflation expectations with the supply of money and also ensure fluid communications policy so that investors and businesses are aware of the steps taken by the central banks all the time.

Fiscal and Monetary Policy as Tools to Control and Stimulate Growth
There are a number of monetary and fiscal policy combinations that governments across the world can use to solve the economic crisis and financial issue. Firstly, governments should look to start with the right basics. Banks should lend to entrepreneurs and businesses which are essentially the backbone of any economy. Secondly taxation should be way of facilitating businesses rather than a hindrance to business expansion and investment. Therefore governments in the developed world should look to encourage investments so that jobs are created and more consumer expenditure is witnessed (Rogoff, 2008).

By ensuring adequate liquidity in the market the central banks of major economies can keep interest rates low and allow businesses cheap funds for investments. Another step that should facilitate growth is the introduction of well thought regulations so that investors confidence in the financial markets such as the stock market and the derivative markets is restored and more people come back to these markets with investments.          

In terms of the fiscal policy governments should look to generate revenues from non-tax sources such as privatization campaigns or research and expenditure in to natural resources. Development of facilities and other industries in the public sector which can generate funds for the government for example tourism, both domestic and foreign, investments from abroad and so on.

Government expenditure is absolutely a necessary part of the solving equation. By spending in the right sectors, growth-oriented, government can really stimulate growth and create jobs. This is an important aspect because money spent by governments allows other businesses to generate revenues and create even more jobs in the economy. An added advantage is that infrastructure is either developed or upgraded. This also indirectly facilitates businesses by giving them a supporting environment to grow in. We also see a situation where governments should put taxes and raise revenues from the public. For instance governments worldwide should tax bankers more than other sectors because they stand to gain from the performance of other businesses. Therefore bankers bonuses should be subject to greater tax rates than bonuses to other executives in other industries.

Importance of Low Levels of Cost of Borrowing
As we see that benchmark interest rates continue to fall in major economic zones and countries what we understand from this fact is that when interest rates fall businesses and financial institutions find it cheaper to lend and borrow money. This situation is created by governments to stimulate businesses and entrepreneurial ventures. The important distinction that must be made here is that the availability of credit at such low levels should be for businesses rather than sub-prime borrowers who are either consumers or businesses. Banks should be encouraged to lend out to those businesses which are either new ventures or businesses that promise to expand and gain market share quickly.

Low levels of interest rates also can lead to an expansionary fiscal policy as governments find it cheaper to borrow from their central banks. This leads to a rise in government expenditure and higher debts for future governments to payoff. Low level of interest rates also lead to comparatively controlled level of inflation in a particular economy. For instance if interest rates are low in an economy then businesses would not need to increase the prices of their goods and services compared to an economic environment where interest rates are higher. The higher the interest rates the higher the level of price rise for consumer products.

The governments must understand that to fight off this monster crisis both fiscal and monetary policies must be used simultaneously to restore economic growth. Businesses must be facilitated and supply side policies also need to be improved upon. For instance better education systems, improved rail networks, and better quality communications network can go a long way in supporting the business environment of a country and the ability to generate entrepreneurs and new ideas for the future.

Conclusion
The idea of a perfect financial system and a sustainable world economy is far from achieved even with the introduction of new financial regulations and systems the fact of the matter is that as economies enter this new after-recession era they are in a reset situation as a lot of previous assumptions have changed. For example businesses now will be more cautious before borrowing from banks for new product ventures, banks would develop tighter products for the sub-prime market and governments would regulate markets and complex securitized products with greater scrutinized mechanism. All in all the future requirements and basic standard operating procedures will change and companies will need to adapt to those.

In terms of the financial sector the role of governments will increase immensely as they would want to protect the depositors and other stakeholders so that few bankers do not risk major crises such as the liquidity crunch which introduced this current economic crisis. Secondly, banks across the globe will develop systems and procedures which will isolate them from the losses incurred by other banks this might mean limited buying and selling of products and services amongst banks and financial institutions.

What governments must realize is that their actions today will impact future generations and therefore they must act responsibly to ensure sustainable levels of debt and the return of market economy and market factors to all the markets and industries of the world. Governments must not look at all the ailing industries and try to give them a stimulus package because that wont solve the problems of businesses in the long-run rather they would reduce the ability of businesses to stay on their feet and continue to growing and creating new jobs.    

Imperfect competition is a market model wherein at least one firm exhibits price-setting behavior. Imperfectly competitive firms enjoy some degree of monopoly power that results either from behavior of other industry firms or product differentiation. As a result of this power, the firms have downward-sloping demand curves. Imperfectly competitive markets can be divided into two categories. Monopolistic competition consists of several firms selling slightly differentiated products. Oligopoly has fewer production players that dominate the market.
   
In monopolistic competition, firms can enter and exit the industry with ease. Goods and services are differentiated using advertising, quality, seller reputation and location among other factors. Differentiates renders notion of single market price futile. Firms enjoy lesser degree of monopoly power as a number of close substitutes are available. In the short-run, where at least one input is variable, firms profit-maximizing output is the quantity of product that equalizes MC (marginal cost) and MB (marginal benefit). MR curve lies below the demand curve and is downward sloping. In the short-run, positive and negative economic profits may exist. These, however, are eliminated in the long-run as easy entry and exit into industry facilitate industry expansion or contraction till profits or losses are absorbed. In monopolistic competition, zero economic profits prevail in the long-run. Zero economic profits point lies to the left of minimum ATC (downward-sloping) curve. Firms operating at point lying to the left of minimum ATC value have excess capacity. Consequently, monopolistic competition does not minimize MC and is economically inefficient. This inefficiency is the price paid for enjoying product alternatives. Further, firms have no incentive to charge lower prices and reduce revenue to achieve efficiency. In oligopoly, firms are fewer in number and dependent upon each other unlike monopolistic competition. A firms actions influence other firms, evoking responses from them. Firms enjoy
Figure 1 Monopolistic Competition- Short-Run Equilibrium

Figure 2 Monopolistic Competition- Long-run Behavior

considerable share of industry output, which can be measured using concentration ratio or HerfindahlHirschman Index (HHI). Concentration ratio measures output percentage accounted for by largest industry firms. It is directly related to influence of a firms decision on its rivals. HHI is the square of percentage share of largest industry firms. It has a maximum value of 10,000. Census Bureau measures industry concentration using the aforementioned methods but the same may be overstated or understated. Expanse of industry and regional domination can create mistakes in industry concentration calculation. Multiple models explain rival behavior in oligopoly. In collusion model, firms collude and form cartels to implement monopoly solution and enjoy maximum attainable profits. Collusion may be overt, wherein firms openly agree to set prices, and output at monopoly level and take decisions to sustain monopoly profits. Since cartels are generally illegal, firms may opt for tacit collusion, an unspoken and unwritten strategy to limit competition and achieve monopoly profits. Tacit behavior is difficult to identify. Colluding firms always have an incentive for cheating to increase their profits. This cheating possibility can be reduced by adopting tit-for-tat or trigger strategies. Game theory is another model that explains strategic choices, or choices taken after evaluating possible rival actions. Pricing choices, product-development and innovation efforts, and marketing strategies are strategic in nature. Outcome of a strategic decision is called payoff and generally implies variation in economic profit. In game theory, players cannot make decisions jointly and must select an optimum strategy based on plausible rival actions. When a players strategy is unaffected by the others action, the player is said to have a dominant strategy. When both or all players have dominant strategies, dominant-strategy equilibrium is attained. Oligopolies have several players and multiple rounds of strategic choices or games. Price war and prisoners dilemma are common examples of game theory usage.

Figure 3 Game Theory Analysis
 Player B
                  Player      
                     A      Action x                Action y
                         PB1

PA1                         PB2

PA2                         PB3

PA3                         PB4

PA4            
                               Action x

                               Action y

Advertising and price discrimination are common in imperfect competition. Protagonists opine that advertising is essential for entry of new firms. It promotes competition lowering prices and conveys useful information to consumers. Antagonist suggest that it increases prices by adding advertising costs to them and generating brand loyalty, thereby encouraging monopoly conditions and creating entry barriers. Empirical studies support both groups. Portion of total costs used for advertising and market power concentration share a positive casual relationship. Another common characteristic of imperfect markets is price discrimination or charging different prices for the same product from different customer groups despite no production cost difference. Different customer groups have different elasticities and marginal revenues. It can be practices in markets with downward-sloping demand curves or markets having some price-setting or monopoly power. Price variations due to location or policy restrictions that add to cost are not part of price discrimination. Distinguishable customers that facilitate easy segregation of consumers into groups, and prevention of resale, curbing reselling of lower price products, are the other conditions for price discrimination to be feasible. Though legal and beneficial to most markets, it is not commonly practiced due to insufficient knowledge of consumer demand.

In this graph the blue line (circle symbols) shows aggregate expenditures, the orange line (square symbols) shows a 45-degree line, and the vertical green line (triangle symbols) shows the full-employment GDP (i.e., potential output).

1.1. Suppose the government increases its spending by just enough to achieve the full-employment GDP. Place the purple line (diamond symbols) to show aggregate expenditures (AE) after this change. (Also, try to figure out from the graph how large the increase in government spending must be. You will need the magnitude of the increase to answer a subsequent question.)

Horizontal line (Parallel to X-axis-Real GDP) at 250 on Y-axis

1.2. How big must the increase in government spending be for the economy to achieve full employment

a.  100 billion
b. 200 billion
c. 150 billion
d. 300 billion
e. 50 billion

1.3. How big was the GDP gap before the increase in government spending

a. 300 billion
b. 200 billion
c. 100 billion
d. 150 billion
e. 50 billion

1.4. Without any increase in government purchases, the graph illustrates

a. A recessionary gap
b. An inflationary gap

2. If autonomous expenditures equal 600 and the mpe is 0.80, then equilibrium income in the economy will be 2,400.

True
False (6000.23000)

3. A decrease in income (Y) will most likely
a. decrease autonomous expenditures.
b. increase autonomous expenditures.
c.increase induced expenditures.
d.decrease induced expenditures.

4. The AE Curve is flatter in slope than the AP Curve because

a. the mpe is equal to one.
b. the mpe is less than one.
c.the mpe is equal to infinity.
d. people increase their spending by more than their income when their income rises.

5. For levels of incomeoutput to the right of the point where the AE Curve and the AP Curve intersect, aggregate expenditures are ____________________ aggregate production, and therefore inventories must be quite ______________
a. greater than low
b. greater than high
c. less than high
d. less than low

6. Suppose autonomous expenditures equal 1,000 and the mpe is equal to 0.60. Now, suppose the mpe rises to 0.75. Using the Multiplier Equation (and assuming the autonomous expenditure value is still 1,000), we know that equilibrium income would
a. decrease by 150
b. increase by 1500
c. increase by 750
d. increase by 150

7.  If the AE Curve is represented by AE  10,000  .9Y, an increase in the autonomous expenditure value of 1,000 (a shift up in the AE Curve by 1,000) will be depicted as a shift in the AD Curve of
a. 10,000
b. 7,500
c. 2,500
d. 5,000

Q. 1
Dubai crisis has been caused by the huge debts that the country has been unable to repay. The total debts are 80 billion. The government borrowed the money to finance its contracts. Due to the financial crisis in the international market, the country was unable to repay the debts. The country has appealed to its creditors to freeze repayment of the debts for six years but the banks have declined. This situation has been worsened by the international financial meltdown of economies. Spillover effects have been experienced in other sectors of the economy and the country is experiencing a decline in most of its economic activities.

Q. 2
The country has lost the funding of its major projects which are the major sources of income. The creditors to the 80 dollar debt have declined the suggestion by the government to freeze repayment of the loan for six years. Most of the projects that the companies had started have lacked adequate funding. Massive unemployment has been experienced by people in the country due to the crisis. Other sectors of the economy have been affected by spillover effects of the crisis and the economy is declining.

Q. 3
The U.S. subprime mortgage affected the banking systems in the country and other economies. Banks in Dubai depend on the US banks for loans. The decline in the US sub prime mortgage reduced the lending capacity of the banks. Banks in Dubai cannot give loans to the people due to reduction in lending capacity. The industries in Dubai have lacked adequate loans to conduct business. This has resulted in poor performance in the economy.

The too big to fail concept is simply abbreviated as TBTF in the financial and economic market. Whether to spend public money in rescuing financial institutions for the reason that they are too complex, too big, or even too interrelated to be left out to collapse, is not a new subject in the economy of the United States of America. Nevertheless, in the economic and financial crisis of last year (2009), the nature and number of these rescues in modern financial systems and markets has noticeably increased salience to this issue (Barbara 5). To address this issue, this paper will discuss the too big to fall concept and the possible remedies to the problems emerging from it.

The TBTF subject in US perspective is first, a political issue. The citizens with their representatives perceive it unfair the rescues or bailouts of the large financial organizations using financial capital that are eventually made available by taxpayers. They see Wall Street being bailed out by Main Street (Barbara, 6). If the governments are supposed to shield the private organizations from collapse, market discipline in the economy will be undermined a condition that the critics of TBTF have described as desirable destruction. Competition is ultimately distorted while capital is economically misallocated. Inappropriate risk management as well as taking unwarranted risk is appreciated. Losses are entertained and it is at this point that taxpayers come into the scene (Truman, par.2). Explicitly or implicitly, governments are infused into the running of financial institutions and this alters the rules of the game. One consequence is a much concentrated financial entities structure, more likely to take unnecessary risk in addition to little evidence of the societal benefits, for example increased efficiency, lowered costs or better accessibility to credit. These are the issues that come with the TBTF concept that has regained popularity since the start of the economical global crisis (Truman, par.2). One of major companies in the United States of America which is referred as being too big to fail is the American International Group (AIG) (Truman, par. 3).

The Too Big to Fail Concept
Too Big To Fail refers to a phrase used to describe the idea used in economic regulation, that affirms that the main and the majorly interconnected business dealings are too large such that the government would not let them to be declare d bankrupt since such a failure could result to very disastrous effects to the entire economy of a country. Originally, the phrase was used to mean that a large and unified business was much diversified so that it was completely immune to failure (Truman, par.1). Therefore, such an enterprise had huge investments in many countries and a downturn of one of its portfolio would thus be easily counteracted by the prevailing successes in a different portfolio. This insulates any possible failure of the business. The premise was later dismissed by an almost worldwide economic recession it was still adopted but coined to refer to the first description given above. This phrase is also widely applied in referring to a policy of a government that entails bailing out businesses-- an issue which raises concerns of moral hazards to business operations. Since the beginning of the global financial meltdown in 2009, the phrase has been at center stage. The too big to fail policy may be applied by the governmental regulators to cushion a bank or large business which is so large such that its failure results to catastrophic effects not only to the country in question, but also the global economy (Barbara 4).

Examples of bailed out situations include the case in the 1970s in the United States of America, whereby the US government bailed out the Chrysler Corporation and in 1980s again it bailed out the Continental Illinois (a Chicago based bank). A more recent case represents the 1998 long term Capital Management that had implemented inappropriate investment decisions on a hedge fund and it was almost collapsing but was rescued by a New Yorks Federal Reserve, held in a group of banks. The intention of the government in bailing out these large banks or corporations is to protect the major banking organizations against the usual disciplines of marketplace since it considers such institutions so important to the economy and their failure would most likely lame the country both economically and financially. Essentially, these companies usually conduct businesses with so many of  other companies such that their failure would mean either consequent failures of the companies they deal with, or a major downturn of their business partners (which are companies as well) (Guenther 2).

The supporters of the too big to fail concept hold that it sustains the stability of a country economically, while the critics of the concept suggest that it is usually an unnecessary risk that is not worth taking by the government (Barbara 7).

Remedies of the too big to fall problem
In the United States, the remedies of too big to fall problem are classified in four proposals. The first proposal involves breaking up the systematically essential institutions such that they are not individually so large and therefore the consequences of their failure to the economy will be eliminated. The second proposal entails separating riskier activities to unrelated organizations whose fall down would not have equal and direct adverse effects to the economy and generally the entire financial system. Thirdly, there is the employment of a combination of rigid modifications that either discourage extreme risk taking or launch cushions against its effects. Finally, the fourth proposal requires establishment of a unique resolution mechanism such that the collapse of systemically significant financial organizations can be administered to reduce the harm to the economic system and market without the involvement of a governmental bail out. However, each of the above remedies has got their supporters and merits as well as detractors and demerits (Ellison 77).

The first category of the proposals, which is the breaking down proposal, involves more issues that just downsizing the institutions by reducing the workforce or selling part of their enterprises, like it has already been done in many countries even without the support of the government. When fully applied, the approach entails breaking up the organizations into smaller unique entities having their own managements and shareholders, thus subjectively limiting their size. The problem with this approach is that no matter how small the institution, a collapse of any institution will always result in adverse economic problems. Moreover, if one big institution is broken up into say, 25 smaller units, all these units will have similar investment strategies, similar risk and disaster management policies and they will all experience similar losses and stresses. Therefore, financial effect of letting each of them fall is just the same as letting one large organization fall. For the second class of remedies which involves the separation of the riskier activities, also have its setbacks. The businesses do not have a consensus regarding the activities that are too risky. The question with this approach is, what about the organizations which are beyond the supervision parameter and are large and interconnected If these organizations are ignored, the TBTF problem will be made worse especially the burden on the taxpayers (Ellison 77-78).

The problem of enhanced regulation and supervision, which is the third group of the remedies of TBTF, includes the technical problem in designing and scheming retooled capital and investment structures. Again, there are ambiguities of the implementation of the regulations, because what will make one absolutely sure that for this time, the situation will be different There is no balance between the discretion left to supervisors and the regulators with rules set in advance. This leaves us with one question would an enhanced regime of regulation and supervision adequately contain the financial, political and economic costs of the moral hazard as well as eliminate problems of the TBTF Although this approach is more promising as compared to the first two, these technical problems are too substantial to be ignored. Therefore this leaves the final approach to the problem of TBTF which comprises resolution mechanisms that should be able to handle the failure of a major business without the intervention of the government. If it were possible to come up with such a resolution mechanism, it would be the best for clearing out the TBTF issue in the principal companies (Ellison 77). However, the possibility of such an approach is more theoretical than practical because to be able to manage big failure, a company must have invested heavily in other big companies that may serve as a cushion against major catastrophes. However, the major institutions are interrelated and the failure of one directly affects the others. As such, a composite and effective solution to the TBTF issue must embrace the concepts of these four approaches to be effective and be able to serve the country reasonably sound for a couple of decades (Ellison 78).

In addition to the four categories of approaches that have been discussed above, the former treasury secretary suggests that it is the collective responsibility of both the government and the citizens to reduce their dependence as well as the dependence of the too small to save businesses on a number of large organizations that engage themselves in extremely risky activities. This will help the nation to avoid worrying too much about the possible collapse of these businesses and organizations (Truman, par. 2).

Still the former chairman for the Federal Reserve presented some views of solving the too big to fail problem, but they were highly ignored by the Obama administration. In his view, the depositing banks should never be permitted to trade too aggressively. He said, Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking (Truman, par. 5). According to his suggestion, the banks should only engage in trading with the aim of serving their customers and leave the big money transactions to the firms outside US governments safety net. The solutions offered by the former secretary to Federal Reserve and may not serve in the best interest to the economy although they may eliminate the too big to fail problem. This is because the two solutions are going to restrict trade and investments in the country that believed in open market and free trade.  It will simply be a solution to one problem and creating another problem. Therefore implementing these solutions alone may not be sufficient in the long run to serve for the good the United States economy.

Conclusion
The accurate solution for too big to fail problem calls for more drastic choices. In addition to the insolvency government, such organizations should eventually be broken up and the unsecured creditor within the insolvent organizations should put their claims converted automatically into equity. A separation of the commercial banking from risky capital investment banking ought to be considered as well (Guenther, 3). This solution will involve more than just one step taken from the possible solutions, but a careful and reasonably consideration of the relationship between the suggested solution that will produce a lasting, composite and effective remedy to the too big to fail problem.  However, whatever the route that the government may consider best in eliminating the bailouts of the large firms, it is fundamental that the breakup of either the interconnections or the capacity of the too big to fall firms be employed in solving the problem. For this remedy to produce the best solution to TBTF, the investment strategies of the broken up units of the big firms ought to be diversified such that the units do not invest in similar portfolios although they may be related and controlled under the same management. Breaking up the large firms and separating the investment portfolios of the subsequent smaller and medium firms is therefore key in solving the too big to fail problem because no firm will be too big to be considered a national or global disaster in the event that it declares bankrupt.