1. Explain the purpose of automobile insurance and examine the extent to which automobile insurance does encourage risky behavior.

Car owners are faced with a lot of uncertainties that include accidents, fire and theft. In case of such uncertainties they are likely to incur damages or losses that are substantial. Automobile insurance, therefore play a vital role of taking up the damages that could have been burdened by the owner. The insurance give compensation for bodily harm and physical damage to the automotive as a result of a road accident. Any bills arising from the liability are also covered by the insurance.

When an individual has an automotive insurance the exhibit a risky behavior usually termed as ex ante moral hazard. This implies that they tend to behave and act in a more risky way since they know that any negative consequences that will arise will be paid for by the insurer. Others are less careful to an extent of leaving their car unlocked or driving more hence increasing theft and accident risks.

  1. Distinguish between positive and negative externalities. Use examples to explain how each of these could arise from human behavior in society.

An externality is the effects that an individual’s actions have on a third party. Positive externality results when the effect is for better or is good. For example, when a neighbor places security lights on the road leading to his/her residence for security reasons will also benefit the neighbors. On the other hand, a negative externality results when the effect is worse or bad. For example, when an individual decides to leave the physical appearance of his house unattractive in a grade-A slob will depress the market price for its neighborhood.

  1. Until recently some athletes were using performance enhancing drugs that were not detected by traditional methods.

In like manner, the authorities are treating and filtering the water that flows into people’s homes, but it is possible that the contaminant is hard to detect. Explain how people could be protected from suspected contaminants if they are not known or difficult to detect. The authorities should inform the consumers about the treatment and filtration, that it is nearly 100 percent. The consumer’s confidence of the exact level of treatment will protect their interests.

4. Evaluating new vehicle technologies to reduce costs is important for companies like UPS and other companies involved in parcel delivery services. The company that can reduce costs in this industry can emerge, or remain, as the market leader. Waiting too long could be too costly and moving too fast could be a fatal mistake. Explain how the knowledge gained by sampling various technologies could be far more valuable than the minimal investment on the part of UPS or the other companies.

Sampling of various vehicle technologies, results in the acquisition of knowledge and information that will greatly aid in decision making. The purchasing team will make informed decisions that will be beneficial for the company in terms of cost and efficiency.

  1. Under a fixed exchange rate system, expansionary monetary policy depletes foreign reserves at the Federal Reserve. Comment on this statement with the help of an Aggregate Supply –Aggregate Demand framework as a tool of analysis.

An expansionary monetary policy occurs due to actions taken by FED that result in an increase in money supply. Assuming a fixed exchange rate by US on the British pound, the above AA-DD diagram is used to explain the effect of a monetary policy under an exchange rate system that is fixed. A shift from AA to A’A’ indicates an increase in money supply. As a result pressure will mount on the exchange rate due to a decline in interest rate for US. As a result the rate of return of British assets will be high compared to US assets. This implies that more pounds will be requested by private investors in exchange of US dollars to take up the advantageous opportunities of British assets. However, due to a fixed exchange rate, the resulting high demand for pounds will be curbed by interventions undertaken by FED, hence the market regaining its equilibrium.

  1. Analyze the implications of currency appreciation and depreciation for Globalization, and explain how the weakening of the U.S. dollar will make U. S. companies more attractive to foreign investors

Currency appreciation and depreciation will affect the exchange rates. Exchange rates will in turn impact on globalization. Exchange rates will affect all the transactions that are carried out across borders. Trade, tourism, investment and finance will also be influenced by the worldwide monetary policies. As US dollar weakens, its exports become comparatively less expensive. This will make it more attractive to consumers as well as foreign investors. The products of exporters will attract high sales hence, huge benefits. Again, as the dollar weakens foreigners travel to US becomes cheap, but foreign travel on the other hand become expensive. This means that parks and hotel investors will flock to US due to high tourists’ inflow.

  1. Suppose that the free market exchange rate for the dollar is 120 yen, but the U.S. and Japanese governments want it to be 130 yen/dollar. Use graphs to illustrate what the governments can do to achieve that goal.

The initial exchange rate between the yen and $ is 120 and it can only be increased to 130 if the Japanese government agrees to depreciate its currency (yen) relative to the dollar.

  1. Explain why economic policies aimed at stabilization can actually increase, rather than decrease, the magnitudes of economic fluctuations.

The monetary and fiscal policies that are aimed at stabilization will exacerbate the magnitude of economic fluctuations because the policies negatively affect the economy through unpredictable and long lags between policy formulation and implementation. Again, the policy has little effect on AD (Aggregate Demand). The proposal, passage and implementation of the policies may take long.

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