Bookstores often offer annual memberships that allow customers to purchase books at a 10% discount. Explain why this may increase profits of the bookstore
What will be an ideal response?
This book club membership program is an example of a two-part tariff. If the consumer purchases a membership, they are able to purchase subsequent books at a discount to the price charged to non-members. This membership is in the best interest of the store's profits if the consumers increase purchases at the store. That is, the loss in profit margin due to the discount is offset by the membership fee and the increased number of book purchases. If the consumer will not purchases any more books than without the membership and saves money by joining the club, then bookstore profits are reduced. The bookstore must believe that joining the book club will induce the consumer to purchase books more frequently at the bookstore or the membership fee will exceed the customer's savings.
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Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, the required reserve ratio, and the discount rate is most consistent with these policies?
(a) Increase / Increase / Decrease / Increase (b) Increase / Decrease / Decrease / no change (c) Increase / Decrease / Increase / Decrease (d) Decrease / Increase / no change / Increase (e) Increase / Decrease / Decrease / Increase
The signaling effect of foreign exchange intervention
A) never has any effect on exchange rates. B) can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies. C) cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes. D) never leads to actual changes in monetary or fiscal policy. E) can alter the market's view of future monetary policies and cause an immediate exchange rate change.