Problem 1: Briefly discuss what actions the U.S. Federal Reserve would likely take in pursuing an explanation monetary policy using each of the following three monetary tools:
a. Reserve requirements.
b. Open market operations.
c. Discount rate.
Problem 2: Janet Ludlow is preparing a report on U.S. based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 17B and 17C. Ludlow's report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.
a. Select and justify three factors from Table 17B that supports Ludlow's conclusion.
b. Select and justify three factors form Table 17C that refute Ludlow's conclusion.
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2007
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2008
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2009
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2010
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2011
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2012
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Return on equity
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Electric toothbrush industry index
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12.5%
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12.0%
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15.4%
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19.6%
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21.6%
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21.6%
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Market index
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10.2
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12.4
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14.6
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19.9
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20.4
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21.2
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Average P/E
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Electric toothbrush industry index
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28.5x
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23.2x
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19.6x
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18.7x
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18.5x
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16.2x
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Market index
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10.2
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12.4
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14.6
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19.9
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18.1
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19.1
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Dividend payout ratio
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Electric toothbrush industry index
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8.8%
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8.0%
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12.1%
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12.1%
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14.3%
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17.1%
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Market index
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39.2
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40.1
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38.6
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43.7
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41.8
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39.1
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Average dividend yield
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Electric toothbrush industry index
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0.3%
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0.3%
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0.6%
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0.7%
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0.8%
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1.0%
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Market index
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3.8
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3.2
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2.6
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2.2
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2.3
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2.1
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Table 17B
Ratios for electric toothbrush industry index and board stock market index
- Industry Sales Growth: Industry sales have grown at 15-20% per year in recent years and are expected to grow at 10-5% per year over the next 3 years.
- Non-U.S. Markets: Some U.S. manufactures are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
- Mail Order Sales: Some manufacturers have created a new niche in the industry by selling electric toothbrushes directly to customers through mail order. Sales for this industry segment are growing at 40% per year
- U.S. Market Penetration: The current penetration rate in the United States is 60% of households and will be difficult to increase.
- Price Competition: Manufacturers complete fiercely on the basis of price, and price wars within the industry are common.
- Niche Market: Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and services.
- Industry Consolidation: Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
- New Entrants: New manufacturers continue to enter the market.
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Table 17C
Characteristic of the electric toothbrush manufacturing industry
Problem 3: a. If the exchange rate value of the British pound goes form U.S. $1.55, then the pound has:
i. Appreciated and the British will find U.S. goods cheaper.
ii. Appreciated and the British will find U.S. goods more expensive.
iii. Depreciated and the British will find U.S. goods more expensive.
iv. Depreciated and the British will find U.S. goods cheaper.
b. Changes in which of the following are likely to affect interest rates?
i. Inflation expectations.
ii. Size of the federal deficit.
iii. Money supply.
c. According to the supply-side view of fiscal policy, if the impact on total tax revenues is the same, does it make any differences whether the government cuts taxes by either reducing marginal tax rates or increasing the personal exemption allowance?
i. No, both methods of cutting taxes will exert the same impact on aggregate future taxes, and thereby offsets the stimulus effect of lower current taxes.
ii. No, people in both cases will increase their saving; expecting higher future taxes, and thereby offset the stimulus effect of lower current taxes.