Unit 1: Microeconomics and Macroeconomics

1. The study of microeconomics

Microeconomics is a branch of economics that studies how consumers, workers,
and firms behave while making decisions on the allocation of scarce resources.
Because resources are limited, consumers, workers, and firms have to make
trade-offs.
Microeconomics also studies another important theme is the role of prices. All
the trade-offs made by consumers, workers, and firms are influenced by prices.
Prices have a strong influence on the behaviors of consumers, workers, and
firms.
Lastly is the role of the market. In the planned economy, prices are set by the
government. In the market economy, prices are determined by the interactions
of consumers, workers, and firms.
2. The allocation of scarce resources
Consumers have limited incomes. The consumer theory describes how
consumers have to make the best trade-offs based on their limited resources and
preferences. For example, consumers make trade-offs for the purchase of more
of some goods with the purchase of less of others. Another example may be
trading off current consumption for future consumption.
The limited resources of workers are their time and talent, knowledge, working
experience, and so on. These resources are limited, so workers have to make
trade-offs. They must decide when to enter the workforce, which job to do, and
who to work for. They can choose to work for a large company with job
security, but fewer opportunities for advancement; or to work for a small
company with more potential for advancement, but less job security. They also
have to make trade-offs between how many hours for work and how many
hours for leisure.
The limited resources of firms are human resources, financial resources,
management ability, production capacity, and so on. Firms decide what to
produce, how to produce, and for whom to produce. Thus, the firm theory
describes how the companies have to make the best trade-offs.
3. What is the important role of prices?
Prices have a strong influence on the behaviors of customers, workers, and
firms.
For example, when the price of goods increases, customers tend to buy
substitutes even if they don’t like them. Workers choose employment depending
partly on the salaries paid to them. Firms deciding whether to buy more
machines or employ more workers also depends partly on the price of machines
or the salaries paid to these workers.
4. What does economics study?
Economics studies how people choose to use their limited resources to satisfy
their demands. Resources are natural resources such as wind, fuel, and land, …;
human resources including talent, time, and labor, …; capital resources such as
buildings, shares, and equipment,…. These resources are limited, but human
demands are unlimited. That’s why it’s necessary to study economics. And
economics studies economic phenomena in two different avenues:
microeconomics and macroeconomics.
5. What does macroeconomics study?
Macroeconomics is a branch of economics that studies the interactions among
all different economic factors such as economic growth, employment, inflation,
and so on. Specifically, macroeconomics also studies economic relations
between other countries in the world. Moreover, macroeconomics studies the
regulation of the economy by the government. The government usually uses
macroeconomic policies such as fiscal policy and monetary policy to promote
economic growth, reduce the unemployment rate, and control inflation.

Unit 2: Public Finance

1. Government revenue: How does the government raise its revenue?
The revenue of the government comes from two main taxes: payroll taxes and
other taxes.
Firstly, payroll taxes refer to social insurance, and health insurance as the
percentage of wages, and salaries paid jointly by both employers and
employees.
Besides, four other main taxes contribute to the government’s revenue.
Individual income taxes are the taxes imposed on wages, salaries, dividends,
and other incomes that a person earns. Corporate income taxes are the taxes
imposed on the incomes of companies, including incomes from production,
trading of goods, and services…. Excise taxes are the taxes imposed on specific
goods and services such as fuel, tobacco, and alcohol, …. Custom duties are the
taxes imposed on the export and import of goods.
2. Government spending: How does the government allocate its revenue
from taxation?
Government spending can be classified into two funds: trust fund and federal
fund.
First of all, trust funds are generated from payroll taxes. The vast majority of
trust funds revenue pays for Medicare and Social Security such as pensions,
support for social families, and wars, ….
Besides, federal funds come from income taxes, excise taxes, and customs
duties, …. Federal funds are used for the government’s projects and programs
such as infrastructure, salaries for state employees, and running government
bodies, ….
3. Government borrowing: How does the government borrow more money?
From whom does the government borrow
money?
The government borrows more money because the government wants to spend
more money than it gets from taxation. The government has to borrow by
issuing bonds or selling other types of securities. There are two ways for people
to buy bonds: directly on its website or indirectly from brokers and banks.
The government has two types of debt: the debt held by the public and the debt
held by the federal accounts. Firstly, the debt held by the public is money
borrowed from domestic investors and international investors. Domestic
investors can be private investors, Federal Reserve (central bank), or state and
local government…. International investors can be foreign private investors,
other governments, and international financial institutions (World Bank, IMF,
…). Besides, the debt held by the federal accounts is the amount of money that
the government loans from the trust funds or the surplus.

Unit 3: Fiscal Policy

1. Deficit spending: Helpful or Harmful?
Deficit spending that is, spending funds obtained from printing or borrowing
instead of taxation. Deficit spending has both a positive impact and a negative
impact on the economy.
Firstly, deficit spending is helpful when the economic growth rate is low and the
unemployment rate is high. For example, when the government spends more
money on building a new road, it creates more jobs for the unemployed, and
then they have more income to purchase goods and services. This raises the
economy.
On the other hand, deficit spending can be harmful when the inflation is high or
the unemployment is low. For example, when the government spends more
money on building a new road, this leads to competition for scarce labor, it
inflates wages, then prices increase and if inflation is higher, it becomes more
difficult to control. The economic crisis is more likely to happen.
2. Expansionary fiscal policy: When and Why?
Fiscal policy should be expansionary when the economic growth rate is still low
or the unemployment rate is high. By increasing public spending and cutting
taxes, the government leaves people more money to purchase goods and
services and firms have more money to invest in equipment. As a result, it
stimulates total spending in the economy and creates more jobs. Therefore, the
unemployment rate is decreased and the economic growth rate is promoted.
3. Contractionary fiscal policy: When and Why?
Contractionary fiscal policy should be used when increasing taxes, reducing
government spending, or combining both of them to restrict demand, slow down
the economy, and decrease inflation. This tight fiscal policy reduces the amount
of money in circulation.
4. Influencing factors on decisions on fiscal policy
There are two types of influencing decisions on fiscal policy: the inside factor
and the outside factor.
To begin with, the inside factor, one of their categories is economic factors
which consist of economic growth, (un) employment rate, and inflation. For
example of economic growth, when economic growth is low, the government
uses expansionary fiscal policy. And when the economy is hotter than expected,
contractionary fiscal policy is conducted. It is similar to the other two factors.
Another category of inside factors is non-economic factors such as political
considerations, natural disasters, and wars….
On the other hand, the outside factors are divided into two major factors. When
making decisions on fiscal policy, the government has to consider the fiscal
policy of other countries. These policies may have generous tax programs,
which tempt multinational corporations to relocate their subsidiaries. Another
factor is the requirement of international financial institutions, which often grant
aid packages subject to conditions relating to fiscal policy.
Unit 4: Monetary Policy
1. Discuss three main tools of monetary policy
There are three main tools of monetary policy that the central bank has used to
conduct monetary policy: reserve requirement; discount rate; open market
operations.
The first tool of monetary policy is the reserve requirement, which is the
percentage of deposits required by the central bank to keep as reserves. The
reserve requirement plays a central role in the amount of money that banks have
to lend out. By adjusting the reserve requirement, the central bank can increase
or decrease the money supply. When inflation tends to increase, the central bank
increases the reserve requirement, the money supply decreases, and banks have
to keep more in reserve so they have less money to lend out. When the
government wants to promote the economy, the central bank decreases the
reserve requirement to increase the money supply. Therefore, banks have more
money to lend out.
The second tool of monetary policy is the discount rate, which is the interest
rate on loans offered by the central bank to other banks. By changing the
discount rate, it can make it more expensive or less expensive for other banks to
borrow from the central bank. Both actions influence the money supply.
( However, both reserve requirement and discount rate are not used in day-to-
day operations, they are only used for major changes because just a small
proportion is changed, which can make a big problem to the economy.)
Last but not least, open market operations are a primary tool of monetary policy.
It is where the government can buy or sell their securities such as treasury
bonds. If the government buys treasury bonds, it pumps more money into
circulation leading to an increase in the money supply. And when the Central
Bank sells treasury bonds, it collects money from circulation, so the money
supply is reduced. Central Bank is allowed by law to buy or sell government
bonds in any quantities, so it is easy to control the money supply by using open
market operations.
 2. Expansionary monetary policy: When and Why?
Monetary policy should be expansionary when the economic growth rate is low,
the unemployment rate is high. When the central bank reduces the reserve
requirement, drops the discount rate, and buys more bonds, this will increase the
bank's lending capacity or increase the money supply. By offering lower interest
rates and easier approvals, banks encourage people to borrow and spend more
money, leading to more investment and production of goods and services.
Therefore, the economy tends to grow.
3. Restrictive monetary policy: When and Why?
Restrictive monetary policy should be used to cool an overheating economy and
control inflation. To achieve the goal of restrictive monetary policy, the central
bank increases the reserve requirement, raises the discount rate, or sells treasury
bonds, these actions will reduce the money supply. Banks will offer higher
interest rates and lessen loan availability to reduce investment consumption and
government expenditure. This will cause a decrease in aggregate demand, so the
prices of goods and services tend to reduce and the inflation rate is likely to
decrease.
4. Objectives of expansionary monetary policy and restrictive monetary
policy
There are three main goals of monetary policy: managing inflation, reducing the
unemployment rate, and promoting moderate long-term interest rates.

Unit 5: Financial Markets

1. Debt and Equity markets
- Debt markets are the market in which debt instruments are traded.
Debt instruments can be bonds or mortgages. Debt instruments can be short-
term (with a maturity of less than one year), intermediate-term (with a maturity
between one and ten years), or long-term (with a maturity of more than ten
years).
When an investor buys bonds of a company, he becomes a bondholder of the
company. He receives fixed amounts of money including interest and principal
payments at regular intervals until the maturity date.
The creditors have no right to vote on any issues of the company.
 - Equity markets are the market in which equity instruments are traded.
Equities are long-term securities because they have no maturity date.
When an investor buys common stocks of a company, he becomes a shareholder
of the company and receives dividends from the company. The shareholder
can’t get back their money, but they can sell their shares in the securities market
for money.
The shareholder has the right to vote on issues important to the firm and to elect
its directors.
2. Primary and Secondary market
- Primary markets are the markets in which fresh securities are issued and
sold to initial buyers (investment banks who underwrite fresh securities-
to guarantee the prices of a company’s securities and sell them to the
public).
The information in primary markets is confidential, these markets are not as
popular as the secondary market.
Primary markets help issuers to raise more funds.
- Secondary markets are markets in which previously issued securities are
traded.
These markets don’t help issuers to raise more funds, but they make securities
more liquid and desirable.
Investors are willing to buy securities because they know that they can sell them
to others in the secondary markets for money whenever they want. Secondary
markets determine the prices of fresh securities and they make securities more
liquid and desirable.
3. Exchange and OTC markets
- Exchange has a physical meeting place (the trading floor) to trade
securities and fixed hours of trading (the trading session).
Securities of large listed companies are traded in exchanges.
- OTC markets haven’t got a physical meeting place or fixed hours, but
transactions are made through means of communication and throughout
the day.
Securities of unlisted companies are traded in these markets.
4. Money and Capital markets
 - The money market is a financial market in which only short-term debt
instruments are traded.
- The capital market is a financial market in which long-term debt and
equity instruments are traded.

Unit 6: Foreign Exchange Markets

1. What are the roles of banks in Forex?
- The central bank acts as the market maker in Forex. It establishes the
market and supervises the market operations by quoting the frame of
exchange rates at any time because the exchange rate is influenced by the
demand and supply of currencies in the international market.
- Other banks act as the dealers in Forex. They buy or sell foreign
currencies on their owned accounts. They can earn profits based on the
differences between offer rates and bid rates.
2. What can be customers in Forex? For what purposes do they participate
in the market?
- Customers can be multinational corporations, importers and exporters, or
individuals.
- For example, multinational corporations have a demand for foreign
currencies for the acquisition of financial and real assets between parent
companies and their subsidiaries.
- While importers and exporters have a demand for foreign currencies for
making or receiving payments for imports and exports.
- Besides individuals can be customers who need foreign currencies for
their trips abroad, or the purpose of saving.
3. How do brokers participate in the Forex?
- The brokers are specialist companies who act as consultants for both
banks and customers. They don’t deal on their own accounts, but they
charge a commission for their consultancy. They give advice on exchange
rates for their customers.