Archive for December, 2017

Real World Graduation: Question 11

RealWorldGraduation_Question_11   <– PDF

Some in Congress in 2006 proposed an income-tax modification bill that would have provided a 5% across-the board reduction in federal income tax rates. The bill mandated that the highest marginal income tax rate would have been reduced from 38% to 33%; the next rate from 25% to 20%, and the lowest from 10% to 5%.  Capital gains rates would remain unchanged.  Critics have claimed that only the very rich would benefit from this measure. They were joined by Mr. Ralph Thompson, estimated to be the nations fourth-richest person, who came out in opposition to the tax cut, saying, “Neither I nor any other wealthy people need an income tax cut.”  But people who favor the tax cut claim that the working people will benefit because they will have more money in their pocket.  For example, the single person working a full-time job (40 hours per week) at $6.50 per hour (just over minimum wage of $5.75 per hour) would have their marginal rate reduced to 5%, so they would have received a tax cut of approximately $4.57 per week after the combined standard deduction of $8,750.  Does this income tax proposal unfairly benefit the wealthy or unfairly penalize the working poor with regard to income tax rates?

a) It unfairly benefits the rich because they will pay less in income taxes.

b) It unfairly benefits the rich because they don’t need the extra money, as Mr. Thompson said.

c) It unfairly penalizes the poor because it left the minimum wage unchanged.

d) It unfairly penalizes the poor because the proponents of the tax cut are lying: the extra $4.57 won’t buy much and isn’t necessary.

e) All of the above are true to some extent.

(The answer is on p. 2 of the PDF.)

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Real World Graduation: Question 10

RealWorldGraduation_Question_10   <– PDF

A Savings-and-Loan bank crisis in the 1980’s and 1990’s required a government bailout. Major automobile companies (Chrysler and General Motors) have sometimes required government bailouts.  In the most recent bailout (2007-2009), many banks (Washington Mutual, Indy Mac), mortgage companies (Fannie Mae, Freddie Mac), and financial institutions (Bear Stearns, American International Group) required government bailouts.

“Fannie Mae” and “Freddie Mac” are nicknames for two government-sponsored entities (GSE) that buy residential mortgages; the goal being to stimulate home-buying. In the latest bailout, the losses to the taxpayers for bailing out these two organizations will range between $221 billion and $363 billion [1].

Bear Stearns, a long-standing investment bank specializing in mortgage securitization, was sold to JP Morgan Chase in an emergency sale to avoid a formal bankruptcy that would negatively affect the rest of the economy. The New York Federal Reserve bought $30 billion of Baer Stearns’ “assets” to get them off the balance sheet, then lent $29 billion to JP Morgan to finance the purchase of Stearns [2].

American International Group, an insurer of mortgage contracts, borrowed $182 billion in bailouts from the Federal Reserve, with the taxpayers liable if they fail to pay it back [3].

Morgan Stanley and Goldman Sachs converted to bank holding companies in order to obtain access to emergency funding from the Federal Reserve to stay afloat and avoid collapse [4]. Goldman Sachs required loans totaling $67 billion, while Morgan Stanley required loans of $96 billion.

How can one predict in advance which segment of the economy will require a bailout?

a) The ones with the highest CEO pay will require the bailout, because the CEO takes all the money out of the company.

b) All companies who operate in accordance with for-profit capitalism.

c) Only foreign companies require bailouts, because they borrow too much American money and fail to pay it back on time.

d) They are not really bailouts because the government pays for it.

e) All of the above.

(See answer on p. 2 of PDF.)

[1] Phil Angelides, Chairman, The Financial Crisis Inquiry Report, New York: Public Affairs, 2001, p. 322

[2] ibid., pp. 290, 291

[3] ibid., p. 350

[4] ibid., p. 362, 363

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Real World Graduation: Question 9

RealWorldGraduation_Question_9   <  PDF

Consider the following fictional scenario. Suppose a certain surgeon perfected a surgical procedure involving the treatment of a certain heart disease.  This procedure increased the survival rate for this particular disease from nearly zero to nearly 100%.  It is widely used throughout the medical industry to treat this particular disease and its complications.

A certain person had this type of heart disease. He had the procedure performed on an emergency basis after being brought in unconscious in an ambulance, and subsequently made a full recovery.  Reviewing the hospital bill, the patient noticed a $50 surcharge annotated “Originator’s surgical procedure usage fee”.  The insurance company informed the patient that his insurance policy does not cover this fee.  It turns out, upon further investigation, that this $50 is going to the surgeon who developed the original procedure as a type of royalty; i.e., a payment for the use of the procedure.  What is the best argument the patient can make to the insurance company and/or hospital for not paying the $50?

a) That he did not know about it before treatment, so he should not have to pay.

b) That it is likely another one of those arbitrary charges the hospitals always add, so it should be deducted off the bill as a routine matter.

c) That he cannot afford it.

d) That the procedure was not provably necessary in his case.

e) That the procedure is so common that people should not have to pay it.

(See the answer on p. 2 of the PDF.)

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Real World Graduation: Question 8

RealWorldGraduation_Question_8   <– PDF

A reputable pollster takes an opinion poll of 1000 people. The poll consists of only one question, and it is about the probable success of a proposed government policy.  None of the respondents were familiar with the policy, but were familiar with the issue that the policy addressed.  The respondents of the poll are asked to give their opinion as one of the following choices.  The percent of the respondents that gave each answer is indicated in parentheses.  The choices were:

a) Virtually no chance of success (3%);

b) Small chance of success (31%);

c) Good chance of success (64%); and

d) Virtually guaranteed success (2%).

The reputable pollster calculates that his margin of error is about 4%. How accurate is the poll as an indicator of how successful the policy will be if it is enacted?

a) The probability of success is 96% (100% – 4%), because the answers have to be corrected for the pollster’s estimated error.

b) The policy will be 64% successful because that choice got the highest percentage.

c) It has a good chance of succeeding because that choice got the highest percentage, but is not necessarily 64% probable.

d) The probability of success is always 50-50 no matter what the poll says.

e) The policy will never be enacted because the people who responded to the poll did not achieve the required two-thirds (66%) majority in their opinion.

(The answer is shown on p. 2 of the PDF.)

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