Questions

What variables go into the derivation of the LM curve?

Define real money balances. Explain the supply and demand for real money balances. What is the relationship between income and transaction, precaution, and speculative motives for holding real money balances?

Explain the effects of fiscal and monetary policies on IS-LM. What are "feedback effects?" Explain the feedback effect that occurs when government spending increases. How does this effect counter the intended effect of this policy?

Explain, verbally and graphically, what how the Fed can respond to a tax increase. What happens if it (i) does nothing, (ii) attempts to keep interest rates constant, and (iii) attempts to keep income constant.

How do changes in the price level affect real money demand? the LM curve? How do these changes show up in aggregate demand? Explain the effects of falling prices on aggregate income.

Use the IS-LM model to predict the effects of each of the following shocks on income, the interest rate, consumption, and investment, In each case, explain what the Fed should do to keep income at its initial level.
A. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems.
B. A wave of mortgage failures increases the frequency with which people make transactions in cash.
C. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.

***

According to the IS-LM model, an increase in government purchases causes a(n)
A. increase in income and a decrease in the interest rate.
B. decrease in income and a decrease in the interest rate.
C. increase in income and an increase in the interest rate.
D. decrease in income and an increase in the interest rate.

Suppose that the LM curve is vertical. An increase in taxes will
A. increase income and leave the interest rate unchanged.
B. decrease income and leave the interest rate unchanged.
C. increase the interest rate and leave income unchanged.
D. decrease the interest rate and leave income unchanged.

According to the IS-LM model, if the central bank increases the money supply, then the
interest rate
A. falls and income falls.
B. falls and income rises.
C. rises and income falls.
D. rises and income rises.

AD and AS and the New Deal

Here's our textbook author commenting on an argument made by this year's Nobel Prize winner in economics, Paul Krugman, using AD-AS analysis. Krugman assumes that in the 1930s, the AD curve was vertical, stuck at a short-rum level of output that would not change when the AS curve shifted. This is not a very strong claim, given that output was not stagnant in the 1930s, and the economy actually grew in the middle of the decade. Still, I thought that the point made in Mankiw's last paragraph was keen and worth considering in light of today's economy. Also, this exchange is a contemporary example of how economists use the AD-AS model to get a better understanding of the real world.

Explaining Inflation to a 10-Year-Old

I really liked this response to a query about inflation from a child, back in 1981. Please read.

Questions

Explain the Keynesian cross. What variables are exogenous to this model? What is planned and actual expenditures, and how do they affect inventories? According to this model, why can national income become stuck at a level that is suboptimal?

Explain the effect of the government purchases multiplier and the tax multiplier on national income.

What is the effect of an increase in taxes on the interest rate, income, consumption, and investment?

What models and attendant variables are combined in the IS curve?

Questions

Remember, Test 3 will be given in room 106.

***

When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?

Give an example of a price that is sticky in the short run and flexible in the long run.

Explain the money demand explanation for the aggregate demand curve. Give an example of an endogenous and exogenous change on the curve.

Explain the impact of an increase in the money supply in the short run and the long run.

Explain the short run and long run aggregate supply curves. What is the Keynesian Range? the Classical Range?

What is stabilization policy? Why do Classical (and New Classical) economists oppose such policies?

What is an adverse demand shock? An adverse supply shock?

one of the official arbiters of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER's web site and find the latest turning point in the business cycle. When did it occur? Was this a switch from an expansion to contraction or the other way around? List all the recessions (contractions) that have occurred during your lifetime and the dates when they began and ended.

Questions

Explain verbally and graphically why many economists argue that Social Security has had a negative effect on the capital stock.

What effect does the baby boom have on the worker-to-retiree ratio in the Social Security system, and how has this been changing over the decades?

Explain why Social Security has maintained political support over the years, in terms of young workers (Y), middle-aged workers (M), and retirees (O). What are some of the proposals discussed in class for solving Social Security-related problems?

Some economists argue that, given the plethora of savings instruments that exist in financial markets today, that Americans save too much relative to the golden rule level of saving. Do you agree? This article on the Social Security Trustees report suggests that the system is in better shape than given credit. This article considers the importance of immigration for maintaining the part of the population that pays into the system. And here's Jay Bookman's less-than-positive take on Social Security, from the Atlanta Journal-Constitution.

Give examples of private and public methods of capital accumulation. What is public capital? What is industrial policy?

What has happened to the rate of productivity growth over the past 40 years? How might you explain this phenomenon?

How do the short run and long run differ in macroeconomics, and why is this relevant to the study of the business cycle. Also, how does it relate to the length of a business cycle correction?

Give an example of a price that is sticky in the short run and flexible in the long run.

Questions

How well does the growth theory of the SGM "fit the facts"?

Choose two countries that interest you--one rich and one poor. What is the income per person in each country? Find some data on country characteristics that might help explain the difference in income: investment rates, population growth rates, educational attainment, and so on. (Hint: The web site of the World Bank is one place to find such data.) How might you figure out which of these factors is most responsible for the observed income differences?

Many demographers predict that the United States will have zero population growth in the twenty-first century, in contrast to average population growth of about 1 percent per year in the twentieth century. Use the Solow model to forecast the effect of this slowdown in population growth on the growth of total output and the growth of output per person. Consider the effects of both the steady state and the transition between steady states.

In the Solow model, population growth leads to steady-state growth in total output, but not in output per worker. Do you think would still be true if the production function exhibited increasing or decreasing returns to scale? Explain.

Scroll down to page 5 on this link to read my book review of Kotlikoff and Burns' The Coming Generational Storm: What You Need to Know About America's Economic Future.

This article on the Social Security Trustees report suggests that the system is in better shape than given credit. This article considers the importance of immigration for maintaining the part of the population that pays into the system. And here's Jay Bookman's less-than-positive take on Social Security, from the Atlanta Journal-Constitution.

Assume that the following data apply for the Chilean economy: n + g = 0.10, k = 2.5y, dk = 0.1y, and MPK x k = 0.3y. According to the Solow growth model, is savings rate in the Chilean economy (a) more than necessary to satisfy the golden rule criterion, (b) less than necessary to satisfy the golden rule criterion, or (c) just right to satisfy the golden rule criterion? Explain your answer in terms of consumption for current and future generations.

How does the status of the current account (i.e., a budget surplus or deficit) affect the level of capital worker and, by extension, the level of current savings relative to s*gold?

When did Social Security start in the United States, and what was its initial purpose with respect to encouraging worker retirement? What is the lump of labor fallacy? What is the earnings test?

What is the legal burden of Social Security payroll taxes? The economic burden?

Explain verbally and graphically why many economists argue that Social Security has had a negative effect on the capital stock.

For Later This Month...

Nov. 18: No class. You are expected to watch the video linked to on BlackBoard. This link is available now.

Nov. 20: Test 3 will be given, as scheduled, during classtime, in Room 106.

Nov. 25: No class. Assignment will be posted to BlackBoard during regular class times on this day.

Questions

Differentiate between the steady state level of capital per worker and the golden rule level; of capital per worker. Why does s* become important, to present and future generations?

In the SGM, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?

Explain the political barriers to achieving the golden rule level of capital per worker.

How is population growth analyzed in the SGM? What is the correlation between population growth and the level of capital per worker in this model?

In the Solow growth model,how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?

Define the efficiency of labor in the SGM. How does this affect the model? What is g?

Many demographers predict that the United States will have zero population growth in the twenty-first century, in contrast to average population growth of about 1 percent per year in the twentieth century. Use the Solow model to forecast the effect of this slowdown in population growth on the growth of total output and the growth of output per person. Consider the effects of both the steady state and the transition between steady states.

Questions

Explain a labor market in which discrimination is likely to take place? Explain a labor market in which discrimination is likely to be punished?

Why did white and non-white unemployment differentials increase in the 1930s?

Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An example is a law requiring severance pay for fired workers.) If this legislation reduces the rate of job separation without affecting the rate of job finding, how would the natural rate of unemployment change? Do you think that it is plausible that the legislation would not affect the rate of job finding? Why or why not? Would this law reward discrimination? If so, how?

Why did the unemployment rate in the US rise in the 1970s and 80s, and then fall again in the 90s and 00s? (Give four explanations.)

Explain the relatively higher levels of unemployment in Europe.

What three factors does the Solow growth model focus on to explain economic growth across countries and across time?

Questions

What are frictional, structural, and cyclical unemployment?

What is the function of government employment agencies?How do they promote employment? How do they promote unemployment?

Give three explanations why the real wage may stay above the level that equilibrates labor supply and labor demand.

Suppose that a country experiences a reduction in productivity--that is, an adverse shock to the production function. (This example should sound familiar!)
a. What happens to the labor demand curve?
b. How would this change in productivity affect the labor market--that is, employment, unemployment, and real wages--if the labor market was always in equilibrium?
c. How would this change in productivity affect the labor market if unions prevented real wages from falling?

Define unemployment insurance. How does it work in the United States? How does it work in Mexico? What do the two studies discussed in class today suggest about the effects of employment insurance on incentives?

Define wait unemployment. How is this affected by labor unions and minimum wages? How is the labor market affected if the minimum wage is below the market-clearing wage for unskilled workers?

Define efficiency wages. What are the five reasons that employers may have to pay them. If they exist, how would this promote unemployment greater than than the natural rate? What are the two objections to their existence, as discussed in class?

Test Thursday

Test 2 will be given in room 106 Merrill, via BlackBoard. This is the same room as before. See you there!

Trick or Treat

Sign of the Times?

Questions

What effect on trade balances result when foreign governments increase purchases?

If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

If a small open economy bans the import of Japanese VCRs, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

Is the trade deficit a problem? Explain the common argument for and against.

Define: nominal and real exchange rates. Check out The Economist magazine's Big Mac Index. The latest update for this index is from last July. In real terms, is there much difference between the price of the Big Mac in the U.S. and Brazil? I'd rather buy Big Mac in New Zealand than in Brazil (or in the U.S.). What does that tell us (ceteris paribus) about the relative value of the U.S. dollar, and New Zealand dollar, and the Brazilian real?

What is the relationship between the real exchange rate and the price of foreign goods. Explain the difference between fixed, floating, and managed flexible exchange rates.

Explain how fiscal policies at home and how fiscal policies abroad affect exchange rates. Explain graphically why protectionist policies may increase net exports while having no effect on the trade balance. (Remember, the total amount of trade falls.)

If Japan has low inflation and Mexico has high inflation, what will happen to the exchange rate between the Japanese yen and the Mexican peso?

Explain how changes in relative price levels, changes in tariffs and quotas, consumer preferences for domestic and foreign goods, and productivity affect international exchange rates?

Define: unemployed, employed, labor force participation rate, natural rate of unemployment, full employment.

Questions

Explain mathematically why domestic spending does not need to equal the output of goods and services.

How is the trade balance tied to net foreign investment?

If I buy a Sony Viao computer, I gain a computer while Mr. Sony gains $2000. What are the three things he can do with my $2000, and how do they affect the trade balance and the capital account (as discussed in class today)?

If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, and the interest rate?

In 2005, former Federal Reserve Governor (and current Federal Reserve Chairman) Ben Bernanke said in a speech: "Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global savings glut--which helps to explain both the increase in the U.S. current account deficit [a broad measure of the trade deficit] and the relatively low level of long-term real interest rates in the world today." Is this statement consistent with the models you have learned? Explain.

What effect on trade balances result when foreign governments increase purchases?

Questions

Define: Inflation as a tax. Who benefits from inflation?

Define: Shoeleather costs and menu costs. What are the other costs to expected inflation discussed in class today? How would you rank them in terms of importance?

Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. (The discoveries of 1896 are an example.) Why might this be true?

Why would an increase in the price of oil not in itself cause general prices to rise?

Inflation redistributes incomes and wealth. How does this affect people on fixed incomes? Holders of real asets? Of money assets? How do COLAs, union wage contracts, and adjustable rate loans counter the effects of inflation?

Define hyperinflation. Why do governments resort to it? How are the costs of inflation magnified by a hyperinflation? (Hyperinflation articles: here and here. Also, here is Zimbabwe's central bank.)

What is dollarization, and how does this affect the inflation rate in (i) countries that dollarize and (ii) the U.S.?

What three strategies do governments often employ to counter the effects of their inflationary policies?

The Housing bubble:

Questions

Under what circumstances is inflation underanticipated? Who benefits from this situation (the borrower or the lender)?

Under what circumstances is inflation overanticipated? Who benefits from this situation (the borrower or the lender)?

In general, did lenders who offered fixed-interest, 30-year mortgages in the early 2000s overanticipate or underanticipate inflation?

Define: the Fisher equation and the Fisher effect. If the inflation rises from 6 to 8 percent, what happens to real and nominal interest rates, according to the Fisher effect?

What is the relationship between real money demand and the nominal interest rate? Based on this relationship, what would you expect the result would be if ATM machines were introduced to an economy?

If prices are rising in an absolute sense, then why should we analyze them relative to (i) prices of individual goods and services, and (ii) wages?

What false conclusion is made from Hume's Angel Gabriel fable and Friedman's Helicopter story?

Monetary Base

Here is the monetary base graph, discussed in class yesterday. Questions from the lecture will be up later today.

An Indecent Proposal?

This is Tyler Cowen, writing on his economics blog:

So I have a modest proposal. The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes. Anyone who is otherwise about to default could then sell the home at a high enough price (fingers crossed) to get out of the deal alive. This would stop home prices from falling and it would limit the number of future defaults.

My only comment is that this strategy didn't work very well during the Depression.

Questions

These questions pertain to yesterday's lecture (Sept. 23):

Here is some of the recent money supply data (the link is from last semester). Note the spike in M from 2002 to 2004. (The money supply increased by over $1 trillion.) How much of this explains price index movements today?

Explain the four money aggregates discussed in class today. How are they related to each other in terms of liquidity? If I take money from a checkable deposit account to a super NOW account, how does M1 change? How does M2 change?

What is the quantity equation, and how was it transformed into the quantity theory of money? Define the quantity theory of money. Why is it considered to be important for the theory that velocity is constant? How did Irving Fisher argue that velocity was constant?

This Niall Ferguson article on Milton Friedman was written shortly after Friedman died a few years ago. Ferguson discusses the significance of Friedman's aphorism, "Money is always and everywhere a monetary phenomenon."

Define seigniorage. Who receives it? How much of the U.S. federal government is financed in this manner, compared to (say) Italy and Greece? (See p. 90 of the Mankiw text.) How does this practice result in an inflation tax?

An incomplete review list:

Define micro, macro. Where does macro come from?
What are the Macro schools of thought discussed on the first day?
What are exogenous and endogenous variables?
Flexible and sticky?
GDP: Define, how is it measured, what are its components? Real and nominal? GDP Deflator? Chained measures? GDP and GNP?
The CPI: What is it? How is it measured? Problems with the CPI? Laspeyres and Paasche indices?
Unemployment: What is it, how is it measured? What is the natural rate?
The basic classical model: How do firms determine their level of production? Where do they access the factors of production? How do households consume and save? What is the role of investment and government spending? What brings the demand and supply of goods and services into balance?
Constant returns? Increasing returns?
How is national income distributed to the factors of production? What is the role played by the mpl and the mpk?
What effect did the Black Death in medieval Europe play on mpl and mpk?
What determines demand for goods and services?
What is the Broken Window fallacy?
What brings the supply and demand for goods and services into equilibrium? (Say, say, say?)
Explain leakages and injections.
Explain national savings,m private savings, and public savings.
How does fiscal policy (G and T) affect saving? Wars? Why does how G is financed (debt? taxes?) matter?
What is money and what are its functions?
Where does money come from? (I.e., how does it emerge from barter?)
Why were goldsmiths the first banks? How did central banking come about?
How is money measured? Why is money measured?
What is the quantity equation and the quantity theory of money? Why was it important to establish that V is constant?
Who was Irving Fisher and how did his institutional argument support that V was constant? What contribution did Milton Friedman make in this area?

Questions

Define money as a medium of exchange, a unit of account, and a store of value. Why is this last definition problematic when the money is a fiat currency? Why does stability matter for stores of value?

Define fiat currency, commodity standard, and commodity money. Define wealth and differentiate it from income.

What is barter? Explain the double coincidence of wants problem. What types of good emerge from barter that allow for indirect exchange to occur? What are their money-ish qualities?

What is the difference between an honest goldsmith banker and a dishonest goldsmith banker?

Besides That, All's Well!

Highlights of today’s monetary policy statement by the Fed:

· On Financial Markets: “Strains in financial markets have increased significantly…”

· On Growth: “Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.”

· On Employment: “…labor markets have weakened further.”

· Inflation: “Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”

· On Risks: “The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee.”

· There were no dissenting votes at today’s FOMC meeting.

· The next scheduled meeting of the FOMC is October 28 and 29.

Questions

Note that the classical model involves some critical assumptions at this point: the capital stock, the labor force, and the production technology are fixed, there is no unemployment, wages and prices are flexible, there is no foreign trade, and money has no effect on the economy. Also, the factors of production, along with technology, determine output.

What is the broken window fallacy? Explain a situation when a bad economist might apply it to an event in Alabama.

Who was J.B. Say and what did he say about the market-clearing process? What are leakages and injections, and why should they equal each other, according to Say?

Differentiate between private and public saving. Are these examples of leakages or injections? How are each affected by (say) a decrease in taxes? an increase in government spending?

What affects investment demand? How does the interest rate affect your personal investment demand (in your human capital)?

***

The marginal product of labor is:
A) output divided by labor input.
B) additional output produced when one additional unit of labor is added.
C) additional output produced when one additional unit of labor and one additional unit of capital are added.
D) value of additional output when one dollar's worth of additional labor is added.

All of the following transactions that took place in 2006 would be included in GDP for 2006 except the purchase of a:
A) 2004 Honda SUV built in Lincoln, Alabama.
B) ticket to see the movie “2001: A Space Odyssey.”
C) year 2007 calendar printed in 2006.
D) book printed in 2006, entitled The Year 4000.

Macroeconomics does not try to answer the question of:
A) why do some countries experience rapid growth.
B) what is the rate of return on education.
C) why do some countries have high rates of inflation.
D) what causes recessions and depressions.

The CPI is determined by computing:
A) an average of prices of all goods and services.
B) the price of a basket of goods and services that changes every year, relative to the same basket in a base year.
C) the price of a fixed basket of goods and services, relative to the price of the same basket in a base year.
D) nominal GDP relative to real GDP.

The Case for Consumption Now

This is from Slate, on research that suggests that the young enjoy their consumption more than the old. Here is an excerpt:

Recent research by economists Amy Finkelstein, Erzo Luttmer, and Matthew Notowidigdo suggests that you'll get a bigger bang for your consumer buck by spending while you're healthy, before old age starts to take the fun out of life's indulgences. Their research is part of a larger academic enterprise attempting to understand what makes us happy. Economics is a field more associated with rational calculation than emotion, but there's an ever-growing subculture of "happiness economists." Just as mainstream economists spend their time figuring out things like gross national product—how much a country produces in dollar terms—these happiness scholars churn out numbers like gross national happiness (how much happiness a country produces).

So is it better to have a higher MPC during your younger years? Maybe. Happiness research--which is the actual focus of this article--is sort of an economic fad, but I think it reflects something of a logical direction for economics when large swaths of the world have dealt with the problem of scarcity well, compared to the state of the world 100 years ago.

Questions

Explain how a competitive, profit-maximizing firm decides how much of each factor of production to demand.

Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events.
a. A wave of immigration increases the labor force.
b. An earthquake destroys some of the capital stock.
c. A technological advance improves the production function (meaning, it increases Y relative to the amount of K and L needed).

Figure 3-5 in our book shows that in U.S. data, labor's share of total income (Y) is approximately constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor productivity. How are these facts related? Could the first fact be true without the second fact being true?

Why does the neoclassical theory assume constant returns to scale?

How do factor prices impact factor input decisions in the classical model?

What effect did the Black Death in Europe have on aggregate labor productivity? On wages? Why do some economic historians believe this event helped fuel the Industrial Revolution?

What determines consumption and investment, according to the classical model?

What does the PPF with capital and consumption goods tell us about present and future quality of life (measured in terms of consumption).

Questions

Define: employment rate, unemployment rate, labor force, labor force participation rate. How does the BLS compute these figures?

Explain how a competitive, profit-maximizing firm decides how much of each factor of production to demand.

Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events.
a. A wave of immigration increases the labor force.
b. An earthquake destroys some of the capital stock.
c. A technological advance improves the production function (meaning, it increases Y relative to the amount of K and L needed).

Figure 3-5 in our book shows that in U.S. data, labor's share of total income (Y) is approximately constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor productivity. How are these facts related? Could the first fact be true without the second fact being true?

Why does the neoclassical theory assume constant returns to scale?

How do factor prices impact factor input decisions in the classical model?

August Unemployment Report

The Bureau of Labor Statistics (BLS) released a report today on employment and unemployment for August (pdf summary available at http://www.bls.gov/news.release/empsit.toc.htm). Highlights of the report:

Unemployment Rate

· The unemployment rate increased to 6.1% in August, from 5.7% in July and 5.5% in June and May.

Payroll Employment

· Total non-farm payroll employment declined by 84,000 jobs in August, following declines of 60,000 in July and 100,000 in June.

o There have been eight consecutive months with job losses. Over that period, payroll employment has declined by 605,000 jobs.

· Reflecting adjustments in the housing sector, employment in the construction industry declined by 8,000 in August and has declined by 564,000 jobs since its recent peak in September 2006.

· Employment fell in the motor vehicles and parts makers sector by 39,000 jobs in August. In the retail sector, employment at auto and parts dealers was down by 14,000 in August.

· Manufacturing employment declined by 61,000 jobs in August; job losses in manufacturing have averaged 43,000 per month thus far in 2008, compared with an average loss of 22,000 per month during 2007.

Questions

Define GDP. List two things that GDP measures. How can GDP measure two things at once?

A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is GDP?

Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?

Define real GDP, nominal GDP, and the GDP deflator. What is the purpose of the GDP deflator?

Here are the latest GDP figures (in an Excel file), in current and constant (chained) dollars.

Consider how each of the following events is likely to affect real GDP. Do you think the change in real GDP reflects a similar change in economic well-being?
a. A hurricane in Florida forces Disney World to shut down for a month.
b. The discovery of a new, easy-to-grow strain of wheat increases harvests.
c. Increased hostility between unions and management sparks a rash of strikes.
d. Firms throughout the economy experience falling demand, causing them to lay off workers.
e. A tsunami devastates the Pacific Rim, resulting in damaged property and loss of life. (Hint.)
f. Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution.
g. More high school students drop out of school to take jobs mowing lawns.
h. Fathers around the country reduce their workweek to spend more time with their children.

Define: Gross private domestic investment. Are public sector employee salaries included in GDP measure? If so, where?

Define: GNP. What goods contribute to (say) Italy's GNP but U.S. GDP?

Define: Net National Product, National Income, Personal Income, and Disposable Personal Income.

Define: The CPI and the Inflation Rate. Who is the typical Urban consumer, and why would an Alabama retiree depending on Social Security payments for part of her livelihood care?

Give three reasons why the CPI may be over-stated.

What is a Paasche index? What is a Laspeyres index?

Last Links for Spring 2008

How Much Do We Understand about the Modern Recession?

The Last Lecture.

Questions

What happened to interest rates and income in late 1929, and how does this relate to the IS-LM model?

Explain graphically, in terms of the Austrian theory of the business cycle, savings- and credit-induced growth.

Remember: Final exam study session, Tuesday, April 22, at 10:00.

Robert Shiller on Housing Prices and Recession

This video is from this past February:

Questions

What variables go into the derivation of the LM curve?

Define real money balances. Explain the supply and demand for real money balances. What is the relationship between income and transaction, precaution, and speculative motives for holding real money balances?

Explain the effects of fiscal and monetary policies on IS-LM. What are "feedback effects?" Explain the feedback effect that occurs when government spending increases. How does this effect counter the intended effect of this policy?

Explain, verbally and graphically, what how the Fed can respond to a tax increase. What happens if it (i) does nothing, (ii) attempts to keep interest rates constant, and (iii) attempts to keep income constant.

How do changes in the price level affect real money demand? the LM curve? How do these changes show up in aggregate demand? Explain the effects of falling prices on aggregate income.

Use the IS-LM model to predict the effects of each of the following shocks on income, the interest rate, consumption, and investment, In each case, explain what the Fed shouyld do to keep income at its initial level.
A. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems.
B. A wave of mortgage failures increases the frequency with which people make transactions in cash.
C. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving.

***

According to the IS-LM model, an increase in government purchases causes a(n)
A. increase in income and a decrease in the interest rate.
B. decrease in income and a decrease in the interest rate.
C. increase in income and an increase in the interest rate.
D. decrease in income and an increase in the interest rate.

Suppose that the LM curve is vertical. An increase in taxes will
A. increase income and leave the interest rate unchanged.
B. decrease income and leave the interest rate unchanged.
C. increase the interest rate and leave income unchanged.
D. decrease the interest rate and leave income unchanged.

According to the IS-LM model, if the central bank increases the money supply, then the
interest rate
A. falls and income falls.
B. falls and income rises.
C. rises and income falls.
D. rises and income rises.

Test Question?

From chapter 8:

Assume that the long-term growth rate of the economy is 5% a year, MPK = 6%, and the depreciation rate of capital is 2%. According to the Solow growth model,
A. the level of saving in the economy is such that the current levels of capital per worker are less than future generations' levels of capital per worker.
B. the level of saving in the economy is such that the current levels of capital per worker are more than future generations' levels of capital per worker.
C. future generations will be better off then the current generation.
D. future generations will be worse off than the current generation.
E. A and C

Questions

Explain the Keynesian cross. What variables are exogenous to this model? What is planned and actual expenditures, and how do they affect inventories? According to this model, why can national income become stuck at a level that is suboptimal?

Explain the effect of the government purchases multiplier and the tax multiplier on national income.

What is the effect of an increase in taxes on the interest rate, income, consumption, and investment?

What is the impact of a decrease in the money supply on the interest rate, income, consumption, and investment?

What models and attendant variables are combined in the IS curve?

Norberg on Globalization

The author of In Defense of Global Capitalism produced this documentary for British television in 2003.

Questions

When real GDP declines during a recession, what typically happens to consumption, investment, and the unemployment rate?

Give an example of a price that is sticky in the short run and flexible in the long run.

Explain the money demand explanation for the aggregate demand curve. Give an example of an endogenous and exogenous change on the curve.

Explain the impact of an increase in the money supply in the short run and the long run.

Explain the short run and long run aggregate supply curves. What is the Keynesian Range? the Classical Range?

What is stabilization policy? Why do Classical (and New Classical) economists oppose such policies?

What is an adverse demand shock? An adverse supply shock?

one of the official arbiters of when recessions begin and end is the National Bureau of Economic Research, a nonprofit economics research group. Go to the NBER's web site and find the latest turning point in the business cycle. When did it occur? Was this a switch from an expansion to contraction or the other way around? List all the recessions (contractions) that have occurred during your lifetime and the dates when they began and ended.

What are some of the reasons discussed in class for the lack of prices adjusting following the 1929 stock market crash, relative to similar periods in economic history that occurred prior to the crash?

Bernanke on the Economy

From this morning, he warns of possible recession:

"It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. GDP measures the value of all goods and services produced within the United States and is the best barometer of the United States's economic health. Under one rule, six straight months of declining GDP, would constitute a recession.

Still, Bernanke said that he expects more economic growth in the second half of this year and into 2009, helped by the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed's aggressive reductions to a key interest rate. Nevertheless, the chairman acknowledged uncertainty about the Fed's next steps, notwithstanding the mounting economic woes.

Questions

Give examples of private and public methods of capital accumulation. What is public capital? What is industrial policy?

What has happened to the rate of productivity growth over the past 40 years? How might you explain this phenomenon?

How do the short run and long run differ in macroeconomics, and why is this relevant to the study of the business cycle. Also, how does it relate to the length of a business cycle correction?

Questions

Scroll down to page 5 on this link to read my book review of Kotlikoff and Burns' The Coming Generational Storm: What You Need to Know About America's Economic Future.

This article on the Social Security Trustees report suggests that the system is in better shape than given credit. This article considers the importance of immigration for maintaining the part of the population that pays into the system. And here's Jay Bookman's less-than-positive take on Social Security, from the Atlanta Journal-Constitution.

Assume that the following data apply for the Chilean economy: n + g = 0.10, k = 2.5y, dk = 0.1y, and MPK x k = 0.3y. According to the Solow growth model, is savings rate in the Chilean economy (a) more than necessary to satisfy the golden rule criterion, (b) less than necessary to satisfy the golden rule criterion, or (c) just right to satisfy the golden rule criterion? Explain your answer in terms of consumption for current and future generations.

How does the status of the current account (i.e., a budget surplus or deficit) affect the level of capital worker and, by extension, the level of current savings relative to s*gold?

When did Social Security start in the United States, and what was its initial purpose with respect to encouraging worker retirement? What is the lump of labor fallacy? What is the earnings test?

What is the legal burden of Social Security payroll taxes? The economic burden?

Explain verbally and graphically why many economists argue that Social Security has had a negative effect on the capital stock.

What effect does the baby boom have on the worker-to-retiree ratio in the Social Security system, and how has this been changing over the decades?

Explain why Social Security has maintained political support over the years, in terms of young workers (Y), middle-aged workers (M), and retirees (O). What are some of the proposals discussed in class for solving Social Security-related problems?

Some economists argue that, given the plethora of savings instruments that exist in financial markets today, that Americans save too much relative to the golden rule level of saving. Do you agree?

Social Security, Medicare Graphic

We'll be discussing this in today's lecture:

Questions

Differentiate between the steady state level of capital per worker and the golden rule level; of capital per worker. Why does s* become important, to present and future generations?

In the SGM, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?

Explain the political barriers to achieving the golden rule level of capital per worker.

How is population growth analyzed in the SGM? What is the correlation between population growth and the level of capital per worker in this model?

In the Solow growth model,how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?

Define the efficiency of labor in the SGM. How does this affect the model? What is g?

How well does the growth theory of the SGM "fit the facts"?

Choose two countries that interest you--one rich and one poor. What is the income per person in each country? Find some data on country characteristics that might help explain the difference in income: investment rates, population growth rates, educational attainment, and so on. (Hint: The web site of the World Bank is one place to find such data.) How might you figure out which of these factors is most responsible for the observed income differences?

Many demographers predict that the United States will have zero population growth in the twenty-first century, in contrast to average population growth of about 1 percent per year in the twentieth century. Use the Solow model to forecast the effect of this slowdown in population growth on the growth of total output and the growth of output per person. Consider the effects of both the steady state and the transition between steady states.

In the Solow model, population growth leads to steady-state growth in total output, but not in output per worker. Do you think would still be true if the production function exhibited increasing or decreasing returns to scale? Explain.

Should You Have a Resume?

Yes, says Ben Casnocha (an interesting guy), responding to Seth Godin, who argues that truly great job candidates do not need them.

Questions

The first MP3 player.

The Birmingham-area job outlook.

The Index of Economic Freedom.

How does the SGM explain the economic recovery of post-war Japan and Germany?

How does the SGM point to the importance of economic policy on savings rates? How do demographic changes affect the level of capital per worker?

What is the Golden Rule level of capital per worker? Why shouldn't an economy devote all of its resources into capital investment?

Might a policymaker choose a steady state with more capital than the Golden Rule steady state? With less capital than the Golden Rule steady state? Explain your answers.

"Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards." Do you agree with this claim? Explain.

India

There's a great article on India in this week's Economist.

Questions

What three factors does the Solow growth model focus on to explain economic growth across countries and across time?

What is the production function in the SGM? The consumption function? How does the SGM make labor a constant term? How is the marginal product of capital related to the production function? If capital per worker is low, what affect does additional capital have on output, compared when capital per worker is high?

What is the steady state level of capital? Why is it different in (say) Miami relative to Havana?

In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state level of growth?

Questions

Define unemployment insurance. How does it work in the United States? How does it work in Mexico? What do the two studies discussed in class today suggest about the effects of employment insurance on incentives?

Define wait unemployment. How is this affected by labor unions and minimum wages? How is the labor market affected if the minimum wage is below the market-clearing wage for unskilled workers?

Define efficiency wages. What are the five reasons that employers may have to pay them. If they exist, how would this promote unemployment greater than than the natural rate? What are the two objections to their existence, as discussed in class?

If wages equal price times workers' marginal revenue, then how will market forces penalize discrimination? How can interventionism protect discriminating employers from paying this penalty? (Here is an article I wrote on the topic.)

Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An example is a law requiring severance pay for fired workers.) If this legislation reduces the rate of job separation without affecting the rate of job finding, how would the natural rate of unemployment change? Do you think that it is plausible that the legislation would not affect the rate of job finding? Why or why not?

Questions

Define: unemployed, employed, labor force participation rate, natural rate of unemployment, full employment.

What are frictional, structural, and cyclical unemployment?

What is the function of government employment agencies?How do they promote employment? How do they promote unemployment?

Give three explanations why the real wage may stay above the level that equilibrates labor supply and labor demand.

Suppose that a country experiences a reduction in productivity--that is, an adverse shock to the production function.
a. What happens to the labor demand curve?
b. How would this change in productivity affect the labor market--that is, employment, unemployment, and real wages--if the labor market was always in equilibrium?
c. How would this change in productivity affect the labor market if unions prevented real wages from falling?

Questions

What effect on trade balances result when foreign governments increase purchases?

If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

If a small open economy bans the import of Japanese VCRs, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?

Is the trade deficit a problem? Explain the common argument for and against.

Define: nominal and real exchange rates. Check out The Economist magazine's Big Mac Index. The latest update for this index is from last July. In real terms, is there much difference between the price of the Big Mac in the U.S. and Brazil? I'd rather buy Big Mac in New Zealand than in Brazil (or in the U.S.). What does that tell us (ceteris paribus) about the relative value of the U.S. dollar, and New Zealand dollar, and the Brazilian real?

What is the relationship between the real exchange rate and the price of foreign goods. Explain the difference between fixed, floating, and managed flexible exchange rates.

Explain how fiscal policies at home and how fiscal policies abroad affect exchange rates. Explain graphically why protectionist policies may increase net exports while having no effect on the trade balance. (Remember, the total amount of trade falls.)

What effect does relative inflation rates have on nominal exchange rates? Why would purchasing power parity mean that these differences are not maintained in the long run?

If Japan has low inflation and Mexico has high inflation, what will happen to the exchange rate between the Japanese yen and the Mexican peso?

Explain how changes in relative price levels, changes in tariffs and quotas, consumer preferences for domestic and foreign goods, and productivity affect international exchange rates?

The U.S.'s Most Serious Threat

...Is our own fiscal irresponsibility, says the U.S. Government Accounting Office's David Walker. Here is a 60 Minutes segment highlighting Walker and his crusade: