ECON 201 Midterm 2 Problem Set 3

Suppose there is a decrease in the tax rate of interest income in the United States. Illustrate the impact of this cut on the interactive graph. Assume the budget is balanced and there is no inflation. All else equal, what is the effect of the tax‑rate cut on the real after‑tax interest rate, the real interest rate, and the quantity of loanable funds exchanged?

The real after‑tax interest rate rises, the real interest rate falls, and the quantity exchanged rises.

Employment laws can vary significantly by country. For instance, in the United States, many jobs are governed by the principle of employment at-will. Employment at-will is rarer in certain countries in Europe, such as Portugal. Regulation and collective bargaining impact labor markets to a larger extent in Europe than in the United States. How do European labor markets compare to the labor market in the United States as a result of these varying labor laws?

The labor market in Europe is less flexible than in the United States.

What is the neutrality of money with respect to the quantity theory of money?

The money supply can affect the growth rate of prices (inflation) in the long run. The money supply cannot affect the growth rate of real GDP in the long run. The money supply can affect the growth rate of the real GDP in the short run. All of the above.

In a macroeconomic context, choose the best definition for the term velocity.

The rate at which money circulates through an economy.

Which factor brings the supply and demand of loanable funds into balance?

the real interest rate

What is a real price?

A real price refers to a price that has been adjusted to account for inflation.

Which of the statements is the best description of inflation?

An increase in the overall price level has occurred.

Which person can be categorized as a discouraged worker?

Andy Friese was formerly employed at Mama's Used Cars. He has not worked there for six months and has given up looking for work.

When governments outlaw high interest rates and the ceiling is binding, what probably happens to the total amount of money borrowed?

It falls because savers aren't willing to lend as much money at this low interest rate.

Which individual is out of the labor force?

John is without a job, is able to work, but is not actively looking for work.

Given the equation of exchange set forth by the quantity theory of money (M×V=P×Q)(M×V=P×Q) , where M is the supply of money, V is the velocity of money, P is the price level, and Q is real output, which of the statements best defines M?

The total amount of currency, coins, and banking sector.

Which of the choices is most directly related to cyclical unemployment?

recessions

If people want to smooth their consumption over time, what will they tend to do when they win the lottery? To smooth consumption over time, lottery winners will

save most of their winnings so that they can increase their spending over time.

The labour force is comprised of

the number of people counted as employed and the number of people counted as unemployed.

Suppose there is unexpected deflation this year that reduces the aggregate price level by 10%. How does deflation affect borrowers and lenders?

Borrowers are negatively impacted and lenders are positively impacted.

The equation of exchange, M×V=P×QM×V=P×Q, relates to the quantity theory of money. In this equation, M represents the supply of money, V represents the velocity of money, P represents the price level, and Q is real output. Which of the statements describes an implication of this equation in the long run?

Changes in the money supply (ΔM)(ΔM) will balance out with changes in prices (ΔP)(ΔP) .

Which choice best characterizes the debate over employment insurance?

Employment insurance increases the unemployment rate experienced in the economy. It is difficult to determine whether the economy would be better or worse off without employment insurance.

Consider each person's situation to determine who would be counted among the "unemployed." 1) Laura works 20 hours in a paid position for her local animal shelter. She would like to work more but cannot find a job that offers her more hours. 2) Erik volunteers 10 hours a week at his children's school and does no other work. He sends his resume to 10 potential employers daily. 3) Pete had a knee replacement two weeks ago and will not work at his workplace for the next three months. 4) James quit his job to stay at home with his children and has not worked in 15 years, nor has he looked for work Who meets the definition of "unemployed"?

Erik

Businesses in some parts of Canada are eligible for the Atlantic Investment Tax Credit, a 10% tax credit. The Canadian government has decided to decrease this credit from 10% to 5%. The graph is the hypothetical loanable funds market in Canada prior to the cut. Use the interactive graph to illustrate the impact this decrease in the tax credit will have, holding all else constant. Select the answer that describes the adjustment process in this market.

Firms find more investments are unprofitable, and decrease their demand. As a result, the interest rate falls.

Which statement is a major consequence of high government budget deficits?

If the government finances the deficit by borrowing money, it can crowd out business investment.

Please use the graph to answer the questions. a. Given the market conditions, what will the prevailing interest rate be? b. Given the market conditions, how much money is borrowed in the loanable funds market?

a. 10% b. $50 Billion

Consider two economic regions, region A and region B. If region A has strict union protection laws present, while region B lacks union protection laws, we can expect that region A will have ______ unemployment rate compared to region B holding all esle constant.

a higher

Please answer the given four questions related to the market for loanable funds. a. What effect will an increase in interest rates have on the quantity of loanable funds supplied? b. As interest rate decreases, what happens to the quantity of loanable funds demanded? c. Which term acts as the "price" in the market for loanable funds? d. If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

a. Quantity supplied will increase. b. Quantity demanded will increase. c. interest rate d. The business will not take out the loan.

a. What is inflation? b. Which of the following scenarios provides the best evidence that inflation has occurred?

a. an increase in the overall price level b. A person whose salary has increased can purchase fewer goods and services.

Select the term that best describes the employment status of each person. a. Anna Conda is in the Amazon on a vacation from her part‑time job as a herpetologist at the Toronto Zoo. b. Bill Loney does not have a job, nor does he intend to look for one. c. Brighton Early is a student. He has no job outside of the home but spends five hours each week on yard work. He is happy with his situation and is not looking for more work. d. Bonnie Ann Clyde has not had any work for six months despite filling out at least eight job applications each day.

a. employed b. out of the labor force c. out of the labor force d. unemployed

The United States Bureau of Labor Statistics (BLS) categorizes individuals in the United States into three broad groups based on their employment status. Categorize each individual as employed, unemployed, or not in the labor force according to BLS standards. a. Brian is a 31‑year‑old who would like a job, is available to work, and most recently sought work six weeks ago. b. Sarah is a 74‑year‑old retiree who has no intention of returning to work. c. Bruce is a 61‑year‑old who has been without a job for two years, is available for work, and most recently sought work last week. d. James is a 35‑year‑old who most recently sought work two years ago. e. Chung is a 35‑year‑old single parent working only 10 hours a week, but seeking more hours.

a. not in the labor force b. not in the labor force c. unemployed d. not in the labor force e. employed

The people described are out of work. Determine the appropriate classification for each person. a. After several months of searching for a job, LaDainian has decided to stop looking. He instead spends his time golfing and spending time with his family. LaDainian is ______ b. Terrell does not have a job. For many years, Terrell's skills were highly desired and he had no trouble finding work. Terrell still has many of these same skills but he is finding that employers now desire different attributes in employees. Terrell is ______ c. Abby is a stellar employee. However, her employer has gone out of business due to a recession and Abby has no job as a result. Abby will surely be able to find a job in the future but remains looking for a job currently. Abby is _______ d. Deron does not currently have a job. Many firms would like to hire him, in Dallas and Brooklyn in particular, but Deron remains out of work as he evaluates potential jobs in search for a proper match. Deron is _____

a. not in the labor force b. structurally unemployed c. cyclically unemployed d. frictionally unemployed

a. The source of the _______ for loanable funds is saving. b. The source of the _______ for loanable funds is investment. c. The _______ represents the price of a loan.

a. supply b. demand c. interest rate

The natural rate of unemployment equals

frictional unemployment plus structural unemployment.

Classify each of the given events according to the category that best describes how it affects the equilibrium interest rate in the market for loanable funds.

Increase the interest rate: an investment tax credit an increase in large investments decreases the interest rate: an increase in savings a decrease in investor optimism

If savers don't feel safe putting their money in banks or buying bonds, what's the best way to sum up what's happening in the market for loanable funds?

Supply of savings falls and the interest rate rises.

Please label each of the hypothetical individuals with the term that best describes him or her. Each term is used once. a. Lily is a recent economics college graduate and has started her first job as a business analyst. b. Mason, a machinist in a coal mine, had a freak accident loading coal, which left him severelydisabled. He has since been released from his employment with a severance package for life,but he would like to continue to work. Months pass and he gets no offers, despite his stellarresume. Mason gave up on the job hunt four weeks ago. c. Olivia has a PhD in economics, but due to the severe recession, has a hard time finding a job.She takes a part-time job as a consultant, but would prefer a full-time gig so that she can haveinsurance benefits. d. Chloe, age 1717, is a full-time student and has no interest in working. e. Fred, a computer programmer, recently quit his job at Vurve due to the onset of carpal tunnelsyndrome and is now trying to find a new job that will not hurt his wrists as much. He isconfident, as many startups are hiring.

a. employed b. discouraged worker c. underemployed d. none of these terms apply e. unemployed

a. For a firm making decisions about investment or research and development, what is the most important interest rate? b. Which statement is accurate?

a. real interest rate b. The nominal interest rate minus the rate of inflation is the real interest rate.

a. Which of the factors would decrease the rate of frictional unemployment? b. When the economy is doing well, a significant share of unemployment is frictional.

a. the advent of the Internet, which makes finding available jobs easier b. true

a. Select the definition of consumption smoothing. b. Identify an example of consumption smoothing.

a. borrowing in periods of low income and saving in periods of high income to make consumption less variable than income b. all of these are examples of consumption smoothing

Identify what type of unemployment each of the individuals faces. a. James is an architect who has been laid off owing to a slump in the demand for property. He feels he will have to wait until the economy picks up before he can get a new job. James is facing b. Eric is an experienced project manager who lost his job at a tech start-up because the company's product failed to become popular. He is confident he can get a new job and has already rejected a number of offers. Eric is facing c. Craig lost his job several months ago. He is having a hard time finding a job that pays him more than unemployment insurance does. Craig is facing d. Sarah is a recent economics graduate who is entering a difficult labor market, due to a severe recession. She is continuing to look for work but is having a hard time getting interviews. Sarah is facing e. Hamid has just graduated as a lawyer from an esteemed law school. He is confident of getting a job and has already refused a few lower‑paying jobs. Hamid is facing

a. cyclical unemployment b. frictional unemployment c. structural unemploymenmt d. cyclical unemployment e. frictional unemployment

Please match each scenario to the type of unemployment. a. Anna Prentice has worked for years fixing broken typewriters. She is laid off from her job as fewer and fewer people use typewriters. She is looking for work but cannot find a job in her area of specialty. Which term describes Anna's type of unemployment? b. Beau Tye decides to quit his job as a waiter in Pensacola, Florida, in order to pursue his dream of becoming an actor in Hollywood. Acting jobs exist, but he has not yet found one. Which term describes Beau's type of unemployment? c. Brock Lee used to work at Munch n' Munchies Restaurant serving fun family fare. Business at Munch n' Munchies has been slow because the major employer in town has laid off a large number of people. There simply was not enough work to keep Brock Lee on the payroll at Munch n' Munchies. Which term describes Brock's type of unemployment?

a. structural unemployment b. frictional unemployment c. cyclical unemployment

Determine whether each of the individuals is considered unemployed or not unemployed. a. Erik volunteers for 10 hours per week at his children's school and does no other work. He sends his resume to 10 potential employers daily. b. Laura works 20 hours in a paid position for her local animal shelter. c. Pete had a knee replacement two weeks ago and will not be available to work at his job as a mechanic for the next three months. d. Alex just turned 16 and started applying for jobs. He has not found a company that will hire him yet. e. James quit his job to stay at home with his children and has not worked in 15 years, nor has he looked for work.

a. unemployed b. not unemployed c. not unemployed d. unemployed e. not unemployed