Macro Final

The supply of fossil fuels like coal and petroleum will become scarcer and scarcer in the next 50 years. With a growing global demand for energy and the looming threat of rising global temperatures, it would seem to be a recipe for a dramatic decrease in the growth rate of economic activity. Why do many economists believe that economies can continue to grow even in the face of resource scarcity?

Prices of scarce resources rise which will then provide incentives to find alternative energy sources.

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock to the economy. Describe the short-run effects of this demand shock and how the economy will adjust in the long run.

An unanticipated increase in aggregate demand will, in the short-run, lead to an output level that is greater than what is consistent with full employment. This occurs because price levels are different that what was anticipated by resource providers. There will be less unemployment than the "natural rate" of unemployment. There will be upward pressure on resource prices and interest rates, which will, over the long-run, result in a decrease in aggregate demand. Resource providers will make adjustments to the new price levels and output will decline to what is consistent with full employment. A new market equilibrium will occur at a higher price level. So in the long-run, inflation (higher prices) will be the major effect of the increase in aggregate demand.

Suppose the annual inflation rate is at 7% and 3% of the labor force is unemployed. If you were on the Federal Reserve's Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?

If I was within the Federal Reserve's Open Market Committee I would choose an expansionary monetary policy where I would lower the rate of interests this helps in spurring the economic growth and reducing the level of unemployment by a certain proportion. An increase in the number of employed workers will increase the country's taxable income yielding to a growth in the gross domestic product. I would further ensure that FOMC adjusts the interest rates through setting targets for Fed funds rate. This refers to the rate which banks usually charge each other for the overnight loans recognized as Fed funds. The Fed will then pressure the banks to adapt to its target with the open market operations. Since the FOMC will be geared at ensuring that the level of unemployment decreases by a certain percentage to encourage an increase in the gross domestic product through reduction in the interest rates then I will also choose buying securities from the banks. This will increase the money supply in the market encouraging more firms and individuals to borrow and entering into investment strategies where the industries will demand more labor. This will eventually result to a decrease in the unemployment level and an increase in the rate of inflation

Some economists argue that the official unemployment rate understates the true level of unemployment. Summarize these arguments.

If a worker is not actively seeking work because he or she has grown discouraged over job prospects, he or she is categorized as a discouraged worker. These workers are not counted in the official ranks of the unemployed, yet their lack of work is real. There are some workers, the underemployed, who would like to have a full time job but cannot find one, so they are working at a part-time job. These workers are officially classified as employed, yet they are being underutilized. Adding the discouraged workers and underemployed workers to the official ranks of the unemployed would increase the unemployment rate.

Donald owns several hotels in New York, Las Vegas, and other centers of tourist activity. Much of Donald's hotel revenue comes from European tourists. Suppose the U.S. dollar depreciates against the euro. Explain how this will affect Donald's hotel business.

In the scenario that you have laid out here, Donald's hotel business will benefit when the dollar depreciates. You might even say he will make so much money your head will spin. This is because European tourists will be better able to afford to come and stay in his hotels.

Suppose you win the lottery and are given a choice to collect either the grand prize of $6 million in 20 annual instalments of $300,000, or collect an immediate one-time payment of $4 million today. If the interest rate is 5% and that is what you use to discount future earnings, which option should you select to maximize the present value of the winnings?

Take the $4 million dollars today. If you take the 20 annual payments of $300,000, with an interest rate of 5%, then in total you will only receive $3 million dollars.

Ted is looking to borrow money from a local bank. He is told that the nominal rate is 8% and that includes an inflation expectation of 5% and a real interest rate of 3%. If there were unexpectedly high inflation over the term of this loan, would Ted be hurt, or would the bank be hurt? Explain your answer.

Ted and the bank entered into this contract with an expectation that inflation would be 5%. If inflation is higher, the bank receives payments that have lost purchasing power. The bank, as lender, is losing due to this unexpectedly high inflation. Ted is repaying the loan with dollars that have a lower real value than had been expected.

Suppose you take $100 to the bank and make a deposit into your checking account. Making small talk, you ask the teller "Do you make money here?" A little surprised, the teller responds, "Of course not, only the U.S. Treasury makes money." Is the teller correct or incorrect? Explain

The U.S. Treasurer mints (literally makes) dollars and coins when requested by the Federal Reserve Bank (which is not a government entity). You could say that the question is both correct and incorrect. The U.S. Treasury only mints money for the U.S., not for all countries.

Explain how an autonomous change in aggregate spending affects real GDP, making reference to the multiplier.

The change in aggregate spending drastically affects the real GDP. The real GDP is a measure of all final goods, therefore meaning that

Why is the long-run Phillips curve believed to be vertical at the natural rate of unemployment or NAIRU?

The long-run Phillips curve is a vertical line that illustrates that there is no permanent trade-off between inflation and unemployment in the long run. ... As unemployment decreases to 1%, the inflation rate increases to 15%. On the other hand, when unemployment increases to 6%, the inflation rate drops to 2%.

Look at the table The Market for Hamburger Flippers. If the minimum wage in this market is $8, what is the impact on the market? Who are the winners and losers of the minimum wage?

There is surplus labor of 10 hours. Winners are those who are able to supply the 45 hours of work at the higher wage. Losers are the firms now paying a wage higher than equilibrium. Additional losers are workers who are trying unsuccessfully to offer 10 hours that would not have been supplied at the equilibrium wage. Hamburger consumers may also be losers if the minimum wage requires an increase in the price of a hamburger.

Examine the table Wheat and Aluminum that shows the maximum possible production of wheat and aluminum for both the United States and Germany. Are gains from trade possible between these nations? Explain.

Yes. The United States has a comparative advantage in the production of wheat because the opportunity cost of producing wheat is only 1 ton of aluminum, but in Germany the opportunity cost of 1 ton of wheat is 2 tons of aluminum. The United States should specialize in wheat production. Germany has a comparative advantage in the production of aluminum is only 1/2 ton of wheat, while in the United States the opportunity cost of 1 ton of aluminum is 1 ton of wheat. Germany should therefor specialize in aluminum production. The United States would trade wheat to Germany in exchange for aluminum.

Why does a $1,000 tax cut generate a smaller multiplier effect than a $1,000 increase in government purchases?

Your statement is the subject of great controversy in the world of economics. Many economists reject the Keynesian theory of economics which your statement reflects. Some economists suggest that multiplier values can be less less than one because certain types of government spending can crowd out private investment or consumer spending that would have otherwise taken place. This crowding out can occur because the initial increase in spending may cause an increase in interest rates or in the price level.