Econ 201 Exam #3 Review Questions

146. What is the current unemployment rate for the U.S.? ....for Michigan?

5.1%

141. Describe a "jobless recovery."

A jobless recovery is an economic phenomenon in which a macro-economy experiences growth while maintaining or decreasing its level of employment.

144. What criteria is used to decide if an individual is "actively seeking" employment?

Actively seeking is doing something that will help you find a job within 4 weeks.

149. What is a supply shock?

An event that causes a shift to the left of a supply curve.

196. In the first Keynesian model, what do we know about savings at this break-even level of income? What do we know about savings if Y is below Y*? ...is above Y*?

Anything below Y* will be dissaving's and anything above is positive savings. At y* savings are 0.

185. Why is the term "Keynesian economics" sometimes viewed as socialist policy? Explain.

Because he offered a rationale for some kinds of government activism, some people believed he was a leftist of some kind.

193. Graphically, use the "expenditures approach" to find the income level where households can "break-even". What algebraic expression can we use to find break-even income, or Y*? Calculate Y*. Compare the values for C and Y at Y*.

Break even point, intersection with 45 angle, algebraic expression C = Y.

166. Who were the candidates for the presidency in the 1932 election? Who was elected in that year? What was the new President's campaign pledge?

Hoover vs. Franklin D. Roosevelt, Roosevelt won with his "New Deal" campaign pledge to try something new to end the depression.

148. Define inflation. What are the three types of inflation?

Inflation: an increase in the price level. 1. Demand-Pull inflation: inflation caused by an increase in the market and an increase in demand shifts to the right 2. Cost-Push: caused by a shift to the left of a supply curve, isn't as common, caused by energy prices (supply shock) 3. Hyperinflation: incredibly high rates of inflation.

165. How did the Great Depression affect politics in the U.S.? How did politics in Europe change as a result?

Lead to many people who thought there might be an issue with classical theory. Europe was affected as well through the Great Depression and they felt the same.

173. Add financial markets to the circular flow model. What is the "leakage" from the circular flow? What is the "injection" into the circular flow?

Leakage is money that is not directly given back to the households (Example: savings). Injection is spending that is not dependent on the current level of income. (Example: Investment Spending)

170. What is "macroeconomic policy activism"? Did Keynes argue for or against this activism?

Macroeconomic policy activism: The use of monetary policy and fiscal policy to smooth out the business cycle. He argued for this activism to help the depression.

161. Which of the two fields, macroeconomics or microeconomics, was widely studied before the Great Depression? Which of the two did not exist before the Great Depression?

Microeconomics was studied before the Great Depression, Macroeconomics did not exist before the Great Depression.

194. What is the multiplier? How will the multiplier change value if the MPS changes? ...if the MPC changes?

Multiplier = 1/(MPS), it will change inversely to the MPS and positively to the MPC

182. If consumption declined, did Keynes agree with Classical theory that investment would increase, and GDP would not decline? Explain Keynes' view regarding decreasing consumption.

No he did not agree, he thought that with decreasing consumption, business owners would not increase their investments.

197. How is savings related to income (Y) in Keynesian theory? Explain the following: S = f (Y). Is this a positive or negative function?

Savings depends on income, and is a positive relationship.

178. What is meant by saying the economy was self-regulating under Classical theory?

Saying the economy is self-regulating means that any problems with it will be fixed on its own without any help.

199. What is the slope of the savings function? What is the vertical intercept of the savings function?

Slope: MPS (Y) vertical intercept: -A

136. Who are the marginally attached workers in the economy? Describe this group.

Someone not working, who would like to work, has looked within the past year, but done nothing within the last 4 weeks. They are people who are looking for a job and would like to work.

137. Who are discouraged workers? Why do they stop looking for a job?

Someone who haven't looked for a job within 4 weeks and has come to the conclusion that they can't get a job. They believe that it is pointless because there has been no result from previous tries.

174. Present the Classical money market using a demand and supply model. How are savings and investment determined? What is the role of the rate of interest in this market? What do we know about the quantity of dollars saved and the quantity of dollars invested?

Supply = Savings (Households) Demand = Investment The rate of interest is the price paid for saving of capital. The quantity of dollars saved and the quantity of dollars invested are equal.

152. What calculation measures the rate of inflation using the CPI?

The calculation that measures the rate of inflation is price changes. (CPI 2015 - CPI 2014)/CPI 2014 X 100 = Inflation Rate 2015

142. Starting with the total population of the U.S., how is the unemployment rate calculated (what identity, equation, formula, etc.)?

Unemployment rate = unemployed/labor force * 100

134. What are the three types of unemployment? Describe frictional, structural, and cyclical unemployment. Give an example of each type.

-Frictional: Change in life where they have a time period before they get back to work. Example college graduate. -Structural: Somebody's position is no longer needed or in short supply, usually by technological improvements. -Cyclical: People become unemployed because a downturn in the economy.

171. Was Keynes concerned about the short run, the long run, or both time periods?

-He was concerned with the short run.

163. Who was the President of the U.S. when the Great Depression began? When had he been elected?

-Herbert Hoover elected in 1928.

203. If households decide to spend more at each level of income, what will happen to the C and S functions (this alters the intercepts of both functions, but leaves the MPS and MPC unchanged)? How will Y* change as a result? ...if households decide to save more?

-If spending increases, the entire line will shift upwards and Y* will shift to the right -If spending decreases, the entire line will shift downwards and Y* will shift to the left

204. If the MPC increases, what will happen to the C and S functions (this leaves the intercepts of both functions unchanged)? How will Y* change as a result? ....if the MPC declines?

-If the MPC increases C will incline, while S will decline, Y* will move to the right -If the MPC decreases C will decline, while S will incline, Y* will move to the left.

192. What is the slope of the consumption function? What is the vertical intercept of the consumption function?

-Slope = MPC, the vertical intercept of the consumption function is A (autonomous consumption)

179. Discuss the role of flexibility of wages and prices in the Classical Theory of Employment.

-The flexibility of wages and prices allowed for any change of the economy speed to work for the business person, by either adjusting prices or wages to fit their needs.

180. How did Classical economists view unemployment in the economy?

-They believed that all unemployment was voluntary and that the economy was at or near full employment.

168. Were Classical economists concerned about the short run, the long run, or both time periods?

-They were concerned about the short run, and thought that the government shouldn't do anything and eventually the long run will correct itself.

198. What is autonomous savings? What is induced savings? What is the MPS? Present the savings function algebraically and graphically.

-autonomous savings is for houses without income -induced savings is households with income. -MPS is the marginal propensity to save, <.50. -A will be negative.

191. What is autonomous consumption? What is induced consumption? What is the MPC? Present the consumption function algebraically and graphically.

...-autonomous consumption: explained somewhere else (the money spent for living) -induced consumption: the portion of consumption that varies with disposable income. -MPC: marginal propensity to consume C= A + MPC (Y)

202. What specific factors (exogenous factors) could cause consumption to increase (we added taxes, debt, real interest rates, and expected future prices to this list)? ....to decrease? How does each factor simultaneously affect savings?

1. Expected future Disposable Income ↑, C↑, S↓ 2. Wealth ↑, C↑, S↓ 3. Debt ↓ (Bad Debt), C↑, S↓ 4. Expected Future Prices ↑, C↑, S↓ 5. Taxes ↓ , C↑, S↓

155. What are the four effects of inflation, or why is any inflation bad?

1. Fixed income households are hardest hit 2. Inflation discourages savings 3. Harms Purchasing Power 4. Interest rates on loans ↑

147. What are the four potential flaws in the current method of measuring unemployment? Would these problems tend to understate or overstate our reported levels of unemployment? Explain.

1. Random Samples: 60,000 households interviewed, happens once a month 2. Part-Time = Full-Time: understates true amount of employment 3. Discouraged Workers: understates true amount of unemployment 4. Lies (about not truly working on the books): overstates true unemployment

154. What are the three types of economic costs that are caused by high inflation rates? Describe each.

1. Shoe Leather Costs: Go from business to business to analyze prices (buyer side problem) 2. Menu Costs: Continually updating prices (business side problem) 3. Unit of Account Costs: When you enter into a contract over an extended period of time, you have to cover for possible inflation (Business side problem)

153. What is the rate of inflation for the U.S. in January 2016 based on the CPI?

1.4%

145. How is data collected for the monthly unemployment rate calculation? Explain.

Data is collected through surveys.

150. Define deflation.

Deflation: a decrease in the price level.

158. What is Fisher's Equation? What is the difference between nominal and real (adjusted) rates of interest? How are nominal interest rates affected by inflation?

Fishers Equation: estimates the relationship between nominal and real interest rates inflation. Nominal is the rate before adjustment for inflation, while the real rate is adjusted for inflation. Nominal interest rates are affected by inflation by the estimate of the expected inflation rates. Real Interest Rate + Expected Inflation = Nominal Interest Rate.

156. What group in the economy will be hit hardest by inflation? Why?

Fixed income houses because they have no opportunity to make of for the inflation and their income is slowly whittled away.

135. Which types of unemployment are avoidable? ...which are unavoidable?

Frictional and Structural are unavoidable, but Cyclical is avoidable.

138. Describe "full employment." Does this mean 100% employment and 0% unemployment are possible in an economy? Explain why or why not.

Full employment is the best possible employment with no cyclical unemployment, it can never be 100% because frictional and structural are unavoidable.

201. Graphically, use the "leakages=injections" approach to find Y*. Find break-even income algebraically. Calculate Y*.

Graphically, when S hits the x-axis at Y* that is the breakeven point. Set S = 0 to calculate Y*.

187. What did Keynes believe was needed at that time? Did capitalism need a complete takeover by government, or did it need a smaller fix?

He believed that it just needed a narrow technical fix.

184. How did Keynes view unemployment in the economy? Did Keynes believe anyone not working was voluntarily unemployed? What policies did Keynes believe could help the economy out of depression?

He believed that there could be involuntary unemployment, but never said that the economy could never be at full unemployment. But when there were recessions/depressions, he believed that there should be macroeconomic policy activism.

189. In historical context, were Keynes' ideas pro-capitalist or anti-capitalist? Explain. In historical context, were Keynes' ideas politically conservative or politically liberal? Explain.

Historically his policies went along with a general enlargement of the role of government in the economy, and those who favored a larger role for government tended to endorse him.

160. Who gains if actual inflation is greater than anticipated inflation? ...is less than anticipated inflation? ...is equal to anticipated inflation? Explain.

If actual inflation is greater than anticipated, the buyer is benefited and the bank is harmed. If actual inflation is less than anticipated, the bank is benefited and the buyer is harmed. If they are equal nobody benefits.

177. In Classical theory, what would happen if consumption declined? Would this send the economy into a recession? Why or why not? What would happen to savings and investment as a result? Would GDP decline, or remain unchanged?

If consumption declined, classical theory states that Investments would increase and GDP would remain unchanged and savings would increase.

159. What impact does inflation have on savings?

If inflation is greater than the savings rate, the money held in savings actually loses value by being in the bank because you could have bought more with it than you earned by saving it.

176. In Classical theory, what did the phrase "leakages equals injections" imply or guarantee?

It implied that no money was lost in the circular flow model, and that any changes within GDP would be balanced elsewhere.

151. Describe the CPI (consumer price index). How is the CPI used in the economy?

It is part of the Bureau of Labor Statistics that measures the average change over time in the price and monitors inflation.

169. Who was John Maynard Keynes? What book did he write, and when was it published?

Keyes was an English economist who wrote "The General Theory" in 1936.

181. Compare/contrast Keynes' beliefs about savings and investment to the Classical money market. How did Keynes believe savings and investment were determined? Did Keynes believe that "leakages equals injections" would be guaranteed? Explain.

Keynes agreed that Demand = Investment, but he did not agree with the savings formula from the classical money market. He believed that Savings = f(Income), which was a positive relationship. And he did not think that leakages equal injection because that is how you get recessions and depressions.

183. Discuss the potential flexibility of wages and prices in the Keynes' Theory of Employment.

Keynes believed that wages and prices where flexible going up, but were sticky downward.

190. How is consumption related to income (Y) in Keynesian theory? Explain the following: C = f (Y). Is this a positive or negative function?

Keynes stated that Consumption depended on Income (C = f(Y)) and it was a positive relationship.

188. In modern times, are Keynes' ideas accepted by just liberals, or are his ideas more widely accepted? The book offers the example of an official in the George W. Bush White House. Who was this person, and how does this serve as an example of how Keynes is viewed historically? Explain.

Keynesian ideas have actually been accepted across a broad range of the political spectrum. The president was a conservative, but the official had done a lot of research on Keynesian economics.

157. What is the difference between nominal income and real (adjusted) income? What happens to real income if the price level rises faster than nominal income? .....rises slower than nominal income? ...rises at the same rate as nominal income?

Nominal income is the dollar amount of your pay check where real income is adjusted for inflation. If real income rises faster than nominal income then nominal income increases (pay raise), if it rises slower, nominal income decreases (no raise), if it rises at the same time, then there is no difference (raise = inflation).

175. Explain the following: S = f (r) and I = f (r). Which of these is a positive function? Which of these is a negative function? Explain the reasoning behind each.

S = f(r) // supply = savings, positive relationship I = f(r) // demand = investment, negative relationship

195. What does the 45o reference line show? What is the break-even level of income, Y*? Explain how Y* serves as the "equilibrium" level of Y for the economy.

The line shows where savings are 0 and income is equal to consumption (Breakeven level of income). Y* is the equilibrium because anything above savings are negative and anything above savings are positive.

139. What is the "natural rate" of unemployment? What is the consensus rate for this level of unemployment in the U.S. today? What do we know about the different categories of unemployment if the actual unemployment rate is above the natural rate? ..is less than? ...is equal to?

The natural rate of unemployment is the best unemployment rate that allows for frictional and structural unemployment. It is 4.8%-5.2%. If the rate is less than that, the economy is growing so fast that the turn over for structural and frictional unemployment is much quicker than planned. If it is more than that it means that the economy is in a downturn with cyclical unemployment. And if it is equal it means that the economy has stayed the same.

140. Looking back at the recessions in 1990-1991, 2001, and our most recent recession, what happens to the national unemployment rate after a recession is over? Does the unemployment rate come down immediately after a recession? Does the unemployment rate stay constant? Does the unemployment rate continue to increase? Explain.

The unemployment rate after a recession does not improve immediately after a recession and can go down more before leveling out and then starting to increase.

186. What did some British intellectuals believe would happen to capitalism in the Great Depression? Did Keynes agree with them?

They believed that the Great Depression was the final crisis of the capitalist economic system and that only a government of industry could save the economy. He argued that the system only needed a minor tweak to re-right itself.

200. How are the MPC and the MPS related?

They both add up to 1.

162. How did officials, including the President, respond to the Great Depression? What controversies existed? Explain.

They did nothing because conventional wisdom said that it would work itself out and interfering would only cause more harm.

167. What did Classical economists know about business cycles? What didn't they know?

They knew that business cycles occurred, but they didn't know why.

164. What were Hooverville's?

They were run down houses that people blamed the existence of on Hoover.

143. What is the labor force? Who has been excluded from the total population to get the labor force? Labor force consists of:

total population - <16yrs - Institutionalized - not in the labor force