ECON 204 Midterm Exam

unemployment rate equation

unemployed / labor force

population rate equation

= employed + unemployed / population of working age

Industrial Revolution

A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.

technological progress

A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output.

gross domestic product (GDP)

A measure of the market value of the output of the economy in a given period.

technology

A process taking a set of materials and other inputs, including the work of people and machines, to produce an output.

1.3 According to the World Bank, real per capita income in the U.S. increased from $57,640 in 2015 to $58,030 in 2016. What was the approximate annual growth rate? A. 0.7% B. 1.0% C. 6.8% D. $390

A. 0.7% (The growth rate can be calculated using the equation in Unit 1.3. Here, the growth rate = ($58,030-$57,640)/$57,640 = 0.007 or 0.7%.)

Which of the following would increase GDP? A. A decline in imports, holding all other components of GDP constant. B. An increase in remittances paid to domestic residents by relatives living abroad. C. An increase in government spending. D. A decline in exports.

A. A decline in imports, holding all other components of GDP constant. C. An increase in government spending.

1.5 Which of the following statements regarding Adam Smith are correct? A. Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. B. Adam Smith advocated that economic agents were guided entirely by self-interest. C.Adam Smith argued that all markets were characterized by perfect competition. D. Adam Smith believed there should be no government involvement in the economy.

A. Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. (This is Adam Smith's idea of the "invisible hand": "It is not from the benevolence of butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest, led by an invisible hand to promote an end which was no part of his intention.")

3.9 If the Federal Reserve increases the reserve requirement, then A. Banks are required to hold a greater amount in reserves, and they have less money available to lend out. B. Banks are allowed to hold a smaller amount in reserves, they will have a greater amount of money available to lend out C. Banks will not change their lending behavior. D. Banks are required to hold a greater amount in reserves, and they have more money available to lend out.

A. Banks are required to hold a greater amount in reserves, and they have less money available to lend out.

3.7 When the Federal Reserve wants to change the money supply, it most commonly A. Conducts open market operations. B. Changes the discount rate. C. Changes the reserve requirement D. The Federal Reserve cannot change the money supply.

A. Conducts open market operations. (Conducting open market operations, like selling or buying bonds, is the most common way that the Fed changes the money supply.)

4.8 Which of the following statements is correct regarding measuring of GDP? A. GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production. These three different measures of GDP are discussed in Section 13.4. B. Both exports and imports are included in the measurement of GDP. C. Government production is not included in the GDP. D. The value added of government production is computed using the price that public goods and services are sold at in the market.

A. GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production. (These three different measures of GDP are discussed in Section 13.4.)

3.6 The Federal Reserve does all except which of the following? A. Make loans to individuals B. Control the supply of money C. Control the value of money D. Regulate the banking system

A. Make loans to individuals (This is the responsibility of individual banks, not the Federal Reserve.)

2.9 The figure below depicts the labor market model. Consider a reduction in the degree of competition faced by the firms. Which of the following statements is correct regarding the effects of reduced competition? A. The equilibrium real wage falls. B. The price-setting curve shifts up. C. The wage-setting curve shifts up. D. The unemployment level falls.

A. The equilibrium real wage falls. (Decreased competition leads to a lower price-setting curve, while the wage-setting curve is unaffected. Therefore the equilibrium (the intersection of the two curves) shifts down and to the left, implying lower real wage and higher unemployment.)

2.8 The figure depicts a labor market. Now consider an inflow of half a million immigrant workers who are all looking for employment. Which of the following statements is correct? A. The firms' marginal cost of production is temporarily reduced. B. Unemployment decreases. C. The wage-setting curve temporarily shifts up. D. All immigrants find work.

A. The firms' marginal cost of production is temporarily reduced. (With the downward shift of the wage-setting curve, the firms' marginal cost of production initially falls. This induces them to employ more workers, moving up the wage-setting curve, thus raising the marginal cost again.)

1.8 What does US GDP per capita measure? A. The total output of the US's economy, divided by the country's population. B. The total output of Washington DC's economy C. The average disposable income of a US resident. D. The total output of the US residents, divided by the number of the residents.

A. The total output of the US's economy, divided by the country's population. (This is the correct definition of GDP per capita as defined in Section 1.2.)

2.2 The figure shows the wage-setting curve and the real wage w*. Based on this figure, which of the following statements is correct? A. The unemployment rate is 5% B. The participation rate is 76% C. Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. D. The employment rate is 95%. E. 4% of the population is unemployed

A. The unemployment rate is 5% (Unemployment rate = Unemployed / Labor force = (0.8 - 0.76)/0.8 = 5%)

3.10 If the Federal Reserve lowers the discount rate it charges to banks, then A. banks will increase their borrowing of reserves from the Fed and thus increase money supply. B. banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, increasing the money supply. C. banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, decreasing the money supply. D. banks will increase their borrowing of reserves from the Fed and thus decrease money supply.

A. banks will increase their borrowing of reserves from the Fed and thus increase money supply.

Which of the following are examples of private property? A. computers belonging to your college B. a farmer's land in Soviet Russia C. shares in a company D. a worker's skills

A. computers belonging to your college C. shares in a company

capitalism

An economic system in which private property, markets, and firms play an important role.

inflation

An increase in the general price level in the economy. Usually measured over a year.

The unemployed are the people who:

Are not in paid employment or self employment Are available for work Are actively seeking work

1.4 Imagine an economy that grows at a constant rate for the 21st century. A plot of the level of GDP over time will fit: A. A straight upward-sloping line on a linear scale, and a convex line on a linear scale. B. A convex line on a linear scale, and a straight upward-sloping line on a ratio scale. C. A concave line on a linear scale, and a straight upward-sloping line on a ratio scale. D. A downward-sloping line on both a linear scale and a ratio scale.

B. A convex line on a linear scale, and a straight upward-sloping line on a ratio scale. (As explained in Unit 1.3., a series that grows at a constant rate looks like a convex line on a linear scale and a straight upward-sloping line on a ratio scale.)

2.3 Which of the following statements about the wage-setting curve is correct? A. The wage-setting curve depicts the workers' reservation wage for different levels of economy-wide employment. B. At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate. C. A lower unemployment rate shifts the wage-setting curve down. D. A higher unemployment rate shifts the wage-setting curve down.

B. At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate. (A lower unemployment rate shifts the workers' best response function for effort exerted given the wage level to the right. This means that the employers need to offer a higher wage to induce a higher effort level. This is a movement up along the wage-setting curve and not a shift of the entire curve, since employment is the horizontal axis variable)

2.5 The wage-setting curve shows that at relatively low levels of unemployment, economy-wide real wages will be relatively: A. Low B. High

B. High (At low levels of unemployment, real wages will be relatively high)

4.5 Temporary change in income affects the current consumption of credit-constrained households more than unconstrained households because A. A credit-constrained household is unlikely to have savings to fall back on. B. If the household cannot borrow, its current consumption is limited by its current income. C. A credit-constrained household cannot foresee the future. D. Credit-constrained households are likely to be shortsighted.

B. If the household cannot borrow, its current consumption is limited by its current income. (If it cannot borrow, then it cannot consume more than its income.)

Which of the following statements are correct? A. Contracts are complete in both competitive goods markets and labour markets. B. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. C. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents. D. Social norms do not affect the outcomes in either goods markets or in labour markets.

B. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. C. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents.

2.1 Suppose that everyone who had been looking for a job for more than six months gave up in despair and stopped looking for a job. What would happen to the unemployment rate? A. It would increase B. It would decrease C. It would not change D. It would change, but the effect cannot be predicted

B. It would decrease (If unemployed individuals stop looking for a job, that means they are now no longer 'unemployed' but now merely out of the labor force. This means the unemployment rate would fall. This is an issue in that many might see this as a sign of macroeconomic improvement, but these individuals still do not have work)

3.4 Which of the following statements are correct? A. Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. B. Net income is the maximum amount that you can consume and leave your wealth unchanged. C. In economics, investment means saving in financial assets such as stocks and bonds. D. Depreciation is the loss in your financial savings due to unfavorable movements in the market.

B. Net income is the maximum amount that you can consume and leave your wealth unchanged. (Net income is the flow that corresponds to your stock of wealth, so if you consume it all your wealth is unchanged.)

3.2 Which of the following statements is correct? A. In the credit market, asymmetric information regarding the quality of the project leads to a principal-agent problem, where the borrower is the principal and the lender is the agent. B. Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. C. Borrowers whose limited wealth makes it impossible to get a loan at any interest rate are termed 'credit-constrained'. D. The amount that the lender puts into the project is called the equity.

B. Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. (Providing collateral is one way to reduce the principal-agent problem. It provides the borrower a greater incentive to work hard, and gives the lender the signal that the borrower thinks that the project is of sufficient quality to succeed.)

Which of the following are examples of markets? A. wartime food rationing B. auction websites such as eBay C. touts selling tickets outside concert halls D. sale of illegal arms

B. auction websites such as eBay C. touts selling tickets outside concert halls D. sale of illegal arms

The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was: A. -2.40% B. 2.35% C. -2.35% D. -0.24%

C. -2.35% (The GDP per capita changed by $21,966 − $22,494 = −$528. The growth rate of GDP per capita is given by this change as a percentage of the 2012 figure: −$528/$22,494 = −2.35%.)

2.4 Which of the following cases would the wage-setting curve shift up? A. Better monitoring by the employer B. Lower unemployment rate. C. A more generous unemployment insurance scheme. D. A sudden influx of immigration

C. A more generous unemployment insurance scheme. (A more generous unemployment insurance scheme improves workers' outside option, so their best response function curve shifts to the right. This raises the firm's profit-maximizing wage level (the wage at which the firm's isocost is tangent to the best response function curve) at each employment rate, so the wage-setting curve shifts up)

4.3 Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption? A. A temporary reduction in income. B. A rise in interest rates C. An unexpected promotion to a senior position. D. A freeze in the value of state retirement benefits

C. An unexpected promotion to a senior position. (A promotion to a senior position is likely mean an increase in future income over a long period. (This promotion may lead to others). If it was expected, then it might already have been taken into consumption plans and have little effect. But if it was unexpected then it is very likely to increase consumption.)

2.7 Which of the following statements about the price-setting curve is correct? A. The price-setting curve simply depicts the firms' profit-maximizing price level for different levels of economy-wide employment. B. Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. C. At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. D. At points above the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level.

C. At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. (The price-setting curve represents the profit-maximizing real wage. At points below the curve, the real wage is too low and the markup (and thus the price) is too high. See Figure 9.10 in the text for a refresher.)

Which of the following statements is correct? A. Money is the cash (coins and notes) used as the medium of exchange to purchase goods and services. B. Bank money is the total money in the savers' deposit accounts at the bank. C. Base money is broad money minus bank money. D.Liquidity transformation occurs when the banks transform illiquid deposits into liquid loans.

C. Base money is broad money minus bank money.

Economic power is:

Concentrated in the hands of owners and managers Limited by competitions with other firms

4.4 Why is investment spending likely to be more volatile than consumption spending? A. Because investment depends entirely on 'animal spirits' B. Because firms cannot foresee the future. C. Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example D. Interest rates fluctuate.

C. Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example (These items include food, heating, lighting, shelter, for example. Such spending is sometimes referred to as 'non-discretionary' spending.)

1.2 Which of the following statements is correct regarding disposable income? A. Disposable income is the amount of income that is given away. B. Disposable income is total income from wages, profit, rent, and interest. C. Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. D. Disposable income is the exact measure of one's wellbeing

C. Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. (Disposable income is total income minus transfers to others such as taxes, which is the maximum amount of possible expenditure without borrowing or selling.)

1.9 Which of the following variables has NOT followed the so-called 'hockey-stick' trajectory? Recall, the 'hockey-stick' trajectory refers to graphs which illustrate that there has been little to no growth for most of history, followed by a sudden and sharp change to a positive growth rate. A. GDP per capita B. Labor productivity C. Inequality D. Global carbon emissions from burning fossil fuels

C. Inequality (There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal.)

4.6 Compared with investment spending, government spending is relatively stable. Why might this be? A. A large part of government spending is on transfers (benefits and pensions) which are 'contractual' and have to be paid whatever the state of the economy. B. The government can spend what it likes'. C. Much of government spending is independent of the state of the economy. D. Government spending is constrained by international agreements.

C. Much of government spending is independent of the state of the economy. (Leaving aside transfers, government spending consists of capital spending - on schools, health, roads, railways etc. These spending decisions are made largely with reference to social needs and political preferences. These do not change rapidly. Furthermore, the projects once begun, cannot easily be abandoned. Likewise with current spending - on salaries in education, health police etc. The level of service and hence the level of spending is dictated by the community's preferences which tend to be stable.)

Which of the following statements are correct regarding the principal-agent problem? A. A principal-agent problem exists in loans due to a positive possibility of the principal not being repaid. B. The principal-agent problem can be resolved by writing a binding contract for the borrower to exert full effort. C. One solution for the principal-agent problem in loans is for the borrower to provide equity. D. The principal-agent problem leads to credit rationing in the loans market.

C. One solution for the principal-agent problem in loans is for the borrower to provide equity. D. The principal-agent problem leads to credit rationing in the loans market.

1.7 Capitalism is an economic system based on A. Private property B. Private property and markets C. Private property, markets, and firms D. Markets and state-owned firms

C. Private property, markets, and firms (While many economic systems are built on private property and markets, capitalism is unique in that most people work for firms rather than for themselves.)

1.6 The historical process which led to requiring fewer inputs to produce the same output is referred to as A. Capitalism B. Specialization C. The technological revolution D. History's hockey stick

C. The technological revolution (The Industrial Revolution launched the permanent technological revolution in Britain around 1800.)

4.2 In figure above, the data for Spain suggests that Okun's Law can be written as y = -0.3597x +1.741. What is the predicted change in unemployment if GDP grows by 2%? A. Unemployment increases by 2.46 percentage points B. Unemployment increases by 1.73. C. Unemployment increases by 1.02 percentage points. D. Unemployment increases by 1.67 percentage points

C. Unemployment increases by 1.02 percentage points. (1.741 - 0.3597(2) = 1.02.)

2.10 Which of the following statements regarding labor unions and wage bargaining is correct? A. Labor unions have no bargaining power when bargaining for their wages. B. A labor union can set both the wage level and the employment level. C. Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. D. The unions' bargaining power comes from their ability to shut down firms.

C. Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. (Demanding too high a wage may squeeze profits sufficiently, leading the firm to close down or cut back on employment. Therefore unions may choose to restrain their bargaining power.)

2.6 The price-setting curve shows how output per worker is split between: A. Unions (dues) and workers (real wage) B. Firm owners (real profit) and unions (dues) C. Workers (real wage) and firm owners (real profit) D. None of the above.

C. Workers (real wage) and firm owners (real profit) (Recall that the price setting curve gives the real wage paid when firms choose their profit-maximizing price. See figure 9.9 for a refresher.)

1.10 People are more productive when they specialize (focus on a limited range of activities) due to: A. Difference in ability B. Learning by doing C. Economies of scale D. All of the above

D. All of the above

3.3 Interest rates can influence the macroeconomy by influencing A. Households' decisions to borrow and spend B. Businesses' decisions to invest in new projects C. The attractiveness of holding equities D. All of the above

D. All of the above (All of these answers influence the macroeconomy. When the interest rate is low, households pay less for borrowing and are more likely to borrow. Paying less in the interest rate also gives borrowers more money to spend. Business' are less likely to invest when the interest rate is high because they are paying more if the interest rate is high. If interest rates rises, then the risk free rate of holding equities rises.)

Which of the following statements is correct regarding the effects of a rise in the real wage on the labour supply of a worker? A. The income effect means that the worker will increase his labour supply. B. The substitution effect means that the worker will increase his consumption of free time. C. The income and substitution effects always enhance each other, leading to higher labour supply. D. At high wage levels, the income effect dominates the substitution effect, leading to lower labour supply.

D. At high wage levels, the income effect dominates the substitution effect, leading to lower labour supply.

3.5 Potential solutions to the principal-agent problem in the credit market include: A. Lenders refusing to lend B. The borrower setting aside some collateral C. The lender requiring the borrower to put some of her wealth into the project D. Both b. and c.

D. Both b. and c. (Both solve the principal-agent problem. When the borrower sets aside collateral for a loan, it gives the loan giver more trust in the buyer and increases the likelihood that the buyer will get the loan. When the lender requires the borrower to put wealth into the project, they have this same trust established)

3.8 The Federal Reserve helps prevent bank runs by A. Providing deposit insurance B. Operating as banks' lender of last resort C. Outlawing bank runs D. Both by providing deposit insurance and by operating as banks' lender of last resort.

D. Both by providing deposit insurance and by operating as banks' lender of last resort.

Which of the following statements is correct? A. To maximize profits, firms set the wage at the level where the workers are indifferent between working and not working. B. Firms aim to set as high a price as possible. C. In equilibrium, the wage clears the labour market, so there is no unemployment. D. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.

D. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.

4.7 When measured over time, the nominal value of many variables in economics grows more rapidly than their corresponding real values. Why might this be? A. Because of errors in the data recording process. B. Errors are likely to be more randomly distributed. Because of population growth. C. Increases in productivity. D. Inflation.

D. Inflation. (If inflation is positive, then nominal values will increase more rapidly than real values because nominal values incorporate two changes simultaneously: the change in volume or size and the change in price. This compares with real values that record only changes in volume or size.)

Which of the following is not a way to estimate GDP? A. Spending B. Production C. Income D. Interest rates

D. Interest rates (You can not measure GDP by the interest rate.)

4.1 Looking at Figure 13.5, which country's unemployment rate shows the least sensitivity to the rate of GDP growth? By how much does a one per cent increase in growth reduce the unemployment rate in that country? A. Germany; by 0.2 percentage points. B. Malaysia; 0.5 percentage points C. Japan; 0.157 percentage points D. Japan; 0.029 percentage points

D. Japan; 0.029 percentage points (The slope of the regression line is given by coefficient on x (=0.029). The second figure (here 0.157) is the value of the intercept.)

4.9 The Consumer Price Index: A. Records the price of all goods and services in the economy. B. Records the price of all goods produced in the domestic economy, including exports. C. Measures the rate of inflation D. Measures the general level of prices that consumers pay for goods and services

D. Measures the general level of prices that consumers pay for goods and services (It records the price of goods and services in a typical "shopping basket")

3.1 Which of the following statements is correct? A.In economics, money refers to the coins and notes in circulation. B. I can exchange my apples for your oranges. Therefore apples can be classified as money. C. Banks must exist for money to do its work. D. Money allows purchasing power to be transferred between consumers.

D. Money allows purchasing power to be transferred between consumers. (Money allows purchasing power to be transferred between people so that they can exchange goods and services, even when payment takes place at a later date (e.g. through the clearing of a cheque or the settlement of credit card and trade credit balances). This is the correct answer.)

1.1 Figure 1.2 shows the distribution of income across and within countries in 2014. The height of each bar represents the annual income of the population (for each decile), measured in 2005 US$, while the width of each country's bar represents its population. The red countries were the poorest countries in 1980, while the green countries were the richest in 1980. Based on this information, which of the following statements is correct? A. Income inequality is higher in Japan than in the United States. B. Countries with a larger population are poorer. C. The income ranking between countries has remained broadly the same between 1980 and 2014. D. The poorest decile in the US earns more than the richest decile in some poor countries.

D. The poorest decile in the US earns more than the richest decile in some poor countries. (The poorest Americans are better off than the richest people in poor countries, because the first column in the US is higher than the last column in the poorest country (which is the country furthest to the left).)

What does UK GDP per capita measure? A.the total output of London's economy B.the average disposable income of a UK resident C. the total output of the UK residents, divided by the number of the residents D. the total output of the UK's economy, divided by the country's population

D. the total output of the UK's economy, divided by the country's population

consumption (C)

Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables.

Polanyi Problem:

For market economies to function with some modicum of fairness, they must be embedded in social norms and institutions that promote notions of the common good. Otherwise, acquisitiveness and competition—the two driving forces of market economies—achieve overwhelming dominance as cultural forces, rendering life under capitalism a Hobbesian "war of all against all." Under neoliberalism, this may worsen in that competition and acquisitiveness become more intense and may override social mores.

Income per person equation

GDP/population

Marx Problem:

Globalization increases the size of the reserve army of unemployed, which diminishes US workers' bargaining power and lowers wages. Under neoliberalism, there are limited government interventions, expanded labor markets (because of globalization), and less effective labor unions, which means wages stay low.

Why are strong unions able to push for higher wages? How do unions improve workers' bargaining power?

In general, strong unions can improve workers' collective bargaining power with their employers. When workers all agree to only work under certain standards, firms (sometimes) have few other hiring alternatives. This allows workers to have more power over their working conditions or incomes.

disposable income

Income available after paying taxes and receiving transfers from the government.

money

Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The 'because' is important and it distinguishes exchange facilitated by money from barter exchange in which goods are directly exchanged without money changing hands.

In a capitalist system:

Most production takes place in firms Inputs and outputs are private property

employment rent

The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). Also known as: cost of job loss.

aggregate output

The total output in an economy, across all sectors and regions.

What do you think has caused the decline in union membership over the last several decades?

There are several possible answers here. One may be the changing structure of the global economy, which places U.S. workers in competition with poorly paid workers elsewhere. The reading also mentions that worsening income inequality might encourage policies that weaken unions (they write, for example, that wealthy individuals have worked to get people who are hostile to unions appointed to the National Labor Relations Board).

disposable income equation

Wages + profit + rent + interest - taxes + transfers

Keynes Problem:

When financial markets convert long-term assets into short-term commitments for investors, this also fosters a speculative mentality in the markets (investors think about what other investors think rather than considering asset values more concretely). This means markets are more susceptible to rumors or fads. Investment instability often causes unemployment which negatively impacts household stability

growth rate equation

change in income/ original level of income

employment rate equation

employed / population of working age

Firms and customers:

firms set a markup above the cost of production, to maximize their profits subject to demand

Firms and employees:

firms set w age sufficiently high to make job loss costly, in order to motivate employees work hard in the absence of complete contracts