Chapters 9-10

If interest rates are 2%, then a $1 trillion tax cut today implies how much of a future tax increase?

$1.02 trillion

US per capita is more than 20x higher than in Nepal. Based on the Chapter 4 model from class, what can we predict about US and Nepalese welfare?

All of these things: - people in Nepal would be happier if they had US incomes - we don't know which country has happier citizens

A one-period one dollar bond is a promise to repay A) r units of goods in the second period B) one dollar in the second period C) 1/(1+r) units of goods in the second period D) (1+r) units of goods in the second period

D: (1+r) units of goods in the second period

T/F: People who are born into the top quintile of the income distribution don't need to bother going to college--in the data it seems that having connections is enough to do well

FALSE

What are the welfare implications of rising interest rates?

Lenders are better off; borrowers are worse off

The US Department of Labor website describes the Registered Apprenticeship program. How might the program be expected to affect labor markets?

Shift the Beveridge Curve down and to the left

The idea that an improvement in aggregate technology causes an increase in population but causes no increase in the average standard of living is attributed to

Thomas Malthus

T/F: According to the chapter 9 model, if interest rates increase, lenders are better off

True

According to US data:

Unemployment and vacancies move in opposite directions over the business cycle

The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of

a credit market imperfection

Assume that US households are net borrowers. According to the Chap 9 model, an increase in the real interest should cause

a decrease in c and an increase in s

The Romer model predicts convergence in ________ whereas the Solow model predicts convergence in _______

growth rates; levels

In the endogenous growth model, workers divide their time between market work and

accumulating human capital

Government could try to address the gap between r2 and r1 by

all of these things 1. subsidizing student loans so that r2 falls toward r1 2. improving the quality of high school education in order to increase college graduation rates, which are associated with raising "a" 3. providing standardized testing to allow lenders to better predict the odds of graduation and loan repayment

When there are credit-market imperfections, an increase in government debt may be advantageous because it

allows credit-constrained consumers to consume more

For a consumer NOT bound by the collateral constraint, an increase in the present value of the collateral leads to

an increase in both current and future consumption

For a consumer not bound by the collateral constraint, an increase in the present value of the collateral leads to

an increase in both current and future consumption

An increase in first-period income results in

an increase in first-period consumption, an increase in second-period consumption, and an increase in saving

We assume leisure is a normal good. This implies that

an increase in lump-sum taxes decreases the demand for leisure

In the model with asymmetric information in the credit market

bad borrowers benefit from the existence of good borrowers

Even in the absence of income-based discrimination in lending markets, college costs more for the poor than the rich

because the cost of borrowing at r2 is higher than the implicit opportunity cost of earning r1 if there is default risk

The mpc is likely to be ________ if there is asymmetric information than if there is not and the impact of recessions on welfare is likely to be _______

bigger; bigger

Americans are relatively strong in their belief that government should provide opportunities

but otherwise isn't responsible for evening out the income distribution

College education widens the income distribution because the poor are unlikely to go to college

but positive externalities from education benefit less-educated workers more than highly-educated ones, which helps reduce income gaps

If lifetime disposable income increases because of an increase in current disposable income then

c, c', and s will all increase

A decrease in matching efficiency

can explain the shift in the Beveridge Curve

In the two-period model with asymmetric information, a one-unit increase in the real rate of interest on bank deposits

causes the real interest rate on loans to increase by more than one unit

We assume that the representative consumer's preferences exhibit the properties that

consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle

With higher future taxes

current consumption declines

In the chapter 10 model with limited commitment, an increase in the value of collateral implies

current consumption will rise; the effect on future consumption is ambiguous

If a country is a net lender in international financial markets, then it has a capital and financial account ________ and a current account and trade _________

deficit; surplus

If the government replaces a lump sum tax with a proportional labor income tax, then

employment and output decrease

T/F: If housing prices fall, then borrowers will reduce current spending but lenders will be unaffected

false

T/F: Parental disadvantage (penalty from having poor parents) is about the same in the US as in other OECD countries

false

T/F: People are much more likely to have to move to find a new job than they used to be

false

T/F: The federal government imposed the mortgage interest payment deduction for income taxes in order to get housing prices to rise again after the Great Depression

false

Consider the two sided search model from class. All other things being equal, which of the following is least likely to increase a searcher's chances of finding a job?

higher real wages

Tertiary education rates in the US used to be ________ than in Europe, but are now ______________. At the same time, the cost of tertiary education in the US is both ______ than in Europe and getting ______ expensive.

higher; the same or slightly lower higher; more

Hope VI is a federal housing program that offers lower income families _______. Moving to Opportunity is a federal housing program that offers lower income families

housing vouchers; counseling about what regions offer the highest upward mobility for children

In the Malthusian model, an improvement in the technology of growing food is likely to

increase the equilibrium size of the population and have no effect on the equilibrium level of consumption per worker

An increase in the real wage

increases consumption and has an ambiguous effect on labor supply

In the two-period model with limited commitment, if the collateral constraint binds

increases in the present value of collateral increase current consumption one-for-one

An increase in the real interest rate

increases savings for borrowers, but has an uncertain effect on the savings of lenders

A competitive equilibrium may fail to be Pareto optimal due to all of the following EXCEPT - inequality - externalities - distorting taxes - non-price taking firms

inequality

The "stickiness" of people born at the very top and very bottom staying in their income bracket

is correlated with attending college. College-educated people have more opportunities no matter what income bracket they are born into

Americans born into the lowest quintile of the US income distribution are _________ to move up out of poverty than are Europeans born into the lowest quintile of their countries' income distributions

less likely

According to our Chapter 10 model with limited commitment, reduced homeownership would most likely lead to _________ aggregate consumption-smoothing and make aggregate consumption _______ pro-cyclical.

less; more

US middle class families (middle three income quintiles) are ______ to be rewarded for investment in post-secondary education by moving up through the income distribution

likely

According to the data from class, the southeastern United States is characterized by relatively _______ geographic mobility and relatively ________ household incomes

low; low

Redlining refers to

maps published by the federal government that outlined non-white neighborhoods in red; Fannie Mae considered such neighborhoods high-risk

Correcting for measurement errors in the trade balance due to profit-shifting and correct measurement of intangibles would make the US estimate of net lending by private households and firms look

more positive

People from the lowest quintile of the US income distribution are _______ to attend college than/as are those in the middle classes and are ________ to move up in the income distribution

much less likely; much less likely

Paul Romer argues that a key feature of knowledge is

nonrivalry

We use Indifference Curves to represent US households because

on average they represent assumptions about US households that seem supported by data and surveys

According to the assumptions of the Chapter 8 endogenous growth model, would an educated worker prefer to live in a country with other highly-educated people or in a country where most other people are not highly educated?

prefer to live in the country with high education levels

Which one of the following properties of preference structure lead consumer to smooth consumption over the present and future?

preference for diversity in current and future consumption

The labor force participation rate is

pro-cycical

All of the following are found in the data to contribute to rising average standards of living EXCEPT: - protection of domestic firms from foreign competition - correction of market failures in capital markets - patent protection enforcement - literacy rates

protection of domestic firms from foreign competition

As the fraction of good borrowers (a) increases,

r2 decreases

In the model with asymmetric information in the credit market, a decrease in the fraction of bad borrowers in the population

reduces the interest rate spread

In the chapter 10 graph, the risk that a borrower might not repay its debt

reduces the welfare of borrowers but leaves the welfare of lenders unchanged

A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that

someone can be made better off without making someone else worse off

All other things being equal if interest rates rise households will

substitute into future consumption, c'

On average, Europeans work both fewer hours per week and fewer weeks per year. This can be explained by

substitution effects dominating income effects where after-tax wage are higher in the US

If there is perfect information and everyone knows future incomes and has no barriers to getting loans then

temporary changes in disposable income that do not affect lifetime wealth will not affect either c or c'

Externalities in the accumulation of human capital are a source of market failure because

the Social Planner would choose a higher level of education--the one that maximized the country's welfare--than the market would

Compared to other OECD countries,

the US has lost its lead in the number of college graduates

The Solow residual attempts to measure the output not explained by

the direct contribution of labor and capital

Suppose that government spending makes human capital technology more efficient. Use the graphical model from Chapter 8 to show how a lump-sum tax on Consumption to improve education would affect new consumption path.

the graph of ln(Ct) to shift down and get steeper

In the endogenous growth model, if more time is devoted to accumulating human capital

the growth rate in output rises, but output falls in the short run

The labor force participation rate was higher in 2012 than in 1948 because

the participation rate of women rose during that time period

All other things being equal, an increase in the real interest rate causes

the present value of future income to fall (higher discount of future earnings)

The consumer's lifetime budget constraint states that

the present value of lifetime consumption must be equal to the present value of lifetime disposable income

In the two-period model, the budget constraint is kinked for all these reasons, EXCEPT a) there is asymmetric information in the credit market b) there is limited commitment in the credit market c) the real interest rate is greater than zero d) there are costs to banks from lending and borrowing

the real interest rate is greater than zero

If the government imposes a marginal income tax on labor income, then

the substitution effect will cause leisure to rise

When we compare rich and poor countries in the world

there is much greater dispersion in growth rates in per capita income among the poor countries than among the rich ones

Using the terminology from Chapter 10 where r2 is the risky (borrowing) interest rate and r1 the risk-free rate, what are the implications of rising interest rates for credit market imperfections?

there is no implication for the spread between r2 and r1

If borrowers are paying a higher interest rate (r2) than lenders are receiving (r1), where does the money go?

there isn't any "extra" money--the reason borrowers are receiving less than r2 is that only a fraction of lenders are actually paying r2

Why is it important that consumers respond differently to temporary and permanent increases in their incomes?

this has implications for the relative effects of temporary and permanent tax cuts

In the presence of government spending, the Social Planner will choose

to have households work more than they would in the absence of government

For a borrower in a (c,c') graph, the optimal consumption bundle is

to the right of the endowment point

T/F: A homeowner is less likely to be credit-constrained than is a renter

true

T/F: Americans are relatively strong in their belief that they have opportunities for advancement

true

T/F: Average life expectancy is positively correlated with per capita GDP

true

T/F: Banks and other financial intermediaries exist in part as a response to the presence of risk in the market for loans

true

T/F: By the 2000s Fannie Mae (and Freddie Mac) were competing with private institutional investors that were speculating, trading, and investing in Mortgage-Backed Securities (MBS)

true

T/F: Fannie Mae provides liquidity in housing markets by giving private banks money in exchange for mortgages. The bank then has money (to lend out or keep in reserves) instead of mortgages. Fannie then sells groups of mortgages to other investors; ....

true

T/F: Home equity loans are a type of mortgage against the value of your house. Mortgages are a way for homeowners to avoid being credit-constrained during times of economic uncertainty, and to avoid paying risky interest rates if there is both uncertainty and ?

true

T/F: In the presence of imperfect information about which borrowers will default, a temporary tax cut acts as a low-cost loan

true

T/F: Only 11% of Americans born to the lowest quintile of the US income distribution go to college

true

T/F: Our trade deficit with China would look much smaller if we both accounted for profit-shifting of intangibles and if we measured the trade data in Value Added rather than Final Product terms

true

T/F: Parental advantage to those born in the top in the US is about the same as in other OECD countries

true

T/F: The current consumption of credit-constrained households will be affected by temporary changes in their current disposable income, thus violating both the Permanent Income Hypothesis and Ricardian Equivalence; mpc>0 for those people

true

T/F: The data problem we have with the production of intangibles is that it is hard to observe where they are really produced, and firms have an incentive to pretend they produced in low-income countries, thus distorting our national income accounting data

true

T/F: The federal government borrowed ~3.2 trillion dollars over 2017 through 2019, and will borrow at least another 3.7 trillion dollars in 2020. Added together, the borrowing over the years 2017-2020 comes to over one third of US annual GDP

true

T/F: credit market failures may add to the market failures unique to education, getting us further from the optimum

true

On average, increases in public 4-year institution tuition in the past 17 years has matched decreases in state support

true--tuition increases have been made to offset reductions in per-student support rather than to increase quality of services

T/F: In the US, there is considerable chance for advancement unless you are born in the lowest 20%

true. people born in the lowest end of the income distribution tend to stay there

T/F: Most Americans feel that there is an opportunity for advancement no matter where an American is born into the US income distribution, and that there is no need for government involvement in addressing income inequality

true; true

The second fundamental theorem of welfare economics states that

under certain conditions, a Pareto optimum is a competitive equilibrium

The first fundamental theorem of economics states that

under certain conditions, a competitive equilibrium is pareto optimal

Poor people are more likely to drop out of college for financial reasons, and drop-outs have higher default rates

unregulated private markets will tend to charge the poor a higher interest rate than they charge the rich because of the higher default rate

The concept of Pareto optimality is a

useful concept because it defines economic efficiency

There are at least 2 types of externality that cause the private market outcome to be below the efficient outcome

we are considering both of these in our models 1. there are real-time external benefits to the private choice. educated workers improve the current welfare of those around them 2. there are dynamic benefits to the current education choice that improve the welfare of future generations

According to the data from class, climate change is expected to ________ the per-capita GDP differences between rich and poor countries within the world and ________ the per-capita GDP differences between rich and poor countries within the US

widen; widen

Which of the following is NOT positively correlated with per capita GDP growth? - average number of years in education, female - literacy rates, adult - widening of the income distribution - all of these are positively correlated with per capita GDP growth

widening of the income distribution

The economy is likely to be ______ if there is asymmetric information than if there is not. Policy is likely to be _______ in improving welfare if there is asymmetric information than if there is not

worse off; more effective

An important feature of the 2-sided search model is that

would-be workers care not just about the market wage but about the chances of finding work

Constant returns to scale means that, given any constant x>0

xzF(K, Nd) = zF(xK, xNd)

In order to make recommendations about education policy and student loan policy

you need to know a lot about the micro-foundations of the market; policy recommendations are not straightfoward