Macroeconomics Exam 2
What event is generally viewed as the onset of the Great Depression? Why do events like this often occur near or at the beginning or during a recession?
The stock market crash (Black Thursday) They cause the real wealth of many people to decrease drastically, which decreases aggregate demand. They also cause people to panic.
What is the relationship between the steady state value of income y* and the depreciation rate δ?
-Increasing the depreciation rate δ would increase the slope of the δk curve and y* would decline -Decreasing the depreciation rate δ would decrease the slope of the δk curve and y* increases
How is the Smoot-Hawley Tariff Act thought to have worsened the severity of the Great Depression?
-The increase in tariffs further stressed struggling nations, including those in debt to the U.S. -Caused other nations to retaliate by imposing their own tariffs
Rule of 70
70 / % interest per year
Why did politicians initially think this would help the economic situation?
-They thought that by raising tariffs on external goods, the US could isolate its economy from the rest of the struggling markets. -High tariffs had the potential to even strengthen the US economy by making everyone buy American-made food and products.
War and Economic Growth
-War increases gov defense spending, which would increase GDP. -However, rebuilding after war leads to destruction of human and physical capital, which are critical for economic growth. -Effects not noticed: population-decrease in population can negatively affect GDP, rebuilding-the rebuilding of cities stunt economic growth -Decrease consumption and other factors in long run -In addition, war can decrease trade between countries involved
Using Cobb-Douglass Function F(K,N) = (K^α) x (N^1-α) , find output. Labor= 20 Capital= 80
31.7
Using Cobb-Douglass Function F(K,N) = (K^α) x (N^1-α), find output. Labor= 20 Capital= 160
40
If a nation has GDP growth of 4%, the price level increases 1.5%, and the population increases by 1%, what is the rate of economic growth?
1.5%
What are bubbles?
A situation in which asset prices appear to be based on implausible or inconsistent views about the future
Decrease in expected income in the future
AD shifts left
The value of the dollar increases
AD shifts left
Why is LRAS vertical?
All input costs are flexible in long run
Why does the population growth rate decline rapidly after an economy is lifted out of extreme poverty?
As income rises, fertility seems to fall. Parents have different perceptions of the costs and benefits of children once living standards improve, leading to lower fertility.
Why is the intensive form of our production function useful for measuring economic growth?
Because changes in real income per capita over time is equivalent to economic growth
List 3 benefits of economic growth and describe how economic growth brings these changes about in an economy.
Better Nutrition, Better Access to Healthcare, More Education, Lifespan and income are dependent on each other
Why was Malthus' prediction about population and wages wrong in context with the world today?
Could not predict population growth or technical change
How is potential GDP related to Aggregate Supply?
Depending on changes in the SRAS or AD, LRAS converges back to potential GDP
What expectations about the future are needed to order to create a bubble in a market?
Economists would have to expect prices for a particular item to rise far above the item's real value to create a bubble in a market.
What is the difference between exogenous growth and endogenous growth?
Endogenous growth tries to take consumer decisions into account, while exogenous growth assumes that each consumer is identical.
What type of growth is the Solow Growth model and why?
Exogenous because it has to make certain assumptions about consumers in order to predict growth
What are some of the main criticisms of the Keynesian school in the 1970's?
Failed to explain the stagflation of the 1970's
What do Monetarist macroeconomics generally advocate for? Do Monetarists believe in the concept of sticky prices?
Focus on monetary poly and the flow of money supply and how it interacts with the economy. They believe in sticky prices, but do not heavily rely on them to explain things.
What does the intensive form of our production function show?
How per capita income is dependent on capital per worker
Marginal Product of Capital (increasing and diminishing?)
Increasing: as the quantity of input decreases, marginal product of input increases Diminishing: as the quantity of input increases, the marginal product of an input falls
What are sticky prices?
Input prices that take time to adjust when there is a change in the price level
Would banning wage contracts for workers reduce price stickiness in an economy? Why or why not?
It could since people would be able to renegotiate their more more immediately, but it wouldn't eliminate it because wages would continue to take longer to change than output prices
In Cobb-Douglass Production Function K=? N=?
K= Labor N=Capital
What is potential GDP?
Level of real GDP if the economy were functioning as well as it possibly could
What is the key emphasis of the Real Business Cycle school of thought? Do RBC economists assume sticky or flexible prices?
Look at the structural side of the economy and examine how certain types of shocks to the economy affect the economy. Flexible
According to the Solow Growth model, will all countries eventually converge to the same level of real wealth? Why or why not?
No. Countries with different savings rates have different steady states, therefore, they will not converge.
What is the Malthusian Trap?
Occurs when population growth out spaces agricultural production causing population to be limited by famine or war
Why does a bubble bursting often have devastating macroeconomic consequences?
Once a bubble bursts, the fall in prices causes the collapse of unsustainable investment schemes, which leads to a crisis of consumer and investor confidence that may result in a financial panic and/or financial crisis.
Why did the housing market bubble have a greater impact on the macroeconomy than the tulip bubble is estimated to have had?
People had to withdraw money to invest. In the tulip bubble, not a lot of money changed hands because most of the dealings were done in the future market.
Why do open and competitive markets help foster economic growth?
Profits are the incentive to enter market, which is easy to do. This fosters the most production and innovation at the lowest price for consumers.
A major oil spill causes the price of oil to suddenly double
SRAS shifts left
Economic boom in Canada, which is a major trading partner of the US
SRAS shifts left
Cell phones are banned in the workplace nationwide and productivity increases as a result
SRAS shifts right
Labor costs fall dramatically throughout the US due to decreased union membership nationwide
SRAS shifts right
Suppose there are two countries. If the exogenous savings rate is higher in country A than in country B, does that mean that the steady state level of income is higher that country A? Why or why not?
Since the savings rate is higher in country A than in country B, country A has a higher level of steady-state income per person. This is because a high savings rate leads to a large steady-state capital stock and a high level of steady-state output.
What are 3 factors than can shift LRAS?
Technology, Institutions, Resources
3 sources of economic growth with examples
Technology-assembly line production, improved assembly line machines can allow quicker production Institutions: Italy's wine laws Resources: human capital, the knowledge a person accumulates over time that can help them improve their work
Why can't we simply use the argument that the aggregate demand curve is downward sloping for the same reasons that the demand curve is downward sloping in a single market? What 3 arguments must we use instead? Give an example of each.
The AD curve is the sum of all goods and services and their demand within the economy. Wealth Effect: if prices rise, you can consume less than before (prices double overnight and you can only purchase about half of what you could yesterday) Interest Rate Effect: if price level rises and real wealth falls, people change their spending habits (less likely to save, lessens Supply of Loanable funds) International Trade Effect: when price level rises faster than other countries, domestic goods become more expensive than foreign goods (more imports, less exports, which decrease GDP)
What did Malthus believe was the driver of population growth?
The Industrial Revolution
How does a small change in the rate of economic growth have a large impact on an economy's income over spans of time? Illustrate this with an example.
The effect of compounding allows growth to build upon previous growth. For example, if the growth rate is 2% and you start out with $100, after about 70 years, you would have about $400 and at a 3% growth rate you would have almost $800.
If GDP>Potential GDP, what can we say about the unemployment rate?
UR is less than the natural rate, which means the economy is overheating
Why can taxes that are too high be harmful for the rate of economic growth?
When taxes are too high, it's a disincentive to produce, which decreases economic growth.
What are some of the main disagreements between the Austrian and Keynesian schools of macroeconomic thought?
Whether or not input costs are flexible or sticky/inflexible
Generally, does the unemployment rate peak at the end of a recession? Why or why not?
Yes. The unemployment rate rises as output declines as companies are making less and selling less, needing less employees.