MBA - MACROECONOMICS ASSIGNMENT

Professor Instructions

Abide by following points or no credit will be given for your answers:

• Concise and to-the-point answersare what I am after. Seriously.

• NOexternal reference materialpermitted to answer questions.  

• Use only concepts learned in assigned HO and NE readings and derive answers from these references.

• Solutions need to be included in this document under each corresponding question. 

Questions

1. Unemployment

a. Many are concerned that the U.S. went directly from a period of high cyclical unemployment to a period of high structural unemployment. 

Should an unemployed person care which label an economist appliesor is out of work is just out of work (read question carefully and answer concisely/ to-the-point)?

b. Unemployment near 0% is expected for a healthy economy. 

i. True or False? ii. Why?

c. i.In terms of economic health, what do you think it is more telling, the trend in job destruction or the trend in job creation?  

ii. If you could only see one of these series before making a guess on the economic health of a nation, which would you want to see? iii. Why?

d. i.Does the idea of “efficiency wages” appear true? 

ii. Why or why not?

e. HO page 271 shows a graph of both a broad measure of unemployment and the usual measure.  Claim:  If the gap between the two were constant, policy makers would draw the same conclusions from either series?

i. Yes, No or Maybe?  ii. Explain?

f. In 2007, Segolene Royal, in an unsuccessful bid for president of France, proposed that workers who lost their jobs would receive unemployment payments equal to 90% of the previous wages during their first year of unemployment.  

i. If this proposal were enacted, what would likely be the effect on the unemployment rate in France? ii. Why?

Let’s say, to keep these unemployment payments from adding to government debt, it was required that the payment be made by the business that fired the worker. 

i. What would the likely impact of this policy be on unemployment in the short- and long-terms? ii. Explain?

{Based on HO Ch. 9 question 3.4 which is based on Alessandra Galloni and David Gautheir-Villars, “France’s Royal Introduces Platform Ahead of Election,” WSJ, February 12, 2007.}

2. Inflation

a. i.How is it that inflation redistributes income?ii. Please provide a numerical example and explain.

b. i. If an economy is experiencing deflation, will the nominal interest rate be higher or lower than the real interest rate? 

ii. What is the equation that relates nominal rates, real rates, and inflation?

c. The following appeared in a newspaper article: “Inflation in the Lehigh Valley during the first quarter of [the year] was less than half the national rate … So, unlike much of the nation, the fear here is deflation—when prices sink so low the CPI drops below zero.”  

i. Do you agree with the reporter’s definition of deflation?

ii. Was Lehigh Valley experiencing deflation? Briefly explain.

{Based on HO Chapter 9 question 6.5. Excerpt is from, Dan Shope, “Valley’s Inflation Rate Slides,” Morning Call (Allentown, PA), July 9, 1996.}

d. i. Does the idea of “menu costs” of inflation appear true to you? 

ii. Why or why not?

e. i. Is anticipated inflation or unanticipated inflation more harmful to an economy?

ii. Why?

3. Economic Growth

a. Briefly, what is the connection between “rule of law” and entrepreneurship?

b. Let’s say that Europe is set to grow at a long-term average rate of 1.5% and the United States at 2.5%. 

i. Is this one-percentage point difference a big deal?ii. Briefly explain.

c. i. What is the curse embodied in the standard production function? 

ii.How does technological advance allow an economy to avoid this curse?

d. In what important way does knowledge capital differ from physical capital?

e. According to Joseph Schumpeter there is no good destruction. Fostering economic growth requires protection of the old rather than creating the new.  

i. Yes or No? ii. Why?

f. Like a fundamental law in physics, it has to be that poor countries catch-up to rich countries. 

i. True or False?ii. What’s the true story?

g. Charles Wheelan in his book Naked Economics wishes for “Goldilocks Regulation.” 

What is he talking about?

h. Some think that regulation is the answer to corruption.  Others insist that regulation engenders corruption.  

What is the basic argument underlying the latter conclusion (endangers corruption)?

i. When it works, government “industrial policy” that funnels critical capital to just the right ventures and facilitates market coordination—in contrast to generally messy market competition—is quite compelling. 

What primary unappealing aspect of industrial policy leads many economists to prefer the messiness of market competition?

4. AS/AD Analysis

a. What major variables cause the Aggregate Demand curve to i. shift in or  ii. out?  

b. Why is the Long-Run Aggregate Supply Curve a vertical line (i.e. why is long-run aggregate supply not affected by the price level)? 

c. There has been much talk since 2009 that the United States has an “output gap.” 

Based on the AS/AD model, what do you think this “output gap” refers to?

d. Why can an unexpected increase in oil prices lead to a supply shock, shifting the Short-Run Aggregate Supply curve ____________________?

e. What does the dynamic AS/AD model capture that the basic AS/AD model does not, Explain?