problem 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 applies or is out of work is just out of work?

b) Unemployment near 0 percent is expected for a healthy economy. True or False? Why?

c) In terms of economic health, what do you think is more telling, the trend in job destruction or the trend in job creation?  If you could only see one of such series before making a guess on the economic health of a nation, which would you want to observe? Why?

d) Does the idea of ‘efficiency wages’ ring true to you? Why or why not?

e) HO page 271 displays a graph of both a broad measure of unemployment and the usual measure. Claim:  If the gap among the two were constant, policy makers would draw similar conclusions from either series. Yes? No? Maybe?  Describe.

f) In year 2007, Segolene Royal, in an unsuccessful bid for president of France, proposed that workers who lost their jobs would receive unemployment payments equivalent to 90% of the prior wages throughout their first year of unemployment. If this proposal were enacted, what would likely be the consequence on the unemployment rate in France? Why?

problem 2: Inflation

a) How is it that inflation redistributes income? Please give a numerical ex.

b) If an economy is experiencing deflation, will the nominal interest rate be higher or lower than the real interest rate? What is the equation which relates nominal rates, real rates and inflation?

c) The following appeared in a newspaper article: ‘Inflation in the Lehigh Valley throughout the first quarter of [the year] was less than half the national rate … Therefore, unlike much of the nation, the fear here is deflation—when prices sink so low the CPI drops below zero.”  Do you agree with the reporter’s definition of deflation? Was Lehigh Valley experiencing the deflation? Briefly describe.

d) Does the idea of ‘menu costs’ of inflation ring true to you? Why or why not?

e) Is anticipated inflation or unanticipated inflation more harmful to an economy? Why?

problem 3: Economic Growth

a) Briefly, what is the connection between rule of law and entrepreneurship?

b) Let’s state that Europe is set to grow at a long-term average rate of 1.5% and the United States at 2.5%. Is this one-percentage point difference a big deal? Briefly describe.

c) What is the curse embodied in the standard production function? How does technological advance permit an economy to avoid this curse?

d) In what significant way does knowledge capital differ from physical capital?

e) According to Joseph Schumpeter there is no good destruction. Fostering economic growth needs protection of the old instead of creating the new. Yes? No? Why?

f) Similar to a fundamental law in physics, it has to be that poor countries catch-up to rich countries. True? False? What is the story?

g) Wheelan wishes for Goldilocks Regulation. What is he talking about?

h) When it works, government industrial policy that funnels critical capital to just the right ventures and facilitates market coordination—in contrast to usually messy market competition—is quite compelling. What primary unappealing aspect of industrial policy leads numerous economists to prefer the messiness of market competition?

problem 4: AS/AD Analysis

a) What main variables cause the Aggregate Demand curve to shift in or out?

b) Why is the Long-Run Aggregate Supply Curve a vertical line; that is, why is long-run aggregate supply not influenced by the price level?

c) There has been much talk as 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 rise in oil prices lead to the supply shock, shifting the Short-Run Aggregate Supply curve ____________________?

e) What does the dynamic AS/AD model capture that the basic AS/AD model doesn’t?