Intro. Macroeconomics
Due 3.02.09
Take Home
This exam is worth 15 percent of the final grade (please adjust the syllabus grading weights – each mid-term is worth 15% and the final is worth 30%). You may work together in discussing the questions but the words must be your own. If you make references to the text, word it similar to this: Goodwin states on page ___ that economic actors in the classical school are those who participate as workers, owners or consumers of products for sale. I hope, however, you are capable of using the concepts and terms without reliance upon the authors’ words and phrases. Provide your own interpretation by paraphrasing. Drawings, graphs, tables, ratios or equations are always welcome to illustrate your answers.
There are
two sections to the text: a short answer essay section requiring knowledge of
the terms and an ability to apply them in the context of a problem and a section
requiring full essays requiring somewhat more difficult application of theories
and policy formulation.
1. What is the difference between normative questions and positive questions and why do most economists attempt to avoid normative questions? Why does Goodwin believe they fail at this?
2. In the 1960s, the Phillips Curve looked to be a correct model of the relationship between rates of inflation and rates of unemployment. In the 1970s and 1980s it was no longer considered a correct view of the relationship between these two variables. What happened?
3. Briefly explain what the Bretton Woods Agreement was and why it collapsed in 1972.
4. List few of the benefits of a market system and at least three examples of the limitations or failures of markets.
5. Sam earns $35,000 a year and Rachelle earns $150,000 a year. If a progressive tax were imposed on their incomes what would happen to their tax payments and their tax rates? Give separate answers for Sam and Rachelle.
6. It’s a tough winter in New England. Assume the following demand and supply schedule of heating oil for homes in Poultney. Draw the demand and supply curves on a diagram to the right. Explain what would happen to price and quantity if a) there was a sudden drop in the temperature – a real nor’easter. b) there was a consolidation of oil supply companies – mergers resulted in fewer heating oil suppliers and c) the State of Vermont placed a ceiling on home heating oil prices of $2.40 a gallon. Consider these as separate events – not combined.
(thousands of gallons)
Price/gal Qty-Dem. Qty-Supp.
$4.00 100 200
3.60 140 180
3.00 160 160
2.40 180 140
2.00 220 120
7. In your graph in question six, which has the steeper slope (demand or supply)? Explain why you think that might be?
8. Explain why the traditional macro model of Y = C + I + G + NX is assumed to be an identity. Hint: You can discover the answer by looking at the circular flow of goods and money in the green colored graph.
9. We talked in class about how the poverty income threshold was originally developed during the 1960s Johnson Administration’s War on Poverty. Discuss the method used to develop the poverty measure, why it was clearly too low a figure and what happened since then to a typical American family’s budget that made it even more of an underestimate.
10. Construct a table for year 1 prices and quantities of a basket of two goods (whatever you want, just don’t copy the table in the text). Now assume in year 2 the economy grows and prices change in some way for the two goods (again, it’s your choice). Construct a price index using year 1 as the base year. What is the price index and what is the inflation rate between year 1 and year 2? Show your table and your other work.
11. Conservative economists (for example, those in the Bush Administration) argue that this method of calculating a price index overstates inflation. Why is that? I call that the potato famine argument. What is that?
12. Nominal GDP equals $10 trillion and the implicit price deflator is 120. What is Real GDP? Show your work. Boy, this is easy.
13. Assume International Paper in Ticonderoga, New York decides to burn tires as a source of energy for its plant (which it temporarily did recently). Middlebury, Vermont, across Lake Champlain, is downwind from the plant and Middlebury residents suffer a dramatic increase in respiratory diseases. Explain how ordinary GDP would account for these separate events and how an Environmentally Adjusted Net Domestic Product would account for the events.
14. What is the difference between the final goods approach and the value-added approach of measuring of GDP? Why do they come to the same value?
1. Classical economists, Keynesian economists and Monetarists would each offer different advice if a market economy is suffering from a serious downturn (rising unemployment, falling demand for output, rising business bankruptcies and increasing home foreclosures). Discuss the likely advice of each of these schools of economic thought, the assumptions they are based upon and how the proponents of these schools believe[d] their policies would work.
2. A number of difficult philosophical and methodological problems come into play when efforts are made to impute a monetary value to non-market production. Discuss the pros and cons (as well as the basic methods) of revising the national income accounts in this way.
3. The authors tell us that a market society often exhibits both abundance and scarcity. What is their explanation for this? We talked at some length in class about other explanations for this co-existence of what are seemingly opposite conditions. Provide a comprehensive explanation that incorporates at least two or three elements. In particular, think of the imperative of corporations to generate profits.