Economics Macroeconomics Answers

Running head: ECONOMICS/MACROECONOMICS ANSWERS 1

Economics/Macroeconomics Answers

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ECONOMICS/MACROECONOMICS ANSWERS 2

Economics/Macroeconomics Answers

Macro Sample Exam Questions Topic 8 Bubbles and Crashes

What is a bubble?

It is an economic cycle in which there is an increase in the price of assets and then

followed by a decrease in their prices.

How does herding contribute to a bubble?

The bubble caused by the market behavior in which investors are willing to buy an asset

and increase prices and later when to try to sell decreases the prices thus deflating the bubble.

The majority invest in this investment as most are investing due to lack of individual decision-

making decision.

What is leverage and how can it contribute to bubbles and crashes?

Leverage is investing borrowed fund to increase potential return on the investment.

Leverage is related to liquidity and with deflation of bubble causes lack of liquidity. Thus

borrowed cash is invested on the overpriced item due to increased demand causing a crash which

is a significant drop in the asset price.

What are CDO's, and how did they encourage reckless lending, heightened risk and then

the recent crash?

It's a financial instrument that pays who investing form the fixed income assets pool

income. The design of CDO is risky in nature and decrease of the asset value resulted in losses

ECONOMICS/MACROECONOMICS ANSWERS 3

during the bubble period. With the perception of increased income the lending institutions

increased interest rate and in as many could not afford deflated the bubble.

What are sub-prime loans, why did they increase to hugely before the crash?

They are loans designed to assist borrowers to build equity and be prime borrowers. In

the crisis, there were low defaults for those who borrowed loan for asset financing, and this

convinced the lending companies to believe that these riskier assets (subprime borrowers) were

not so risky after all. This lends to lending company carelessly lending as the subprime

borrowers kept borrowing from other banks to repay the bank they borrowed from before thus

leading to the crisis as lending companies were not getting their money back.

How do bubbles and crashes undermine theories that insist on the intrinsic 'rationality'

and 'efficiency' of markets?

When there is a speculation that there is an increase in income or price of an investment,

it attracts the public attention, and this heightens the expected success hence leading to asset

price increase. It creates the speculation bubble that is deflated by falling prices.

Macro sample exam questions T 9 Inflation

What is the Phillips Curve?

It’s a curve that is used to show the relationship in the trade-off in the short run a between

inflation and unemployment rate

How does the Quantity Theory of Money explain inflation?

ECONOMICS/MACROECONOMICS ANSWERS 4

When using the quantity theory of money, when the Federal Reserve increases the supply

of money thus causing the value of money to fall and increasing the price level thus inflation as

inflation is an increase in price level.

Prices of different goods may not rise or fall together, so how do we arrive at a measure

of the general level of inflation?

Some items are sampled and put together; these are termed as the market basket and

prices are compared over time resulting in the price index and compared over the years.

Why do we say that debtors often benefit from inflation?

The reason is that the debtors benefit due to that the amount paid is worthless regarding

the present purchasing power.

The economic conditions of the 1970's seemed to contradict the implied claims of the

Phillips curve, why?

It occurred a stagflation which is the presence of increased levels of inflation, and there

was an increased level of unemployment. It was due to short-run graph between inflation and

unemployment rather than long-run graph

Why is deflation bad, macro-economically?

In a bad deflation, it means that it will decrease the output and productivity that will

cause unemployment as few workers will be needed due to low demand.

If productivity rises in proportion to wages, does this mean the wage increase does, or

that it does not, contribute to inflation? Why?

ECONOMICS/MACROECONOMICS ANSWERS 5

Yes, increases in wage cause inflation, increase in wages increases the flow of money in

the economy and thus increases the price of the item thus overall effect of the market hence

causing inflation in the market.

Given a simple supply curve, how would we depict an increase in inflation--as a

movement along the curve, a shift of the curve downwards, or a shift upwards?

It causes the supply curve to shift upwards and to the left as inflation causes to the price

increase that is in conflict to the demand.

Macro Sample Exam Questions T10 Deficits and Debt

Explain the difference between a government's fiscal deficit and its debt

The deficit is the difference between the government income through taxes and other

receipts and the actual money spent. Debts are accumulation of all deficits and other money

borrowed to keep running the country.

What is the difference between a structural deficit and a cyclical deficit?

A Structural deficit is a deficit in the budget that exists even if the country's economy is

beyond the potential level that is above output while cyclical deficit the part of the deficit that

exists because the economy is operating below its potential output that is below output.

When might a government fiscal deficit be good (or at least necessary)?

It's good as during the deficit spending through tax breaks, or the buy of products and

ventures by the administration can stop the descending winding and help to turn the economy

back around.

ECONOMICS/MACROECONOMICS ANSWERS 6

Why does debt need to be judged about assets (including income)?

It assists in evaluating whether the organization has enough supports to meet its present

obligation commitments, however to likewise evaluate whether the organization can pay an

arrival on their speculation.

What ratio is commonly used to give a sense of the burden of a government's debt?

It’s the Debt/GDP ratio which is the Interest paid on the government debt paid on the

burden

How does a recession impact on a government's fiscal position?

Recession causes the government spends more money, and this makes the government

have fiscal policies that enable the government cuts taxes, giving people more money to spend

Macro Sample Exam Questions T 12 Fiscal Policy

The Ricardian Equivalence Theorem says that deficit stimuli don't work. Why?

Many individuals are liquidity constrained, and not very many individuals have the

information or slant to gauge the effectiveness of current government spending plans on their

lifetime tax liability since individuals know their taxes must ascent later on

What does it mean to say Keynesians argue for countercyclical fiscal policy?

Counter-cyclical fiscal policy should be used to offset fluctuations in aggregate demand.

What is crowding out?

ECONOMICS/MACROECONOMICS ANSWERS 7

Argument against the Keynesian view that expansionary fiscal policy works during a

recession

What are automatic stabilizers?

They are financial strategies and projects intended to balance fluctuations in a country's

monetary action without intercession by the administration or policymakers on an individual

basis.

Explain what it means to say fiscal policy aims to 'stabilize' an economy.

Its mean that the measures to avoiding a boom and bust economic cycle. The policies are

taken to move the economy closer to potential output.

Macro Sample Exam Questions T13 Unemployment

Explain the difference between cyclical and structural unemployment.

STRUCTURAL Unemployment is unemployment due to economic structure changes of

the economy. Cyclical is unemployment is due to slow development in the economy of a country

such recession, depression

Which type of unemployment is less likely to be affected by demand stimulus? (One

word will do)

Structural Unemployment of workers whose skills are not demanded by employers or not willing

to relocate to areas with the job.

What is the 'non-tradable sector'? Unemployment due to 'globalization' is less likely in

this sector than the 'tradable' sector. Why?

ECONOMICS/MACROECONOMICS ANSWERS 8

The tradable sector of a nation's economy is comprised of the business sectors whose

yield as far as products and enterprises are exchanged globally, or could be exchanged

universally given a conceivable variety in relative costs. Globalization increases import and

export thus reduced unemployment

What is a 'reservation wage'?

It’s the lowest wage offer that an unemployed worker is willing to accept

Macro Sample Exam Questions T14 Structural Stagnation

How is a structural stagnation different to a normal recession?

A recession is a brief time of declining yield while a structural stagnation is a time of

extended moderate development and high level of unemployment. What's more, Unemployment

is because of brief cutbacks in a recession yet longer-term changes in a structural stagnation.

According to Colander, how has globalization and the reduction in 'the world price'

(depicted in his 'globalized AS-AD model') impacted on the US economy? (Hint, there are two

major impacts which he cites).

 Greater free trade.

 Greater movement of labor.

In an open economy, expansionary policies might not result in inflation, but rather, have

another (different) effect to do with trade. What is it?

The Higher interest rates cause the currency to appreciate and thus reducing net exports

ECONOMICS/MACROECONOMICS ANSWERS 9

The 'globalized AD-AS model' depicted in Colander draws a World Aggregate Supply

(WAS) curve alongside the American SAS curve. He says adjustments needed to deal with

structural stagnation are either a move down of the SAS or up of the WAS. Explain what these

moves would signify.

Assumptions about future wage, future inflation, and future benefits change total request.

the increment in expected future salary, builds wage utilization today, and expands total request

and the expansion in the expected inflation rate, makes purchasing merchandise less expensive

today, and builds total aggregated demand as per the AD curve - increment in expected benefits

help company's venture, which builds total aggregate demand

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