Deck 5: Introduction to Macroeconomics

Question 1

Explain the difference between macroeconomics and microeconomics.

Answer 1

Macroeconomics focuses on the economy as a whole and in particular on the determinants of total national output. Microeconomics by contrast looks at the functioning of individual decision-making units like the household and the firm.

Question 2

What is aggregate behavior?

Answer 2

Aggregate behavior is the behavior of all households and firms together.

Question 3

Draw a graph of a business cycle. Label and explain the phases of a business cycle.

Answer 3

During an expansion the level of economic activity is increasing. The peak is the highest level of economic activity. A contraction means that the level of economic activity is falling. A trough is the lowest level of economic activity.

Question 4

The government releases GDP data on a quarterly basis. Explain why this would make it difficult for policy makers to determine what point in the business cycle the economy is at currently.

Question 5

Why do economists look to microeconomics to explain macroeconomic events?

Question 6

Microeconomists generally do not expect to see excess supplies in most markets. However, macroeconomists will often observe that during recessions the quantity of labor supplied can exceed the quantity of labor demanded. Explain what macroeconomists are referring to and explain why the wage rate may not adjust right away.

Question 7

Assume there are two managers that have very different ideas about how to deal with recessions. Mr. Nice Guy believes in keeping workers during an economic downturn and does so by getting all of his workers to agree to a wage cut. Mr. Tough Guy believes that the best policy is to lay off workers and keep the wages of the remaining workers unchanged. Compare and contrast these two methods of dealing with an economic downturn. Which is likely to be more profitable for the firm and why

Question 8

Define contraction (recession or slump).

Question 9

Sticky prices and wages are often cited as an example of market inefficiency. For example, many firms, during recessions, lay off workers. Yet many of these same firms are reluctant to begin hiring, even as the economic situation improves. Can you provide an explanation for this behavior that might demonstrate that it is rational?

Question 10

How would the duration of unemployment be different during an economic downturn if sticky wages (the counterpart to sticky prices) were not present in labor markets? Explain.

Question 11

Explain what is meant by deflation. Explain the impact that it might have on the value of assets.

Question 12

For many decades it was common in Japan for workers to be granted lifetime employment, at least in the manufacturing sector. What impact do you think this had on the unemployment rate in Japan had this unwritten policy rule by corporations not been in effect? Is this necessarily an efficient economic policy?

Question 13

Define an expansion or boom.

Question 14

In the late 19^th century the price level in the United States fell for more than two decades yet real incomes actually rose. What explanation can you offer to explain how this could have happened?

Question 15

Explain what sticky prices are in terms of macroeconomic equilibrium.

Question 16

Provide some explanations for why prices might be sticky in the economy.

Question 17

List the three major concerns of macroeconomics.

Question 18

Define the business cycle.

Question 19

Identify three macroeconomic and three microeconomic topics.

Question 20

Identify the following topics as either predominantly macroeconomic or microeconomic.
(a) Provision by firms of medical benefits for employees
(b) The demand for coffee
(c) Unemployment
(d) The price of a government bond relative to the price of IBM stock
(e) Unemployment among economics professors
(f) The business cycle
(g) Consumption spending by the household sector
(h) Rent controls in New York
(i) Inflation
(j) The money supply

Question 21

List and briefly explain the three market arenas.

Question 22

Is it possible for the prices of some goods to fall during a period of inflation? Explain.

Question 23

What is the circular flow diagram and why is it useful?

Question 24

Explain what a capital gain is and give an example.

Question 25

Define what is meant by the term "shares of stock".

Question 26

Define the terms recession and depression.

Question 27

What are transfer payments? Provide at least three examples.

Question 28

Lay people often define unemployment as when there are people out of work. How do economists define unemployment?

Question 29

When there is unemployment there is an excess supply of workers. Describe how microeconomic theory explains the response to this phenomenon.

Question 30

Describe what a business cycle is.

Question 31

Explain the costs and consequences of hyperinflation.

Question 32

Explain what the money market is. Make sure to discuss the three players in the money market.

Question 33

Briefly explain what the circular flow diagram illustrates for a macroeconomy.

Question 34

What is inflation?

Question 35

Which are the four components of the macroeconomy?

Question 36

Explain why labor markets are different from goods markets. Make sure to include in your answer who is doing the demanding and who is doing the supplying.

Question 37

Explain why we should not expect to see zero percent unemployment.

Question 38

Define aggregate output.

Question 39

What is a dividend?

Question 40

Define hyperinflation

Question 41

Explain the two main types of government policies that can be used to influence the macroeconomy.

Question 42

What is the difference between a corporate bond and a share of stock?

Question 43

Define stagflation and explain why it undermined faith in the simple Keynesian model.

Question 44

Assume that the demand for construction workers declines because of a slump in the housing market. Explain using Classical reasoning why this will not cause unemployment.

Question 45

Which school of thought would more likely make the following statements?
a. The economy is in recession but we should leave it alone.
b. Draft a piece of legislation subsidizing the hiring of recent college graduates.
c. Let's fine-tune the economy.
d. The market is self-correcting.

Question 46

Identify the following as either fiscal or monetary policy.
a. The government increases spending on roads and bridges.
b. The Federal Reserve lowers interest rates.
c. The government increases the income tax rate.
d. The government buys bonds in the open market.

Question 47

Briefly describe what is meant by the phrase "fine tuning."

Question 48

What was the Great Depression?

Question 49

How is issuing stock different from issuing a corporate bond? Explain.

Question 50

What might be some Keynesian prescriptions to get the economy out of an economic slump?

Question 51

What are the basic tenets of Keynesian theory that help explain the level of employment?

Question 52

What are Treasury bonds, notes and bills?

Question 53

Keynes argued that prices and wages don't determine the level of employment. Which determinant did he believe was important?

Question 54

Classical economists believed that recessions were self correcting. In their view, how did the economy self correct?

Question 55

In which of the three basic markets (goods-and-services, labor, money) is each of the following items traded?
(a) Rory McIlroy's golf skills
(b) A pack of cigarettes
(c) A government bond
(d) A share of IBM stock
(e) An IBM computer
(f) The abilities of IBM's CEO

Question 56

Provide a brief history of the origins of macroeconomics.

Question 57

What event provided the impetus for the development of modern macroeconomics? Why did this event require a fundamental rethinking of how the macroeconomy operated?

Question 58

List the three debt instruments that the federal government issues and explain how they work.

Question 59

What are corporate bonds?

Question 60

Assume that the demand for computer programmers drops precipitously. Explain using Keynesian reasoning why this will cause unemployment.

Question 61

Explain why a cut in spending to bring down inflation during a period of stagflation does not solve all macroeconomic problems.

Question 62

What might be some Keynesian prescriptions to bring down the rate of inflation in the economy?

Question 63

How do Classical economists and Keynesian economists differ in their perceptions of how well markets and prices function?

Question 64

Under which condition does stagflation occur?