|Specific Course Objectives:
I. Supply & Demand
1. Explain the law of demand, and what a demand curve
shows. Why does the curve slope downward, i.e., why are price and quantity
demanded inversely related?
2. Explain the law of supply, and what a supply curve
shows. Why does the curve slope upward, i.e., why are price and quantity
supplied positively related?
3. How are price and output levels determined in product
markets, according to the supply and demand model? What is meant
by equilibrium price and quantity? Explain how markets ensure that
the amount people want to sell is in balance with the amount people want
to buy, i.e., Qs=Qd. Graphically illustrate.
4. Why do prices and output levels change in product
markets? If prices increase or decrease, will the underlying equilibrium
situation change? Why or why not?
5. Explain what a change in demand means, and how it
is illustrated. What nonprice factors could cause demand to change?
How so? Why don't price changes in product markets change demand?
Why do economists define a change in demand in such a special way?
6. Explain what a change in supply means, and how it
is illustrated. What nonprice factors could cause supply to change? How
so? Why don't price changes in product markets change supply?
Why do economists define a change in supply in such a special way?
7. How will each of the following changes in demand
(D) or supply(S) affect equilibrium price and quantity? Do price
and quantity rise, fall, or stay the same, or are the answers indeterminate?
Verify your answers graphically.
a. S increases,
b. D increases,
c. Both S and D
d. S increases, D decreases.
II. International Trade
1. Who are the most important trading partners
of the US? How important is international trade to the US economy?
What are the primary US exports? What are the primary US imports?
2. The US Census Bureau (http://www.census.gov/foreign-trade/top/index.html#top_partners)
ranks the top 10 trading partners of the US, as well as the top 10 countries
with which the US has a trade surplus or a trade deficit. Using the
current month's data, compare the top 10 deficit and surplus countries
with the top 10 total (exports + imports) trading partners. Does
the US have primarily surpluses or deficits with our top 10 trading partners?
3. Discuss absolute advantage and comparative
advantage. Why are trade patterns primarily determined by comparative
4. What are the economic effects of international
trade? Who gains/loses?
5. What forms of protection do countries
use to limit imports? Why do countries adopt protectionist measures?
What are the economic effects of such measures? Evaluate the case
6. Using the Balance of Payments concept, discuss
how the Euro/$ foreign exchange rate is determined. What factors
would lead to a change in the exchange rate? How would such changes
affect the US economy?
III. Tobacco, Alcohol and Illegal
1. Under ordinary circumstances, competitive
markets are efficient in allocating resources to differing goods.
Explain, using the supply & demand model, why competitive markets result
in an efficient balance between what businesses spend on making more products
and what consumers are willing to pay for those products.
2. Explain the three reasons why
the government tries to either limit or ban the production of certain products,
like tobacco, alcohol and illegal drugs.
3. Explain what a negative externality
is, and give an example. Explain, using the supply & demand graph,
why an unregulated marketplace is less efficient than a regulated marketplace
if negative externalities exist.
4. If consumers of an "undesirable"
product don't care very much about its price, i.e., they have "inelastic
demand," what will happen if the government tries to limit the production
of the product by prosecuting its sellers? Will the policy reduce the number
of buyers of the product and reduce profits to its sellers? Give
an example of such an "undesireable" product.
IV. Environmental Policy
1. What is the optimal level of pollution,
i.e., how should it be determined?
2. Examine the problem of pollution
from the negative externality approach. Why is pollution a negative
externality? Why do companies pollute? Explain, using the supply
& demand graph, why an unregulated marketplace is less efficient than
a regulated marketplace if companies are allowed to pollute.
3. Examine the problem of pollution
from a property rights approach. Why do companies pollute?
4. Discuss the "legal" approach and
"economic" approaches that the government can use to reduce pollution to
a more optimal level. Why do economists favor "market-oriented" remedies
to "non-market oriented legal" remedies?
V. Health Insurance in the US
1. Health insurers can set premiums
either using experience rating or community rating. What's the difference?
2. Should private health insurers
be forced to use community rating for individual policies? Why?
3. What is adverse selection?
If insurers are forced to use community rating for individual policies,
why would adverse selection gradually eliminate high coverage policies?
4. What is moral hazard?
Because of moral hazard, what happens to the level and efficiency of the
health care industry? Why can be done to limit the problems arising
from moral hazard?
VI. Federal Spending, Taxes & Deficits
Office of Management and Budget Historical Spending and Revenue (Tax)
1. Looking at Table 1.1:
A. How much is total Federal government
spending (outlays) going to be in 2012? How much will total receipts
(mostly taxes) be? How big is the government deficit?
B. The off-budget numbers largely reflect
the receipts and outlays of the Social Security program. What do
the 2012 off-budget numbers tell you?
C. Clinton was responsible for the 1994
- 2001 budgets, G W Bush for 2002 - 2009 and Obama for 2010 - 2013.
Compare and contrast the changes in spending, receipts and the deficit
that occurred during each of these presidents terms of office. Note:
Obama is responsible for the 2013 budget because no matter who is elected
this November, they'll have to live with the budget negotiated by Obama
and Congress this year (which is still not settled).
2. When the Federal government runs deficits, it has to borrow
money which then increases the National Debt. Looking at Table 7.1
A. How much did the Clinton, GW Bush and
Obama budgets increase the National Debt (use the time periods in C above)?
The amount you have to borrow and the amount you
already owe are not important measures of indebtedness. Rather those
numbers have to be compared with how much total income you have, i.e.,
a rich person can borrow and owe a lot and not be in any danger of default.
Since the Federal deficit and national debt represent claims on the US
of A, judgments about the indebtedness of America should compare those
numbers to the national income of the USA. The latter can be measured
by the Gross Domestic Product (GDP) number.
B. Looking at Table 7.1, discuss how big the National
Debt is as a percentage of National Income (GDP) under the Clinton, GW
Bush and Obama budgets. Looking at Table 1.2, discuss how big the
budget deficit is as a percentage of GDP in those 3 administrations?
Looking at Table 1.2, discuss how much National Income (GDP) grew during
the 3 administrations.
3. A. Looking at Table 2.1, what are the most important
taxes that the federal government collects? Discuss how they have
behaved during the Clinton, GW Bush and Obama administrations.
B. Looking at Table 2.3, which shows
the tax level for each tax as a percentage of National Income (GDP), what
has happened over the 3 administrations to the burden of paying personal
income, corporate income and payroll taxes?
4. The TaxFoundation
website reports reports incomes received and taxes paid by differing income
classes for differing years. Looking at Tables 5, 6 & 8 what
happened to the shares of total income and total taxes paid, and the average
tax rate, for the rich, the middle class and the poor between the Clinton,
GW Bush & Obama administrations?
5. A. Table 3.1 shows how much Federal spending is occurring
in differing departments over time. Comparing the 3 administrations,
why has Federal spending increased so much?
B. Focusing only on the 2013 spending
numbers, if you wanted to reduce the budget deficit in half (say $500 billion),
what areas would you cut? What would your prospects of re-election
look like if you proposed those cuts prior to November's election day?
6. If Congress and Obama cannot agree on a budget by 12/31/12,
then both have previously agreed that an "automatic" set of spending cuts
and tax hikes will take place on 1/1/13. The following website describes
these automatic cuts and hikes: http://www.cfr.org/economics/fiscal-cliff/p28757
. Will these cuts and hikes prove politically popular if enacted?
1. GDP is often used as a basis for
judging the health of the economy. Explain what Real GDP measures and how
it is measured. What is included/excluded?
2. Web-Based Question: The
Bureau of Economic Analysis' (BEA's) website (http://www.bea.gov)
provides the latest estimates for US Real GDP. Looking at Table 1
of the latest news release (Full
Version w/ Tables) discuss how Real GDP has behaved over the past 4
years. Which components of GDP have been responsible for the changes
in Real GDP?
3. Real GDP is the broadest measure
of economic activity. If Country A has a larger Real GDP per person
number than Country B does that mean A is a better place to live than B?
Why or why not?
4. The CIA’s World Factbook website (https://www.cia.gov/library/publications/the-world-factbook/index.html)
provides detailed economic and other information for almost all countries.
Click on the map for each country (look at the tables at the bottom for
each country) to find the following information for the US, Japan, Germany,
Mexico and Russia: GDP per capita (PPP), shares of income for the
top 10%/bottom10%, infant mortality rate, life expectancy (male &
female), and current environmental issues. Make a table highlighting
the information across the 5 countries. Do the GDP per capita (per
person) numbers give you a good picture of the relative well-being of each
country’s citizens? Why or why not?
5. The Organization for Economic
Development (OECD) maintains a website (http://www.oecdbetterlifeindex.org/#/11111111111)
where you can calculate a Better Life Index that incorporates both economic
factors and noneconomic factors for differing countries. Change the
default weights to see where the USA would rank relative to other countries
if: (1) only income had the highest weight & the rest were at the lowest
level; (2) only the economic factors of housing, income and jobs had highest
weights & the rest were at the lowest level; (3) the 3 economic factors
had the lowest weight and the others were at the highest level; and (4)
all factors were equally important with the same weight. Do the income
differences alone tell you about differences in standards of living across
VIII. Unemployment & Inflation
1. How is the unemployment rate computed,
i.e., who's counted? Discuss the types of unemployment and their causes.
Does the government index of unemployment provide a good "picture" of the
lack of jobs in the economy? What are the costs/benefits of unemployment?
If differing countries have the same annual unemployment rate are they
likely to have the same kinds of problems?
2. Each month the US Department of Labor
reports the current employment situation in the US. Using the data
contained in Table A, how much did the number employed and number unemployed
change in the past 12 months? Did they change by equal amounts?
Why or why not?
3. What does the inflation rate measure?
How is it measured? What are the problems of measuring inflation?
What are the major types/causes of inflation? What are the costs/benefits
4. Each month, the US Department of Labor
reports the latest CPI figures. What are the current figures for
the official CPI-U for the 12-month percentage change in the past
year. What does the CPI -U index measure? What
sectors are making the index increase the most? What sectors have
limited increases in the index? Also look at the 12 month percentage change
in the C- CPI - U index. Is it the same as the CPI - U change?
Why or why not?
5. The OECD (Organization for Economic
Cooperation and Development) website provides the latest information
on the economic performance of most industrialized countries (http://stats.oecd.org/Index.aspx?QueryId=36337).
Using the website's data for 2012, rank the following six countries (US,
France, Germany, Italy, Japan & the United Kingdom) from best to worst
in the following categories: GDP % change, inflation and the unemployment
rate. Which economy has performed best overall? Worst?
6. Market economies are characterized
by wide, repeating swings up and down in economic activity, called business
cycles. Discuss the four phases of the cycle. How are the turning
points in the cycle determined? Why do business cycles happen?
7. The National Bureau of Economic
Research (NBER) Business Cycle Dating Committee is the most cited source
for dating cyclical turns in the US economy. The
website contains the information on the recent cycle turning dates and
the latest reports of the Committee. Since 1945, how many cycles
has the US economy been through? How long was the average expansion?
contraction? What's been happening to the length of the expansions
and contractions in the past two decades? Looking at the latest report
of the Committee, when did the most recent recession begin? When
did the most recent recovery begin?
8. Does the business cycle care who's
President? Check out the Businessweek
IX. Housing Bubble
1. Compare traditional mortgages, interest-only
mortgages and negative amortization mortgages.
2. Discuss the role of Fannie Mae and Freddie
Mac in the mortgage market and how they "securitize" mortgages. How
did changes in Fannie Mae & Freddie Mac policies that were adopted
in the late 1990s influence the type of mortgages people took out when
they bought homes and the number of people able to buy homes?
3. Insurers, investment banks and commercial
banks started to issue credit default swaps to baskets of securitized mortgages
in a big way in the late 1990s. What is a credit default swap?
How did the issuance of mortgage security credit default swaps influence
the type of mortgages people took out when they bought homes and the number
of people able to buy homes?
4. Why did the "Housing Bubble" pop?
Why were so many homeowners unable to make the payments on their homes?
Who's to blame, the mortgage borrowers, bankers, government agencies, investors,
or all of the above?
Week recently published an article on trends in homeownership.
What has happened to the fraction of Americans who own homes?
X. Aggregate Demand & Aggregate Supply
1. Briefly, using the Aggregate Demand &
Aggregate Supply graphical model, show how the national economy achieves
an equilibrium level of Real GDP.
2. What would happen to Real GDP and the
US Price Level (inflation) if Aggregate Demand increased or decreased?
What factors can cause Aggregate Demand to change?
3. What would happen to Real GDP and the
US Price Level (inflation) if Aggregate Supply increased or decreased?
What factors can cause Aggregate Supply to change?
4. If you have a recession: (1) what kind
of demand side policy should you enact to cure the recession? and (2) what
kind of supply side policy should you enact to cure the recession?
5. If you have an inflation: (1)
what kind of demand side policy should you enact to cure the inflation?
and (2) what kind of supply side policy should you enact to cure the inflation?
XI. Fiscal Policy
1. What is fiscal policy? What
is the appropriate demand-side fiscal policy to cure a recession?
2. What are the automatic stabilizers?
How do they work as demand-side fiscal policies to reduce business cycle
3. What is the appropriate supply-side
fiscal policy to cure a recession? an inflation?
4. What are the advantages and disadvantages
of using fiscal policy to stabilize the economy?
5. What is the "Fiscal Cliff?"
What are the provisions of the Budget Contral Act of 2011 and why was it
passed (click here
for an overall summary and here
for a review of the 2013 year effects)?
6. The Congressional
Budget Office (CBO) has just issued a report
on what will happen to the US economy if the "Fiscal Cliff" occurs.
Review the likely effects on the US economy and whether Obama & Congress
should allow it to occur.
National Commission on Fiscal Responsibility and Reform (commonly called
the Simpson-Bowles Commission) in December 2010 made some recommendations
on how to reduce the Federal Budget Deficit over the next eight years.
What kinds of spending and tax changes did they recommend? Should
Obama and Congress seriously consider their plan?
8. Currently many Republicans favor tax
reform that generates more tax revenue over tax rate increases. Specifically
they would like to limit the deductions that individuals and companies
can take. Looking at Businessweek's
list of deductions, and how much taxes would increase if they were eliminated,
would a Republican approach limiting deductions be a practical way to generate
more tax revenues? Which deductions would have to be eliminated or
XII. Monetary Policy
1. What is the Federal Reserve?
What are its functions?
2. What are the three "ordinary"
tools that the Federal Reserve uses to change economic activity?
How do they influence interest rates and the economy? What should
the FED do during recessions? during inflations?
3. What are the advantages and disadvantages
of using monetary policy to stabilize the economy?
3. What additional actions did the
Federal Reserve take to stabilize the economy when the 2008 Financial Crisis
XIII. The Great Recession (2007-9)
1. Investopedia reviews the causes and immediate
effects of the Financial Crisis in 2008 in the following web chapters:
What caused the Financial Crisis in 2008?
What role did the housing market play in creating the crisis? What
happened during the crisis in financial markets?
2. The following links describe how the
various actions taken by government agencies in response to the crisis:
Treasury Report April 2012
Federal Reserve Report
How did various federal government agencies
respond to the crisis, i.e., what were the key steps taken to stabilize
the economy? Were the steps necessary and were they effective?