Midterm Exam Study Guide
Midterm Exam Study Guide Econ 104
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This 7 page Study Guide was uploaded by Eunji Cho on Saturday February 28, 2015. The Study Guide belongs to Econ 104 at University of Massachusetts taught by Robert Pollin in Spring2015. Since its upload, it has received 197 views.
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Date Created: 02/28/15
Economics 104 Midterm Exam Study Guide Intro on Economic Crisis 1 To what extent might we say that the most recent economic crisis was a unique set of circumstances To what extent could we say it is part of a larger pattern The most recent economic crisis was unique since it involved bundling and securitizing mortgages 39subprime market and the housing bubble We could say that it was part of a larger pattern since crisis happens every 85 years from 1770 and since it happened due to overleveraging borrowing too much in pursuit of new pro t opportunities 2 What does it mean to quotsecuritizequot a mortgage What if anything does mortgage securitization have to do with the crisis Securitizing a mortgage refers to bundling together and slicing up mortgages into new nancial instruments Mortgage securitization created risk in the market which means when the market crashed there was nothing to support the risk and the crisis came After the bubble burst housing net worth dropped drastically 3 Based on what you have read and heard in class be prepared to comment on the following quote from the 2001 Economic Report ofthe President the last one issued by the Clinton Administration quotGiven the massive nancial instability of the 19305 narrowing the range of banks activities was arguably important for that day and age But those rules are not needed today The 19305 nancial instability was due to the Great Depression The government restricted bank s actions during that period since anything that the banks did would have created risk in the economy which is not favorable during such a period The government doesn t need to restrict banks anymore since there is more 39security in the system than there was in the 305 4 What happened to total household wealth both during the nancial bubble years and after the bubble burst Try to be as speci c as possible Total household wealth dropped drastically after the bubble burst it went from 707 trillion to 531 trillion The Economy and You 1 What is your assessment of the evidence as to how the economic crisis affected members of this class Be familiar with speci c relevant pieces of evidence But also be prepared to present some general perspectives based on your reading of the evidence That is in general would you say the impact on members of the class was quotsevere very badquot quotnot so bad after allquot or something else The point will be not your conclusion per se but your reasoning in getting to that conclusion H M The majority of the class was affected by the economic crisis which means that the impact was severe The impact included loss of income savings jobs home and fall in other nancial holdings This shows that macroeconomics matter to everyone and that the Great Recession affected a great variety of people Economics as a Moral Science 1 What does it mean to say that economics is a quotmoral sciencequot Can science have any moral values attached to it while still being based on research and not just on unsubstantiated viewpoints Economics as a moral science means that although the eld of economics follows the general patterns and formulas it has moral values attached to it The values include trying to make the society better for everyone government working to stabilize economy and x the wrong government regulations to prevent undesirable things that markets won t stop Science can have moral values attached to it as does economics 2 It is fair to call the US economy a mixed capitalist economy as opposed to a free market economy Two key areas of market regulation are labor markets and nancial markets What are major reasons to either 1 support and 2 oppose regulations of labor and nancial markets Minimum wage and unions are major labor interventions created by the government and the people Some reasons to support these are that the employees will have higher standard of living due to higher income and that they will have more power in the labor industry However one may oppose these interventions due to the fact that minimum wage causes employers to employ less people since it costs more In nancial markets limits on speculative trading are put Some people may support this saying that it helps people stay away from activities that might put their nancial lives in danger while others might oppose this intervention saying that it leads to more tax coHec on 3 What is a minimum wage law Is it the same thing as a quotliving wagequot law Minimum wage refers to the lowest amount of money an employer can legally pay an employee It is different from living wage living wage refers to a minimum wage high enough to support worker and hisher family at a decent minimal standard 4 Minimum wage laws are often cited as an excellent example of the quotlaw of unintended consequencesquot in action What is meant by such a reference Is it an accurate description of how minimum wage laws work The 39law of unintended consequences refers to when outcomes that are not the ones intended by a purposeful action happens Minimum wage laws are often called as an example of the law since it can hurt the people that the government are trying to help minimum wage can help people earn more and have a better life while it may defer employers to employ people since it costs more for them leading to higher unemployment National IncomeNational WealthGDP 1 What is the difference between national income and as Adam Smith put it the quotwealth of nations Be able to work out numerical examples with both national income and national wealth National income refers to the GDP of a country which is the total income or total nal output of the economy National wealth is assets minus the liabilities debt that the country has also known as the net wo h 2 Be familiar with the meaning of the equation for GDP ie GDP C I G XM C Household consumption spending I Business investment G Government spending X Exports M Imports 3 What are some possible problems with GDP as a measure of national wellbeing broadly and possibly even more narrowly total national product Paid work is included in GDP whie unpaid work doesn t account for the nation s GDP Underground economy is a huge sector that is not included in a country s GDP The GDP reveals the gap between the rich and the poor as well as the race and gender income differences Dividing Up GDP Income Equality 1 What has happened to income inequality in the United States over the past 35 years In answering this question be prepared to consider whether the overall picture changes when we compare different measures of income inequality Income inequality rose drastically over the past 35 years The top 1 of the economy had approximately 10 of the income in 1980 while in 2008 they had 235 The top 10 had approximately 33 of the nation s income in 1980 while in 2008 they had 497 2 Capitalist economies are not designed to create equality But there are laws norms and institutions that encourage either greater equality or greater inequality What are examples of such institutions considering both those that promote equality and inequality Examples of these institutions include social insurance minimum wages unions public education and health care and progressive taxa on Poverty 1 What is the of cial de nition of poverty in the US context Is this an adequate measure in your view The of cial de nition of poverty is quotThe state of one who lacks a usual or socially acceptable amount of money or material possessions Poverty is said to exist when people lack the means to satisfy their basic needsquot This is not an adequate measure in my view since the de nition of one s 39basic needs differ greatly from one person to another 2 What are some possible ways in which poverty statistics may be less accurate than they were in the 1960s Lowincome people spend more on nonfood necessities than they did in the 19605 such as childcare and health care 3 Assuming the poverty statistics are broadly accurate in portraying trends describe the trend in overall poverty over the past 30 years Over the past 30 years the overall poverty in the US rose from 12 of the population to 151 This refers to 25 million people to 46 million RacialGender Inequality 1 Based on statistical evidence on income unemployment poverty and wealth is it fair to say there are persistent differences in economic status by race Yes The average household income of a white person is 55412 and that of an AfricanAmerican is 32229 The unemployment rate of whites is 57 while that of AfricanAmericans are 121 The poverty rate of whites is 128 while that of AfricanAmericans are 276 2 Evaluate this statement quotBusinesses operate to generate pro ts Therefore they would only want to hire the most productive employees regardless of race or genderquot This is correct although not all business currently follow this statement For businesses to generate the most pro t there should be no discrimination in their employment process They will make less money if they discriminate 3 GDP doesn t measure the extent of product getting generated in the economy that is unpaid How signi cant is unpaid labor in various countnes Women s unpaid labor amounts to 11 trillion worldwide and 14 trillion in US as of 1995 In Canada it had the value of 474 of its GDP in Finland 491 and in Nepal 1707
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