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ws 104 study guide

ws 104 study guide


School: University of Massachusetts
Department: Economics
Course: Introduction to Macroeconomics
Professor: Gerald epstein
Term: Spring 2015
Tags: Macroeconomics
Cost: 50
Name: Macroeconomics Final Study Guide
Description: Macroeconomics Final Study Guide.
Uploaded: 05/05/2017
6 Pages 153 Views 0 Unlocks

What are the main features of industrial policy that have contributed to the strong economic growth performance of some Asian countries such as, initially, Japan, then South Korea and China?

What is industrial policy?

” What specifically did he mean by this?

Economics 104: Introduction to Macroeconomics STUDY GUIDE FOR FINAL EXAM  Economic Growth-2 1. The late Professor Vernon Ruttan asks the question, “Is war necessary for economic  growth?” His answer was Don't forget about the age old question of what type of mass movement occurs when rocks fall freely through the air
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“Yes.” What specifically did he mean by this? • War is not necessary for economic growth. What he means by this is industrial  policy is necessary for economic growth. Industrial policy is enacted through the  U.S. pentagon. Relevant advances of technology happened in the U.S. pentagon;  they were not developed out of the free market. The fundamental technology to  have the internet was created though the pentagon.  2. What is industrial policy? What are the main features of industrial policy that have  contributed to the strong economic growth performance of some Asian countries such as,  initially, Japan, then South Korea and China? • They produce things that people in other countries want to buy, they lend money  at cheap rates to companies that can demonstrate the ability to sell things on  export money. Actively engaging in the government and not relying on static  comparative advantage. Electronic manufacturing, making cars; these are things  that people in wealthier countries need and are willing to buy.  Unemployment and Inflation 1. Evidence on inflation/unemployment trade-off: Is it accurate to say that there is always a  trade-off between unemployment and inflation? Compare evidence on a decade-by decade basis. What do the patterns show? • No in the 50s and 60s there is a trade-off but in the 70s this reverses and there was  no longer a tradeoff, the rose concurrently. The relationship is unstable,  sometimes it is inverse, sometimes it is direct. 2. Consider the decade of the 1970s. What could explain the relationship between  unemployment and inflation that we observe then, relative to the relationship we observe  for the 1950s and 1960s? • 3. Consider the 1990s: Then Federal Reserve Chair Alan Greenspan hypothesized that the  U.S. workers had become “traumatized.” If Greenspan’s observation is accurate, why  might that influence the inflation/unemployment trade-off, both in the 1990s and more  generally? • At low unemployment workers acquire more bargaining power. Global Economic Patterns and Global Trade 1. Be clear on where the U.S. stands in the global economy. How big is the U.S. economy  as a share of the global economy? How important is the U.S. in terms of population? In  terms of addressing climate change? • U.S. in terms of GDP is about 20% of the world’s economy, 5% of the population  and, 15% of greenhouse gasses. 2. Rich, poor and middle-income countries: Be clear on some of the major differences  between countries in terms of what the average person in each category of country can  expect. • Large disparity between countries between average income and life expectancy.  Some places might have much lower income per capita, but their average life  expectancy might have them living longer.  3. What is the law of comparative advantage? Following the law of comparative advantage,  why would any given country seek to specialize in producing one or two products and  importing everything else they need, rather than diversifying? • Countries are better off specializing in economic activities in which they are best  at and they should import other things from other countries. It leads to higher  productivity. 4. If we consider the cases of South Korea and China, is it accurate to say that their  successful growth experiences have been tied to the idea of comparative advantage? In  this context, be able to distinguish between “static” and “dynamic” comparative  advantage. • Static comparative advantage is the proposition that when you take a snapshot in a  moment of time it is what a country is good at producing. Snapshot of China in  the 1980s they weren’t producing anything. Dynamic approach you look at  China, South Korea, and Japan, they are good at producing manufactured goods. China and the U.S. Economy 1. China’s successful growth experience since the early 1980s has been closely tied to its  achievements as an exporter, with the United States being the largest single purchaser of  Chinese-made products. What have been the main factors behind China’s success in  exports? • They are making things that people are willing to buy. They were able to  establish capacity in making products that they could sell in bulk for exports.  They were able to establish a way to produce a lot, at a low cost. They were able  to this because they kept labor costs low. China has also maintained the value of  their currency keeping exports low in other countries including the United States. China actively intervenes in currency markets in order to keep their currency’s  value low. 2. Be sure to understand the role of exchange rate issues with respect to China and the US,  and more generally. How does having a “cheap” currency help a country export? How  could China continue to help keep its currency value low?  • Cheaper currency allows country to produce goods cheaply and can sell at a low  price to other countries. Hey can keep their currency’s value low by selling yuan  and using American money to drive down the value of the yuan and drive up the  value of the dollar. They buy U.S. government bonds in dollars to drive down the  value of the yuan 3. Has the rise of China as an export powerhouse been detrimental in any way to working  people in the U.S.? If so, how; and if not, why not?  • Yes, global trade in general, specifically with China, has effectively expanded the  reserve army of labor meaning that workers bargaining have to deal with  companies in the U.S. threatening to move operations to china or to buy from  china.  Immigration Jobs and Public Services in the U.S. 1. It is a widely held view among some politicians and authors (e.g. Camerota, NY Times)  that immigrants in the U.S. labor market hurt job prospects for native U.S. workers.  Why might this be the case? On balance, what does the evidence on this issue find? • Expanding reserve army of labor, have more people competing for the same  number of jobs. This is true at low wage levels. Evidence does not seem to be  the case. 2. It is also a widely held view that immigrants living in the U.S. are absorbing a significant  share of the economy’s available public services, without paying a proportional share of  taxes to support these services. On balance, what does the evidence on this issue find? • The immigrants are helping all people living on social security pensions. They  are paying in their taxes but they are not getting benefits because they are not  documented.  Fiscal Policy and the U.S. Federal Government Budget 1. Be very clear on key categorical distinctions/definitions. Understanding them is not a  matter of mere word games, but of understanding the issues at hand. The key definitions  to know are: • Deficits vs. accumulated debto Deficits are flow of how much government borrowed over any time  (usually the year); accumulated is added up from deficit and is how much  you owe. • Cyclical vs. structural deficits o Cyclical is deficit that results from recession; structural deficits are deficits  when the country is not in a recession and is is even growing while they  still have deficits. 2. The main justification for cyclical deficits comes from the “functional finance” approach.  The overall approach here is not to think of government deficits as necessarily either  good or bad, but to ask the question: What function are the deficits serving? Are the  deficits being put to good use? • In a recession you want to counteract the recession instead of making people  suffer. 3. Two perspectives other than “functional finance” on the governments running fiscal  deficits are the doctrine of “sound finance” and the “Ricardian Equivalence” theory. Be  clear on what these mean. In both cases, they would argue against the government  running deficits. But what are their arguments? In what ways do they differ from the  functional finance perspective? • Government should use it budgetary powers for the good by thinking about ways  that would stabilize the economy, mainly during recession. When private  spending is going down, government spending should go up. Sound finance is  when government should balance its budgets except during major wars, you don’t  want to build up debts. Is proposition that functional finance approach won’t  work on its own terms, when government borrowing goes up, private spending  goes down.  4. As a share of U.S. GDP, the federal government’s fiscal deficit reached its highest level  since World War II between 2009-12. What is the explanation for deficits at this level? • 1950 through present 2.2 or 2.3 percent of GDP. The deficit got big to counteract  the great recession, taxes go down and expenditures for government spending go  up. 5. While the fiscal deficit reached an historic high over 2009-12, government interest  payments as a share of overall government spending remained historically low. How  could this be possible? Why has it happened? • The government interest payments are 1.3% of GDP while government debt to  people is about 75%. Low because government borrowed a low amount of money  during recession but they also bought at low interest payments. The government borrowed at such low interest rates because the Federal Reserve drove down the  federal funds rate to zero. Government bonds rate move at the same rate as the  federal funds. Government bonds are risk free. Federal Reserve and U.S. Monetary Policy  1. Be clear on what we are referring to when we talk about “The Fed.” Who are the main  decision makers at the Fed? • Open market committee includes five people who are appointed by the president  of the united states; they are presidents of the 12 regional banks. 2. The Fed’s mandate is to maximize employment in a manner consistent with price  stability. The Fed’s main policy tools are to: 1) lower or raise the Federal Funds interest  rate; and 2) lender of last resort policies. Be clear on what both of these policies are and  how they differ.  • Lowering the Federal Funds rate aims to lower all rates and stimulate business  investment while raising the Federal Funds rate aims to raise all rates and slow  down a boom that may be excessive. Lender of last resort is an institution,  usually a country's central bank, that offers loans to banks or other eligible  institutions that are experiencing financial difficulty or are considered highly risky  or near collapse. 3. Using the tools available to them, how might it be more difficult for the Fed to maintain  control over inflation and unemployment when financial markets are unregulated? • The Fed has control over the movement of the federal funds rate and the lender of  last resort bailouts. Unregulated =unusable=more bailouts. Policies over  inflation and employment got swamped by the financial crisis.  4. We have gone over how the current monetary policy stance at the Fed has been  extraordinary in historical terms, because the Fed held the Federal Funds interest rate at  close to zero for nearly 7 1/2 years. The Fed is currently slowing raising the Federal  Funds rate, but only very modestly. What is the purpose of this policy?  • Leaving the rates low Limits policy options for future, also you can’t push Federal  Funds rate below zero, low interest rates hurts small savers, people counting on  interest earned on bank deposits and, low interest rates encourages speculation by  large-scale financial market participants. 5. What would be reasons for the Fed to be raising the Federal Funds rate now? Is there a  relationship between their most recent actions, and their understanding of the concept of  the “natural rate of unemployment?”• We are at the full employment now based on the “natural rate of employment”  and any reduction in employment will result in a greater increase in inflation.  They are raising the Federal Funds Rate to in order to keep employment at its  current rate.  Financial Collapse, Great Recession, Austerity, Recovery?  1. In 2007 – 09, the U.S. and global economy experienced the most severe financial bubble,  collapse, and crisis in 70 years. Be clear on the basic dynamics driving a financial  bubble. Why can financial bubbles be self-reinforcing? Why do they collapse? • People choose to buy at a low price and borrow money to do this. This drives up  eventually it gets too big and it bursts. It bursts when the ability to service debt is  not forthcoming. 2. Two factors have contributed to making this most recent financial bubble and crash  bigger than previous ones: 1) rising inequality in the U.S. economy; and 2) Deregulation  of U.S. financial markets. How have these factors contributed to the crisis? • Rising inequality contributes to economic instability because it moves more  money toward the richer people and they have more money to move around in  financial markets. Effective regulations historically help financial market and if  they start to deregulate the economy becomes more unstable. 3. How did the government try to get out of the crisis using monetary policy, fiscal policy,  lender-of-last-resort and financial regulatory policies? • Monetary policy: Drive down federal funds rate to zero at 5.2% in 2007 and 2009  it was zero. Aggressive expansionary fiscal policy, increase in government deficit  from what it had been in 2007 1.7% and by 2009 it was about 10% counter cyclical approach. U.S. treasury bailing out big banks to the tune of $1 billion,  the fed bailing out the rest at 30% GDP. Critics say that the policy was too  modest. Financial regulatory policy (Dod-Frank): as the economy moves into  another expansion we will limit the forces that brought down the economy in  2007/2008.

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