Salient Economic Concepts

Part 1: Salient Economic Concepts

• Explain why an economy will not tend to be as successful over time, all other things equal, if individuals and families save less. (5 points)
• Show you understand the autonomous spending multiplier concept by explaining why most local governments require contractors to hire labor and buy materials locally, to a large degree, whenever the local government funds a big construction project. (5 points)
• In macroeconomics, the word investment is used differently than it is used in an investments class. In an investments class, to make an investment would mean placing some money into an asset, that might be risky, with a desire to earn a return. Explain how macroeconomists use the word investment, and explain why investment contributes to the health of an economy. (5 points)
• The casino industry and insurance industry each use probability principles as they offer their services to their customers. Explain why the average person will lose BOTH when gambling and when buying insurance, but then also explain why financial advisors will normally advise people to buy some insurance but will never advise people to gamble. (5 points)Part 2: Stats-Book and Theory Questions Note: When analysis is warranted, more credit will be given for answers that use the diagrams presented in class. More credit will also be given for answers that include a “story” providing an intuitive explanation of the situation. For stats-book questions, more credit will be given for more specific answers.
• The U.S. economy fails at times, but mostly succeeds. Present statistical evidence of your choosing that provides evidence supporting this fact. (15 points)
• Robert Solow won a Nobel Prize in economics for showing technological improvement, more than anything else, explains the rather steady improvement in the U.S. living standard over time. Present an analysis that explains why technological improvement will tend to improve the living standard. In the process, also explain how an improvement in technology will tend to impact the economy’s employment level, output level, and price level. (15 points)
• The composition of output changed radically during World War II as the U.S. shift resources to fight the war. There was also a rather significant change in the composition during the Great Depression, as the U.S. economy faltered. Present data that is informative regarding how the composition of output was different during WWII and the Great Depression compared to normal times. (15 points)
• Present a composition of output analysis that shows how normal economic growth will tend to change the composition of output if government does NOT change its taxation level nor its government spending level (15 points)
• Identify one “demand side” shock that could throw the economy into a recession. Then, assume the economy is in a recession, producing less than its potential, and propose and action government could take to get the economy out of the recession. Present an analysis that explains why the action you propose will help get the economy out of the recession. (20 points)

Part 2: Stats-Book and Theory Questions Note: When analysis is warranted, more credit will be given for answers that use the diagrams presented in class. More credit will also be given for answers that include a “story” providing an intuitive explanation of the situation. For stats-book questions, more credit will be given for more specific answers.