Category: Economics

➤ How do fixed factors differ from variable factors?
Fixed factors remain constant in the short run, while variable factors change with output. Examples: machinery is fixed; labor and raw materials are variable. Variable inputs affect marginal product and total output immediately. This distinction matters for short-run supply, cost curves, and decisions about hiring, scheduling, and inventory management.

➤ Do the three given functions show constant returns to scale?
Yes. Check exponent sums: 1/2 + 1/2 = 1, 3/4 + 1/4 = 1, and 2/5 + 3/5 = 1. Each pair sums to one, so for z = 2 we have y(2k,2L) = 2y(k,L) in every case. All three functions display constant returns to scale.

➤ Why include wealth, assets, or neighborhood measures when defining SES?
Wealth and assets capture accumulated resources and financial buffers that income does not. Neighborhood measures reflect local services, schools, and environmental exposures. Including these dimensions improves predictive power for outcomes like health, education, and mobility. They also reduce bias when current income or education misrepresent lifetime socioeconomic position.

➤ How do macroeconomic policies influence economic performance?
Macroeconomic policies influence output and stability through fiscal and monetary tools. Fiscal policy changes government spending and taxes to alter aggregate demand. Monetary policy adjusts interest rates and money supply to control inflation and support output. These policies affect consumption, investment, employment, exchange rates, and long-term productivity by shaping incentives and financial conditions.

➤ How does the FOMC set and implement monetary policy?
The committee reviews economic data, discusses policy options, and votes on a federal funds rate target. Implementation occurs through open market operations carried out by the New York Fed, balance-sheet measures like asset purchases, and forward guidance. These tools adjust liquidity, interest rates, and market expectations to influence economic activity.

➤ Why does marginal utility of money decline as wealth increases?
Because each extra unit of income buys less additional wellbeing when basic needs and secure consumption are already met. Utility functions assume diminishing returns: satisfaction increases at a decreasing rate. Factors include saturation of consumption, risk tolerance, access to goods, and substitution effects. This diminishing marginal utility underlies policies like progressive taxation and targeted transfers.