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Category: Economics

  • (Answered) 2. Activities included (and not included) in the calculation of GDPThe gross domestic product (GDP)…

    2. Activities included (and not included) in the calculation of GDPThe gross domestic product (GDP) of the United States is defined as the all in a given period of time.Based on this definition, indicate which of the following transactions will be included in (that is, directly increase) the GDP of the United States in 2024.
    Scenario2024 GDPIncludedExcluded
    The Federal Emergency Management Agency (FEMA) deposits funds into Mike’s checking account to help pay for his hurricane-related expenses.
    Golden Sun Motors, a U.S. automobile company, produces a minivan at a plant in China on March 10, 2024. Golden Sun Motors imports the minivan into the United States on May 20, 2024.
    Using ghost peppers from a garden on your Mississippi property, you make hot sauce in 2024. Similar sauces sell for $6 in a grocery store.
    Liberty Wheels, a U.S. automobile company, produces a sedan at a manufacturing facility in Bakersfield on January 21, 2024. It sells the car at a dealership in Philadelphia on February 10, 2024.
    Jack Motors, a Scottish automobile company, produces a connected SUV at a plant in Pennsylvania on December 5, 2024. Jill buys the connected SUV on December 24.
    Yeast Crafters, a U.S. yeast company, produces brewer’s yeast at a plant in Wisconsin on September 13, 2024. It sells the brewer’s yeast to Hoptopia Brew Works for use in the production of a new beer that will be made in the United States in 2024. (Note: Focus exclusively on whether production of the brewer’s yeast increases GDP directly, and ignore the effect of production of the new beer on GDP.)

  • (Answered) Consider an aggregate demand and aggregate supply model where, in the short run, aggregate capital…

    Consider an aggregate demand and aggregate supply model where, in the short run, aggregate capital is fixed at the level $\bar K$. The aggregate demand curve, aggregate output (Y) demanded as a function of aggregate price level (P), is given by a standard downward-sloping curve. The aggregate supply curve, aggregate output (Y) supplied as a function of aggregate price level (P), is not standard, and the question leads you to derive the aggregate supply curve. The aggregate production function is linear in capital and labour (L): $ Y = AL+ \bar K$, A > 0. The labour union is very powerful and dictates the minimum aggregate nominal wage rate as W. Each worker is endowed with one unit of labour which they supply inelastically if the producers offer the nominal wage $ W > \bar W$. A worker does not supply any labour if $W < \bar W$. At W = W, a worker is indifferent between supplying and not supplying her labour endowment. The number of workers available in the economy is fixed at $\bar L$. (a) Derive, with a clear explanation, the aggregate labour supply $(L^S)$ in this economy as a function of the aggregate nominal wage rate, W. (b) Note that the marginal product of labour is constant, A > 0.
    (i) Derive, with a clear explanation, the aggregate labour demand $(L^D)$ in this economy as a function of the real wage rate, W/p.
    (ii) Using your answer to part (i) above, derive the aggregate labour demand $(L^D)$ in this economy as a function of the aggregate nominal wage rate, W.

  • (Answered) 2. The theory of liquidity preference and the downward-sloping aggregate demand curve Suppose the…

    2. The theory of liquidity preference and the downward-sloping aggregate demand curve
    Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money.
    Money DemandMoney Supply020406080100120121086420INTEREST RATE (Percent)MONEY (Billions of dollars)Money Demand Money Supply
    Money Demand and Money Supply
    Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to their money holdings. In order to do so, they will bonds and other interest-bearing assets, and bond issuers will realize that they interest rates until equilibrium is restored in the money market at an interest rate of .
    Aggregate Demand040801201602002401801501209060300PRICE LEVELOUTPUT (Billions of dollars)Aggregate Demand
    Aggregate Demand Curve
    The change in the interest rate found in the previous task will lead to a in residential and business spending, which will cause in the quantity of output demanded in the economy.

  • (Answered) For each of the following scenarios, analyze the effects of the given supply or demand shock on the…

    For each of the following scenarios, analyze the effects of the given supply or demand shock on the respective market. In your response, clearly identify whether the shock primarily affects supply or demand, how supply or demand changed, and explain the expected impact on equilibrium price and quantity, assuming other factors remain constant. Then illustrate the changes using the diagrams provided on the second page. In each diagram: Label the initial equilibrium price and quantity as P₁ and Q₁. Label the new equilibrium price and quantity after the shock as P₂ and Q₂. Links to relevant articles are given to provide additional context for each scenario. However, reviewing or referencing them in your answers is not required or expected. Scenarios:
    A.) Market: GLP-1s (e.g., Ozempic) Shock: Recent findings show that GLP-1 receptor agonists, like Ozempic, are highly effective in treating diabetes and promoting weight loss. Relevant story here.
    B.) Market: Gasoline Shock: OPEC Plus, the cartel of oil-producing countries, has announced an increase in oil production. Crude oil is the primary input in gasoline production. Relevant story here.
    C.) Market: Tesla Cars Shock: Public perception of Tesla has been affected by Elon Musk’s political and social media activity, leading some consumers to reconsider their purchase of Tesla’s vehicles. Relevant story here.
    D.) Market: New Cars Shock: The Trump Administration has announced plans to impose 25% tariffs on all foreign-made vehicles and auto parts. Relevant story here.

  • (Answered) Differing views of self-correctionEconomists disagree about how quickly the economy adjusts to an…

    Differing views of self-correction
    Economists disagree about how quickly the economy adjusts to an aggregate demand shock. In the view of some economists, people form expectations based on present realities and change expectations gradually as their experience unfolds. Such expectations are said to be
    The following graph shows the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS) curves for a hypothetical economy that is initially in equilibrium, operating at potential output at point N. Suppose an unanticipated increase in investment spending causes the aggregate demand curve to shift to the right (from AD1 to AD2). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which direction?
    From point N to point D and, eventually, from point D to point Z
    From point N to point D, before returning to point N
    Directly from point N to point Z
    From point N to point K, before returning to point N
    Now suppose that the increase in investment spending was entirely anticipated by firms and workers. This means the public fully anticipates the rightward shift of the aggregate demand curve (from AD1 to AD2). According to rational-expectations adherents, the anticipated change in aggregate demand will cause the economy to move in which direction?
    From point N to point K, before returning to point N
    Directly from point N to point Z
    From point N to point D, before returning to point N
    From point N to point D and, eventually, from point D to point Z

  • (Answered) 1. Activities included (and not included) in GDP calculationThe gross domestic product (GDP) of the…

    1. Activities included (and not included) in GDP calculation
    The gross domestic product (GDP) of the United States is defined as the all in a given period of time.Based on this definition, indicate which of the following transactions will be included in (that is, directly increase) the GDP of the United States in 2024.
    Scenario2024 GDPIncludedExcluded
    Wellness Wise Bistro, a U.S. health food company, produces a veggie wrap at one of its many locations throughout the region on January 21, 2024. It sells the wrap to a customer that same day.
    Du Belgique Air, a Belgian household appliance company, produces a air fryer at a plant in New York on December 5, 2024. A chef-in-training buys the air fryer on December 24.
    Mikayla Brown buys a 1976 Ford Mustang in Idaho on March 10, 2024.
    Yeast Crafters, a U.S. yeast company, produces brewer’s yeast at a plant in Wisconsin on September 13, 2024. It sells the brewer’s yeast to Hoptopia Brew Works for use in the production of a new beer that will be made in the United States in 2024. (Note: Focus exclusively on whether production of the brewer’s yeast increases GDP directly, and ignore the effect of production of the new beer on GDP.)
    The Federal Emergency Management Agency (FEMA) deposits funds into Mike’s checking account to help pay for his hurricane-related expenses.
    Sakura Technologies, a U.S. gaming company, produces a gaming controller at a plant in Japan on March 10, 2024. Sakura Technologies imports the gaming controller into the United States on May 20, 2024.

  • (Answered) Multiple choice questions (2 points each) (a) Hector has a mortgage with a fixed nominal interest…

    Multiple choice questions (2 points each)
    (a) Hector has a mortgage with a fixed nominal interest rate of 6% that he took out five years ago. Over the years, the inflation rate has crept up unexpectedly to its present level of 7%.
    i. Hector is worse off as inflation increases, and the lender of his mortgage is better off.
    ii. Hector is better off as inflation increases, and the lender of his mortgage is worse off.
    iii. Both Hector and the lender are better off
    iv. Both are worse off
    (b) Due to the current slump, Melanie has been laid off from her programming job. Melanie’s unemployment can be characterized as
    i. Cyclical unemployment
    ii. Seasonal unemployment
    iii. Frictional unemployment
    iv. Structural unemployment
    (c) You have just been awarded a cost-of-living increase tied to the CPI. The CPI has gone from 100 to 112 . If your salary is $20,000 per year before the increase, what will it be after the CPI increase is factored in?
    i. $22,400
    ii. $30,000
    iii. $20,000
    iv. $21,200
    (d) Which of the following statements about inflation is true?
    i. Inflation is a general fall in the level of prices
    ii. Inflation discourages people from holding onto cash because cash loses value over time.
    iii. Price stability is the situation when the overall level of prices changes rapidly
    iv. When the economy is growing, inflation tends to decrease
    (e) Adult population: 200 million Labor force: 150 million Employed persons: 138.75 million The unemployment rate is , and the labor force participation rate is,
    i. 7%; 60.4%
    ii. 0.7%; 99.3%
    iii. 5.6%; 69.4%
    iv. 7.5%; 75%

  • (Answered) 2. Deviating from the collusive outcomeStargell and Schmidt are brewing companies that operate in a…

    2. Deviating from the collusive outcome
    Stargell and Schmidt are brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.
    Suppose that Stargell and Schmidt form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)
    Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Stargell and Schmidt choose to work together.
    Monopoly Outcome
    When they act as a profit-maximizing cartel, each company will produce cans and charge per can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.
    Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Stargell decides to break the collusion and increase its output by 50%, while Schmidt continues to produce the amount set under the collusive agreement.
    Stargell’s deviation from the collusive agreement causes the price of a can of beer to

  • (Answered) Consider the competing views of John Taylor and Ben Bernanke on the causes of the U.S. housing…

    Consider the competing views of John Taylor and Ben Bernanke on the causes of the U.S. housing bubble (2003–2006)
    Taylor argues that excessively low interest rates set by the Federal Reserve fueled the housing boom, while Bernanke maintains that financial innovation, lax lending standards, and global capital inflows played a larger role than monetary policy. Suppose you’re an economic advisor assessing the potential role of monetary policy versus structural credit market changes. Which of the following best reflects a rigorous synthesis of the disagreement, and what does it imply about the limits of central banking in asset price stability?
    Taylor’s argument implies that the Fed’s policy was a primary driver, with global capital flows amplifying mortgage availability and housing demand; Bernanke’s rebuttal emphasizes that monetary policy has limited influence on long-term interest rates and therefore limited ability to control asset prices.
    Taylor and Bernanke differ mainly in degree: Taylor believes low interest rates were sufficient to cause the bubble, while Bernanke believes low rates were necessary but not sufficient, with speculation and behavioral factors playing key roles.
    Bernanke contends that mispricing was driven more by financial innovation, lax lending standards, and a global savings glut, suggesting that asset bubbles can form even when interest-rate policy is consistent and prudent.
    Both economists agree regulatory failures were central, but Taylor focuses on the timing and stance of monetary policy as a trigger, whereas Bernanke emphasizes structural credit-market changes and argues that bubbles are often rare, hard to predict, and not fully within the Fed’s control.

  • (Answered) Acquiring a company through the purchase of shares on the open market and against the will of the…

    Acquiring a company through the purchase of shares on the open market and against the will of the target company’s existing management is called a ”hostile takeover”. Such in- vestors were known as “raiders”. All this was fictionalized in the movie Wall Street, with Michael Douglas portraying the raider Gordon Gekko, who famously espoused “Greed is good.” The time was full of jocular jargon, as management could consume a “poison pill” by taking on a costly financial structure that would make it difficult to consummate a hostile takeover. In some cases, a raid could be fought against by buying a raider’s shares back at a premium; this tack became known as “greenmail,” a takeoff on blackmail. To get a gist of the strategizing that occurred between a raider and management, consider the game below:
    N= {Raider,Management}
    (Do not Buy),(Buy, Greenmail),(Buy, No Greenmail,Take Over), (Buy,No Greenmail,Do not Takeover) are the terminal histories.
    P(∅) = Raider, P(h) = Management for non-terminal history h= {Buy}, and P(h′ ) = Raider for non-terminal history h′ = {Buy,NoGreenmail}
    Preferences over the terminal histories are: (Buy,Green Mail) ≻Raider (Do Not Buy) ≻Raider (Buy, No Green Mail, Takeover) ≻Raider (Buy, No Green Mail, No Takeover)
    Write down actions for each player.
    Draw the extensive form of the game.
    Find the Pure Strategy Nash Equilibrium of the game
    Find the Subgame Perfect Nash Equilibrium of the game.
    Are PSNE and SPNE the same? If not, explain why.