Download LAZ B2 Listening Exam 01 Spring 2012

LAZ Listening Exam 01 – Level B2
Prof. Peter Cullen
Spring/2012
Text
The economy is a dynamic system. All this means is that the economy changes over time.
This is obvious: prices bounce up and down, wages change, and companies enter and exit
markets. This dynamism is something that Traditional Economics has recognized, but has
generally views as generated by external (exogenous) sources such as technology
changes, political events, and changes in consumer taste. The interesting question for
complexity economists is how such dynamic behaviour might be generated internally
(endogenously), as a result of the structure of the economy itself.
When scientists talk about a system being dynamic, what they mean is that the state of the
system at the current moment is a function of the state of a the system at the previous
moment, and some change in between the two moments. A simple example of a dynamic
system is your bank account. The state of the account, or balance, changes over time.
Your balance tomorrow is dependent on your balance today, plus any changes during the
intervening day such as deposits, withdrawals, or interest payments. Changes in a
dynamic process can either be discrete, like a bank account, in which the changes occur
at specific points in time, or they can be continuous and smooth, like the orbiting of
planets.
A convenient way to describe a dynamic system is in terms of stocks and flows. A stock is
an accumulation of something, such as the balance in a bank account or water in a
bathtub. The rate at which a stock changes over time is known as a flow – for example the
rate of money flowing into or out of a bank account or water flowing into and out of the
bathtub. The economy is full of different stocks that change over time, for example the
total supply of money or the number of people employed. Each of these stocks has
corresponding flows, or rates of change over time. For example, the central bank might
increase or decrease the money supply, or companies might hire or fire employees. Note
that flows are always per some unit of time. Stocks and flows do not always have to be
tangible things such as money and people. They can also be less tangible, such as
consumer confidence.
When one starts thinking of the economy as a collection of stocks and their related flows, it
quickly becomes apparent that the various stocks and flows are connected to each other in
complex ways. For example, if the stock of employment fell to a low level, a policy maker
might decide to cut interest rates in order to encourage borrowing, which would expand the
stock of money available for investment, which would be used by businesses to invest in
new productive capacity, creating more demand for employees. This would raise the stock
of employment and thus feed back to affect future interest rate policy. Such chains of
relationships between stocks and flows in a dynamic system are known as feedback loops.
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LAZ Listening Exam 01 – Level B2
Spring/2012
Prof. Peter Cullen
___________________________________________
Name, Date, and Registration Number
Questions: Answer all 5 of the following questions. SIMPLE AND CORRECT IS
BETTER THAN COMPLICATED AND WRONG. USE SHORT PHRASES AND
SENTENCES.
This exam requires interpretation and analysis. It is designed to test your ability to
apply what you hear to possible discussion areas.
1. How do Traditional Economists view exogenous factors differently from Complexity
Economists?
2. Why is a bank account a good example of a dynamic system?
3. What does the author mean by “discrete change”?
4. What is the relationship between stocks and flows?
5. Why is the example of employment levels and interest rates considered a feedback
loop?
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LAZ Listening Exam 1 – Level B2
Prof. Peter Cullen
Spring/2012
Answer Sheet
1. How do Traditional Economists view exogenous factors differently from Complexity
Economists?
TEs think that changes in the economy are caused by external factors such as politics
or technology. CE are interested in how internal dynamics change in the economy.
2. Why is a bank account a good example of a dynamic system?
Because the balance on one day depends on the balance on the previous day plus the
movements into and out of the account.
3. What does the author mean by “discrete change”?
Change that occurs at a specific point in time.
4. What is the relationship between stocks and flows?
Stocks are the basic amount of accumulated units of wealth, and flows are the way the
quantity of these units changes over time.
5. Why is the example of employment levels and interest rates considered a feedback
loop?
Because the level of employment can be influenced by raising or lowering interest rates,
which causes a new level of employment and new costs for businesses – requiring a new
interest rate to put money into or take money out of the economy in light of the new
employment level.
.
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