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Intermediate Macro, 2009 Study questions for the first exam on Thursday, February 26. Q&A likely to be on Sunday, February 22. 1. Who officially designates the US economy to be in recession? And who is the NBER? What is the common definition of recession? What other variables does the NBER actually consider? When did the current recession begin? When was the previous recession? Definition of depression? 2. Who keeps and reports the unemployment data? What is the current unemployment rate? 3. Definitions for “marginally attached,” “discouraged workers,” and “involuntary part-time.” Why aren’t these counted as unemployed? If they were, what would be the unemployment rate? 4. Who keeps and reports the inflation data? What instrument is used to measure inflation? What is the current rate? Define deflation. How is deflation a problem for the economy? Study your handout entitled “deflation and the real rate of interest.” 5. What is the CBO and what do they do? What size deficit did they recently forecast? Based on what critical assumption? Why was it so big? (That is, what reduced tax revenues, and what increased government spending?) What percent of GDP is it expected to be? What does the CBO project for the unemployment rate, GDP, inflation, home prices, consumption, and the financial system? (To answer the previous questions, review the CBO’s “Budget and Economic Outlook: Fiscal Years 2009 to 2019,” which I e-mailed to you.) Why consider the deficit as a percentage of GDP? How big was the deficit as a percentage of GDP in 1944? How much was last year’s deficit? Will this year’s deficit be the largest ever? 6. What are open market operations? What is the Federal funds rate? What has the Fed done to the Federal Funds rate? What other unconventional steps is the Fed taking? (See “Fed to use all available tools.”) The Fed’s actions have been described as “ad hoc.” What does that mean? Who currently leads the Fed? 7. What happened to US imports in October? What happened to US exports in October? Which had the biggest dollar value of change? What did this do the trade deficit? Define “trade deficit.” View “Dollar’s drop in values lead to massive trade impact,” an 8.5 minute segment from the January 30 edition of NewsHour. Summarize the story and relate it to our discussions. 8. What’s happening to the ocean’s acidity? Why? How does this relate to economic activity? 9. Which country is experiencing hyperinflation? credit crisis? Which nation’s government has collapsed because of the international 10. “The Giant Pool of Money”: What was the source of this money? What Fed policy critically influenced the pool of money? In general, what is a security? In a paragraph or two, why were mortgage standards relaxed? (Tie in descriptions of mortgage-backed securities, the “safety” of MBSs, and what was happening to housing prices and how that made mortgages seem safe.) MBSs were “bundled” and “sliced,” with the “slices” sold. What was the name of these slices? Who bought the slices? What is a rating agency, and how were the slices rated? How did the “subprime housing crisis” become the “credit crisis”? 11. Another Frightening Show About the Economy”: Describe the commercial paper market, money market mutual funds, and the newsworthiness of The Reserve Fund. Did The Reserve Fund hold MBSs? Explain the significance of that. How did a credit default swap initially work? How did they evolve into speculation/gambling? What would make the speculator/gambler win? How/when did it become important that the insurers (meaning the sellers of the CDSs) did not have enough funds to cover their obligations? (Tie in the connection between CDSs and MBSs.) How did the lack of transparency of CDSs contribute to the subsequent freezing of the credit market? 12. Paulson plan: How much? Originally planned to be used for what? How much was initially released? How was it used? How will the second installment be used? 13. David Brooks: Which “hard science” do economic modelers emulate? According to him, how is this relevant today? 14. This American Life, and “blame the economists?” readings: Here I want you to argue as effectively as you can for both of the following points of view: (a) Provide two examples of rational behavior. How do mainstream economists define “rational”? What are the implications for Smith’s “invisible hand”? (b) Describe the behavior in terms other than “rational.” Provide examples. What are the implications for Smith’s “invisible hand”? //// Which of the two do you find more convincing? Comment. 15. Distinguish between the “stimulus package” and the “bailout.” Where does each currently stand? For this, I want you to keep an eye on the news. 16. Who was Greenspan? Why was he called before Congress? What “errors” did he “admit” to? 17. How did the classical economists view the economy? How did they model the labor market? Graph and explain their expectation. What is the policy implication of the classical theory? What critique did Keynes provide of this specific piece of classical theory? When? Name of his book? When looking at the economy as a whole, how is the approach of “macroeconomics” different from classical economics? Explain the tradeoff in this theory. (See your deflation handout.) What is the policy implication of Keynesian economics? 18. Explain the relationship between output and income. The following questions (based on Blanchard’s Chapter 2) have been previously distributed: 1. 2. 3. 4. Define GDP, intermediate good, nominal, real (don’t worry about “chained”), employed, unemployed, labor force, unemployment rate, labor force participation rate, discouraged workers, inflation, and distinguish between the GDP deflator and the CPI. Why do economists care about unemployment? Inflation? Review the histories depicted in the figures on pages 25, 28, and 31. Notice the extreme values. What are today’s values? What determines GDP in the short, medium, and long runs? Also on pages 36-7, answer question(s) 1 b, e, f, 2-6. -----------------------------------------------------Assignment for Thursday, 2/5 Go to www.npr.org/blogs/money Click on Adam Davidson Click on “Obama Gives Keynes His First Real World Test” Listen to the piece. 1. Based on the show, write a question and answer it. Develop the question from something that you didn’t already know. This should be about half a page. 2. Reflect on Keynesian economics, or on economics as a discipline. This reflection should relate to the show. Not to exceed one page.