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8 General Economics Questions

1. What is a government budget deficit? How does a federal budget deficit affect the economy? How does it affect the level of investment and interest rates? How does it affect the individual consumer? Give at least three examples in your response.

2. Are unions good or bad for the economy? How do unions at GM and Ford affect employment levels and wages? How do unions affect other industries in terms of employment and wage levels?

3. What is the demand for loanable funds? Where does it come from? What is the supply of loanable funds? Where does it come from? How do interest rates affect the supply and demand for loanable funds?

4. What are the prime rate, the discount rate, and the federal funds rate? Who controls these rates? What would you expect to happen in the general economy if these rates are all increased? Decreased?

5. Suppose that an unpopular president was leaving office, and a very popular candidate was elected, and this significantly increased the public's confidence in the future of the economy. Using the aggregate demand/aggregate supply model, explain the effect on the U.S. economy.

6. How does a current budget deficit affect future workers? How could a policy by the current government to reduce the national debt hurt these future workers?

7. Monetary and fiscal policies are said to have "lags." What are lags and why do they exist? How are the arguments for and against active policy decisions affected by these lags?

8. The government often wants to stabilize or stimulate the economy. In order to do so, they must decide on the relative size of the money supply, taxes, government spending, or some combination of these alternatives. What are the difficulties encountered in deciding which policy to enact and the size or magnitude of these actions? Use examples when answering these questions.

Solution Preview

1. The government runs a deficit whenever it spends more than it takes in. This can be good for the economy by creating jobs, but it can hard the economy if it drives up interest rates. High interest rates "crowd out" private investment, as businesses cannot afford loans at the higher interest rates. Thirdly, government spending can create inflation if the economy is nearing capacity. Consumers can benefit from the increase in economic activity, which creates jobs. However they may be negatively affected by inflation, especially if they are retired and not seeking work. These groups are on a "fixed income" meaning that they cannot expect their incomes to increase with inflation. Therefore, inflation increases the cost of living for them, and they can buy less than they could before.

2. The effect of unions varies depending on the situation. When workers are underpaid due to a monopoly of the labor market, unions can help by giving workers a fair share of the profits. This spurs economic growth as workers are also consumers. However, if unions insist on many perks or higher wages than the employer can afford, they can harm the economy by driving employers out of business, or cause them to offshore.

3. Borrowers ...

Solution Summary

Deficits, interest rates, money supply, etc. are discussed in 799 words in the answer to 8 general economics questions.

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