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Macroeconomic Questions

The US is one of the wealthiest nations on earth, yet our fundamental economic problem is scarcity. How can this be? Also, what are the broadest and narrowest measures of money and how are they used?

Contrast and discuss capitalism's and socialism's solutions to the three economic problems (what, how & for whom to produce).

Most economists oppose trade restrictions because of the negative effects they may create. What are the main problems associated with trade restrictions?

What does the law of supply say that most individuals would do if their wage increased? Explain the importance of substitution in this decision.

Discuss the six roles of government in a market economy. According to economic theory, to what extent should government intervene in our economy?

What is potential output and how is it related to the target rate of unemployment and the target level of capacity utilization? Which is greater: potential or actual output during a recession? During an economic boom?

Name and discuss the assumption economists make that allows them to focus only on supply in the long run? (hint: it's a Frenchman's law).

What was the Keynesian's main argument against the classical view that the economy will get itself out of the depression?

Discuss what is the difference between induced and autonomous expenditures. And, in what way the trust fund is not a real solution to the Social Security problem?

Discuss how open market operations affect interest rates through the bond market.

In what way is inflation a tax?

Solution Preview

These questions are really designed to make you think about economic concepts. You will need to understand them in order to do well on your tests, so make sure that you fully grasp the information I am presenting here. Thus, these are not intended to be complete answers to the questions but rather ideas to set you on the right path to your own answers. Please contact me if you need further guidance.

#1 When we talk of scarcity within an economic context, it refers to limited resources, not a lack of riches. Think about all the ways you could spend $1. They really are more than you can count. These resources are the inputs of production: land, labor, and capital. The basic economic problem which arises from people having unlimited wants while there are and always will be limited resources. Because of scarcity, various economic decisions must be made to allocate resources efficiently. People must make choices between different items because the resources necessary to fulfill their wants are limited. These decisions are made by giving up (trading-off) one want to satisfy another.

The narrowest measure of money supply, known as M0, provides information about how much physical cash there is in the economy. It includes only liquid assets such as currency in circulation. The broadest measure, M3, includes all the money that people have on deposit in checking or other demand accounts, as well as instruments directly exchangeable for currency, and also foreign bank deposits denominated in American currency, CDs greater than $100,000, institutional money market mutual funds, and repurchase agreements.

Socialism solves the problem of what to produce by government calculation. Based on prior years' demand, it looks for a trend and then predicts the next year's demand for each product. The means by which goods are produced are also mandated by the government, which owns the means of production. The government may choose to produce things in an inefficient manner in order to keep more people employed. Furthermore it allocates things so as to prevent scarcity. This may mean that someone who works very hard will not receive more than someone who does not.

Capitalism allows market forces to solve all these problems. Each company will do its own projections, and will be motivated by profit. If they over predict the y will be left with unsold merchandise, while if they under predict they will lose out on profitable transactions. They will produce in the most efficient way possible, motivated by profits here also. They will sell through means of the market, where buyers and sellers come together and through the process of suppy and demand find an equilibrium price that ...

Solution Summary

Various questions regarding induced and autonomous expenditures, scarcity, and the law of supply