J. Bradford DeLong's Blog, page 2164

Econ 1: Fall 2010: Sample Midterm (Draft)

1: International question: Write one paragraph—four sentences or so—explaining what the balance of trade is, and why it is an important concept in international economics.

2: Growth question: China’s total GDP today is about 1/6 that of the United States. China’s population is about four times that of the United States. The current level of GDP per capita in the United States is about $45,000 of marketed final goods and services produced per year. Current projections are that—if nothing goes wrong—GDP per capita in China will grow at an average rate of 6% per year for the foreseeable future. Current projections are that GDP per capita in the U.S. will grow at an average rate of 2% per year for the foreseeable future. In what year do you project that average GDP per capita in China will equal its level in the United States? What will the level of annually-produced GDP per capita be in that year?

3: Supply and Demand question: The supply and demand curves for the market for tennis rackets are:

Qd = 500 – 4Pd

Qs = –100 + 6Ps

The government wants to raise money to provide public tennis courts, so they imposes a $10 tax on each tennis racket sold.

a: How many rackets were sold before the tax went into place?

b: How many rackets were sold after the tax went into place?

c: What is the after-tax price of rackets to the consumers?

d: How much money will the government raise to build new tennis courts?

e: What are the advantages and disadvantages of taxing tennis rackets in this case instead of implementing a general sales tax on all goods?

f: If we count the government revenue as part of the total surplus, what is the total surplus after imposing the tax?

g: Give a short argument for why we should nevertheless implement this tax.

4: Supply and Demand question: Let us return to the city of Avicenna and the market for yoga lessons. Suppose that the daily demand curve for lessons is: Q = 1000 – 10P, where Q is the number of lessons sold and P is the price of a lesson in dollars.

a: Suppose that there are only 25 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP?

b: Suppose that there are only 50 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP?

c: Suppose that there are 100 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student. What is the market equilibrium price of yoga lessons? What is the daily quantity? What is the daily producer surplus? What is the daily consumer surplus? What is the daily contribution of yoga lessons to measured GDP?

5: Market Structure question: Suppose that the Production and Distribution Coordination bureaucracy in the city of Avicenna around Euphoric State University decides that, to ensure quality, all yoga lessons must be provided by a single monopoly Euphoric Yoga Consortium. The daily demand curve for lessons is: Q = 1000 - 10P, where Q is the number of lessons sold and P is the price of a lesson in dollars. There are 100 qualified and competent yoga instructors in Avicenna, each of whom can teach 10 students a day and has a reservation wage of $10 a student.

a: Suppose the Euphoric Yoga Consortium is organized as a profit-seeking monopoly firm. What is the price that it will charge for yoga lessons?

b: What is the daily quantity of yoga lessons that will be given at that price?

c: What is the daily consumer surplus?

d: What is the amount of its daily revenue that EYC will be willing to devote to campaign contributions for people running for seats on PDC if they can be confident of electing a PDC that will see things their way and ensure quality of yoga lessons by preserving EYC’s important social role as guarantor of quality in the yoga lesson business?

e: What is the daily amount of money that the assembled yoga instructors of Avicenna will be willing to contribute to people running for seats on PDC if they can be confident of electing a PDC that will see things their way and lift the oppressive dead bureaucratic monopoly-capitalistic hand of EYC from its position on the throat of the people?

Liveblogging World War II: November 1, 1940

Vannevar Bush's National Defense Resources Council awards a $40,000 contract to Columbia University to assemble a large sub-critical atomic pile made of graphite and uranium oxide.

Econ 1: Fall 2010: Files for November 1 "Monopolistic Competition" Lecture

Monopolistic Competition:

Slides

Paul Krugman Smackdown Watch: David Beckworth Says QE Is Effective

David Beckworth says that quantitative easing worked remarkably well in the Great Depression:

Macro and Other Market Musings: QE Has Worked Before: My Reply to Paul Krugman: QE has been done before in the United States and it worked incredibly well.  It was initiated in early 1934 when FDR and his treasury officials decided to (1) devalue the value of the dollar relative to gold and (2) quit sterilizing gold inflows.... [T]hat is exactly what was needed, a big permanent shock to inflation expectations that served to stop the deflationary spiral, end the liquidity trap, and allow a recovery in aggregate demand... backed up with significant and permanent increases in the monetary base over time: it went from about $8 billion right before the policy change to about $24 billion by the end of the 1930s.... FDR's QE was a smashing success when it came to shoring up aggregate spending. So those of us folks who want the Fed to increase and stabilize nominal GDP have a good reason to believe it is possible--it happened before.... QE worked  because it (i) it reshaped inflation expectations and (ii) was backed up with meaningful increases in the monetary base.  

The Fed is more than able to do the same today.  It certainly can reshape inflation expectations. Just look at what has happened to them over the last month or so when Fed officials started talking up QE2. The Fed would be far more effective, though, at shaping inflation expectations by explicitly committing to some nominal target.... The Fed, then, needs to (1) announce an explicit nominal [CPI or mnominal GDP] target and (2) say it will do whatever is necessary to hit it...

The Democrats Are Remarkably Popular...

Duncan Black:

Eschaton: I think the ignored true narrative of this election season is that as horrible.... With 14.2% unemployment in Nevada, a potted plant should be able to beat Reid and he just might pull it off.

There Should Be Resignations in Protest and on Principle from the Washington Post Today...

...but there should be such resignations every day.

Which is worse?

Rosaline Helderman's claim on A-1 that just because having Republican Robert F. McDonnell as governor has not put Virginia into a ditch, President Obama and Democrats are wrong that having Republicans in charge nationally would do that.

Or David Broder's call for Barack Obama to bomb Iran to get the economy moving?

It would be good for the country if this monstrosity shut itself down today.

Why oh why can't we have a better press corps?

Broder is the worst. He is monstrous:

[I]f Obama cannot spur that [economic] growth by 2012, he is unlikely to be reelected.... Can Obama harness the forces that might spur new growth?.... What are those forces?... One is the power of the business cycle.... What else might affect the economy? The answer is obvious, but its implications are frightening. War and peace influence the economy.

Look back at FDR and the Great Depression. What finally resolved that economic crisis? World War II.

Here is where Obama is likely to prevail.... [H]e can spend much of 2011 and 2012 orchestrating a showdown with the mullahs. This will help him politically because the opposition party will be urging him on. And as tensions rise and we accelerate preparations for war, the economy will improve.

I am not suggesting, of course, that the president incite a war to get reelected. But the nation will rally around Obama because Iran is the greatest threat to the world in the young century. If he can confront this threat and contain Iran's nuclear ambitions, he will have made the world safer and may be regarded as one of the most successful presidents in history.

Liveblogging World War II: October 31, 1940

The last day of the Battle of Britain. The RAF lost 915 fighters and 544 airmen.1733 Nazi planes were shot down.

Duncan Black: Barack Obama Goes Off Message Once Again

Duncan Black:

So What Are We Going To Do About These Problems Then?: [Obama's] answers to [my] housing question were quite disappointing. I don't like the "deserving versus undeserving" rhetoric, especially in the context of the bankster bailout.... Obama:

The biggest challenge is how do you make sure that you are helping those who really deserve help and if they get some temporary help can get back on their feet, make their payments and move forward and stay in their home, versus either people who are speculators, own second homes that they really couldn’t afford because they’d gotten a subprime loan, and people who through no fault of their own just can’t afford their house anymore because of the change in housing values or their incomes don’t support it. And we’re always trying to find that sweet spot to use as much of the money that we have available to us to help those who can be helped, without wasting that money on folks who don’t deserve help. And that’s a tough balance to strike.

The problem is that "foreclose" is the new "issue as many crappy loans as you can for securitization." Foreclosures are how the servicers are making money, and itdoesn't even matter if investors in those mortgages are getting the shaft, at least until there are more lawsuits.... [S]ervicers prefer foreclosures to short sales or sensible principal modifications....

[I]nitially a lot of the problems on the foreclosure front had to do with balloon payments people didn’t see coming, adjustable rate mortgages that people didn’t clearly understand, predatory lending scams that were taking place -- now the biggest driver of foreclosure is unemployment. And so the single most important thing I can do for the housing market is actually improve economic growth.... Yes, turning around the economy faster allow more people to stay in their homes. But we haven't turned around the economy, and it's unclear if Congress will pass any additional legislation, including unemployment extensions. In theory there's a lot that the executive branch can do without Congressional approval. There is still a lot of HAMP money sitting there. We own Fannie and Freddie. I just can't believe there's no way, with improved carrots and sticks, to encourage more widespread principal modifications which would both help more people keep their homes and, you know, help the economy because they'd have additional money to spend on things other than their underwater mortgages.

All of that is even without the fraudclosure mess.

Principal modification, one way or another, was always going to be the only way through this. It still is.

Petrer Dorman: The National Income Identity Is Not Mocked...

Peter Dorman:

EconoSpeak: This Is What Accounting Identities Look Like: I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities... “serious” people somehow think that public and private debt levels can be lowered simultaneously, without... a current account surplus.... It does not occur to them that one person’s debt is another’s asset.... [I]f the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen.

That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken.

Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to... a downward spiral of pointless misery.

Kevin O'Rourke Says: Here Comes the European Double-Dip...

Kevin O'Rourke:

What do markets want?: [T]he question of what markets want is beginning to exercise people (see for example here, or here).... [M]arkets understand that governments face political constraints, and take this into account when assessing the credibility of their economic policies. (And, moreover, market participants tend not to believe in tooth fairies or negative fiscal multipliers.)

We’ve known all along that fiscal adjustment here would be contractionary, and that our economy thus needed substantial export growth if it was to avoid falling into the hands of the IMF. That in turn requires a buoyant European economy; hence my alarm regarding austerity measures in countries like the UK and Germany.... Ireland has no choice right now concerning what policies to pursue, but other countries do, and if those with fiscal space (as measured by the interest rates at which they can borrow) choose to embark on contractionary policies now, for what appear to be nothing more than ideological reasons, then that is profoundly irresponsible from the point of view of the fragile system that is the European economy.

And:

What do markets want?: With governments around Europe moving towards fiscal austerity, at a time when over-indebted households are still reluctant to spend, the danger is that Europe will move back into recession.
 
Why are European governments embarking on such a risky strategy? In peripheral economies such as Greece, Ireland or Spain, the governments have no choice: the markets have made it clear that otherwise they will no longer be willing to continue lending to them. Governments have thus had to cut spending and raise taxes at the worst possible time.... [I]t must have been utterly exasperating for the Spanish government when, late last week, Fitch downgraded Spanish debt on the basis that Spain's adjustment process will lower its medium run growth prospects. It seems a case of damned if you do, damned if you don't.
 
What, might Spanish politicians well ask, do markets want?
 
As it happens, the EMS crisis of 1992-1993 taught us a lot about what markets want.... The initial response of politicians was a macho one: get the fundamentals right and the problem would go away. The fundamentals concerned were low inflation, low deficits, and low levels of government debt. But speculation did not stop. The lesson of the EMS crisis is that low inflation, low deficits and low government debt are not, it turns out, enough on their own... if government policies are to be credible.... [F]ar from enhancing credibility, the 'responsible' and deflationary policies which governments thought markets wanted fatally undermined it.... This should not have been a surprise to the governments concerned, since it is a constant theme in 20th century economic history....
 
Markets want debts to be kept under control, but in the long run they also want tolerable levels of unemployment, since this is what democracy demands of governments. In our current circumstances, this means economic growth. Too much austerity at the wrong time will not make governments more credible, but less so.
 
Where will this growth come from?... Europe hopes that it will export its way to recovery.... [T]his could lead to US and Asian retaliation.... Those economies with fiscal room to manoeuvre need to use it now, for the good of the European economy. Furthermore, we should be asking whether the European Union as a whole should embark on a growth and investment strategy. Major European investments in new transportation and energy infrastructures are needed in the long run anyway....

If the EU turns itself into a mechanism for imposing asymmetric and deflationary adjustment on the continent, it will be seen, rightly, as one of the causes.
And the markets won't like that.