ECON 104 Sample Test CH8 thru 10

ECON 104 Sample Test CH8 thru 10 - MACRGECONONECS - score...

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Unformatted text preview: MACRGECONONECS - score 1m. s Name WWW fi‘ Seorge Mason lllxti1a‘e'ers’t’t3.r Last Name, Firet Name Not Student If.) Sample Test -— Spring 20% - Section 004 - 7226 to 10m PM '{huxsday —— instructor: EC Holt QAprii 2394, Chapter 8 the 13. When you are finished, sign piecige beiow and turn in both this test and your Scantron. onor Hedge: I haVe neither given nor received side on exam. Signed: (Student‘s Signature} MULTII’LE EHOICE. Choose the one alternative that best completes the statemeet or enmers the question. 1} A33: of the foiiowing are exempies of sociai infrastructureEXCEP‘i‘ A} ifighways built by local governments. B} dams built by the federal government. C} pubiiely owned schools. D} equipment evened by firms. 2} Gross investment A) increases during recessions and decreases ciming expansions. B} decreases during both recessions and expansions. C} timeases during both recessions and expansions. 13} decreases during recessions and Matias during expansions. 3) Net investment equals A) gross investment minus depreciation. 3) capital Stock minus depreciation. C) gross inVesment/ depreciation. D) the totai quantity of plants, equipment, and buildings. 4) if you lend a dollar for a year and at the enci of the year the price level has risen by 10 percent, A) the Furthesing power of your loan has risen over the year regardless of the interest rate at which you lent it. 3) you must have eamed a notional interest rate of 5 percent to maintain the purchasing power of your loan. C) you must have earned a terminal interest rate of 10 percent to maintain the purchasing power of your ioen. D) the purchasing power of yum loan has remaineci constant over the year regardless of the interest rate at which you 1th it. 5} If the read interest rate is 4 peroent and the inflation rate is 3 percent. the nominal interest rate is approximateiy A} 7 percent. B) 1.33 percent. C) 1 percent. D) 12 Pagani- 6) Other fifings remaining the same, the gxeater the expected profit rate from capital, A) the steeper is the investment demand curve. B) the less the amount of investment. C) the water the amount of investment. D) the flatter is the irwesmtent demand curve. 7} During a business cycle expansion, exPected profit rates and firms‘ investment A) rise; decreases B} fall; increaSes C) fall; decreases D) rise; increases 3} Suppose a firm borrows funds ta finance insteennent. The opportunity cost of this invesmiem A) i3 graft?! thm the teak interest rate. 13} is less than if the firm used its retained earnings. {3} is equal to the real interest rate. D} is greater fhan if the {inn used its rammed earnings. 9) An increase in the reai maexest rate A} creates a movemeni upward along the inveshnem demané curvie. 3) shifts the izwestment demand curve iefkward. C) Bhifffi the investment demand curve righhvard. D) createfi a movement downward along the investment demand curve. i . a .7331. wit“ .1 C.) G) .h. Rea} Mamet rate {permit per year) a: a s 2 s G 150 300 459 569 750 900 invesunemibliiiunsof “€996 oi! fimimwififi 10) In the abOVe figure, if the real interest rate falls {mm 13 to 8 peremt. the quantity of investment A) decreases below $15G billion. 13) increases from $150 billion to $300 billion. C) cannotbe determined. D) dedeases from$30€3bfliionto$150bflliom 11} In the above figure, the onset of a recession wili A) have no effect on the investment demand curve. 3) shift the investment demané carve leftward. C) shift the investment (Eemand Curve rightwarci. D) make the invesmlent demand curve become horizontal Real interest rate W per 1163?? 12) In the above figure, the economy is at pointa on the initial investment demand mama. What happens if corporate taxes are reducad? A) There is a movement to a point such ass on investment demand me 1139‘ B) The investment demand curve shifts rightwarci to a me such astz. C) The investment demand curva- shifts leftward to a curVe such asID1. D) There is a movement to a point such ash on investment demand curve 1230. 13} National saving equals A) Private Saving plus government saving. B) net transfers plus consumption spending. C) govemxnent saving plus foreign saving. D) private saving plus foreign saving. 14) __.____.._,. increases households” saving. A) A stock market boom that increases the yurehasing power of hauseholds' wealth B) Higher Expected future income C} A tax cut that increases disposable income 3} A decrease in the real interest rate 15) 3111313058 MOE}? has an income of $35,000 mutually and: has inherited a savings account of $20,000. Wyatt has a job that pays $35,860 annually, but has debts totaiing $6,906. Which of the following is true? A} We can expect Wyatt and Molly to have equai amounts of consumption this year. 3) We can expect Wyatt and Molly to save the same proportion of their incomes this year. C) We can expect Wyatt to save more than Molly this year, D) We can exPect' Molly to save more than Wyatt this year. Reel interest rate (percent per year} (eilzions of 1995 dollars) 16) In the above figure, the economy is at 901nm on the initial saving supply curveSSg. What happens if dispeselfie machine demeaseg? A} The saving supply curve weuld shift rightward to a curve such asSSz. 3) Nothing: the eeenomy weuld remain at point e. C) There Would be a movement to a point such as?) on saving supply curve 580. D) The saVing supply curve would shift leftward to a curve such asSSI. 17) In the above figure, the economy is at pointe on the initial saving supply curveSSg. What happens if real wealth decreases? A} The saving supply curve Would shift tightward to a me such asSSg. B} The 5ath supply curve would shift leftward to a curve such 3:555}. ' C) Nothing; the economy would remain at point a. 13) There would be a maVement to a point such as}; on saving supply curve 550. 18) If the real interest rate is above the equilibrium real interest rate, A} lenders will be unable to find borrewers willing to borrow all of the available funds and the real interest rate will fall. B) lenders Will be unable to fled borrome willing to borrow all of the available funds and the real interest rate will rise. C) borrowers will be unable to borxow all of the funds they want to barrow and the real interest rate will fall. D) borrowers will be unable to borrow all of the funds they want to borrow and the real filterest rate will rise. 19) An inereasa in world income shifts the saving supply curve A} rightward and increases the wozld real interest rate. 3} rightward and decreases the world real interest rate. C) leftward anti increaees the world real imereet rate. D) lefmard and decreases the world real mterest rate. 20) FBI a nation, if net taxes; are greater than govemmant pmchaees, A) the govemment has a budget surpius. B) government saving is positive. C) government saving is negative. - D) Both answers A and B are correct. .a 0 per year} m h Reef imam rate (percent a: M 0 "i 2 3 4 5 6 Worm saving and invest:an (triniuns of 1996 deilars) 5w.meuusm'aa; 333.3,.5‘1453}? Ff‘?,.%zf:?:2’~ 21:5 T316 above figure shows the pfivate work! saving (curvePS), world saving {curve 55) and World investment (curve 1133 Curves. The difference between points-2A and B is A) $3 trillion. B) private saving. C) a saving smplus. D) government fiissaving. 22) Saving equals mvestment in the world economy, A) $0 saVifig equals investment for each nation. B) but investment is greater than saving for some countries. C) but saving is greater than havestrnent for some counuies. 0) Both anSWers B and C are correct. i; «A U 35 on Real imotest rats {percent per soar} h ii} o 0.5 1. 1.5 2.0 2.5 3.0 immot sno saving (trillions of 19% ooliars) I 93:33:31? 23) The above figure shows a nation's saving supply and investment demand curves. The world real interest rake is 4 percent. The figure imiioabes thai A) Wflfld saving and invastmeot are not in equilibrium. 3) the nation's exports are greater than imPOrts. C) the nation's international borrowing equals $1.5 triiimn. 13) the nation's titer-nations}. borrowing equals $1.9 trillion. 24) To understand the growth of average iiving standards, we need data on the growth rate of A) real GDP. 3) retail prices. C) real GDP per perm D} wholesale prices. 25} During the 19965, which of the following countries experienced the slowest rate of growth in real GDP per person? A} 1310811 B) Canada C) United States D) France 263 All Of the following are necessary preconditions for economic growihEXCEPT A) Props“? rights. B} markets- C} monetary exchange. D) 188111310115 on private ownership of productive factors. 27) Property rights are A) rights that include the right to own financial, but not physical, assets. 5} the rights to use money in exchange for goods and services. C) sedai arrangements that govern the ownership, use, and disposal of goods and factors. D) rights filat cio not inoiude the right to own financial assets. 23} {30111311113113 economfic growth requires all of the foiiowing actisétiesflCEPT A} Widespread restrictions on property rights. 13) saving ami investment in new capital. C) hivesflnent in human capital. D) techfiologicai progress. 29) Human capital is, in part, the A} amount of money heici by a worker. B} stock of koowiedge of a worker. C} stock of financial assets held by the public. D} stock of plant and equipment. 39} The more education that workers have, tiao is. their human capital and is their productivity. A) 811131133”; higher B} larger; Bower C) larger; higher D} Smolier; iower 31} Labor productivity is measureci by A) real GDP per unit of capital. B) ma! GDP per hour of labor. C) reai (3315. D} capital per hour of labor. 32) Whixzh of the following directiy creates growth in labor productivity? 1. growth in capital per hour of labor H. technological change Di. population growth AHde Bflandlfi CHI DH 33) Productivity growth A} Was high in the 19603, slowed after 1973, and immigrated after 1983. 3) consistently fell between 1969 and the present. C) Was constant from 1969 to {be present. D) WfiS 10W in the 19605, speeded up after 1997's, and slowed after 1983. 34} The productivity curve is a relationship between A) nominai GDP per hour of labor and capital per hour of labor, with tedmology held constant. 3} real GDP per hour of labor and capital per hour of labor, with technology held constant. C) real GD? per hour of 33330: and capital per hour of labor whomever technological growth occurs. 13) calPital Per hour of labor and technological growth. Real GDP per W of law (1996 deflate) o . ‘ deem “‘“ "" ‘ ,pe 35) In the above figure, the movement from points: to inointe shows the effect of A) an increase in labor profiuctivity. B) an advance in teehnoiogy. C) afl increase in the capital stock 9) the two-tidrds mie. 36) In the above figure, a technological innovation is represented by a movement such as from A) paint a to point 17. 3} point a to point e. (2) point a to point 52. 1)) point a to paint :3. 3’7} The iaw of realms states that, as A) ihe quantity of one input used in production increases, all eise being the same, outgut increases by ever smaller emoums. 3) tethflelogy mereases, e11 else being the same, output increases. C} the quantity of one input used in production immeases, ail else being the same, output increases. ‘0} the quantity of one input used in production increases, all eise being the same, output increases by ever larger amounts. 33} The one mild rule states that, holding tedmology constam, for every 1 percent increase in A) capital per hour of labor, output per hour of him: will increase by 0.33 percent. 3) real wages, hours of work increase by 9.33 percent. C) real Wages, hours of work decrease by 0.33 percent. 9) hours worked, output will increase by 0.33 percent. 39) If file 5-3va rate increases, a coueh‘y's growth rate of output per hour of labor and capital per hour of labor _ A) mereases; increases C) deareasas; increases 13) decreases; decreases D) increases; decreases 43) Mela of the following is associated with dassical growth theory? 1. Growth in real GD? can continue indefiniteiyl Ii. Technological growth increases as the population grows. Ill. Population explosions bring real GDP per person back to subsistence levels. All EH! (1)1de Dim m 'q21:il‘f)I:E:::3?3“§L‘3fi$?§73§§’53€‘ E £33 a“) i 51 g . s 8 . "U = g - ' Subslstence a 6 reaswge E e: 4 3’ E 1.0 1 ‘33; 2 o 2 4 s 10 1 labor {millions of hours} aamemamu / z tszfs'flfl’s‘séfii'i 41} In the above figure, suppose the economy is initialiy at points. According to classical growth theory; an increase in tedmology will A} not mOVe the economy from a. 5) move the economy from a to ti to c. C) move the economy from a to b to a. D) move the economy from a to b to c. 42) Naoclsssical growth theon pmdicts that A) advances in technology increase the productivity of capital, which leads to an increase in investment and rising per capita GDP. 3) advances in tedmology are a result of discoveries motivated by the pursuit of profits. C) growth in real GDP can continue indefinitely. D) growth in real GDP can increase without any increase in investment demons. 43) H films 88*: PriCes and flaen keep them fixed for a period of time, their fixed prices imply that A) the aggregate price level adjusts continuously. @310: Sggregate price level is fixed and that aggregate demand determines the quantity of goods email services C) prices are set by aggregate demand and supply. D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and serviCes sold. 4:42} The mfisumpfioo function relates consumption expenditure to A} the inferat rate. B) saving. {C} disposable income. D) the price leveL 590 g ................................................. .. é c; é (niiiions at 1996 deflate) Common expmdimre " we 2 3 4 5 504:) Dispasama income (hiiiisns (£1998 Guitars) £th 1.11:: waizfs'flzi; 45} in the aboVe figure, at a disposable income Ievai of $203 biiiion, saving equais A) $49 billion, B) dispesabie incme. C) Consumption expendiiures. D) zero. 46} When the coftsumption function iies above the 45-deg1‘ee line, households A) saute all (if any increase in meme. (pare dissavin . C) spend on consumption an: increasing percentage of any immease iii income. D) went! on mnemption a fiecreasing percentage of any increase in immune. 47) The marginal propensity to consume measmes how much (1:) disposabie Emma goes to saving. kg) of a change in disposable income will be consumed. C) consumption expenditure occurs at the equilibrium income. 13} disposable income is consumed. 43) If mumpfion expenditures for a household increase from $1900 to $1890 when disposable income rises from $1000 to $2006, the marginal propensity to consume is A) 0.2. B) 0.5. C) 0.3. 610.8. \x J 19 Disposable income Consumytion expenditure {dofiars} 16f) 225 2&0 300 3GB 375 400 4-50 599 525 6:00 600 49) Using the above tame, if dispfighle incame is $400, saving ii; A) $199. :‘-"’B)3—$50. C) $50. D) $3. 50} If wealth increases, the consumption function . A}; "-15me upward. B} shifts dowrm'ard. C5 has a steeper sigma. D} is unaffected. 51) The graph of the aggregate expenditure curve has _ 9:3 flzquaxis and on thex-axis. A) real GDP; aggregate planned expenditure MB} éggregate pianneci exPendifure; read GDP C} aggregate actual expenditure; real GDP D) household expenditures; real GDP 52} Any Expenditure component that depends on the have} {3f real CD? is called A) autonomuus expenditure. B) equilibrium expenditure. induced expenditure. D) Spurious expendimre. 33) Autonomous expenditure is not influeztced by A) real GDP‘. B) any other variable. C) the price ieva}. 13} the mteres" rate- 54) An inCI‘BaSE in US. exports because of maeasing foreign incomes is in the Unified States. A} a decrease in induced expenditure B) an increase in induced expenciiture C) a decrease in autonomous expenditure 1)) an increase in autonomous expenditure 11 45“ H .. AE g a 2% @506 § Emu 35. Aggregate manned expendinm m 8 é? LMWW 100 200 360 490 5:10 660 Real GB? (billions of 19% dofiars) 55) In the above figure, at the equflibrium, induceci expenditure is A) sme ammnt not given in the above answers. @390 Izzézlficmw (1) $300 billion, Xinjému billion. 45" iine .3 N (wiltions or 1996 Mm} a; 3‘ £0 Aggregate manned expenditure 0 8 9 1 1 1 1 2 T 3 Reat GE3P [triflians of 1995 Guitars) =2":2”-3:::f;é:;~'-:°zs®'rap . 55) Biféherabove figure, if the level of real GDP is $11 trillion, ‘97-?Ebifinvmtories are abnve the iavels planned by firms. 3) planned expenéitures are zero. C) mvenmries are beiow the Eevels planned by Erma. 33) inventoriES equai the levels planned by firma. 12 57) If reai GDP is $2 biflion 33d pianned aggregate expenditure is $2.25 billion. invmteries will A) pile up and output wiii decrease. B) pile up and output Wfli increaee. C) be depieted and output will increase. 1)) be depleted and outpui Wfll decrease. 58) Because Of the multipiier. a onenfime change in expenditure wil}. A} expand imam by an irdinite amount B) have littie secondary effect on imome. 0 decrease saving and invesment acfivi‘cy and future inseam. D) generate more additienaE iamme drag; the inifiai change be expendimre. 59} If there are no taxes or imports and MPG : 0.67, the multiphez is A) 3. B}1.5. c; 0.33. D) 6. 69} Suppose that in 2002 the economy has anMPC of 0.67 and in EGGS theMPC changes to 0.8. Web of the following best describes what happens to the multiplier? A} It falls from 1.49 to 1.25. B) It rises {ram 3 t0 5. C} It rises from 1.25 to 1.49. D) It fans from 5 to 3. 61) SfiPPGse the WC = 6.67 and fierce are no taxes or imports. Then a $190 increase in autonomous spending cause: equilibrium expenditure to A) imrease by $300. 8) increase by $208. C) decrease by $390. D) dewease by $200. Real GDP (trillions Aggregate expenditure of 1996 dollars) {trillions of 1996 dollars) 0 9.3 1.0 1.2 2.0 2.1 3.0 3.0 4.0 3.9 5.0 4.8 52) The data in the above table indicate that autonomous expenditure is A) $4.8 triflion. B) $0.3 trillion. C) $3.0 trillion, D) None of the above answers is correct. 63} imports A) increase the size of the multipiier because imports make disposable income less than real GDP. 3) decrease the size of the multiplier because imports lead to an increase in taxes and govemmant purchases. C) decrease the size of the multiplier because spending on imports does not increase real GDP in the domestic nation. D) increase the size of the multiplier because imports are paid for by exports. 13 64) Any change in the price Emmi wifl result 3113 A) movement along the AB curve and a shift of {MAD curve. 3} 51%! in the £3 and Al?) was in the same aiirecfien. C) Shift in the AE curve and a movement along thew curve. 13} shift in the AB and AK) curves in oppasite directions. 55} When autonomous expendjhzre changes, the horizontal distance by which the aggregate demand curve shifis A) Cieyends on the size of the multiyfier. E) is determ'med by the inverse of the muifipiier. C) is accentuated by autematic stabiiizers. D) depends; on the size of the wealth effect Censumption expenditm‘e: C s 3 +- 93H hveshnent: I = 5 Government purchases: G = 7 Exparts: X n 10 imparts: M :2 0.2? 65} The equations above describe the economy of La La Land. What is the equation for the aggregate expencfimre curve? A) AE = 30 + as}: 3} A5 a 39 - 051/. C} A2 = 30 + easy. D) AE == 13 + 0.5}: 14 the new protestienism The great hollowing-out myth Coutrar‘l to what John Edwards, John Kerry and George Bush seem to think, outsourcing actually sustains American jobs get artigie gggkgrogng EARLIER this month the president's chief economic adviser, Gregory Mankiw, once Harvard's youngest tenured professor, attracted a storm of abuse. He told Congress that if a thing or a service could be produced more cheaply abroad, then Americans were better off importing it than producing it at home. As an example, Mr Mankiw uses the case of radiologists in India analysing the X-rays, sent via the internet, of American patients. Mr Mankiw's proposition, in essence, is the law of comparative advantage, first postulated by David Ricardo two centuries ago and demonstrated to astonishing effect since. Yet the Republican speaker of the House of Representatives, Dennis Hastert, joined Democrats in their rebuke of Mr Mankiw for approving of jobs going Overseas; another Republican called for his resignation. The White House gave Mr Mankiw only lukewarm support—unsurprisingly, since George Bush recently signed a bill forbidding the outsourcing of federal contracts overseas. And the Democratic presidential contenders? Mr Mankiw had just written their attack ads. As if to underline the point, this week‘s Wisconsin primary was dominated by the subject 01‘ jobs, and the failure of the Bush administration to do enough to protect them from going off to India. In John Edwards, who wants to rewrite the North American Free—Trade Agreement, the American left may have found its cuddliest protectionist yet; support for the southerner surged after he spent much of a debate drawing implicit comparisons between his own skills as a jobs—defender and those of John Kerry, who has stuck to free trade only a little more loyally. The Democratic front-runner defends NAFTA, but rants about “Benedict Arnold” bosses betraying American workers by moving jobs overseas (presumably to boost returns for fat—cat investorS, like, er, Mr Kerry's family). As for what might be called the business lobby, this is in disarray. “Tech jobs are fleeing to India faster than ever," moans the cover of Wired. Watch “Lou Dobbs . Tomlght", America‘s main business show, and every factory—closing is hailed as proof of America's relentless “hollowing-out" at the hands of dark forces in China, India and indeed the White House. Strangely, no mention is made of the fact that a pretty tiny proportion of all jobs lost actually go overseas. So what is really happening? Three themes emerge: 'Although America's economy has, overall, lost jobs since the start of the decade, the vast majority of these job losses are cyclical in nature, not structural. Now that the economy is recovering after the recession of 2001, so will the job picture, Perhaps dramatically, over the next year. 00utsourcing (or “offshoring”) has been going on for centuries, but still accounts for a tiny Proportion of the jobs constantly being created and destroyed within America‘s economy. Even at the best of times, the American economy has a tremendous rate 0f“Churn"~—over 2m jobs a month. In all, the process creates many more jobs than it destroys: 24m more during the 19905. The process allocates resourceswmoney and PEOPIE~—to where they can be most productive, helped by competition, including from outsourcing, that lowers prices. In the long run, higher productivity is the only way to create higher standards of living across an economy. OEven though service-sector outsourcing is still modest, the growing globalisation of information—technology (IT) services should indeed have a big effect on service- sector productivity. During the 19905, American factories became much more EffiClent by using IT; now shops, banks, hospitals and so on may learn the same lesson. This will have a beneficial effect that stretches beyond the IT firms. Even though some IT tasks will be done abroad, many more jobs will be created in America, and higher—paying ones to boot. Just you wait The “joble55 recovery" first, then. Despite strong productivity growth and an aCCEIEI'ating recovery from the recession of 2001 (the economy grew by an annual 4% in the fourth quarter of last year), jobs are being created at a feeble rate of 100:000 or so a month. The jeremiahs point out that a net total of 2.3m jobs have been lost since Mr Bush came to office. Although this date is often used as the starting-point from which to make a comparison, it is a silly one. In early 2001 the hangover effects from the investment boom of the late 19905 were only starting to be felt. Unemployment, at 4.2%, was unsustainabiy below the “natural” unemployment rate, consistent with stable inflation, that most economists put at around 5%. In other words, perhaps two— thirds of those 2.3m jobs were unsustainable “bubble” ones. Given the scale ofjob losses-«along with the shocks of a stockmarket bust, corporate-governance scandals and terrorist attacks—it is a wonder that the recession was so mild. By the same t0ken: a mild recession is now being foilowed by a commensurater mild recovery. This WEEk, the White House retreated from a claim that 2.6m new jobs would be created this year. But there are reasons to think that job growth will be more robust. In particular, the remarkably strong productivity growth, running at twice its long- run average of 2.1%, must slow down eventually. In the face of rising order books, businesses will have to hire more workers. This may already be happening in some parts of the country. William Testa, director or rregional research at the Federal Reserve Bank of Chicago, points out that the downturn began in the mid~west (because of its relative emphasis on manufacturing, notably business equipment, the mid—west was hit first by the slump in business investment) and then spread to the coasts. Now a recovery is spreading in the reverse directionustarting on the coasts and ending up, alas for Mr Bush, in the key electoral states of the industrial heartland. In the absence of an obvious jobs recovery, it is perhaps not surprising that the mi/th arose that the American economy was being buffeted by structural, not CYCIiCBL forces. Yet it nevertheless is a myth—as three notable economists, William Baumoi, Alan Blinder and Edward Wolff, point out in a rECent book.:“w churning, they point out, has being going on in the American jobs market f0r years, and “the creation of new jobs always overwhelms the destruction of old jobs by a huge margin." Between 1980 and 2002, America's population grew by 23.9%. The number of employed Americans, on the other hand, grew by 37.4%. TOda'Y, 138.6m Americans are in work, a near— record, both in absolute terms and as a proportion of the population (see chart). The beauty of churning at ailait papniiatémz’ in employment Of course some firms wither—Reynolds Tobacco's workforce shrank by nine-tenths between 1980 and 2002—but others grow: Wal-Mart's by 4,700%. During the 19905, “40L.:._s_s_._...._.“ ‘ :w‘ “M - an: $355 85 {£0 {£5 fifififie 04? ' - Eng: iffl- {Janifirfltiflvi abOUt a quarter of all American busmesses 3.5mm:Rental.-eitahmsrfitafihi‘ibfi She'd jobs in a typical three-month period, ECluivalent to 8m jobs. Yet jobs created greatly outnumbered these, to the tune of 24m over the decade. The process leads to incremental shifts that can have profound cumulative consequences for some sectors of the economy. In 1960 only one in 25 workers was employed in the business-services and health-care industries. Today, one in six is. In terms of Output, manufacturing has risen, but, thanks to that productivity spurt, these goods are produced by fewer peOple—~—12% of the workforce, less than half the proportion of three decades ago. And what of China? Still plffling. Certainly, China competes with some labour- intensive American industries that have long been in decline, such as textiles and stuffed toys. In the mid-west, metal—furniture makers and small tool—and—die foundries face growing competition. Yet most Chinese imports are of consumer goods, competing with imports from other poor countries, whereas America‘s manufactures are chiefly capital goods. Even at their peak in 2001, the number of all “trade-related” layoffs represented a mere 0.6% of American unemployment. As for the Indian threat, “offshoring” is certainly having an effect on some white- collar jobs that have hitherto beensafe from foreign competition. But how big is it, really? The best—known report, by Forrester Research, a consultancy, guesses that 3.3m American service—industry jobs will have gone Overseas by 2015—barely noticeable when you think about the 7m-8m lost every quarter through job-churning. And the bulk of these exports will not be the high-flying jobs of IT consultants, but the mind—numbing functions of code-writing. Meanwhile, there is another side to the ledger. Instead of focusing 0n jobs lost to the globalisation of information technoiogy, Catherine Mann of the Institute for “The creation of International Economics in Washington iooks at globalisation's power to reduce prices and so help spread new Jobs always new technology, new practices and job‘creating investment OVerWhelms the through the economy. destruction of Old jobs by a huge She uses the example of cheaper IT hardware, one of the margin" main aSpects of globalisation in the 19905. Most of the drop in prices for PCs, mainframes and so on was caused by the relentless advance of technology; but she still thinks ‘- ~ - that trade and globalised production-ail those Dell Computer factories in China, for instances—was responsible for 10—30% of the fall in hardware prices. These lower prices led to higher American productivity growth and added $230 biilion of extra GDP between 19.95 and 2002, equivalent to an extra 0.3 percentage points of growth a year. These days, software spending is increasing at twice the rate of hardware spending, as businesses struggle to make their new computers work better. The manufacturing sector is where such integration has gone furthest. In many other parts of the Amarican economy, the process has barely begun—particularly among smaller- and medium-sized businesses. Mr Mankiw's example of the Indian radiologist shows how the internet could help lower costs and raise productivity in health care. Who would object to that? Ms Mann concludes that, if IT software sees falls in prices, thanks to globalisation, similar to those that IT hardware has seen, then the second wave of productivity gains—notably in the service sector—could be greater than the first, which was based mainly on manufacturing. Some service sectors, such as construction and health care, are ripe for gains, because their efficient use of IT is low. Will the trend lead to jobs going overseas? You bet, but that is not a disaster. For a Start: America runs a large and growing surplus in services with the rest of the world. Thejobs lost will be low-paying ones, such as bank tellers and switchboard operatorS. Trade protection will not save such jobs: if they do not go overseas, they are stiil at risk from automation. BY contrast, jobs will be created that demand skills to handle the deeper incorporation of information technology, and the pay for these jobs wiil be high. The demand for computer-support specialists and software engineers, to take two examples: is expected by the Bureau of Labour Statistics (BLS) to double between 2000 and 2010. Demand for database administrators is expected to rise by three- fifths. Among the top score of occupations that the BLS reckons will see the highest growth: half will need IT skills. As it is, between 1999 and 2003 (that is, including during the recession) jobs were created, not lost, in a whole host of white-collar occupations said to be particularly susceptible to outsourcing. Yes. individuals will be hurt in the process, and the focus of public policy should be directed tOWards providing a safety net for them, as weil as ensuring that Americans have education to match the new jobs being created. By contrast, regarding globalisation as the enemy, as Mr Edwards does often and Messrs Kerry and Bush both do by default, is a much greater threat to America's economic health than any Indian softWare programmer. ‘ *u Downsuin in America: Realm: Causes, and Conseguences,” Russell Sage Foundation wesbingtenpostsent A Phony Jobs Debate By Robert J. Samuelson Wednesday, February 25, 2004; Page A25 We are having a ferocious jobs debate, most of it fraudulent. If presidents could easily create jobs, the unemployment rate would rarely exceed 3.5 percent. But all they can usually do is influence the economy through taxes, spending and regulatory decisions -- and hope that job growth follows. In our market system, private employers play the pivotal role. They will add jobs only if: (a) demand justifies new workers; (b) labor costs aren‘t at unprofitable levels; and (c) they think healthy economic conditions Will last. Electing a president based on job creation makes as much sense as selecting a doctor based on palm reading. The jobs rhetoric captures politics‘ casual cynicism. John Kerry and John Edwards must grasp a president's modest job-creating powers; otherwise, they wouldn't be fit for the White House. Their jobs obsession is dishonest expediency. They know President Bush is vulnerable. To be fair, the deceit is bipartisan. The Bush administration is ready to claim credit for almost any good economic news. The contrast with Iraq is instructive. The administration is accused of falsifying the case for war by distorting the intelligence on weapons of mass destruction. This alleged dishonesty is a legitimate issue. But no one considers it dishonorable to blame a president falsely for job loss (or to credit him falsely for job gains). The dishonesty is so routine that it's I'CSpectable. The press abets the hoax because it must report what candidates say and because it favors campaign combat over substance. Admitting the truth is no fun: On jobs, presidents are mostly prisoners of the business cycle. The present cycle has been particularly confiising. On the one hand, the monthly unemployment rate peaked at 6.3 percent in June‘2003, much lower than in the slump of the early 19905 (7.8 percent). On the other hand, job creation has lagged badly. By the government‘s payroll survey, nonfarm employment is about 2.35 million below its March 2001 peak and up 366,000 fiom its August low. What Went Wrong? J ob losses stem mainly from the aftermath of the recent boom. Even weak companies can flourish in a boom. There’s enough business for almost everyone. Rampant optimism encourages expansion. Once the boom collapses, surplus capacity means that vulnerable firms shut, shrink or merge. It's survival of the fittest -- a process that concentrates business at efficient firms. This improves labor productivity (which is a company's output divided by its employees' hours) but can temporarily hurt employment growth. Productive firms do more with less. Countless industries followed this script. Consider plastics. From 1999 to 2002, the number of business establishments dropped 13 percent and the number of workers 8 136111611t (119,000 jobs). "The industry felt [the boom] was going to continue forever,“ 33375 Lori Anderson of the Society of the Plastics Industry. The same Darwinian squeeze afflicted retailing. From 1998 to 2002, Wal-Mart expanded by almost a third to 4,694 locations: reports Stores magazine; meanwhile Kmart and Sears closed almost 1,300 stores. F210ng 3 Weak economy, a government can do three things: cut interest rates; run a budget defieit; and allow -- or cause —— its currency to depreciate. The first two promote bOHOWing and spending; the last makes a country's exports cheaper and its imports costlier. All these weapons have been deployed. Bush's policies are mostly standard economics; based on past patterns, these policies should have produced stronger job growth. Bu’t private employers have resisted hiring. "Economists are scratching their heads:" SaYS Randell Moore, editor of the monthly Blue Chip Economic Indicators, which surveys 50 economic forecasters. somCJObS have moved abroad. Slow foreign growth and (until recently) the high dollar have hurt U.S. exports and encouraged imports. Mark Zandi of Economycorn estimates that almost 900,000 manufacturing jobs have been lost to the higher trade deficit. By contrast, he reckons that "offshorh1g" of service jobs ~— call centers, software design ~— has cost Only about 200,000 jobs over the same period. That's out of more than 130 million jobs. There are other theories. By one, higher fringe benefits (mainly health insurance and pension costs) have deterred companies fiom hiring. Although wage increases are slowing, total labor costs including fringes are actually rising. They grew 3-8 P3113th in 2003, up from 3.4 percent in 2002. Another theory is that employers haVe delayed hiring because they worry that the recovery will falter. We don't know. But what we can know is that policies from a President Gore or Kerry or Edwards Wouldn‘t have improved matters much. Of course, Democrats might have discarded some Bush policies: say, tax cuts for the rich. Still, the main forces shaping the job market Would have remained well beyond presidential reach: the boom-bust cycle (President Bill Clinton didn't create the boom, and the bust was unfolding even before Bush's election); weak growth in Europe, Japan and Latin America, which account for almost 40 percent of US. exports; and business cautiousness. Protectionism is no Panacea. It barely touches job creation; America's trade problem is weak exports as much as strong imports. Even if every offshored service job had somehow been saved, the job picture wouldn't have changed much. N0 matter- During elections, politics overwhelms reason. Perhaps continuing economic gTOWfll and a weaker dollar will soon produce more jobs. On average, the economists surveyed by Moore expect 166,000 new jobs a month in 2004 -— or about 2 million for the Year. Whatever occurs, someone will be blamed or credited. In war, truth is often said to be the first casualty. It's the same in campaigns. ...
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ECON 104 Sample Test CH8 thru 10 - MACRGECONONECS - score...

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