Week 6

Question 1

When is a good excludable according to economists?

Answer 1

When a person can cheaply be prevented from using a good, economists say the good is excludable.

Question 2

When is a good nonexcludable according to economists?

Answer 2

When a person cannot be cheaply prevented from using a good, economists say the good is non-excludable. Jeans are excludable; asteroid deflection is nonexcludable.

Question 3

When is a good considered nonrival?

Answer 3

When one person’s use of a good does not reduce the ability of another person to use the same good, economists say the good is nonrival.

Question 4

Whats the difference between private goods and public goods?

Answer 4

Private goods are excludable and rival.
Public goods are nonexcludable and nonrival.

Question 5

What is a free rider?

Answer 5

A free rider enjoys the benefits of a public good without paying a share of the cost?

Question 6

What are forced riders?

Answer 6

Some people want more national defense, some people want less, and pacifists want none. So, taxation means that some people will be turned into forced riders: they must contribute to the public good even though their benefits from the public good are low or even negative.

Question 7

What part of the total amount of public goods produced should be produced by the government?

Answer 7

In principle, the government should produce the amount that maximizes consumer plus producer surplus or the total benefits of the public goods minus the total cost.

Question 8

Explain club goods

Answer 8

Club goods are goods that are excludable but nonrival.

Question 9

Explain common resources

Answer 9

Common resources are goods that are non-excludable but rival

Question 10

Name the four types of goods

Answer 10

• Private Goods
• Common Resources
• Club Goods
• Public Goods

Question 11

What does the aggregate demand curve tell us?

Answer 11

The aggregate demand curve tells us all the combinations of inflation and real growth that are consistent with a specified rate of spending growth.

Question 12

Explain the Solow growth rate

Answer 12

The Solow growth rate is the rate of economic growth given flexible prices and the existing real factors of capital, labor, and ideas.

Question 13

What is the RBC model?

Answer 13

Real business cycle

a way of thinking about business fluctuations often called the “real business cycle” model

In this model, the equilibrium inflation rate and growth rate are determined by the intersection of the AD and LRAS curves

Question 14

Name a reason behind why growth rate fluctuates

Answer 14

One reason that the growth rate fluctuates is that economies are continually being hit by shocks, which shift the Solow growth rate

Question 15

What is an aggregate demand shock?

Answer 15

An aggregate demand shock is a rapid and unexpected shift in the aggregate demand curve

Question 16

Explain the phenomenon behind menu costs

Answer 16

Economist call the costs of changing prices menu costs because an obvious example is the costs of printing new menus when a restaurant changes its prices.

Question 17

Name solutions to the tragedy of the commons

Answer 17

Command and control and, more recently, tradable allowances have been used to solve the tragedy of the commons problems.

Question 18

What can be understood under ‘tragedy of the commons’?

Answer 18

The result of non-excludability and rivalry is often the tragedy of the commons: overexploitation and under maintenance of the common resource.

Question 19

Name positive shocks that shift the aggregate demand curve

Answer 19

• A faster money growth rate
• Confidence
• Increased wealth
• Lower taxes

Question 20

Name negative shocks that shift the aggregate demand curve

Answer 20

• A slower money growth rate
• Fear
• reduced wealth
• higher taxes

Question 21

The government has two kinds of fiscal policy used to fight a recession. Name them

Answer 21

1. The government spends more money
2. The government cuts taxes, giving people more money to spend

Question 22

Explain the multiplier effect

Answer 22

The additional increase in aggregate demand caused when expansionary fiscal policy increases income and thus consumer spending

Question 23

Explain The Ricardian Equivalence

Answer 23

A tax cut opens the possibility of a special type of crowding out. When Ricardian equivalence holds, a tax cut doesn’t increase aggregate demand even in the short run.

Question 24

What does crowding out mean?

Answer 24

When increased government spending comes at the expense of reduced private spending, we have the phenomenon of crowding out

Question 25

Whats hte biggest problems with government spending as a boost to aggregate demand?

Answer 25

Most changes in government spending are not very large in the short run. If changes to government spending are not large in the short run, the boost to aggregate demand won’t be very large either

Question 26

Name the list of relevant lags in government expenditure;

Answer 26

1. Recognition lag
2. Legislative lag
3. Implementation lag
4. Effectiveness lag
5. Evaluation and adjustment lag

Question 27

What are automatic stabilizers

Answer 27

Some kinds of fiscal policy are built right into the tax and transfer system, and they do take effect without significant lags

Question 28

What are the differences between government spending and tax cuts?

Answer 28

The main difference is that a tax cut or tax rebate puts more spending in the hands of the private sector, while an increase in government spending puts more spending in the hands of the government.

Question 29

When might fiscal policy make matters worse?

Answer 29

If expansionary fiscal policy is paid for by borrowing, taxes will rise in the future.

Question 30

When is Fiscal Policy a good Idea?

Answer 30

When the government faces some immediate emergency, such as a war, a worsening depression, or a natural disaster.

Government spending is best for the macro economy when it is worth incurring some long-run costs to get a sort-run economic boost

Question 31

Define Business fluctuations

Answer 31

Fluctuations in the growth rate of real GDP around its trend growth rate

Question 32

Define a Recession

Answer 32

Significant, widespread decline in real income and employment

Question 33

Define Inflation

Answer 33

Measure of the change in the underlying currency

Question 34

How to calculate inflation rate?

Answer 34

((P2-P1)/P1)) x 100

Percentage change in a price index from one year to the next

P2 index value in year 2 and P1 index value in year 1

Question 35

Whats the formula of quantity identity of Money (Irving Fisher)

Answer 35

M x v = P x Yr

1. Money supply = M
2. The velocity of Money = V
3. Price level = P
4. Real GDP = Yr.

M x V is the total amount spent on final goods and services and P x Yr is the price level times real GDP – Equals nominal GDP

Question 36

Explain the AD/ AS Model

Answer 36

Aggregate Demand and Supply Model

Consists of three curves:

1. The aggregate Demand Curve (AD)
2. The Long-Run Aggregate Supply Curve (LRAS)
3. The short-run aggregate supply curve (SRAS)

Shows how unexpected economic shocks can temporarily increase or decrease the rate of growth

Question 37

Define the Aggregate Demand Curve

Answer 37

Shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

Question 38

Define The short-run aggregate Supply curve

Answer 38

Shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky

Question 39

What are the limitations of fiscal policy

Answer 39

Difficult to time and dose fiscal policy so that aggregate demand shifts at the right moment by the right size

Question 40

Name 3 Obstacles to Climate Policies

Answer 40

1. Risk of stranded assets
2. Time scale and hedging climate risk
3. Leakage and green paradox effects government regulations will encourage firms to relocate

Question 41

Define the Green paradox:

Answer 41

Companies want to be quick in burning fuels because it is not sustainable. They want to burn these fuels whilst they are still valuable. This speeds up the climate issues

Question 42

Define Carbon offset:

Answer 42

A reduction in emissions of carbon dioxide made in order to compensate for emissions made elsewhere