Questions and Answers of Principles Of Economics

Some economists believe that the short-run Phillips curve is relatively steep and shifts quickly in response to changes in the economy. Would these economists be more or less likely to favour
Imagine an economy in which all wages are set in three-year contracts. In this world, the central bank announces a disinflationary change in monetary policy to begin immediately. Everyone in the
Some economists have proposed that central banks should use the following rule for choosing their target interest rate (r):where:p is the average of the inflation rate over the past year y is real
The privatization of industries and firms was a feature of the 1980s and early 1990s. The arguments in favour of transferring assets to the private sector were based on the belief that the incentives
What is meant by ‘sustainable economic growth’?
Explain the shape of the New Keynesian AS curve.
What are the two ways in which the output gap can be calculated and what is the difference between them?
What is the relevance of the size of the output gap in policymaking?
Using an AS/AD diagram, show how a rise in AD could lead to a rise in national income but with no change in the price level.
What are the two main types of supply-side policy and what is the difference between them?
Why do supply-siders emphasize the importance of marginal tax rates in relation to incentives?
What is the Laffer curve?
Why do flexible labour markets improve the efficiency and capacity of the economy?
Why is it necessary for governments to invest in education, training, and research and development?
Using the New Keynesian AS curve, explain why, when the output gap is very large, the AS curve has an almost horizontal slope.
Why might governments find it difficult to accurately measure the size of the output gap?
Assume that a government is successful in shifting the AS curve to the right. Show what happens to the Phillips curve in such a situation.
What sort of trade-offs do governments face if a decision was being considered to reduce the level of welfare benefits as part of a market-orientated supply-side policy?
Governments that have implemented major cuts in higher rates of income tax have been accused of giving more money to the rich at the expense of the poor. Construct an argument to counter such an
What sort of assumptions underlie the policy that cuts in income taxes would increase the supply of labour hours offered in an economy?
What are the potential costs and benefits of policies designed to improve the flexibility of labour markets?
Why do governments find it difficult to reduce spending?
A government announces a decision to increase investment in spending on higher education with the intention of increasing the participation rate in higher education by young people, to 45 per cent
How would a government be able to tell whether a policy of increasing private sector involvement in public sector services provision actually leads to a more efficient outcome compared to having
Economists bore the brunt of criticism in relation to the Financial Crisis because its theories failed to predict it. Since 2009, there has been much soul searching and debate within the profession,
What is deregulation, and what were the main features and consequences of the deregulation of the financial markets in the 1980s, 1990s and into the 2000s?
What is meant by the term ‘sub-prime market’?
Why did many countries experience a banking crisis in 2007–8?
What is meant by the term ‘efficient markets hypothesis’?
What are the main characteristics of asset bubbles?
Briefly describe the theory of the ‘financial accelerator’.
How did central banks respond to the Financial Crisis?
Why did governments such as those in Greece, Spain, Ireland, Portugal and Italy experience such a rise in deficits and debt in the wake of the Financial Crisis?
What are the main arguments for and against the continuation of austerity programmes in countries which have experienced sovereign debt problems?
What is the ‘productivity puzzle’, and what are the main explanations put forward for explaining the puzzle?
Explain how deregulation of the financial system may have affected the following:a. A newly married couple, aged 24, who have just secured their first job and want to buy a house.b. Joint homeowners
As the Financial Crisis developed, newspapers often carried lurid headlines about the extent to which house prices were falling, for example, ‘House Prices Fall 50 Per Cent’. Economists might
Consider some of the implications of the assumption of rational behaviour in a market for an asset such as bonds. What might you expect to see happening in such a market in response to new
Consider Eugene Fama’s comments in his Nobel Prize lecture on identifying asset bubbles.a. Do the examples he gives convince you that the concept of asset bubbles has ‘little meaning’?b. If
From Malkiel (2003):I suspect that the end result will not be an abandonment of the belief of many in the profession that the stock market is remarkably efficient in its utilization of information.
To what extent do you think that Minsky’s financial instability hypothesis is the most accurate theory to explain the Financial Crisis of 2007–9?
In the face of a financial crisis such as that created by the dot.com collapse and the 9/11 terrorist attacks in the US, why would a central bank have responded by lowering interest rates and
What is the role of the European Stability Mechanism in managing sovereign debt problems of member countries?
Governments across Europe have instituted austerity measures in an attempt to cut budget deficits which ballooned after the Financial Crisis. Are they right to do this if economic recovery is weak?
One of the biggest threats to the stability of a currency union is asymmetric shocks. As we have seen in this chapter, a shock to one economy which results in recession and rising unemployment can
What are the main advantages of forming a currency union? What are the main disadvantages?
Are the advantages and disadvantages you have listed in answer to question 1 long run or short run in nature?
Is a reduction in price discrimination across countries likely to be an important benefit of forming a currency union? Explain.
What are the main characteristics that reduce the costs of a common currency?
How would an asymmetric supply-side shock to a country that was a member of a currency union affect the country and the other members of the currency union?
What is an optimum currency area? List the criteria that an optimum currency area must satisfy.
What is fiscal federalism? How might the problems of macroeconomic adjustment in a currency union be alleviated by fiscal federalism?
Why might the members of a currency union wish to impose rules on the conduct of national fiscal policies?
What are the main features of the so-called fiscal compact?
Consider two countries that trade heavily with one another – Cornsylvania and Techoland. The national currency of Cornsylvania is the cob, while the Techoland national currency is the byte. The
Suppose Techoland and Cornsylvania form a currency union and adopt the electrocarrot as their common currency.Now suppose again that there is an increase in demand for electronic goods in both
Suppose that Techoland and Cornsylvania decide to engage in fiscal federalism and adopt a common fiscal budget.a. Show, again using the AD/AS model, how fiscal policy can be used to alleviate the
The United States can be thought of as a non-trivial currency union since, although it is a single country, it encompasses many states that have economies comparable in size to those of some European
Explain, giving reasons, whether the following statements are true or false.a. ‘A high degree of trade among a group of countries implies that there would be benefits from them adopting a common
Do you think that the free-rider problem associated with national fiscal policies in a currency union is likely to be a problem in actual practice? Justify your answer.
If the interest rate on Spanish government debt is rising while that of Germany is falling:a. What does this tell you about the view of the markets on the two countries?b. If the interest rate is
What is the role of the European Stability Mechanism in managing sovereign debt problems of member countries? How effective do you think it has been?
For a common currency area to work effectively it is argued that on joining, member states need to be at a similar stage in the economic cycle. Why do you think this is the case?
The fiscal compact would be fine if all countries in the euro area were at the same stage in the economic cycle and it was designed to act as a deterrent for profligacy in the future. As a means of
In March 2017, the EU Commission published a document which aimed to ‘map out the challenges and opportunities ahead of us and present how we can collectively choose to respond’. In the
Why did Milton Friedman cast doubt on the likely success of the project to launch a single currency across Europe?
What are the main factors which put the future stability of the euro in doubt?
What do you understand by the term ‘populism’ in the context of the EU?
What are the main reasons for the growth in support for populist political groups across Europe?
Why is the possible breakdown of the Schengen area potentially damaging for the future of the EU?
Why has the migrant crisis increased pressure on EU governments and increased the tensions between members of the EU?
Why have the fiscal plans of the Italian coalition government caused tensions with the EU Commission?
What do you understand by the term ‘doom loop’?
Why have some supporters of Brexit accused some politicians, businesses and the media of creating ‘project fear’?
Why was the Irish backstop such a contentious issue in Brexit negotiations?
It has been reported that the experience of Brexit has made other countries contemplating leaving the EU think twice.Polls conducted in 2018 suggest that around 42 per cent of Europeans ‘trust’
Comment on Friedman’s conclusion that the ‘drive for the euro has been motivated by politics not economics’.If economics had driven the creation and development of the euro, what do you think
A number of eurozone countries still have large amounts of debt. Do some research to find the size of the debt of countries in the eurozone. Why does the size of sovereign debt threaten the existence
Members of the eurozone have forsaken monetary independence. This means they are not able to manipulate their currency to help manage asymmetric shocks. How does currency manipulation help in the
Populist movements have been said to reflect ‘the will of the people’. Economists such as Kenneth Arrow and theories like the ‘median voter theorem’ along with the ideas of French political
Italian politicians face difficult economic choices. Unemployment is high and growth is sluggish. There is a divide between the more prosperous north and poorer south. As a member of the EU, the
Can the ‘doom loop’ ever be broken?
Some EU politicians have accused the UK of ‘wanting its cake and eating it’. In the context of the referendum vote to leave the EU and the subsequent negotiations on withdrawal, how far would you
The Irish backstop provided the guarantee that whatever the outcome of the post-withdrawal negotiations, a hard border would not be reintroduced to the island of Ireland. This is widely agreed to be
‘Trading on WTO rules would not affect businesses in the UK trading with EU countries and EU countries trading with the UK in any major way and suggestions to the contrary are just “project
Explain, using examples, the difference between a ‘principal’ and an ‘agent’.
Why does the existence of asymmetric information mean that economic decisions do not conform to the assumptions of the standard economic model?
What is the difference between a ‘hidden action’ and a ‘hidden characteristic’?
Why can mental accounting lead to irrational decision-making?
Why might herd mentality lead to asset prices rising faster than the fundamental value of the assets?
Use an example to explain prospect theory.
In each of the following cases, who is the principal and who is the agent, and explain why there might be asymmetry of information.a. A suspicious wife hires a private detective to report on the
In the situations in Question 1, identify the hidden actions and the hidden characteristic(s).Question 1In each of the following cases, who is the principal and who is the agent, and explain why
A boyfriend can signal to a girlfriend that he loves her by giving an appropriate gift. Do you think saying ‘I love you’ can also serve as a signal? Why or why not?
Michael turns up to an interview in a brand new designer suit. What do you think Michael is trying to do? How might the employer find out if Michael represents a good investment as a prospective
Imagine that you are in charge of health policy in your country. A mutation of the swine flu virus leads to a rapid increase in the number of people contracting the virus, with the expectation that
There is now ample scientific evidence that smoking is dangerous to health and that eating too much and exercising too little can lead to medical problems such as diabetes. Many people seek to adapt
Different views, opinions, approaches and methods have existed in economics for almost as long as the profession has existed. Despite this, some approaches and methods tend to rise and dominate
Explain how and why markets only developed in relatively recent times in human history.
What are the fundamental assumptions and approaches of classical and neo-classical economics?

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