Intro on Economic Crisis 1 To what extent might we say that the most recent economic crisis was a unique set of circumstances To what extent could we say it is part of a larger pattern Has been an economic crisis every 8 5 years from 1770 present day Basic pattern of overleveraging borrowing too much in pursuit of other profit Creates a self reinforcing bubble which ultimately bursts causing a crisis This recent bubble was unique due to bundling and securitization Rating agencies were supposed to make these investments more safe but in reality opportunities increased risk Credit rating agencies rated a large amount of investments the highest level that became junk when the market crashed 2 What does it mean to securitize a mortgage What if anything does mortgage securitization have to do with the crisis Securitizing a mortgage is the process by which a mortgage is broken down into bonds and bundled based on the risk of investment investors receive interest based on the credit rating Securitizing mortgages helped to cause the financial crisis because many firms were invested in these bundles and as the rate of delinquencies rose there was a lack of payment to firms making their assets worth nothing 3 Based on what you have read and heard in class be prepared to comment on the following quote from the 2001 Economic Report of the President the last one issued by the Clinton Administration Given the massive financial instability of the 1930s narrowing the range of banks activities was arguably important for that day and age But those rules are not needed today 2 What happened to total household wealth both during the financial bubble years and after the bubble burst Try to be as specific as possible During the financial bubble total household wealth gained enormously Peoples houses were worth the most they ever were leading to a rise in total household wealth After the bubble burst household wealth dropped to a dramatic low It then slowly regained as people stocks would regain their value but the housing value would never regain similar value Pollin Economics 104 Study Guide for Midterm Exam Page 2 Household remain unwilling to spend money and businesses unwilling to invest Markets fall The Economy and You 1 What is your assessment of the evidence as to how the economic crisis has affected members of this class Be familiar with specific relevant pieces of evidence But also be prepared to present some general perspectives based on your reading of the evidence That is in general would you say the impact on members of the class was severe very bad not so bad after all or something else The point will be not your conclusion per se but your reasoning in getting to that conclusion Economics as a Moral Science 1 What does it mean to say that economics is a moral science Can science have any moral values attached to it while still being based on research and not just on unsubstantiated viewpoints Economics is moral in that a government chooses what it wishes to fund or support Government can subsidize health care public schools and many other public use Government intervention Is mainly the moral part of economics A market has many natural ups and downs but the government regulates them with laws institutions labor laws and such 2 It is fair to call the U S economy a mixed capitalist economy as opposed to a free market economy Two key areas of market regulation are labor markets and financial markets What are major reasons to either 1 support and 2 oppose regulations of labor and financial markets It is fair to call the U S economy a mixed capitalist economy there is regulation in many areas of the market You may either support of oppose regulation based on what political party you support You may support regulation if you believe children shouldn t be able to work 12 hour days or that loans shouldn t be given to anyone You may oppose regulation if you are a fan of free markets and believe that a market is a self regulating institution Pollin Economics 104 Study Guide for Midterm Exam Page 3 3 What is a minimum wage law Is it the same thing as a living wage law The minimum wage law is the lowest amount an employer is legally allowed to pay a A living wage is lowest possible wage a worker can be paid so they may support their worker family at a decent standard 4 Minimum wage laws are often cited as an excellent example of the law of unintended consequences in action What is meant by such a reference Is it an accurate description of how minimum wage laws work This reference is a way to show that increasing minimum wage can unintentionally create a decrease in job creation In certain circumstances this is an accurate description of how minimum wage laws work If minimum wage increases and price of the good sold remains the same employers will be forced to cut jobs but if the price of goods increases the business will make enough to maintain current employment National Income National Wealth GDP 1 What is the difference between national income and as Adam Smith put it the wealth of nations Be able to work out numerical examples with both national income and national wealth Flow vs stock Water flowing into a bathtub vs water already stored in the tub Wealth assests liabilities GDP by income Total wages benefits total profits Net Worth Income is what continues to flow wealth is what you already have 2 Be familiar with the meaning of the equation for GDP i e GDP C I G X M Household consumption spending Investment business Government spending Exports Imports 3 What are some possible problems with GDP as a measure of national well being broadly and possibly even more narrowly total national product GDP does not take into account private investment or private net worth GDP also does not take into account the distribution between the wealthy and the poor Pollin Economics 104 Study Guide for Midterm Exam Page 4 Dividing Up GDP Income Equality 1 What has happened to income inequality in the United States over the past 30 years In answering this question be prepared to consider whether the overall picture changes when we compare different measures of income inequality Income inequality has risen over the past 30 years 2 Capitalist economies are not designed to create equality But there are laws norms and institutions that encourage either greater equality or greater inequality What are examples of such institutions considering both those that promote equality and inequality Social insurance Progressive