Economics 104 Introduction to Macroeconomics Prof Robert Pollin STUDY GUIDE FOR MIDTERM EXAM 2 26 14 The exam will consist of a combination of true false questions multiple choice questions and short essay questions requiring about three paragraphs to answer You will have some choice in deciding which questions to answer There will also be some extra credit questions You will also be asked to describe your term paper for the course 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 a Subprime mortgage market and housing bubble b Bundling and securitizing mortgages c Over borrowing money i Borrowing too much money in pursuit of new profit opportunities d The larger pattern is overleveraging e Rating agencies were suppose to make investments safer but in reality increased f Rated a lot of mortgages the highest level that were worthless when the market risk crashed instruments 2 What does it mean to securitize a mortgage What if anything does mortgage securitization have to do with the crisis a The process of bundling together and slicing up of mortgages into new financial b Broken down into bonds which were sold c Millions of people need mortgages but loaners don t know anything about them i Risky investment on the part of the loaners d Drove up prices of houses i Housing prices have been stable for decades 10 increase in value year after year 1 As demand for houses goes up so does price 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 Pollin Economics 104 Study Guide for Midterm Exam Page 2 narrowing the range of banks activities was arguably important for that day and age But those rules are not needed today a People on wall street are always against regulations because its harder to make money i Regulations in the 1930 s kept banks from lending out too much money ii In 2001 the fed s cut interest rates for the Federal Reserve to 1 1 This led investors to take their money somewhere else i e the housing market 4 What happened to total household wealth both during the financial bubble years and after the bubble burst Try to be as specific as possible a Households less willing able to spend i Leads to Businesses less willing to invest to expand business ii Leads to less job creation iii Leads to Markets are less buoyant 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 a Over 65 percent of you and your families have experienced some hardships due to the financial crisis and recession Income loss job loss loss of homes b c About 86 percent also know people in other families who have experienced hardships d More severe hardships when broaden circle out beyond one s own family 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 Pollin Economics 104 Study Guide for Midterm Exam Page 3 a Households most fundamental b Businesses c Markets institution where exchange occurs d Government e Money exchange f When they all interact together that is an economy 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 a U S economy is a market economy but with i Public education healthcare public pensions military not based on self interest ii How large is gov t spending as a share of the economy 35 b How do we pay for gov t spending i Warren Buffet proposes Stop coddling the super rich ii The super rich get major cuts at about only 15 c Regulations around i Financial Markets ii Labor Markets iii Product safety limits on speculative trading min wage rights to recognize unions food drug administration d Should there be i Bank bailouts years 1 More to reduce poverty 46 mil in poverty 15 1 highest in 52 3 What is a minimum wage law Is it the same thing as a living wage law a Lowest amount of an employer can legally pay an employee o Living wage is a minimum wage enough to support a worker and his her family Nominal vs Real Min wage b Making an adjustment for inflation and the cost of living c Nominal value of min wage is 350 higher than in 1968 i 1 60 in 1968 7 25 today d Real value of minimum wage is 27 lower than in 1968 i 10 03 in 1968 7 25 today e a dollar bought 6X more goods than it did today f If minimum wage went up to 10 50 i Prices would go up 2 7 ii Big mac would go from 4 00 to 4 11 Pollin Economics 104 Study Guide for Midterm Exam Page 4 1 Highest percentage of low wage workers are in fast food restaurants 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 a The law of unintended consequences is that the actions of people and especially of government always have effects that are unanticipated or unintended b This means that if minimum wage increased some economists believe that demand for workers would decrease leading to increased unemployment c Yes it is an accurate description because as a business expenses increase they will be looking to hire fewer workers at higher wages leading to increased unemployment 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 a Flow Vs Stock 1 Water flowing into a bathtub flow vs water stored up in a tub stock how much you own in a point in time 2 Wealth Assets Liabilities Net Worth a All physical