ECON 102 1st EditionExam # 2 Study Guide Lectures: 10 - 15Lecture 10 (October 13)What is creative destruction?From the Economist’s audio of Ryan Aven, what did he say about the generalrevolutions of technologies?Lecture 11 (October 15)What are the three reasons for a downward sloping Aggregate Demand curve?What happens to a person’s expected wage when they graduate from col-lege? Are there any exceptions to this?Lecture 12 (October 20)What are the two groups of Fiscal Policy?What caused the Social Security fund accumulate so much money? What isthe problem being caused by this now?What and how does mandating auto and health insurance effect its price?Lecture 13 (October 22)What is meant by “progressive income tax?” Why does the United States use this?What are “inside lags” and “outside lags”?Lecture 14 (October 27)Why is putting “money in a mason jar” an ineffective way of saving money?What is the real expected return from lending?Lecture 15 (October 29)Explain Financial Intermediaries:Define Liquidity:What must happen to the interest rate of an investment if it is deemed “risky” for the investor?ANSWERS*******************************************Lecture 10 (October 13)What is creative destruction?The view that a firm will try to come up with new products and more efficientways to produce products to earn monopoly profits.From the Economist’s audio of Ryan Aven, what did he say about the generalrevolutions of technologies?Technology is good at routine level work (middle skill line) and is directly sub-stituting those workers. This causes people to compete for work and low wage jobs, result of Hollowing Out.Lecture 11 (October 15)What are the three reasons for a downward sloping Aggregate Demand curve?1. Real Wealth Effect: holding nominal wage constant lowers Price allowing you to buy more things, consumption increases.2. International Trade Effect: holding foreign prices constant if US prices decrease, our Net Exports will increase.3. Interest Rate Effect: If the cost of borrowing decreases as Price de-creases (details on this are only for the final, not second the exam!)What happens to a person’s expected wage when they graduate from col-lege? Are there any exceptions to this?“Big Jump” Up the income distribution when you graduate from college, the more education you have the better. HOWEVER, it matters what you major in a lot more than you think! Currently, engineering majors make the most and “of the arts” majors make the least. “Of the Arts” degrees sometimes do not impact future wages any more than a high school degree.Lecture 12 (October 20)What are the two groups of Fiscal Policy?1. Discretional Spending: stuff the government can change at a moments noticeEx: road construction, pull troops out of war2. Non-discretional Spending: things the government has contractual com-mitments to. To get out of this spending the government must renegotiate the contracts.Ex: entitlement programs, if people have been promised something they are entitled to it. What caused the Social Security fund accumulate so much money? What is the problem being caused by this now?The baby boomers. More babies were born than the average for 14 years, all of them were working and paying social security, huge amount of money!!Now, they are all getting ready to retire and money is being taken out fasterthan it is being put in by the current generation’s workers. Within a decade the Social Security system will either default on its obligation or will have toincrease taxes (But it is a solvable problem).What and how does mandating auto and health insurance effect its price?The government requiring everyone to have insurance brings the cost down for everyone by diversifying the pool of the insured. EX: if auto insurance was not required, only bad drivers would purchase it. Therefore, insurance companies would have to shell out a lot of money in claims to cover the crashes. Once GOOD drivers are brought into the insurance pool, they are less likely to crash and need coverage. This allows the insurance companies to have more more money coming in than they are being hit with for claims,and thus charge less overall.Lecture 13 (October 22)What is meant by “progressive income tax?” Why does the United States use this?The richer you are the more you are taxed. The first $50,000 you earn you pay one tax rate, the next $25,000 you are taxed a higher rate. This is used because lower income people/families are paying for their basic needs (food, water, shelter) and cannot be taxed very much without havingto forgo these. Half of americans do not pay taxes because they would not have enough money to maintain a healthy caloric intake/ have a safe place to live.What are “inside lags” and “outside lags”?inside lag: the time it takes for a policy to be formedoutside lag: the time it takes for a policy to be implemented and actually workLecture 14 (October 27)Why is putting “money in a mason jar” an ineffective way of saving money?As money sits in a mason jar is losing purchasing power because of infla-tion. It is better to invest the money (in diverse areas of risk) and earn inter-est on it.What is the real expected return from lending?Real expected return from lending = {the nominal interest rate} - {the ex-pected inflation rate} - expected risk - transaction costs and taxesLecture 15 (October 29)Explain Financial Intermediaries:Financial intermediaries link households to financial markets, where they al-locate savings to other households, to firms, and to governments. EX: Banks,Bonds, Stock Market. They are the “intermediates” by being between the savers and the borrowers.Define Liquidity:Liquid: how quickly/easily something can be converted to cash. An asset is illiquid if the investor must wait a specific length of time before receiving payment because it cannot be converted to cash without a large loss in value. EX: selling it to someone else to make them wait, they will pay less forthe investment because they now have to wait to be repaid.What must happen to the interest rate of an investment if it is deemed “risky” for the investor?The investor would need a higher rate of return to compensate for the uncer-tainty involved in lending the money and the opportunity cost of investing elsewhere.EX: Lending to a college student (no income, less credit history) versus lend-ing to Eudey (established teacher who has been working and paying off debts for
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