Exercise 2:

i. Why is the Value-Added Method used as an alternative method to calculate GDP?

ii. What is the difference in computing the value of public service and private good?

Today and due to the spread of Covid-19, we can observe that some sectors in an economy are expanding and others contracting, while the government very actively is intervening in the economy. Using the public economics framework, list and discuss at least three examples of government initiatives for the USA Remember to contextualize, define, exemplify, and illustrate relevant concepts, as well as including data to support your descriptions and analyses.

b. In the country of Hypothetica, we have the following information for the year 2015:

*Consumption totalled $2 billion, but 25% of this total consisted of goods which were initially sold in 2014.

*A total of $250 million worth of new housing stock was sold.

*Labour wage income was $150 million. *Businesses invested $100 million dollars in new capital (i.e. machinery) stock.

*Businesses also bought $200 million dollars worth of company shares on the stock exchange.

*Foreigners with working visas living in foreign-only households bought $100 million worth of locally made goods and services.

*The government spent $500 million building roads.

*Hypothetica is a closed economy, thus they are no exports and imports.

(i) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s consumption in 2015

(ii) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s investment in 2015

(iii) What was Hypothetica’s GDP in 2015 using the expenditure method? Explain your answer

Two firms choose the prices of their products on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make

1. Is the Pricing decision facing the 2 firms a prisoner’s dilemma situation? Why or why not?
2. What is the outcome of the game if the firms do not cooperate in making the decision to choose their prices? Why?
3. What is the outcome of the game if the firms do cooperate in making the decision to choose their prices? Why?

If the economy starts at the natural rate of output, then in the short run a decrease in aggregate demand moves the economy to a lower level of output and, according to the Phillips curve, a higher level of unemployment as the inflation rate falls.

Select one:

True

False

In the long run, unemployment depends upon factors such as the nature of the job search process, the amount and duration of unemployment benefits and the power of unions and minimum wage laws that alter the amount of structural unemployment.

Select one:

True

False

According to the natural rate hypothesis (Friedman and Phelps), in the short run the economy will move to a point on the Phillips curve where the unemployment rate is lower if the inflation rate rises.

Select one:

True

False

Milton Friedman argued that the Fed's control over the money supply could be used to peg the level or growth rate of a real variable, but not the level or growth rate of a nominal variable.

Select one:

True

False

In the United States, the inflation rate has been consistently above 4 percent during the period from 2000 to 2015.

Select one:

True

False

To move to a point on the Phillips curve where inflation is lower, unemployment must rise and the unemployment rise could have been caused by the Fed decreasing the money supply.

Select one:

True

False

According to the natural rate hypothesis (Friedman and Phelps), policymakers face a long-run Philips curve that is vertical because the natural unemployment rate is independent of the inflation rate.

Select one:

True

False

The federal government could increase spending and decrease taxes to move to a point on the short-run Phillips curve where inflation is lower, but unemployment would rise.

Select one:

True

False

The short-run Phillips curve shows the combinations of unemployment and inflation that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve.

Select one:

True

False

In the mid and late 1990s, aggregate supply shifted to the right and the Phillips curve shifted to the left as inflation expectations changed to a lower rate.

Select one:

True

False

Chinese consumers are increasingly being influenced by video bloggers, columnists, and photobloggers on social media platforms including Instagram, WeChat and Weibo. Becky Li, with more than 7.5 million combined followers on WeChat and Weibo, is one of China’s top fashion bloggers in China. She is regarded as one of China’s influencers in the fashion world and offers good content of shopping and experience advice. Another well-respected Chinese fashion blogger Zhang Dayi has her own clothing and beauty brand which she sells on the Alibaba Group’s Taobao e-commerce platform. Zhang Dayi allows customers to post reviews of the fashion items it sells and customers can add each other as friends, share wish list items, and recommend products to each other. In this situation, consumers form a structured set of relationships involving a particular brand online – for Zhang Dayi’s online brand. These fashion influencers have become very successful because they help Chinese consumers to choose style for self-expression Adapted from source: https://www.scmp.com

Questions: a) Name and explain the source of social influence used to describe Becky Li and Zhang Dayi. Describe the characteristics of your identified source of social influence.

b) Give TWO reasons why the source of social influence identified in (a) can bring influences on consumers. Illustrate EACH reason with ONE supporting reference from the case.

c) Name the source of social influence used in the above case of which “consumers form a structured set of relationships involving a particular brand online – for Zhang Dayi’s online brand”. Discuss the characteristics of your identified source of social influence.

Suppose the Phillips curve is correct. If the government increases taxes, then aggregate demand decreases and unemployment falls in the short run

Select one:

True

False

According to the long-run Phillips curve, in the long run, unemployment depends upon factors such as fiscal and monetary policies that are designed to reduce cyclical unemployment.

Select one:

True

False

Proponents of rational expectations argued that if people expected a decrease in the money supply growth rate and inflation, then the decrease in the money growth would have little or no affect on output in the short-run.

Select one:

True

False

The long-run and short-run Phillips curves intersect where expected inflation intersects actual inflation.

Select one:

True

False

The short-run relationship between inflation and unemployment is often called the Phillips curve and it reflects a negative relationship between the two economic variables.

Select one:

True

False

If the Phillips curve is usually correct, then an increase in output and a corresponding decrease in unemployment would be unusual.

Select one:

True

False

The correlation between unemployment and inflation can be explained by upward pressure on wages and prices when unemployment is low.

Select one:

True

False

According to the natural rate hypothesis (Friedman and Phelps), in the long run, monetary growth did not influence those factors that determine the economy’s unemployment rate.

Select one:

True

False

A fiscal policy that reduces the amount of cyclical unemployment would affect the long run Phillips curve but not the short-run Phillips curve.

Select one:

True

False

Many economists during the 1960s believed the implications of the Phillips curve, which offered policymakers a menu of possible economic outcomes from which to choose and the choice for expansionary policy would lead to inflationary pressure but reduced unemployment.

Select one:

True

False

How can the government affect productivity?