Question

Chapter 9 Question Most cities are served by only one cable company. How might this monopoly power affect prices and service? What should the government do, if anything? Chapter 10 Question Why might inflation accelerate as the unemployment rate declines? Chapter 11 Question From March 2009 to 2013, the U.S. stock market more than doubled in value. How might this have affected aggregate demand? What happens to aggregate demand when the stock market plunges? (you must give either a professional or personal example with the discussion portions)

Answer 1

Chapter 9 Answer: Monopolies exist where there is only a single provider of a good or service. This means that they face no competition and do not have price restrictions because no other firm is competing with them for market share. As far as consumers are concerned, a single cable company operating in a city may have a detrimental impact.

Since a monopoly does not have any competition, such as a single cable company serving an entire city, it can potentially increase its prices indefinitely, and thus hurt consumers who’ll need to pay the exorbitant prices as they don’t have a choice. Service standards can also go down considerably due to the monopoly. Such a business can decide not to serve less profitable areas of a city at all and refuse after sales service completely.

If a government wishes to disassemble a monopoly, it can create a regulation which will divide the monopoly into separate companies, or divide its services into smaller regions, thus allowing other companies to enter the smaller segments. This had happened in the US in the 1980s with the telecom sector being deregulated.

The other action that a government can take via industry regulators is setting pricing controls for a service, in this case, for the cable company, in order to save consumers from unreasonable prices.

Chapter 10 Answer: According to the Phillips Curve, there is an inverse relationship between the unemployment rate and inflation. This means that as the unemployment rate decreases, inflation rises. It is important to note, though, that the relationship is not linear but L-shaped.

When unemployment declines, the availability of labor is significantly lower than the number of jobs available and being offered by employers. Thus, labor supply is far lower than demand for it. This leads to employers having to offer higher wages to lure potential employees, which, in turn, leads to an increase in wage inflation, thus pushing overall inflation higher.

Chapter 11 Answer: A stock market boom occurs when consumers are confident about their country’s economic prospects and have higher income than previously. This leads to increased consumption, which leads to a shift in the aggregate demand curve to the right which signals an increase in aggregate demand.

On the other hand, a stock market plunge is reflective of weakening confidence in economic prospects. In such a scenario, consumers tend to restrict spending, thus resulting a shift in the aggregate demand curve to the left reflecting reduced aggregate demand.