The Increase in Female Labor-Force Participation in the Us in the 1960s
The increase in female labor-force participation in the US in the 1960s had a bigger impact on real GDP measurements than it did on actual real economic activity.
TRUE. Since it was common for women to do valuable work at home, outside the market economy, their contributions to real economic activity went unmeasured by real GDP which is strictly market-based. When these women entered the labor force, activities like childcare, food preparation and house cleaning, were then done by hired workers who were paid to provide these services. These new market transactions increased real GDP, but not necessarily real economic activity, since it reflected a substitution of market for non-market activity, and an improved measurement of economic activity, not necessarily an increase in that activity.
2. For a standard Cobb-Douglas production function, per capita GDP of 2 when half of the population is in the labor force, is consistent with a capital-labor ratio is 1 and total factor productivity of 4.
TRUE. If K/L is equal to 1 and TFP is equal to 4, then the Cobb-Douglas production function implies that Y/L must also be equal to 4: Y L =A K L ! ” # $ % & 1/3 ⇒4=4×11/3 To obtain per capita GDP, this output-per-worker number must be scaled by the fraction of workers in the total population, L/Pop, which is 0.5, therefore, per capita GDP is equal to 2: Y Pop = Y L× L Pop ⇒2=4×0.5 3. An increase in total factor productivity raises the demand for labor since firms will want to expand production to increase profits.
TRUE. Firms make decisions to maximize profits, not simply produce the same amount of output. Therefore, the demand for labor by firms is determined by the marginal productivity of labor. A profit-maximizing firm in a competitive environment will hire workers until MPL = w, where w is the real wage. Increasing productivity, other things equal, implies an increase in the marginal productivity of labor so that MPL > w. Firms, therefore, can increase profits by hiring more of these higher-productivity workers at a given wage rate, hence the demand for labor increases.
4. Interest rates are pro-cyclical, therefore, a downward-sloping yield curve is an indicator of a future recession.
TRUE. Yields on long-maturity bonds are an average of the current interest rate and the market’s expectation for future interest rates (plus a risk premium). Therefore, when long-maturity bond yields are below the current interest rate, ie, a downward-sloping yield curve, the market is anticipating that interest rates will fall in the future. Since interest rates are procyclical, this implies that they are also anticipating a recession.
5. Bitcoin is not money.
TRUE. Clearly Bitcoin is not legal tender, which is a status that only a government can create and enforce. However, there are many privately issued liquid assets that are close substitutes to legal tender that we typically think of as money, such as a checking account at a bank. Bitcoin, however, is not a very close substitute for legal tender, therefore it is not thought of as money. It lacks wide acceptance to clear transactions and it has a value relative to real goods and services that fluctuates wildly, which makes it difficult to use to facilitate routine transactions.
6. Hyperinflation is a monetary phenomenon that is typically caused by an unsustainable fiscal policy.
TRUE. Hyperinflations have their origins in governments that want to undertake spending programs, but are unable to sell bonds or raise tax revenue to finance this spending, and who then resort to increasing the money supply to finance fiscal deficits. The net effect of this new money is inflation, and expectations of future inflation, which requires the government to create money at an ever increasing rate to try to finance its spending. The net result of this is hyperinflation.
7. When the Fed follows the Taylor Rule, it builds a connection between current inflation and expected future inflation.
TRUE. The Taylor Rule requires the Fed to buy or sell bonds in the amount necessary to achieve a target interest rate. This target rate is determined by the current inflation rate. The interest rate that bond traders would consider to be a fair rate, however, depends on expected future inflation over the term of the bond. Therefore, for the target rate to be the market equilibrium rate, there must necessarily be a tight connection between the current inflation rate and the expected future inflation rate.
8. A value-added tax is more efficient than a progressive tax on labor income that raises the same revenue.
TRUE. Since a value-added tax applies a low tax rate across all goods and services produced in the economy, it typically implies a smaller loss of efficiency than a large tax applied to the labor of high-income earners. In other words, the
loss in consumer and producer surplus from a progressive labor-income tax will be greater than for a value-added tax.
9. A government deficit is a future tax liability.
TRUE. The government’s budget constraint implies that the value of its current debt is equal to the discounted present value of its future primary surpluses. If a government is able to raise revenue by selling new debt, ie, if the government is running a deficit, that new debt will only be held by the private sector if it represents an offsetting claim on future tax revenue that would create a primary surplus.
10. Uncovered interest rate parity implies that countries with high interest rates tend to have currencies that depreciate over time.
TRUE. According to uncovered interest rate parity, when investors attempt to borrow in a low interest-rate country and lend in a high interest-rate country (ie, the so-called “carry trade”), they will create demand for the high interest rate currency today and an offsetting supply of it in the future when their investment matures. Therefore, any interest rate spread that they might UIC says that these profits will be zero on average since the currency of the high interest-rate country will depreciate in value over time eliminating the perceived profits.
Shinzo Abe was elected Prime Minister of Japan in December 2012 after two decades of slow growth and falling prices. He pledged dramatic policy changes to revive the Japanese economy, dubbed the “three arrows of Abenomics.” We consult the Economist Intelligence Unit and press reports for specifics:
Arrow #1: Fiscal stimulus.
A sizeable economic stimulus package was passed by parliament in February of 2013, and a smaller one in October of that year. The IMF reports that this resulted in a 2013 fiscal deficit of 7.6% of GDP and net government debt over 130% of GDP. The current forecast for debt-to-GDP in 2015 is 230%. The fiscal stimulus was enacted despite fears that Japans public debt was reaching dangerous levels. To allay these fears, parliament raised the consumption tax from 5% to 8% in April 2014. At the governments discretion, a further hike to 10% is scheduled for October 2015. If the