MILLER WEB SITE
CURRENT EVENTS MATERIALS
2/7/2005
By
Andrew J. Dane
Microeconomics
http://www.economist.com/agenda/displayStory.cfm?story_id=3620794
Visible Hands
The article examines issues surrounding the use of prices to allocate resources.
1.
How is the rationing function of prices discussed in the article?
Answer:
2.
Since OPEC cannot set the price of oil because it does not have the legal power of a government to
set a price floor, how does it succeed in having substantial control over the price of oil?
Answer:
3.
According to the text, the rationing function of prices is “the synchronization of
decisions by buyers and sellers that leads to equilibrium.” The first sentence in the
second paragraph reads, “Prices, when freely set, bring order and concord to the
unplanned activities of market economies—as if by an invisible hand.” Also, in the
third paragraph, the article states that “when strong demand drives prices up, high
prices are supposed, in turn, to stimulate supply (sic).”
OPEC controls a substantial amount of the world’s production of oil and thus can
increase or decrease market supply by large enough amounts to have a major
influence on oil’s price.
Explain in terms of the supply and demand model how the Chinese control the price of their own
currency the yuan against the dollar in the foreign exchange market, since the Chinese government
cannot set a legally enforceable price ceiling on the world market price of the yuan. (Hint: What the
Chinese government wants to prevent is one dollar being worth less than 8.28 yuan, that is, from
falling below 8.28 yuan.)
Answer:
The Chinese must increase the demand for dollars whenever the supply of dollars
increases in the foreign exchange market in order that the price of one dollar in
terms of yuan will not change. An increase in supply and an equal increase in
demand will result in no change in price.
http://news.yahoo.com/news?tmpl=story&u=/ap/20050204/ap_on_go_pr_wh/student_aid_1
Bush Wants to Cut Student Loan Program
The article examines a proposal by the Bush administration to restructure federal aid to college
students.
1.
Would you predict that the increase in Pell grants would increase the demand or quantity demanded
by poor students for a college education, other things being constant? (Hint: Pell Grants do not have
to be repaid as is the case with loans.)
Answer:
2.
Based on information in the article, what effect would the Bush proposals for bank loans have on the
supply of loans and thus on the equilibrium price and quantity of loans, other things being constant?
Explain. (Hint: The “price” of a loan is the interest rate.)
Answer:
3.
The increase in Pell Grants would have the effect of lowering the price of a college
education and would thus increase the quantity of college education demanded.
The equilibrium quantity of loans would decrease and the interest rate would
increase, other things being constant. The reason is that the Bush administration
proposals will decrease the subsidies for making student loans to banks. A decrease
in a subsidy will decrease supply, and a decrease in supply will decrease quantity
and increase price, other things being constant.
The Bush administration’s proposals increase funding for poor college students from grants by
reducing loan programs. Is this approach likely to have a larger effect on college enrollments than
the alternative approach of reducing grants and expanding student loan programs? Explain.
Answer:
A loan actually increases the cost of attending college because it must be paid back
with interest. Grants are transfer payments that do not have to be repaid. Thus they
make attending college cost less for the student. It is likely that grants would have a
larger effect on college enrollments than would loans.
Macroeconomics
http://story.news.yahoo.com/news?tmpl=story&ncid=&e=9&u=/ap/20050203/ap_on_bi_go_ec_fi/e
conomy_4
Productivity Rises, Extends 3-Year Streak
The article looks at the growth of productivity for 2004.
1.
What effect would the change in productivity have had on the U.S. production possibilities curve in
2004? Explain
Answer:
2.
What effect would the increase in productivity have had on the cost of producing a unit of real GDP,
other things being constant? Explain.
Answer:
3.
Other things being constant, the increase in productivity—output per labor hour—
would have shifted the production possibilities curve for 2004 to the right. The
reason is that the existing labor force could have increased total output, other things
being constant.
The cost of producing a unit of GDP would have decreased because fewer labor
hours would have been needed to produce it. Other things including the wage being
constant, a unit of GDP would have been produced at a lower cost per unit.
Can you say with certainty that the increase in employment in all of 2004 by 2.2 million would have
shifted the production possibilities curve to the right? Explain.
Answer:
No. It is necessary to know whether the labor force increased along with the
increase in employment. If it did, then the possible output of the economy would
have increased because of an increase in labor resources, other things being
constant. If the increase in employment was due to a decrease in the number
unemployed with no change in the labor force then output would simply have moved
from a point inside an existing production possibilities curve to a point on or nearer
to the existing production possibilities curve, other things being constant.
http://www.bls.gov/news.release/empsit.nr0.htm
Employment Situation Summary
The article is the news release by the Bureau of Labor Statistics for employment surveys for January.
1.
What would the unemployment rate for January have been if discouraged workers had been included
as unemployed?
Answer:
There were 515,000 discouraged workers in January. If these workers had been
included among the unemployed, then there would have been a total of 8,252,000
unemployed (7,737,000 + 515,000). The labor force would also have increased by
515,000 to 148,494,000.
Unemployment rate = (unemployed ÷ labor force) x 100
= (8,252,000 ÷ 148,494,000) x 100
= 5.6 percent
2.
What was the population 16 years of age or older in January?
Answer:
3.
The population over 16 years of age (working age population) is the sum of the
civilian labor force plus those not in the labor force. Therefore the population of
working age in January was 224,837,000 (147,979,000 + 76,858,000).
What is the most likely category of unemployment, cyclical or structural, to have decreased in
January?
Answer:
According to the news release, employment increased in all of the service industries
while decreasing in all of the goods producing industries. Also, overall employment
increased. It is therefore most likely that cyclical unemployment decreased in
January.