Economics

Midterm.

Do this test by yourself. Do not share the content of the exam with anyone. Follow the instructions carefully. (For example, if I ask you to use Krugman’s arguments to answer a question, use Krugman’s arguments to answer the question.) You can use any resource you can find to answer the questions except another person. Please cite your sources. Be thorough in your answers. My standards will be much higher here than on your homework. (There is not length requirement, but don’t write a single page and expect a good grade. This test is 25% of your grade in a graduate course. That is about 2% of your entire degree. Please take this test seriously.)

The test has two sets of questions, set A and set B. Answer two questions from set A and two from set B. (For a total of four questions.) These questions are all broad based that will require you to compare and contrast the larger topics we have dealt with so far this semester OR extend the analysis present in the author’s paper. The “flavor” of the questions will be like MSFE students will see in their comp exams.

Some of the questions will refer to econ blogs. Many of the comments to these blogs are insightful, but most of those comments are nonsense. If you can tell which is which, use those comments as a resource.

Put the test in the drop box on WTClass on or before March 14th.

QUESTION SET A

Question A 1.

From Economist Bryan Caplan (http://econlog.econlib.org/archives/2014/02/how_welfare_hur.html#comments)

“Walmart's critics often argue that food stamps, Medicaid, and other poverty programs subsidize its labor force .  Since government pays a big part of its workers' living expenses, Walmart doesn't have to.  Is this true? As long as non-workers remain eligible for poverty programs, the answer is no.  This is basic supply-and-demand.  When the government offers free stuff to people with low incomes, the marginal benefit of work falls - and so does labor supply.  When labor supply falls, hours of work go down, and wages rise.  This could be very nice from the point of view of Walmart's workers.  From the point of view of Walmart's stockholders however, it's bad. Not convinced?  Ask yourself: "If I ran Walmart, would I favor higher unemployment benefits?"  Of course not.  Why not?  Because higher unemployment benefits make it easier to not apply for a job at Walmart.  The same goes for any government program that makes idleness less unpalatable. Once you grasp why standard welfare programs hurt Walmart, you are ready to search for counter-examples.  Is there any government program that actually increases labor supply?  Indeed there is: the Earned Income Tax Credit .  To benefit from this program, you have to work.  The more you work, the larger your tax credit.  When the EITC goes up, the marginal benefit of work rises - and so does labor supply.  This doesn't mean that Walmart is the sole beneficiary of the EITC; unless labor demand is perfectly inelastic, workers capture some of the program's benefits too.  But from Walmart's point of view, a bigger EITC is better.”

Consider Caplan’s argument that a large welfare state does not subsidize Wal Mart in the light of Krugman. Do you think that Krugman would agree? Explore fully. (Hint: Spell out Krugman’s argument about unemployment in the US and compare it to Caplan’s.)

Question A2.

Lucas and Mankiw, Romer and Weil agree that national growth rates will eventually converge. Compare the ways in which they reach this conclusion. (I am mainly wanting you to compare their methodology.)

Question A3.

Consider this quote by Thomas Sowell: “Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.”

Would Hayek agree with Sowell? Explain carefully and fully.

Question A4.

A central (the central?) tenant of economics is that people respond to incentives. What evidence would you say Akerlof gives that people respond (or not) to incentives? In addition, economists generally think that markets are the best way to allocate resources. Describe carefully the source of market failure Akerlof identifies. Then, describe what policies, if any, are needed from the government to remedy the “failure.” If you think no policy is necessary, justify your answer. Give an example from real world markets or from real world policy.

QUESTION SET B

Question B1.

Consider Table 2 in Krugman. Why does Krugman include Table 2 in his paper? In other words, what point is strengthened by the data in Table 2 and why is it crucial to Krugman’s larger thesis? NOW, recreate the data for Table 2 for either the UK or US for the latest year possible. Has anything changed as a result of the Great Recession?

Question B2.

Both Krugman’s and Lucas’ papers explored inequality. Krugman discussed individual workers while Lucas discussed inequality among nations. Compare the two. How are their arguments alike? How are they different? Do you have confidence that eventually Lucas’ prediction will come true? If so, would that give you confidence that inequality among individuals will also eventually become less? (In answering, remember why Krugman thinks there is an increase in inequality.)

Question B3.

Why, according to Sargent, were Reagan’s fiscal and monetary policy regimes “incredible?” Explain carefully. Now consider fiscal and monetary policy under Obama/Bernanke. Were they incredible or not? Explain carefully.

Question B4.

Mankiw et.al. uses the Solow Growth Model to describe economic growth. Romer’s idea of “endogenous growth” that he describes in the pod cast is different. Why? Why would Romer’s ideas be so hard to model in the Solow framework? (Note that the Romer is the podcast is Paul. The Romer that wrote with Mankiw is David. They are not the same person and are not related.)