Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

1. “Economic History: Muddled Models,” by Buttonwood. The Economist Blogs, July 20, 2012. http://www.economist.com/blogs/buttonwood/2012/07/economic-history

a. This article is a book review. What’s the book being reviewed? Who is the author? In brief, what doesthe book’s author say economists do?

b. Two economists can disagree, sometimes strongly. The best of economists do not resort to adhominem arguments in these disagreements, recognizing that they are using different models. Whatthree things characterize an economic model? In the disputes described in the article, whichcharacteristics of economic models create the disagreements between economists?

c. The blog author writes, “Just when economists have reached a consensus, events in the real worldproved them wrong.” Sketch out the evolution of thought in the area of macroeconomics, asdescribed in the article. Do you think our understanding of the macroeconomy will continue toevolve over the next few decades? Why? In what ways?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

2. “Why We’re in a New Gilded Age. Review of Capital in the Twenty-First Century,” by Paul Krugman. New York Review of Books, May 8, 2014.http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/

a. The book reviewed in this article has changed economic discourse. What is the book? Who is theauthor? What is the UC Berkeley connection? What is the subject of the book? What do we nowknow about income inequality that we didn’t know before the work reported in this book?

b. In what way(s) is “the structure of [US] inequality rather clearly different”?

c. In what ways – economic, social, political, etc. – does rising inequality have an effect? What classesand readings are you drawing on for your answer to this question? How do you suppose the study ofeconomics might add to your understanding of the effect of rising inequality?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

3. “Economics Has Failed America,” by Daniel Altman. Foreign Policy, May 19, 2016.http://foreignpolicy.com/2016/05/19/economics-has-failed-america-globalization-trade/

a. Which textbooks does the author cite in his article? In each case, how much do the authors write intheir books about the costs of specialization and trade?

b. Go through the argument about the existence of gains from trade. (“If we assume this ___ and this___, then we can conclude that___”). Write out an argument that points out the costs ofspecialization and trade. Now, identify which parts of your two arguments are examples of “positive”economic analysis and which parts of “normative” economic analysis. If you identified aspects of yourarguments that were normative, revise your argument until it is completely positive economicanalysis and not normative.

c. Some estimates are that more than 25 percent of all college students take a Principles of Economicsclass (http://www.jstor.org/stable/1183192). Nearly all of those Principles courses teach the gainsfrom trade. Relatively few teach about the costs of specialization and trade. How do you think what istaught in economics principles courses affects the public policies that our elected officials enact?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

4a. “Students with Bridges to Prosperity build bridges, relationships in Panama,” The Daily Collegian (PennState), October 2014. http://bridgestoprosperity.org/wp-content/uploads/2014/10/Students-with-Bridges-to-Prosperity-build-bridges-relationships-in-Panama-The-Daily-Collegian_-Campus.pdf

4b. “Avery Bang: Young Bridge Engineer is Changing Lives,” by Aileen Cho. ENR.com (Engineering News-Record), January 28, 2013. http://enr.construction.com/people/awards/2013/0128-young-bridge-engineer-is-changing-lives.asp

a. Who is Avery Bang? What is her role with Bridges to Prosperity? What does Bridges to Prosperity do?

b. Explain how a footbridge over an otherwise impassable river will affect the economy of a village thathad previously been isolated. Use the concepts of production possibilities frontier and gains fromtrade in your explanation.

c. What are the advantages of building a bridge? What are the disadvantages? Will more and more andmore bridges be a good thing? Or is there a limit to the number of bridges that should be built? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

5. “How Scalpers Make Their Millions With ‘Hamilton’,” by Tiff Fehr, New York Times, July 29, 2016.http://nyti.ms/2a4y7or

a. What is “Hamilton?” What was special about the July 9 performance?

b. Drawing on the article, sketch a model of supply and demand that shows why the price of scalpedtickets for the July 9 performance was so much greater than it had been in May. Identify the forcesthat shifted demand and those that shifted supply.

c. Many venues do what they can to stop “bot-driven ticket buying.” Most of us have had theexperience of trying to buy a ticket for an event seconds after they go on sale, only to find nearly alltickets are sold, and then to find those very same seats on a resale site a few minutes later. Do youthink it is fair that “bots” can outsmart the venues, purchase thousands of tickets, and sell thosetickets on the secondary market? Do you think it is economically efficient? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

6. “Smart Money Buys Brand X,” by Cass R. Sunstein. Bloomberg View, July 21, 2014. http://www.bloombergview.com/articles/2014-07-21/smart-money-buys-brand-x

a. Whose study is cited in the article? Who do they find is more likely to buy store brands (e.g., CVSbrand) rather than national brand (e.g., Tylenol)? Give three examples of items that are available asstore brand and as national brand. In your group, add to this table that shows which items youpurchase as store brand and which you purchase as national brand.

Purchase store brand Purchase national brand

b. Store brands are typically less expensive than national brands. Use a model of supply and demand toillustrate the markets for store brands and the market for national brands. What factors account forthe differences in supply between the two markets? For the differences in demand?

c. Based on the findings cited in the article, what is an inexpensive advertising/marketing campaign thatwould shift demand from national to store brands? In each of the two markets (store brand andnational brand), how would your campaign affect supply? Demand? Equilibrium price? Equilibriumquantity?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

7. “In Praise of Price Gouging,” by John Stossel. Posted at Townhall.com, September 7, 2005. http://www.townhall.com/columnists/JohnStossel/2005/09/07/in_praise_of_price_gouging

Note the date of the article: it was written in 2005 one week after Hurricane Katrinahit.

a. Stossel begins with a (hypothetical) story of someone paying $20 for a bottle of water. Use a supplyand demand graph to illustrate how the equilibrium price of a bottle of water might have risen,post-Katrina in New Orleans, from $1 to $20 a bottle. Is the increase in price a result of a change indemand, change in supply, or both?

b. When the price of a bottle of water rises to $20, Stossel claims "water goes to those who really needit." Do you agree? Use economic terms and concepts to explain why you think water does (or doesnot) therefore go to those who really need it.

c. Why might a government want to make a distinction between the provision of water bottles in theimmediate wake of a natural disaster and the provision of carpentry services in the months and yearsof rebuilding that follow? Here, think about the short-run and long-run changes in supply and indemand that can take place, and about the trade-offs between efficiency and equity. How does youranswer illustrate the definition of “price gouging”?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

8. “Dynamic Ticket Pricing Gains Traction in College Football,” by Jon Solomon. CBS Sports, October 1,2014. http://www.cbssports.com/collegefootball/writer/jon-solomon/24730405/dynamic-ticket-pricing-gains-traction-in-college-football

a. What is “Dynamic Pricing”? According to article, what effect did dynamic pricing have on prices fortickets for Rutgers home football games?

In the article, Jan Alan Eglen is quoted, “We have forecasting availability within our algorithms thatcan predict if we lower prices, a school will probably make more revenue than the fewer tickets we’dsell if we raise prices.” Find that quote in the article. Connect it to the concept of price elasticity ofdemand.

b. There are three parties in the market for college football tickets: the school, the fan at the game, andthe “secondary market broker” (a.k.a., the scalper). Explain how the implementation of dynamicpricing affects the amount of consumer surplus received by the fan at the game. How does it affectproducer surplus? Who “wins” from dynamic pricing? Who loses?

c. What should be the goal(s) of the college athletic office: maximizing attendance, maximizingrevenue, or maximizing profit? (To distinguish between revenue and profit, think about theadditional costs incurred from an additional fan at the game.) Is dynamic pricing a good way for thecollege athletic office to achieve its goal(s)?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

9a. “Is Uber’s Surge-Pricing an Example of High-Tech Gouging?” by Annie Lowrey, New York TimesMagazine, January 20, 2014. http://nyti.ms/1bYnc4n

9b. “Under Pressure from Uber, Taxi Medallion Prices are Plummeting,” by Josh Barro, New York Times:The Upshot, November 27, 2014. http://nyti.ms/1Fx7ook

9c. “The Uber Model, It Turns Out, Doesn’t Translate,” by Farhad Manjoo, New York Times, March 23,2016. http://nyti.ms/1RfPNef

a. What is Uber? How do you get an Uber ride? How do you pay for it? What is surge pricing? What is ataxi medallion? What has happened to prices of taxi medallions in New York and in Boston?

b. Use the model of supply and demand to illustrate (separately) the markets for Uber rides and for taxirides. Distinguish between a run-of-the-mill weekday and a time (such as Halloween) when demandis very high. What is the effect of Uber on profit for taxi drivers? Do your results help explain what ishappening to prices of taxi medallions? Do your results explain why Uber uses surge pricing?

c. Farhad Manjoo argues the Uber model doesn’t translate to other industries. What are keycharacteristics of the “Uber model” that aren’t shared by other industries? Are those characteristicsaffecting the supply side or the demand side of the other markets?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

10a. “Striking it Richer: The Evolution of Top Incomes in the United States", updated June 2016, byEmmanuel Saez, June 30, 2016. http://eml.berkeley.edu/~saez/saez-UStopincomes-2015.pdf

10b. “The Middle Class is Steadily Eroding. Just Ask the Business World,” by Nelson Schwartz, New YorkTimes, February 2, 2014. http://nyti.ms/1kAYcXF

a. Use the article by Prof. Saez to answer these questions. For each answer, cite the page or figure #where you found the answer. (Note that the pagination is odd with the first page as page 0.)• What is the source of Professor Saez’s data?• How much did real average income per family increase in 2015? What was the rate of change for

the top 1%? For the bottom 99%? Did inequality increase or decrease in 2015 relative to 2014?• From 2009-2015, by how much did average income per family grow? What was the increase for

the top 1%? For the bottom 99%?• From 2007-2009, by how much did average income per family decrease? What was the decrease

for the top 1%? For the bottom 99%?• Approximately what % of income did the top 1% receive in 1998? In 2007? In 2015?• What was the dollar cutoff in 2015 for the top 1%? The top 5%? The top 10%

Based on that last set of answers, do you a family earning $150,000 per year is earning a “middleclass” income?

b. Based on the Schwartz article, what share of consumption spending was the top 5 percentresponsible for in 2012? As of the writing of the article, how much had consumption spendingincreased since 2009 amongst the top 5 percent? The bottom 90 percent? Why does Schwartz say“just ask the business world”? Who in the business world is experiencing the effects of risinginequality?

c. Some argue that economic policies should focus only on efficiency even if the result is risinginequality. Others argue that a nation is defined by more than simply its economic policies and thatequity must also be considered in designing the nation’s “best” policies. Yet others argue there is notrade-off: that inequality lowers economic growth and policies that promote equality are also pro-growth. Enter this debate. What should the nation’s economic policies consider? Only efficiency, orboth efficiency and equity? Is your position the same even if there is a trade-off between equity andefficiency?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

11. “Wealth Inequality Has Widened Along Racial, Ethnic Lines Since Great Recession,” by RakeshKochhar and Richard Fry, Pew Research Center, December 12, 2014. http://pewrsr.ch/1yImF75

a. What is the difference between the definitions of income (covered in article #10a) and wealth(covered in article #11)? What is the source of the data used by the Pew Research Center in the studycovered in this article? Why does focusing on medians rather than means provide less sensitivity tooutlier values?

Fill in this table with data from Kochhar and Fry’s article or the accompanying graphic. (Dollaramounts will be approximate)

Median family wealth (in dollars)

White non-Hispanic Black non-Hispanic Hispanic

1989

2007

2013

What happened to the wealth gap between 2007 and 2013 as measured by the ratios white:black andwhite:Hispanic?

b. Discuss the role of housing in explaining changes in the wealth gap, 2007 to 2013. As part of yourdiscussion, draw a model of the supply and demand for housing that helps explain why housing priceschanged as they did over the last decade.

c. Two forces can create an increase in wealth: increased saving out of income, and increased rates ofreturn on the assets purchased with that saving. To lower wealth gaps, some scholars propose “babybonds,” granting saving accounts to infants. Another proposal sometimes offered is introducing childsavings accounts in elementary schools, to create a habit of saving from a very young age. Do youthink baby bonds (or child savings accounts) could help close the wealth gaps? For either approach,are we talking about a “quick fix” or a long term process? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

12. “What's Wrong with Airbnb?,” by Frances Woolley , Worthwhile Canadian Initiative, July 15, 2016.http://worthwhile.typepad.com/worthwhile_canadian_initi/2016/07/whats-wrong-with-airbnb.html

a. Woolley distinguishes between the long-term and short-term rental accommodation markets.Describe each of those markets. Who are the buyers? Who are the sellers?

b. Consider whether the market for Airbnb apartments is a monopolistically competitive market. Arethe characteristics of monopolistic competition satisfied by this market? Draw graphs that show themarket for Airbnb rentals [1] before the recent big expansion of Airbnb and [2] now. What do yourgraphs say about the level of economic profits for Airbnb landlords?

c. Many communities, especially in popular areas like New York City and the San Francisco Bay Area,are moving to ban or limit Airbnb rentals, arguing that Airbnb rentals are driving up apartment rentsfor full-time residents. Do you think Airbnb rentals should be allowed in Berkeley? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

13. “Mexico’s Sugary Drink Tax Makes A Dent in Consumption, Study Claims,” by Eliza Barclay, NPR: TheSalt, June 19, 2015. http://www.npr.org/sections/thesalt/2015/06/19/415741354/mexicos-sugary-drink-tax-makes-a-dent-in-consumption-study-claims

a. How big is Mexico’s tax on sugary drinks? When was it implemented? What externality is beingaddressed? What has been the effect on the quantity of soda sold? Do these results account forshifts in demand?

b. Illustrate the effect of the tax in a graph. Be sure to think about the effect on price and quantity, inthe long run and in the short run. Is the tax optimal?

c. Opposition to soda taxes often cites the regressivity of such excise taxes. An alternative is tostructure the tax so it is a percent of the buyer’s income rather than a percent of the good’s price. Forinstance, in Finland, the price of a speeding ticket depends upon the driver’s income.(http://www.theatlantic.com/business/archive/2015/03/finland-home-of-the-103000-speeding-ticket/387484/) Should the tax on soda be based on the income of the consumer rather than the price of theproduct? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

14. “Is It Time To Ban Computers From Classrooms?,” by Tania Lombrozo, NPR.org, July 11, 2016.http://www.npr.org/sections/13.7/2016/07/11/485490818/is-it-time-to-ban-computers-from-classrooms

a. What are the problems cited in the article with the use of laptops in class? What did ProfessorsMueller and Oppenheimer find in their research comparing taking notes by hand with taking notes ona laptop?

b. In the language of economics, describe the negative externality created when a student uses thelaptop during class for something other than note-taking. Draw a graph that depicts the market-equilibrium and social optimal quantity of laptops in class.

c. Is it possible to institute a policy that brings the use of laptops to the social optimum? Does thebanning of laptops produce the socially optimal quantity of laptops in class? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

15. “Information Asymmetry: Secrets and Agents,” The Economist, July 23, 2016,

http://www.economist.com/node/21702428/print

a. What is the example that Prof. Akerlof used to introduce the concept of information asymmetries?

b. What is signalling? Why is signalling more difficult in labor markets in the state of Washington? Whatis screening? How does it affect markets beset by asymmetric information?

c. Consider the market that is “admissions to college.” The colleges and universities are the buyers. Theprospective students are the sellers. Describe the information asymmetries that affect this market.What strategies do you think colleges and universities should take to lower the asymmetries? (Somestrategies may be new; some may be strategies colleges already use.)

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

16. “Here’s What’s Going Right, and Wrong, in the U.S. Economy,” by Neil Irwin, New York Times, July 29,2016. http://nyti.ms/2a5fuRf

a. Make a list of what the author says is going right, and what is going wrong in the U.S. economy.

b. For each of these 5 items, go online and find the most recent data. The easiest cite to use is FRED:https://fred.stlouisfed.org/. You can also obtain the data from federal government websites. GDPrelated data are available at http://bea.gov/national/index.htm. Wage and productivity data areavailable at http://www.bls.gov/.

In your group, use FRED to make graphs that show each of these 5 items for the period 1/1/2000 totoday. For each item, determine what is the best way to display it: in levels, in changes, or in percentchanges.

c. Look at each of these 5 items over the 15 year period (the graphs you created in part (b).) Do youagree with how Irwin sorted them into what’s going right and what’s going wrong? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

17. “The Problem with Poor Countries’ GDP,” by Bill Gates, Project Syndicate, May 6, 2013.http://www.project-syndicate.org/commentary/poor-countries-need-more-accurate-gdp-data-by-bill-gates

a. What is the definition of GDP? Of per capita GDP? Why does the author, Bill Gates, think per capitaGDP is not a good indicator of economic conditions?

b. Describe two events from the past (actual, not made up) that have impacted living standards but arenot well measured by GDP. Try to come up with one event for which living standards rose more thanGDP would indicate, and one event for which living standards rose less than GDP would indicate.

c. If the measurement of GDP were reformed, in what ways would the lives of average citizens in richcountries such as the U.S. be affected? In what ways would the lives of average citizens in poorcountries such as Zambia be affected? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

18. “Yellen's Philosophy: The More Jobs Data, the Better,” by Michelle Jamrisko. BloombergBusinessweek, July 17, 2014.http://www.businessweek.com/articles/2014-07-17/feds-yellen-goes-beyond-unemployment-rate-to-craft-policy andhttp://www.businessweek.com/printer/articles/213940-janet-yellens-favorite-jobs-numbers

a. According to the article, what measures does Fed chair (and Berkeley Professor) Janet Yellen rely onas indicators of the health of the labor market?

b. The article and accompanying graphic give information about the labor market over the last decade.Which measures indicated that the labor market in 2014 is doing well? Which measures indicated thelabor market in 2014 is still struggling?

c. The article is from last summer. Go online and find the most recent data for each of the statisticscited in the article. How is the labor market doing today relative to 2014?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

19. “Wealth Inequality and the Marginal Propensity to Consume,” by Nick Bunker, Washington Center forEquitable Growth, December 17, 2014. http://equitablegrowth.org/news/wealth-inequality-marginal-propensity-consume/

a. What is the definition of “marginal propensity to consume”? Express the definition in words and inmathematical terms. Be sure everyone in your group agrees on the mathematical expression. Checkwith the group next to you to be sure they too agree.

b. According to the study by Chris Carroll et al cited in the article by Bunker, does the value of the mpcdepend upon the amount of wealth a family has? Does it depend on the type of wealth the familyhas? Be specific. Relate the findings in the Bunker article to reader article #11 (wealth inequality).

c. The concepts in the article can be expressed with the slope of the consumption function. Draw agraph that illustrates the concepts in each of the two articles.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

20. “More Services Means Longer Recoveries,” by Martha L. Olney and Aaron Pacitti, The Berkeley Blog,May 2, 2013. http://blogs.berkeley.edu/2013/05/02/more-services-means-longer-recoveries/ Fullpaper available at http://eml.berkeley.edu//~olney/olney-pacitti%2007-29-16.pdf

a. Economies produce, broadly, goods, services, and structures (buildings). What has happened to theshare of output that is services over the last several decades? What has happened to the length ofbusiness cycles over that same period?

b. According to Olney and Pacitti, why does a rise in the service share of an economy lead to longerrecoveries? Can you think of other reasons why a rise in services might be correlated with longereconomic recoveries?

c. If the longer recoveries are the consequence of the rise of services, are there public policies we canpropose that would hasten economic recovery? Are there costs to imposing those policies? Shouldwe propose and enact such policies?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

21. “The Ripple Effect: What One Layoff Means For A Whole Town,” by Massimo Calabresi. Time,September 11, 2009. http://content.time.com/time/nation/article/0,8599,1921445,00.html

a. The article starts with Brian Whitfield’s job loss. Draw a diagram that shows each layoff or hours cutmentioned in the article and how they are linked to each other.

b. Define the concept of the multiplier. Connect your diagram in part (a) with the concept. If the articlehad continued with each and every job loss experienced in the Roxboro, NC area, what industries doyou think would have been represented in the additional rounds of the multiplier process?

c. When people are laid off, they have two choices: • continue to spend the same amount, paying for goods and services by draining their assets

(withdrawing savings, for instance) or accumulating liabilities (charging credit cards, forinstance), or

• cut spending, perhaps as much as dollar for dollar with the loss of incomeThe more laid-off families borrow, the smaller the multiplier. The more laid-off families cut spending,the larger the multiplier and thus the greater the damage of “one layoff” to a whole town. Is it goodfor laid-off people to borrow and maintain their spending? Discuss. (It’s a normative question. Startby stating a goal.)

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

22. “Holding on for Tomorrow: How Economic Uncertainty Dulls Investment.” The Economist, November16 2013. http://www.economist.com/news/finance-and-economics/21589859-how-economic-uncertainty-dulls-investment-holding-tomorrow

a. According to the article, what are the factors that affect uncertainy? Which of these factors are out ofthe control of companies?

b. Why does uncertainty affect investment? In your answer, be sure to reference the expected rate ofreturn on an investment project. Sketch an investment demand curve, properly labeling your axes. How does a change in uncertainty affect investment?

c. Should government policy address the level of uncertainty in the economy? If so, is there an optimallevel of uncertainty greater than “0 uncertainty” (that is, complete certainty)? What policies might beenacted to address business uncertainty? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

23. “Dollar Weakens as Investors Reduce Bets on Fed Rate Increase,” by Ira Iosebashvili, Wall StreetJournal, August 10, 2016,http://www.wsj.com/articles/dollar-weakens-as-investors-reduce-bets-on-fed-rate-increase-1470841840

a. In the week including August 10, 2016, did the US dollar get weaker or stronger? Does that mean oneUS dollar exchanged for more units of foreign currency, or fewer units of foreign currency? Does itmean the price of foreign currency increased or decreased?

b. Explain why the Fed increasing interest rates has an effect on the exchange rate between the dollarand the euro. Draw the graphs that show the effect. Check with your group partners to be sureeveryone has a clear and thorough understanding of the process by which monetary policy affectsexchange rates.

c. Is a weaker dollar good for the US economy? Discuss.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

24. “We’re in a Low-Growth World. How Did We Get Here?,” by Neil Irwin, New York Times, August 6,2016, http://nyti.ms/2baasAf

a. According to the author, what are the supply-side features of the “low-growth world”? What are thedemand-side features?

b. Choose any two of the features mentioned in the article. Go to FRED https://fred.stlouisfed.org/ andlocate at least 25 years of data relevant to that feature. Do the data support the thesis that we are in alow-growth world? That is, do you see a worrisome long-term trend, or a short-term blip?

c. Without getting into a raucous political debate over Presidential candidates (or, by the time you readthis article, winner and losers of the Presidency), discuss the ways in which the low-growth worldimpacted the 2016 Presidential campaign.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

25. “How Powerful are Fiscal Multipliers in Recessions?,” by Alan Auerbach and Yuriy Gorodnichenko,NBER Reporter 2015 Number 2: Research Summary, 2015. http://www.nber.org/reporter/2015number2/auerbach.html

a. According to the article, what happens to the size of the government spending multiplier over thecourse of the business cycle? When is it large? When is it small?

b. There are two possible reasons that the size of the government spending multiplier may vary over thecourse of the business cycle.• Consumer spending responds more to changes in income in a downturn than in an expansion• In a downturn, monetary authorities do not raise interest rates which would otherwise cause

investment spending to fall just as government spending was increasing

Let’s consider the first of those two possibilities. If consumer spending responds more to changes inincome in a downturn than in an expansion, why and how does this impact the size of the multiplier? Explain your answer in words and with mathematical terms.

c. Use the production possibilities frontier model, with the types of output divided into governmentgoods and services and all other goods and services. Show the effect of increasing the production ofgovernment goods and services. Does it matter whether or not you begin on, versus inside, theproduction possibilities frontier? Relate this analysis to this article.

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

26. "Quantitative Easing: Lessons We've Learned," by Brett W. Fawley and Luciana Juvenal. The RegionalEconomist, St. Louis Fed (July 2012), pp. 8-9. http://www.stlouisfed.org/publications/re/articles/?id=2258

a. What is QE? How does it differ from conventional monetary policy? What is the goal of QE?

b. When the Federal Reserve conducts conventional monetary policy (targeting a federal funds rate),they traditionally buy and sell short term government bills, also called U.S. Treasuries. Use theconcept of the yield curve to discuss how and why conventional monetary policy is supposed to affectmedium- and long-term interest rates. Use the same concept to illustrate the effect of QE2 andOperation Twist.

c. The Fed implemented QE2 because it had hit the zero lower bound. What is the “zero lower bound”? Do you think the Fed should continue (or, depending on events between August and November,should have continued) to keep the federal funds rate at the zero lower bound? Why or why not?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

27. “Fed Suggests a Growing Chance That Rates Will Rise This Year,” by Binyamin Appelbaum, New YorkTimes, July 27, 2016, http://nyti.ms/2a06jla

NOTE: The article was written in July 2016; you are reading it in November 2016. Did the Fed increaseinterest rates in September? Check the news or go straight to the source: http://www.federalreserve.gov/newsevents/default.htm

a. According to the article, what is the Fed’s current policy with regard to monetary stimulus? What isthe nature of the debate at the Fed, as described in the article?

b. The Fed is guided by a “dual mandate.” What does that mean? Use the concept of the Phillips curveto illustrate the tension the Fed faces between addressing unemployment and inflation.

c. Which part of the dual mandate do you think the Fed should emphasize? Why?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

28. “Meet the Feds,” Financial Times (undated, but probably early January 2016),https://ig.ft.com/sites/profiles/fomc/

a. Make a list of the Fed officials named in the article. Which ones are doves? Which are hawks?

b. What are the definitions of “inflation hawk” and “inflation dove”? Using the concept of the Taylorrule, describe the difference between an “inflation hawk” and an “inflation dove.”

c. Do you think the Fed should be aggressive in removing the monetary stimulus and raising interestrates? Or should the Fed move slowly? Why?

Department of Economics Fall 2016University of California Economics 1Berkeley Professor Olney

QUESTIONS FOR DISCUSSION

29. “Federal Reserve Press Release: FOMC July 26-27, 2016 Meeting.” July 27, 2016.http://www.federalreserve.gov/monetarypolicy/files/monetary20160727a1.pdf

a. What decision did the FOMC make at its July 26-27 meeting? What was their rationale?

b. Go online to find the statement from the October 2016 FOMC meeting.(http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) What are the differencesbetween the FOMC statements of July 2016 and October 2016?

c. (As I write in August 2016. . .)

There is much speculation as to when the FOMC will next increase interest rates. Based on the Julyand October FOMC statements, what sort of economic indicators do members of the FOMC seem tobe watching? What do you suppose needs to happen (or, what did happen) to those indicators beforethey decide to take action? What do you think the Fed will do next . . . and when?