Economic questions Essay

1. It has to do with game theory. In the prisoner’s dilemma, two suspects are taken by the police and each told separately that they can gain their freedom by testifying against each other. If neither testifies, they each will serve a six months sentence. If one testifies the other stays silent, the one will go free and the other will serve 10 yrs. If both testify then both will serve 5 yrs. The best thing is for both to be silent, but the more likely scenario is that each, fearful of a long sentence, bails on the other and nobody wins. In economics it is the investors hoping to ride the high flyers into the New Year; the best outcome is for nobody to sell. Most years, that is how it works and year end rallies leave everyone satisfied. 2. Economic theory. Through regulation is the best way market failure or externalities are dealt with when they are harmful to society. Externality is an economic side effect. They are the costs or benefits that come from economic activities that affect others than the individuals that re engaged in the economic activities. Some solutions are negative- taxes, positive-subsidy. 3. Sources of income in a capitalist economy would be their property rights that entitle them to earn a profit for the use of their capital as risk in some form of economic activity. They would be related through labor by human capital. The knowledge and skill acquired by labor through education and labor. 4. The rate is determined by a percentage of its turnover or sales. 5. Investment is something investors decide how much they will spend on new investment. Example: Producers have to decide whether to replace used up or obsolete machinery, whether to expand production these costs will become an investment that in turn should make them money. There are four principal determinants of autonomous investment, the level of technology, rate of interest, expectation of future economic growth and the rate of capacity utilization. 6. With an equilibrium price. The price that equates quantity demanded to quality supplied. If any disturbance from that price occurs, excess demand or excess supply emerges to drive price back to equilibrium. 7. The classical view of how our economy behaves is this: If the economy were left on its own without the interference of government or the Fed. It would move towards an equilibrium rate of growth that would produce with only minor interruptions, full employment without inflation. This hands off rests upon two simple propositions about market, one that all markets are basically competitive and two, all prices are flexible upward and downward approaching equilibrium. Unemployment is only a temporary condition caused by wage rates climbing above the equilibrium rate. A shift in the extraction curves is the economy’s rate of unemployment and rate of inflation. 8. Supply-side economists emphasize the importance of reducing tax rates. They accept the Keynesian idea that lower tax rates will increase consumer demand, but they believe a more important consequence is the added incentive it provides suppliers. For example; lower corporate tax rates increase after tax profit, which induces suppliers to increase aggregate supply. Lower income tax rates encourage more people to work longer, adding as well to aggregate supply. 9. Savings automatically converts to investment; so that investment induced growth is dependent on saving. 10. The division of labor into specialized activities that allow individuals to be more productive. The idea that labor productivity is a function of the degree of labor specialization. 11. Upward sloping trend cutting through the cycle traces the economy’s output performance over the course of a business cycle, measured either from recession to recession or from prosperity to prosperity. The upward sloping character of the trend line signifies economic growth. 12. Every economy, whatever its level of national income, includes people earning different incomes. Knowing someone’s absolute income tells us little about that person’s income status. 13. Consumption spending is rooted in Status. High income people not only consume more goods and services than others, but also set consumption standards for everyone else. 14. Aggregate supply is the total supply of goods and services that all firms in the national economy are willing to offer at varying price levels. Aggregate demand is the total quantity demanded of these goods and services by households, firms, foreigners, and government at those varying price levels. Macroequilibrium is reach when aggregate supply equals aggregate demand. 15. Consumption spending has tended to be more stable than investment spending in the past. MPC can be counted on to remain pretty much unchanged. Autonomous consumption is hardly likely to change. Investment spending is considered volatile. Economists identify changes in aggregate expenditure as the key to understanding why national income changes. Changes in investment have highly magnified effects on national income. The income by which income changes as a result of a change in aggregate expenditure is called income multiplier. 16. The economy’s output or gross domestic product is the total value, measured in current market prices, of all final goods and services produced in the economy during a given year. 17. One solution is to combine wage and price controls with a Keynesian style job creating policy. Stabilization policy is one option. 18. Four principle factors contributing to a nations economic growth, the size of the labor force, the degree of labor specialization, or the division of labor, the size of its capital stock and the level of its technology. Savings automatically converts to investment; so that investment induced growth is dependent on savings. 19. Demand deposits are only half of a banks business. Loans are the other. The bank makes a profit only on the loans it provides, not on it deposits. Borrowers benefit from inflation where lenders, where as lenders lose money. 20. Through the circular flow model, how the economy’s resources, money, goods and services flow between households and firms through resource and product market. 21. Economies with negative balances on current account will find their exchange rate falling. And unless these rates are propped up by government intervention, they will fall to stem the currency outflows exist; the exchange rate will keep falling. Eventually the rate will reach the level appropriate to a zero balance on current account. It takes only time. He would think we were habitual borrows. 22. They are the â€Å"what is† and â€Å"what it should be† 23. Nothing because the infrastructure is what an economy’s ability for development depends upon. Such as with education to educate people involves not only the task of acquiring compliance but the funds needed to build the school and staff them.