Question & Answer

What would happen to the AS_L curve and the level of unemployment if unemployment benefits were increased?

Why might a recovering economy (and hence a fall in government expenditure on social security benefits) make the government feel even more concerned to make discretionary cuts in government expenditure?

Does this mean that Keynesians would advocate using supply-side policies only at times of full employment?

Why do Keynesians argue that, even in the long run, demand-side policies will be still be required if faster growth in aggregate supply is to be achieved?

Do all investment projects generate significant spillovers

What is endogenous about endogenous growth theory?

1. If there was a growth in the total number of worker hours because people worked longer hours, what would happen to GDP per hour worked and GDP per capita?

2. If people worked longer hours how would you assess whether the country was better or worse off?

If this is true, why do people not increase their rate of saving?

If there were a gradual increase in the saving rate over time, would this lead to sustained economic growth?

In the absence of growth in the workforce what does the required investment per worker curve capture?

What would be the rate of economic growth if 20 per cent of national income were saved and invested and the marginal capital/output ratio was ⁵/₂?

(Looking at the Maths) How long would it take an economy, like China, growing at an annual rate of close to 10 per cent to (a) double in size; (b) triple in size?

Explain the mechanisms whereby the DAD and IS curves will shift by the same amount as the DAS and MP curves in the long run.

Does a rise in potential real income result in a fall in the natural rate of unemployment?

Under what circumstances would adherence to money supply targets lead to (a) more stable interest rates; (b) less stable interest rates than pursuing discretionary demand management policy?

Would it be desirable for all countries to stick to the same targets?

Why does an unstable demand for money make it difficult to control the supply of money?

How could we model a credit market disruption and its impact on interest-rate differentials using the Keynesian cross (Keynesian 45° line) diagram?

1. Trace through the effects of a squeeze on the monetary base from an initial reduction in cash, to banks’ liquidity being restored by the rediscounting of bills. Will this restoration of liquidity by the Bank of England totally nullify the initial effect of reducing the supply of cash? (Clue: what is likely to happen to the rate of interest?)

2. Given the difficulties of monetary base control, would you expect cash in circulation and broader measures of the money supply, such as M4, to rise and fall by the same percentage as each other?

If the Bank of England issues £1 million of extra bonds and buys back £1 million of Treasury bills, will there automatically be a reduction in credit by a set multiple of £1 million?

Why would it be difficult for a central bank to predict the precise effect on money supply of open-market operations?

If banks operated a rigid 5 per cent cash ratio and the government reduced the supply of cash by £1 million, how much must credit contract? What is the bank deposits multiplier?

How could long-term monetary growth come about if the government persistently ran a public-sector surplus?

Give some examples of these random shocks.

Do theories of the long-run and short-run consumption functions help us to understand consumer reactions to a change in taxes? (See section 17.1 and Case Studies 17.1 – 17.4 on the student website.