Saturday, October 9, 2010

Quiz 2

Here is a brief answer key for the quiz.

1:10 Section
Question 1: You need to think about how income is earned. All income is tied into the production of something. At the end of the production process the final market value of an items is compensating workers and owners for their contribution to the production process. 
Question 2: Can be found in the practice questions for Inflation on Connect
Question 3: Changes in inflation are zero sum (people are neither richer or poorer), but inflation does have a cost. The main cost is a reduction in economic growth, but you should have also listed redistribution of income.
Question 4: Was completed in class when we discussed globalization and wage inequality. The demand for labor in the high skilled industry increases (wages increase) and the demand for labor in the low skill industry decreases (wages decrease). Supply does not change.
Question 5: Promote saving and investment, human capital, and a better legal system

2:10 Section
Question 1: GDP only accounts for production it ignores other factors that have improved our standard of living. These include health care, education, environment, and leisure time.
Question 2: Can be found in the practice questions for Inflation on Connect. The one catch is in 2009 the price of chickens increases to $6.00 and ham to $12.00. If people are indifferent between 2 chickens and 1 ham, given the new prices their bundle will not change (hams cost twice as much as chickens). There is no substitution bias.
Question 3: Can be found in the practice questions for Wages and Unemployment on Connect. If 65% of the working age population is in the labor force than 35% of the working age population is not in the labor force. In other works .35x = 52.5 or 150 million in the working age population. Which means the labor force has 150 - 52.5 or 97.5 people. If 5.5 % of the labor force is unemployed than the economy has 5.36 million workers unemployed and 92.14 million workers employed.
Question 4: Real wages have risen because of a shift in labor demand (technology making workers more productive). Over the last 25 years the growth in real wages has slowed because of an increase in labor supply (baby boomers and woman).
Question 5: The four poverty traps are landlocked, natural resources, bad governance, and civil war.

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