Introduction to Micro and Macro Economics - Assignment Example

Introduction to Micro and Macro Economics What is the difference between macroeconomics and microeconomics? Which is more interesting and important? 1. Micro means limited and macro means over all, microeconomics refers to the study that is made on individual level and macroeconomics is a study that is conducted for a huge population. Since the decisions made on macro level impact a greater amount of people, it is more important than micro level but while making macro level decisions, micro level decisions need to be given equal importance. What is GDP? How is it measured? What are the strengths and weaknesses of the measure? 2. GDP refers to the monetary value placed on all the set of goods and services produced within a nation over a specific period of time, GDP is calculated by the adding all the expenses conducted by government, private sector, investments in business and exports after deducting the imports. Problem with this measure is that it does not include the goods and services that are not made public. The US has the following tools to influence the macroeconomy: Monetary policy Discretionary fiscal policy Tax policy Job training and education Automatic fiscal stabilizers Why do we not put exchange rates and tariffs on the above list? How do each of the policy areas work? Which is most effective? 3. The US does not use tariffs and foreign exchange rates to control or influence its economy because they have signed a policy with the WTO which has barred them for conducting such activities in order to promote international trade. The monetary policy tool is used to decrease or increase the amount of capital within an economy. The government adopts an expansionary monetary policy in order to increase money supply within the country and adopts a contraction one to make the opposite possible. The government uses the tool of taxes to in order to increase and decrease a certain economic activity from taking place. Taxes are levied on individual goods and services. Government may influence the employment side of the economy when it uses the job training and education tool to influence economy. Monetary policy has a major impact on the economy of a country as it does not impacts a certain portion of the economy, rather it effects the entire population and the their spending and saving patterns. With the 2012 presidential election only a few weeks away, how would each candidate likely address the issue of raising GDP and ending the current period of sluggish growth. 4. President Obama plans to decrease the budget deficit by decreasing government spending by a considerable amount, similar are the plans of Romney, but along this plan he even plans to decrease taxes in order to increase spending which will ultimately increase revenue and GDP. What is a market? What is regulation, and how does it affect markets? 5. Market is a place where buyers and sellers interact with each other to conduct transactions, regulations are rules and guidelines set to control the activities of buyers and sellers to make sure that both groups do not cheat each other. What is supply and what is demand? What are variables (beside price) that affect each? 6. Demand is the number of goods and services that a person is willing, able and has the money to buy and supply is the amount of goods and services manufacturers are, willing and able to sell at a particular price. Demand and supply are influenced by various factors including price, choice, taste, socio economic status, season and various others. What are shortages and surpluses, and what are the implications of each? 7. Shortages is a term used to refer the situation when the demand of a particular good or service is higher than the supply and surpluses takes place when supply is higher than demand. If shortages and surpluses arise, people will start selling and buying in black markets, prices may fall below the equilibrium level or rise above. The equilibrium price is sometimes referred to as the “market clearing” price (which sounds like a desirable price). What happens to the firm if they are not at or near the equilibrium price? 8. If a firm is trading below the equilibrium price they will end up suffering losses and if they are selling way above the equilibrium price they will make abnormally high profits. How would a firm respond when an outside force causes its demand or supply curve to shift? 9. To cope with environmental factors, the manufacturer may try to comply with the situation or attack the environment by making changes to its price, promotion, packing and production. Government Spending and Fiscal Policy How much did the federal government spend in FY 2010? How much were its revenues? Its deficit? 1. During the era of 2010, the total US deficit was $1.29 trillion, the spending stood at $3.456 trillion and the total revue earned was $2.165trillion (White House 2010). What are the projections for the deficit for the next several years? 2. The government plans to decrease the deficit to -2.3% of GDP by 2015 and further decrease it to -0.8% by 2025 and by 2035 it expects the deficit to be zero. What is the difference between a cyclical and a structural deficit? 3. The difference between structural and cyclical deficit is that even while there is economic growth, the country experience structural deficit. What is the difference between mandatory and discretionary spending? 4. Discretionary spending is totally dependant on the governments will and mandatory spending is what government spends even if it does not wish to and is necessary. What are automatic fiscal stabilizers? Why is it necessary to have a deficit in the federal budget in order to make automatic fiscal stabilizers work? 5. Automatic fiscal stabilizers are spending conducted by government regardless of how the economy is functioning, to ensure that automatic fiscal stabilizers work; there should be certain amount of deficit because this will help in countering increase in rate of inflation as these stabilizers increase demand. What does the term “discretionary fiscal policy” mean? 6. Discretionary fiscal policy refers to the adoption of either a reduction or expansionary fiscal policy that government adopts according to the situation of the economy. How much is the federal debt? To whom is it owed? 7. The current US national debt is more than $16 trillion, US owes it to various countries from which it trades and borrows and top of this list is China. What does it mean to “broaden the base and cut the rates” as applied to the federal income tax? 8. This phrase means that the government should increase the number of goods and services it is taxing and decrease the tax rates. What were the overall conclusions of the Simpson-Bowles commission? Why have we not implemented their recommendations? 9. The conclusion of the commission was to decrease and put a cap at the governments discretionary spending each year; these recommendations have not been accepted and applied because this would lead to decrease in the well-being of US citizens. Taxation In percentage terms, what are the main sources of revenue for the federal government? How have these revenue sources changed over time? 1. Out of the total revenue earned through taxes, income tax leads by 42%, the second in the lead is payroll taxes which contributes 40%, corporate income tax add up to 8% of total revenue and the remaining 6% and 3% is shared between other taxes and excise taxes as of 2010 (US Census Bureau 2012). Since the period of 1950 near to 50% of revenue has been gained by government through income taxes, the contribution made by payroll taxes have increased over the time period. In percentage terms, what are the main sources of revenue for state and local governments? How have these revenue sources changed over time? (These data are published by the Bureau of the Census at http://www.census.gov/govs/qtax/ 2. The highest percentage of revenue earned by local government is 30% which is obtained through transfers made inter government, 28% revue is obtained from taxation on property, 23% revue is obtained from charges and misc. receipts, the remaining 6%, 3% and 2% is contributed by Sales taxes, other taxes and income taxes levied on individuals as of 2010. Since 1972 the amount of revue earned through property taxes have declined while revenue earned through charges have increased. Now combine the data from the two previous questions, and determine in percentage terms what the sources of revenue for all units of government (federal, state, local) combined. 3. The three main sources of revue for both local as well as federal government are: inter government transfers, income taxes levied on individuals and charges and misc. receipts. Taxes are classified as progressive, regressive, and proportional. What do these terms mean? 4. Progressive taxes refer to the form of taxation in which the quantity of items taxed is increased in order to increase government revenue. In regressive taxation people who earn low have to pay higher percentage of their total earned amount as taxes as compared to those who earn more. In proportional taxation, all individuals have to pay same tax rate regardless of what they earn (Hatten 191). There are six major sources of revenue for federal state and local governments. From the list below, choose any one federal source and any one state source of revenue. Do some internet research and determine if the tax is progressive, regressive, or proportional. Explain your answer. a. Federal Income Tax b. State Income Tax c. Payroll taxes d. Corporate Income tax e. Property tax f. Sales tax 5. The federal income tax is based on progressive taxation system as it charges higher from the wealthy. The state income tax system is both proportional and progressive depending on the state, states like Utah pay proportional as the tax rate is fixed for all. The sales tax in the US is generally a regressive tax. What changes would make the system less regressive? Why do most states not adopt these changes? 6. The policy makers can remove taxes or decrease taxes on necessities that a poor individual can only afford, for example removal of taxes from food items can make the sales taxation system less regressive. States do not adopt these changes because these changes may lower the amount of revue earned by the states as other methods of obtaining taxes are not as direct as sales tax. What does the term “marginal tax rate” mean? What is your marginal tax rate for all taxes (income, FICA, Medicare, NC income tax) combined? What would the lowest possible marginal tax rate be? the highest? 7. Marginal tax refers to the increase of taxes as the amount of income rises. If an individual earns $100,000 he has to pay a tax at a rate of 28% of his income, the lowest he will pay is 21% and the highest he will pay is 28%. The estate tax has been the subject of considerable debate. What is the structure of the tax? How has this structure changed, and how will it change in the next few years? What are the arguments for and against the estate tax? 8. Estate tax is the tax that a beneficiary has to pay after he/she inherits property of a deceased, currently the minim taxable inherited property is 5 million and the tax that is paid is 35%. It is expected that in 2013 the taxable inherited property will be as low as 1 million and percentage of tax will be 55%. The problem with this sort of tax is the increased burden that families of the deceased will have to pay, those in favor say that this will help increase the revenue earned by the government. European governments rely heavily on the VAT. How does it work? How does it differ from a sales tax in the US? Does the heavy reliance on the VAT make the European tax system more or less progressive than the US system? 9. According to buyers, VAT refers to the tax paid by buyers for purchasing an item and for sellers the tax is only levied if value is added to a particular good or service. Sales tax is paid as a percentage of the amount of money paid by a buyer of a good or service, and VAT is levied during the stages of value addition and production. VAT is progressive taxation system because it puts more burdens on the wealthier population as goods with added value are taxed and wealthier are those who are able to purchase such goods and services. What is the Earned Income Tax Credit? How does it work? Why was President Reagan a big fan of the EITC? What has been the effect of the recession on the EITC? 10. EITC refers to the refund or the amount of tax saved by individuals who are poor and do not earn well. Individuals who earn less than $13,000 are eligible for EITC, if an individual has a family that includes a wife along with three children then that family is eligible if the total family earning is less than $43,000. President Regan was in favor of this program because through this program, many people have survived from entering in the category of those individuals who are recognized as poor. When recession arises, people loose jobs and wages are decreased, due to decrease in wages, the number of people qualifying for EITC increases. What do school teachers and Sumo Wrestlers have in common? 11. The commonality between school teachers and sumo wrestlers is that they both are involved in tax evasion. Why do people cheat? When have you cheated? What would have stopped you - economic, social, or moral incentives? 12. People cheat due to economic reasons, for example: one may cheat to earn higher money. Cheating can only be countered with the aid of economic incentives. Do public school teachers “teach to the test”? How do you know? 13. Teachers teach only to test rather than focusing on what the children has learned because testing has been made compulsory for the future of the student and not what he/she has learned. Is this statement true? “If morality represents the way we would like the world to work, and economics represents how it actually does work, then the story of Feldman’s bagel business lies at the very intersection of morality and economics. Yes, a lot of people steal from him, but the vast majority, even though no one is watching, do not.” (p. 50) 14. Yes the world is working in accordance to the statement because profits of individuals is given more importance than utility of the society, thus economics is the way reality is defined. Freakonomics Why do economists say that information is never free? 1. Economist believes that there is no such thing as free information because information has a cost attached to it, for example: one may get free analysis from an economist but it is not necessary that the receiver of that information makes profit out of it. The receiver may make a loss and this would be recognized as cost of information. What information do you generate at work? Does it have “raw power” (p. 66)? What is the cost? 2. At work individuals come across secret, this information is regarded as raw power because this information can be used to play politics; the cost of information is the loss of identity within the organization. Explain Plessy v. Ferguson. Jim Crow laws. 3. The law that was announced in this case is referred to as separate but equals means that the blacks and whites both had equal rights and access to public property but the property that white were allotted were not to be used by blacks and vice-versa. What was the history of the Ku Klux Klan before WWII? after WWII? 4. Before the WWII, the clan was formed to slaughter slaves and treat the black slaves badly and was recognized as a terrorist group. After the WWII they were recognized as brothers in arms with the law enforcement agencies. Who was Stetson Kennedy? What was his role in extinguishing the Ku Klux Klan? 5. Stetson Kennedy was a third year old male who was against the ideas of the Ku Klux Klan and went undercover to put an end to the clan. What does it mean to say that sunlight is the best disinfectant? 6. This phrase means that information is the best way of doing business. What is information asymmetry? Give an example not in the book? 7. This term means that one individual or group has better information than another individual, for example: during a war, one country has more intelligence than the other one. Do physicians use asymmetry to sell additional, marginally needed tests? If so, what can society do about it? 8. Physicians do benefit from asymmetry of information as patients know less than physicians and are ready to perform any tests without even knowing its importance. Society can access more information and figure out whether the tests are necessary or not. Do real estate agents have your interests at heart? Why or why not? 9. Agents do not work for the interest of the client and may persuade them to sell their homes at much cheaper rates than what actually can be obtained because agent’s interest is in the commission that the seller and the buyer both pay. Of all the ways to find information about potential mates, which works best for singles, and why? 10. While locating a date the best way to find one is to state that race does not matter, this will impress other open minded individuals who an individual prefers to date. Dug dealers What is “conventional wisdom?” Who coined the term? Why is it not a compliment? 1. He term was made by John Kenneth Galbraith and the creator of the term does not finds the term as a compliment because he believes that we only give importance to information we already know and are not ready to give importance to information that is new to us. Consider each of the following statements. Can you characterize them as conventional wisdom? In other words, are the statements simple, convenient, comfortable, and comforting, though not necessarily true? a. Most people who receive free medical care do not appreciate it. b. CEOs pay should be no more than seven times the pay of the lowest paid workers, just as in Japan. c. Half of all babies born in the US are born to women who cannot afford to feed the child. d. The CIA was the chief sponsor of the US crack trade. e. You must be a baptized Christian to go to heaven. 2. A. Convenient B. Conventional Wisdom C. Convenient D. Comfortable E. Simple Should you give a couple of bucks to the guy standing on the corner with a sign, “homeless and hungry”? Why or why not? 3. The guy with the banner should not be provided with money or food unless it is clearly figured out that he is homeless and suffering otherwise those who deserve will be left undeserved. Consider this statement: In politics, it is usually more important what you 4. The statement is true because politicians make various promises but keep very few of them. Works Cited Hatten, Mary Louise. Macroeconomics for management. Englewood Cliffs, N.J.: Prentice-Hall, 1981. Print. Quarterly Summary of State & Local Taxes - Business & Industry - US Census Bureau." Census Bureau Homepage. N.p., n.d. Web. 17 Oct. 2012. . The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform. Washington: White House, 2010. Internet resource. Read More