Daily Review

5. Structural unemployment is:

            a. obsolete skills

            b. equal to cyclical unemployment minus frictional unemployment

            c. related to job search

            d. procyclical

            e. non existent

The correct answer is "a".  

As jobs become obsolete, workers either leave the workforce or enter into unemployment.  It is my opinion that more and more jobs will become obsolete as technology replaces labor.  For example, Rosetta Stone will replace World Language teachers.  Technology should create new jobs to replace the ones destroyed, but it is my opinion that technology is changing faster than the skills needed to compete in a techno world are increasing.  Thus, I see an increase in the natural rate of unemployment.

You can find my macro app for sale here.

Daily Review

3. Which of the reasons below do not explain the slope of the AD curve?

            a. real balances

            b. Interest rate effect

            c. diminishing marginal utility

            d. foreign purchases

            e. substitution effect

There are two correct answers: c and e.  When the price level falls, money buys more real goods than before.  Consumers will then save their income increasing the supply of loanable funds and decreasing the interest rate.  As the price level falls, foreigners now prefer US goods.  In a nutshell, that's the reasons for the downward sloping AD curve.  

Daily Review

2.  If the Yen/USD is 110Y=1USD$, how much is one Yen worth in dollars?

            a. .09

            b. $1.10

            c. $10.00

            d. $ .90 

The correct answer is "a".  A simple solution to exchange rate problems is to divide both sides of the equation by 110.  Now the problem becomes 1 = 1/110 or 1Y = .09USD.  A depreciating dollar is good for our exports.  

If you like the Daily Review and would like to receive it on your Android phone, you can download my FREE app here.

Is War Good for the Economy?

After WWII, the United States experienced a boom in GDP and tremendous growth in standard of living. Many historians and social studies teachers often say that war is good for the economy and they point to the economic boom following WWII.  If war is so good for the economy, why is the unemployment rate in the United States 9.1?  Why is GDP growing at 1.4%, far below the growth necessary to sustain employment?

Currently the U. S. is in two parts of the world fighting terrorism.  I think historians have made a logical fallacy of Post Hoc.  I often hear social studies teachers where I work comment that war stimulates the economy.  Military personnel are not counted in the labor force so an increase in young men going into the service isn't employment.  In fact many of these soldiers do not return home so productive resources are destroyed along with capital and natural resources.  War moves the production possibilities curve inward, not outward.

I heard on Fox News that approximately 79% of our elected officials have not had an economics class.  Without economics, I believe it would be hard to construct policy.  Being an elected official is difficult, unrewarding work.  An official has to balance so many variables.  But when it comes to war, war does not stimulate the economy as I often hear.

Daily Review

1.  The unemployment rate is calculated by

            a.  Labor Force/Civilian Non-institutional Population

            b.  Unemployed/Labor Force

            c.  Unemployed/Employed

            d.  Change in Unemployment/Change in Labor Force

The correct answer should be "b".  Unemployment is a dynamic calculation based on the number of workers becoming separated from employment, re-entrants into employment, and unemployed workers finding work.  The current unemployment rate stands at about 9%.  The author of this blog believes that this rate will continue for a very long time.   The graph to the right is from the Congressional Budget Office.  Recession, and thus, unemployment, should continue through 2016 if you believe the forecast. 

Daily Review

In the country of Alpha, the resources can only make two goods--This and That.  When resources are specialized, Alpha can make 40 of This or 80 of That.  What is the opportunity cost of making one This?

The opportunity cost is 2 of That.  Alpha might want to make That when the opportunity cost is only 1/2 of This and trade.

The Daily Review is a FREE app for the Android to help students prepare for the AP exam.  The link to the app is here.

Daily Review

What are the three reasons given in AP microeconomics for the slope of the demand curve?

The demand curve usually slopes downward and to the right because of diminishing marginal utility, income effect, and substitution effect.

Under what conditions would the demand curve be vertical?  Under what conditions would the demand curve be horizontal?

Daily Review

When Juan received a raise at work, his demand for on-movies increased.  For Juan, on-demand movies are (a) inferior good; (b) superior good; (c) normal good; (d) Giffen Good.

Assuming that everything else is held constant, the correct answr is "c" - a normal good. 

Most goods are normal goods.  While reading this article about the Macau sex fair in Asia, I wondered if an underlying reason for this behavior was another assumption.  In microeconomics, economists assume that man seeks to maximize utility.  So in Juan's case, watching more movies heightens his utility. I also think that purchasing more on-demand movies also attacked the fundamental economic problem which ishow to satisfy unlimited wants with limited resources.

The Daily review is a feed for my FREE app for the Android available on the Android market here.  Also for the Andorid, Exam Cram for macro.

Daily Review

In year t, the CPI was 208.  In year t+1, the CPI is 216.  What is the inflation rate?

The inflation rate is a percentage change from year t to t+1.  Here, the rate is (216-208)/208 = .038.

Extra Credit.

The Federal Reserve might think a 3.8% inflation rate is evidence of price instability.  One of the tools of the FED is to raise interest rates.  In a recession such as the one we have right now, higher rates might squash consumer and investment spending.  Higher rates might appreciate the USD and make living expenses higher.  What FED policy, in any, might the FED pursue?

The Daily review is a feed for my FREE app for the Android available here.

Daily Review

What is the term economists use to describe the "cost of the next best alternative"?  For example, suppose Juan wants to watch Monk tonight and the season premiere of Vampires in the Mist.  If Juan watches Monk, he gives up Vampires.  In economics this cost is called?

If you answered "opportunity cost" you answered in align with economic thinking.  The true cost of a choice is what you give up.  This is a cost because resources are limited but wants are unlimited.  When wants are greater than the resources to satisfy them, economists describe this dismal condition as scarcity.  All resources are scare thus there is always opportunity cost.

This daily review is content for my FREE Android app.  The app is Economics Review 2.

Education and Income

This story repeats again the positive relationship between lifetime earnings and educational attainment.

I know one reason why college grads earn more than high school grads is simply because they miss less work.  If the college grad works more hours than the high school grad, they earn more income.  Maybe the college grad gets more opportunities to work longer.

One has to be careful to say that education causes income to increase.  I still believe that education is a normal good.  The two variables are related but earning a degree does not cause your income to increase.  All you have to do is look at the recent college grads working as a waiter to see the fallacy of that thinking.

Daily Review

The Daily Review is an RSS feed to my app, Economics Review 2--a FREE app for the Android. The app simply takes content from my blog and sends it to your phone.  The Daily Review is intended to help AP Microeconomics and Macroeconomics students prepare for the AP exam in May.  Good pedagogy dictates that spaced practice repeated over a long time ensures learning and recall.  This learning theory is the incentive behind my app. 

Today's question is:  How do you define economics.

The College Board test will expect an answer similar to: "the situation where wants are unlimited and resources are limited".

Usually, there will be distractors about the lack of money or time, but look for the answer that defines "Scarcity". 

Income Effect

Today, my employer, Muscatine Community Schools, gave me a new, Mac Book to use.  I was elated at the new productivity tools at my disposal.  The book came fully loaded including Photoshop.  I was going to buy a new computer as the hard drive crashed on my Dell, but now I don't have too.  I was wondering if there were two effects that contributed to my elation.

One effect is the income effect. I now feel richer and I am richer now that I don't have to buy the Apply online.  The next effect is the consumers surplus.  I would have paid $2,000 for a new computer but I only paid $0.

I was wondering if giving goods away for FREE would modify behavior by changing incentives.  Anyone receiving something free would experience the same effects that I just mentioned and would have incentives to save or even consume complementary goods. 

As a great coach once said to be, "Beware of the naked man offering you his shirt."  Gifts can change incentives but one must be careful that the incentives are not perverse.

My New App

If you are a student of AP Economics, you might want to download my new FREE Android App.  My app is called, Economics Review 2 and links to this website.

I plan to have mountains of review questions posted that you can get right on your phone to practice for the AP in addition to my usual comment.

For those of you wanting to make your own app, I used www.appmaker.com.  The entire app was made in three hours. 

Natural Rate of Unemployment

Using Excel 2007, I tried to plot the natural rate of unemployment as the moving average of the last 10 months.  I find working wtih Excell 2007 frustrating so I don't believe these results.  You can observe that the trend is to a higher natural rate of unemployment than the 5.2% historical treand. 

Series 2 is the moving average. 

Moral Hazard

Does shifting the blame create a moral hazard?

Suppose Juan is in my microeconomics class and he blames me for his inability to learn.  If Juan is sincere, then he has the incentive to act more recklessly in my class since it's my fault he's not learning.  Juan's beliefs are a moral hazard.

Suppose Juan blames the government for not creating jobs for us so he takes unemployment benefits and claims bankruptcy.  Is Juan acting as if a moral hazard is his incentive?

Scott Wolla Explains Supply

The St. Louis Fed has a series, Economic Lowdown, for students.  In this series, "
Economic Education Specialist, Scott Wolla, explains concept of supply in the first episode of the Economic Lowdown Video Companion. Students will learn how changes in the price of a good affect the quantity of the goods produced and how changes in market conditions will affect the supply curve.

The link is here.

I also recommend reading "Many Moving Parts" the annual report.  This report has an outstanding take on the unemployment picture.

Loanable Funds

Here is my complete Loanable Funds ebook.  This is my summer's work.

Here is where I would teach each of the concepts.

This work is the result of reading, research, and reflection.  I now stand humbled like the bamboo.  This work was not easy for me.  I plan to present this next summer at the AP annual conference.  Wish me luck.

Iowa's Straw Poll

For most of the candidates, the straw poll in Iowa is a jumping off point.  I'm going to predict that Rick Perry will win the nomination based on good looks.

Alternative Fuel

I believe Presidential hopeful, Rick Perry, has told his loyal congregation that developing domestic fuel sources in the US will spur the economy by creating job growth.  I believe he's right, but for the wrong reason.  The reason I think he's right is the Moby Dick reason of opportunity cost.

As company's work their tail off fishing for an alternate fuel source, they will find that the cost of alternative fuels is greater than importing foreign oil.  If you believe that consumers and investors consider relative costs, then developing domestic fuel sources, especially from oil, will prove to be too costly.  Usually, necessity is the mother of invention.  If some innovative brilliant entrepreneur develops fuel that is less costly, then you will have job growth.  But the growth will be the result of an unintended consequence.

Real Interest Rates in the Depression

When teaching about the Loanable Funds Market, teachers sometimes disagree about how to label the y-axis.  Should they use "nominal" or "real" on the axis?  My answer is that they should use real interest rates because real rates express the opportunity cost in terms of goods and services.  But another reason to use real is that nominal rates can be misleading and hide other variables that affect the opportunity costs in the credit markets.  For example, in the attached table, the nominal rate is going down, but so is the rte of inflation.  This means that the real rate is going up.  This nmight explain why investment dropped during this time.  An exceptional blog post that includes all of the relevant data is here.

This post is related to my research on the Loanable Funds Market.  I am completing the writing of my ebook on the subject complete with teaching problems and answers.  I will post my ebook here for free when it's complete. 

Perfect Substitutes

Say there are two grocery stores equal distance apart from my home.  The prices are the same and so is everything else.  Now, because of summer construction along the road to one of the stores, it now takes me longer to drive to the store and return home.  Since these stores are perfect subs, when there is a rise in the price of one good, the demand will completely fall off to a boundary.  And that's exactly what I'll do.  I drive to the one without the road construction.  This behavior will continue until the construction is complete.  What other goods are perfect subs?  Red and Blue pencils.  Palin and Bachmann.

Bamboo

This summer has been humbling for me.  I began vacation on June 8 with the high hopes of writing several ebooks on economics.  I have only written one on the Loanable Funds Market.
Throughout the summer, I would find relaxation by painting bamboo.  The grass is one of the four gentlemen that represents strength by being flexible without breaking.  This summer has humbled me.  As I return to school, I must keep in mind that my students will have many difficulties learning and I must be kind not to break their spirit.  As I say goodbye to summer, I am humble under the weight of hope that remains unsatisfied.  My ebook will be available to reader of this blog next week as a Google document.  I want to add a cover page, and clean up the writing which is esoteric and obtuse.  Time to move on.

Market for Lemons

Mikeroeconomics
brought to you by Livescribe

The pre-owned car market is rife with uncertainty. What happens when buyers are unsure if the car they are buying is a lemon or a peach? Economics predicts that buyers will take the average price offered and those with lemons will offer to sell their cars but owners with peaches will not. Eventually, the only cars left for sale are lemons. Of course, the existence of warranties and reputation eliminate some of the uncertainty in buying a used car. This post took the better part of two weeks to write having to work through the math and understand the concept. I am in awe of men who can observe market behavior and mathematically model it. The math for this problem came from Walter Nicholson's intermediate microeconomics textbook. I am in awe.

Bank's Balance Sheet

Jokes
brought to you by Livescribe

This summer has taken many turns in my research. This balance sheet is shown for instructional purposes, but reminds me of adverse selection.

Adverse selection is a market failure that occurs when those in need of insurance or a loan are the ones who seek the insurance or the loan. When a bank's balance sheet deteriorates because of many bad loans, there might be a tendency for banks to make riskier loans with a high payoff. This is essentially doubling down on a bet to make up for prior losses. A bank is this situation is putting capital at risk.

When an economy has a large current account deficit, the country is issuing a lot of debt. The US has seen a deterioration in bank balance sheets and a high current account deficit. Currently, our debt/GDP ratio is 100%. I believe we could be seeing the next currency crisis.

Since 2004, the dollar has depreciated against the Euro. (See FRED data series AEXUSEU). This means that our current account is negative. Today, the S & P downgraded US debt. If you remember 1997 and the Asian Financial Crisis, you might get a refresher soon.

Break-Even Analysis for a Perfectly Competitive Firm

A perfectly competitive firm is a price taker.  In this market, the price is $12.  The firm faces fixed costs of $10 and must pay $8 an hour  for each laborer.  How many hours will this firm have to work to break even?

I set the cost equal to the revenue with the formula: 10 + 8X = 12X.  Solving for X, you find that 2.5 solves the equation and the graph confirms.

This is standard microeconomics.  This analysis suggests that the firm should make as many Hair Ball Steamers as it could since its revenues outpace expenses by $4.  I think is is ridiculous.  The resources have a opportunity cost and so this kind of analysis is flawed.  Let's leave this thinking to the accountants.

TI-83 Project

Here's a project for your microecon students that uses a graphing calculator.

Suppose that the demand for ear plugs is 30 - .2X.  Calculate the marginal revenue, price elasticity of demand, and total revenue.

Answers should look like Figures 1, 2, and 3.

My calculator displays several profit max positions, but algebra shows that the profit max position occurs at 75 units ( 0 = 30 - .4X).

Extra credit: prove price elasticity = 1 at 75 units.( 1 = 15 / (30 - 15)

Liquidity Effect?

Is there really a liquidity effect?  That is, do nominal interest rate decrease when there's an increasee in the money supply?

In this exceptional paper, the author argues that there is no liquidity effect.

Most of the reading I'm doing suggests that the liquidity effect is dominated by the inflation expectations.  The liquidity effect is a major part of teaching AP Macroeconomics because it's tied to the actions of the FED.  I think more time should be devoted to teaching the Fisher Effect. 

Is College Worth It?

A lesson plan prepared by the St. Louis Federal Reserve Bank is here.

I think the lesson could have been improved by using the discount rate to measure real returns.  I still say that education is a normal good.  Yet, I know education increases human capital.

Price Effect in Loanable Funds Market

Jokes
brought to you by Livescribe

A complex chain of macroeconomic events happens when the price level increases. The price level, as measured by the Consumer Price Index, increases, consumers demand more money as a medium of exchange to make transactions. The increase in the demand for money, raises the nominal interest rate in the money market in the short run. In the loan run, the price level translates into a demand for loanable funds and the real interest rate increases.

Since inflation eats away the real return on a loan, creditors want a higher real return on their loans. Thus, the real interest rate rises. If the real rate did not rise, then the creditor would be better off spending the money now because they would be able to consume a higher real level of consumption.

I'm still learning how to use my Livescribe Pen to blog. As you can see the top half of this page was posted yesterday. I tried to save a dollar by using the bottom of the paper, but apparently you cannot do that. Each day I make marginal improvements.

Minimum Wage in Unskilled Labor Market

Jokes
brought to you by Livescribe

Are Squirrels Rational?

Do squirrels respond to incentives?  If I lower the cost of eating, do squirrels eat more?  My experiment suggests that they do.

I spent a lot of time this summer in our backyard making a bird sanctuary for bird watching.  I would buy exotic bird feed only to have the squirrels perform acrobatics to eat it before the birds could arrive.  So I decided to lower the cost of eating for the squirrels.  I bought shelled peanuts, whole kernel corn, and sunflower seeds.  The little rodents ate that instead of my bird seed.

I believe that the squirrels face a downward sloping demand curve.  They will increase the amount of food that they will eat if I lower the price everything else being equal.

Marginal Analysis

Jokes
brought to you by Livescribe

I'm relearning how to use my Livescribe Pen. Last year, this lecture would have taken 30 minutes, now, two minutes and 44 seconds. I still need a lot of work, but I can see possibility.

Republican Santorum

Republican presidential hopeful, Rick Santorum, was in Muscatine today campaigning.  Rick is very approachable and answers questions directly.  Mr. Santorum believes that government is too big.  He is against a government-run health care system and ending entitlements.  He is a Tea Party candidate.  I like how he was on time.  Tomorrow, I get to meet with Ron Paul.

Jason Welker Explains Loanable Funds

This post is so superior to anything I could write so I'm posting it here.

You will hear Niall Ferguson and Joshua Cooper Ramo on CNN discuss the deficit.