SOME ANSWERS AND COMMENTS ON THE TEXT DISCUSSION QUESTIONS
One reason behind the argument that the government should attach a value to homemaking services and include it in GDP statistics is that our society seems to value production that does have a value attached. How many homemakers, when asked what they do, say, “I’m just a homemaker”? How many farm wives who do the milking, the gardening, the canning, and the care of the livestock are referred to as “just housewives” rather than farmers? I’ve even heard women in less developed countries; where cooking means growing, harvesting, processing, and cooking the food; where housekeeping means building, repairing, painting, and cleaning the house; and where childcare means providing medicine, education, health care, and clothing for the children; say that they do not feel valued until they earn a monetary income.
Another problem with not counting the value of homemaking services is that comparisons become distorted. For example, in the 1950s, many homemakers cared for their homes and families by themselves, without paying for additional help. In the 1980s and 1990s, many women work outside their homes, and pay for child care services, laundry services, housekeeping services, and so on. The very same homemaking services might have been done, but were not tabulated as part of GDP in the earlier time period.
2. While there are problems with the use of GDP as a measure of economic activity, there are even more serious problems with the use of GDP as a measure of standards of living. International comparisons discussed in Chapter 16 on Economic Development will make this even more evident.
3. We think it’s good for students to know the macroeconomic ramifications of the various government policies. For example, we normally don’t think that a nation will go to war just to improve its macro economy, yet the stock market couldn’t have been more optimistic during the War in the Gulf.
4. Liberals prefer fiscal policy that increases government purchases and income transfers (though conservatives generally approve of increases in defense spending). Conservatives prefer fiscal expansion through reduced taxes. Conservatives also tend to favor policy that reduces interest rates. These are all generalities; of course the real world is more complex.
5. This one is a harder one. Tell students you don’t believe it was successful in the early 1980s, and you’ll be branded a liberal! Point out the various ways to look at the effects of the policy, and students will welcome your impartiality. For example, there may be some types of supply side policies that work better than others (some policies, such as antitrust enforcement and affirmative action, may even be considered as supply side policies). Chapter Seven on Poverty does a good job of explaining how many people can be left out of the prosperity of the economy.
Which of the following is a tool of supply side policy?
reduction in tax rates
increase in government regulations
increase in government transfers
all of the above
Business purchases include:
purchases of machinery.
purchases of factories.
“purchases” of inventories.
All of the above.
The effects of stagflation include:
all of the above
Expansionary monetary policy involves:
an increase in the money supply.
a reduction in interest rates.
an increase in business and consumer purchases.
all of the above
T 1. The letter “P” on the vertical axis of the graph of aggregate demand and aggregate supply refers to the average price level in the economy.
T 2. Gross domestic product is defined as the market value of all final goods and services produced in the economy, over a particular time period.
F 3. Aggregate supply shows the quantity of total output supplied (produced), assuming that the average price level in the economy is constant.
F 4. If we are interested in the value of GDP during the current year only, then we are interested in real GDP.
F 5. Underground activities refer to activities such as homemakers’ services, which do not create incomes.
T 6. The composition of GDP refers to the types of goods and services that GDP consists of.
T 7. Durable goods are those goods that last longer than one year.
F 8. Business purchases of GDP include the purchases of stocks, bonds, and treasury bills.
F 9. Fiscal policy includes government purchases of goods and services, government taxes, and Federal Reserve decisions about the money supply in the economy.
T 10. Supply side policy can include deregulation and cuts in tax rates.
F 11. My current purchase of a 10-year old house is part of current GDP.
T 12. The price the consumer pays for a gallon of gasoline, including any excise taxes, is called the market price of gasoline.
T 13. Production by a foreign citizen in the U.S. is part of U.S. GDP.
T 14. Production by a U.S. citizen in a foreign country is part of U.S. GNP.
T 15. Two different types of fiscal policy may result in identical levels of GDP but a different composition of GDP.
F 16. Expansionary monetary policy results in increased interest rates.
T 17. Changes in government income transfers may be considered as fiscal or supply-side policy.
F 18. (appendix) The aggregate demand curve is downward sloping because higher average price levels directly reduce our purchasing power by making goods and services more expensive.
T 19. (appendix) One of the reasons for the downward sloping aggregate demand curve is that a higher average price level is associated with higher interest rates, thereby reducing purchases.
F 20. (appendix) An increase in aggregate demand along the Keynesian (flat) portion of aggregate supply results in increased GDP and a higher average price level.
(Answers are shown in the following graphs in order to distinguish between AD and AS shifts.)
Draw the shift that will occur if there is an increase in government income transfers, which increase the incomes of many consumers. What will be the effect on GDP and employment? ______________ What will be the effect on the average price level? ________________
(Note that on questions of this nature, instructors must be extremely careful to distinguish between changes in taxes and transfers as fiscal policy tools vs. supply-side policy tools. Questions need to be phrased with reference to the effect of a change in transfers and taxes on income versus work incentives.)
Draw the shift that will occur if there is an increase in government purchases of public libraries. What will be the effect on GDP and employment? ____________ What will be the effect on the average price level? ________________
Draw the shift that will occur if the government reduces regulations requiring consumer safety for automobiles and other manufactured goods, thereby lowering the costs of production. What will be the effect on GDP and employment? ____________ What will be the effect on the average price level? ____________
Draw the shift that will occur if there is a reduction in tax rates that successfully increases work incentives and work effort by the labor force. What will be the effect on GDP and employment? ________________ What will be the effect on the average price level? ________________
Draw the shift that will occur if there is a reduction in taxes that serves to increase the after-tax income of consumers. What will be the effect on GDP and employment? _____________ What will be the effect on the average price level? ______________
6. Draw the shift that will occur if the government reduces transfers, that we will assume results in greater work incentives and work effort by the labor force. What will be the effect on GDP and employment? ________________ What will be the effect on the average price level? _______________
Draw the shift that will occur if the Federal Reserve increases the money supply, thereby lowering interest rates. What will be the effect on GDP and employment? _____________ What will be the effect on the average price level? _____________
Draw the shift that will represent each of the following types of inflation.