Office Hours for Exam II

ECON 251 – Fall 2015

Office Hours for Exam II:  Sunday 3- 5 p.m.  Monday 3-6 p.m.

1. Read the following pages (48-49) from the Economic Report to the President and answer the following question: What role does entrepreneurship have in productivity increases?

This report can be downloaded from the class webpage at http://courseweb.stthomas.edu/mehartmann/macro/macro_econ.html

2. Harrison, David and Ryan Dube. “Peru's Economic Woes Echo Latin America's.” Wall Street Journal October 12, 2015, page A11.

Article Summary: Peru, the site of this year's International Monetary Fund (IMF) annual meeting, is now symbolizing the macroeconomic plight of Latin America. The IMF now forecasts the region's output to contract in 2015 for the first time in six years, while inflation is expected to soar into the double digits. Latin American countries are suffering from China's economic slowdown, which has crimped the region's commodity exports.

Based on your macroeconomic knowledge, please answer the following questions: a. Demonstrate how China's economic slowdown has slowed down economic output in Peru. (Hint: cookie cutter approach step 1-3). b. What policy action would the Central Bank of Peru take to lower inflation? Using a macroeconomic framework, including diagrams, explain the effects of this action on real GDP and price levels. (See lecture notes.) (Aside: the Central Bank of Peru is the equivalent to the Federal Reserve.) c. What policy action would the Central Bank of Peru take to raise economic growth? Using a macroeconomic framework, including diagrams, explain the effects of this action on real GDP and price levels. (See lecture notes.) d. “[Peru] is focusing on [improving its] education and infrastructure, while trying to cut red tape and bring more workers into the formal sector to increase productivity.” Explain how this affects potential output and consequently employment.

3. “Fed Chairwoman Janet Yellen has said she believes an improving labor market would eventually nudge inflation higher, allowing the Fed to raise rates before then end of the year.” (Source: “U.S. Consumer Prices Fall, Clouding Fed Rate Decision.” Wall Street Journal October 16, 2015, page A2.)

Explain why. (Hint: cookie cutter approach step 1-3).

4. Read the summary of the Wall Street Journal article “Rising Euro Jeopardizes Bloc's Economy” (10/25/13)

VALLETTA, Malta—European Central Bank President Mario Draghi signaled that the bank is prepared to undertake another large stimulus package that could include more bond purchases and a cut to the already negative deposit rate, as the eurozone struggles with ultralow inflation and a tepid recovery. “It was not a wait-and-see, but it was a work-and-assess,” Mr. Draghi said Thursday of the spirit of the ECB’s governing council meeting, which took place in euro member Malta. “We are ready to act if needed, we are open to a whole menu of monetary policy instruments.” … Mr. Draghi’s strong hint at additional stimulus underscores the fragile state of the global economy and continued reliance on super-easy monetary policies. The Federal Reserve last month decided to keep interest rates near zero despite the U.S. having a faster, jobs-filled recovery than Europe. The Bank of Japan is in the midst of a large asset-purchase program and the Bank of England still has its policy rate at a record low. …At Thursday’s news conference, ECB Vice President Vítor Constâncio ticked off a litany of reasons why prolonged weak inflation, or sustained falls in prices known as deflation, worries central bankers and justifies the massive stimulus many have undertaken. Falling prices may cause consumers to put off purchases if they expect that trend to continue, he noted. It also raises the cost of servicing debt. In addition, he noted that official consumer price measures may overstate the extent of inflation.

For deflation to take hold, consumers and businesses would have to expect price falls to continue. Central bankers want to persuade households and financial markets that, whatever its current reading, the inflation rate will be around their target over the medium term, in which case they describe inflation expectations as being “anchored.” … a. What is ECB? (Google if you do not know what it is.) b. What is deflation? How does deflation hurt an economy?