Last updated: October 30, 2001
REVIEW FOR SECOND MIDTERM

EC 200 - ECONOMIC LIFE
Dr. Tran Huu Dung

Office: 254 Rike Hall
Office Hours: MTWTh 11:30 am -12:30 pm, MW 5:30-6:00pm, or by appointment
Phone:  (937) 775-2295
Fax: (937) 775-2441
Email: tran.dung@wright.edu
Main home page: http://www.wright.edu/~tdung/
Welcome to the EC 200 webpage!

This webpage is for you, students taking this course from me (Tran Huu Dung) at Wright State University.  If you are taking this course from other professors, this page is not for you.  I do have some stuffs that might be of interest to visitors, please click here to go to the main gate to my homepage, and navigate from there.

Informationabout the course is detailed in the syllabus distributed in class.  If you have misplaced your copy, email me, I'll send you a replacement.

If this is the first time you are taking a course with me, please send me an email ASAP to introduce yourself (your name, your major, your aspiration, and anything you care to tell me).  The more I know about you, the better I can tailor the course to your background and your needs.

Visit this page as often as possible (it's a good idea for you to bookmark it).  Also visit the companion page, Readings on Economic Life.  I post new articles here first, then archive them in that page.

See you in class!

THD

 

OBJECTIVES OF THE COURSE

This course is designed to introduce economics to non-business majors.  It offers students a broad knowledge of economic issues and institutions relevant to the contemporary world, and provides them with the basic rules for efficient decision making for households and business firms.  Topics include supply and demand, costs, profits, fiscal and monetary policies.  Special attention is paid to international economic relations.

This course is part of the General Education (GE) curriculum at Wright State University.  As such, it tries

(1) To make you a more critical thinker, a better problem-solver, and a more effective communicator.  Your whole life will be much better that way.

(2) To make you more deeply aware of what's good and what's bad, morally and ethically, so you can be a more valuable member of mankind.

(3) To make you know more, and understand more, both the past and the present, and how the future will be shaped.

SUMMER 2003 TENTATIVE SCHEDULE

.

Week

Date

Topic

Chapter

1

M

T
W
Th

Introducing the Economic Way of Thinking
Production Possibilities and Opportunity Cost
Market Demand and Supply
Markets in Action
Production Costs

1
2
3
4
6

2

M
T
W
Th

Perfect Competition
Monopoly
Labor Markets and Income Distribution

FIRST MIDTERM

7
8
10

3

M
T
W
Th

Gross Domestic Product
Business Cycles and Unemployment
Inflation
Aggregate Demand and Supply

11
12
13
14

4

M
T

W
Th

Fiscal Policy
The Public Sector
Federal Deficits, Surpluses, and the National Debt
Money and the Federal Reserve System

SECOND MIDTERM

15
16
17
18

5

M
T
W
Th

Money Creation
Monetary Policy
International Trade and Finance

FINAL EXAM

19
20
21

 

IMPORTANT CLASS RULES

Attendance is recorded and will be taken into consideration in borderline cases
OTHER RESOURCES
Readings in Economic Life
Web page for the textbook
[click here for the PowerPoint Presentation Slides prepared by the author himself]


REVIEW FOR SECOND MIDTERM
!WHEN? THURSDAY NOVEMBER 1, 2001

!WHERE? REGULAR CLASSROOM (You should know where it is)

!EQUIPMENT NEEDED:
      Pencil or pen
      Calculator (optional)
      Brain
      (But NO notes, NO books)

!TYPE OF EXAM:
      10 True-False questions
      30 Multiple Choice questions

!HOW IMPORTANT IS THIS EXAM?
      30% of the total score for the course

!WHAT TO STUDY IN THE TEXTBOOK
      Chapters 12, 13, 14, 15

!  MAKE SURE THAT YOU KNOW:

1. Definition of GDP (real and nominal), disposable personal income
2.  How to measure unemployment, different types of unemployment
3. How to measure inflation, real and nominal income
4. Aggregate demand and aggregate supply
5. What could cause AD and AS to shift
6. Shapes of AS curve according to various schools of economists
7. Cost push inflation and demand pull inflation
8. Graphical analysis of equilibrium GDP and price level using AD and AS curves
9. Fiscal policy

REVIEW FOR FIRST MIDTERM
!WHEN? TUESDAY OCTOBER 9, 2001

!WHERE? REGULAR CLASSROOM (You should know where it is)

!EQUIPMENT NEEDED:
      Pencil or pen
      Calculator (optional)
      Brain
      (But NO notes, NO books)

!TYPE OF EXAM:
      10 True-False questions
      30 Multiple Choice questions

!HOW IMPORTANT IS THIS EXAM?
      30% of the total score for the course

!WHAT TO STUDY IN THE TEXTBOOK
      Chapters 1, 2, 3, 4, 6, 7

!  MAKE SURE THAT YOU KNOW:

1. The concept of scarcity
2. The definition of economics
3. Opportunity costs
4. Production possibilities curve
5. Demand, quantity demanded, demand schedule, demand curve, substitutes and complements, normal goods and inferior goods.
6. Supply, quantity supplied, supply schedule, supply curve
7. Law of demand
8. What could cause the demand curve to shift.
9. What could cause the supply curve to shift
10. Market equilibrium
11. Effects of demand and/or supply curve shifts on market equilibrium
12. Price ceiling, price floor
13. Short run and long run
14. Production and the law of diminishing returns
15. Fixed costs and variable costs
16. Characteristics of a perfectly competitive firm
17. How a perfectly competive firm maximizes its profits


  • Global Recession Near, Some Economists Say [Washington Post 9/27/01]--Confidence, Already Damaged by U.S. Slump, Further Dented by Attacks and War Concerns
  • The clouds darken:  Airlines' woes leave others lurching [Boston Globe 9/21/2001]
  • How to Stimulate the Economy? [Economist 10/4/01]--Central banks have reduced interest rates to their lowest levels for decades. But have they done enough to revive the sickly world economy?

  •  

    Wall Street Journal
    October 8, 2001
     

    High Employment Appears to Be Over In Wake of Attacks
    Former Welfare Recipients Who Found
    Work Now Get Apologies and Pink Slips
    By JACOB M. SCHLESINGER and RUSSELL GOLD

    .....

    Beyond the obvious economic damage of Sept. 11 -- the stock-market plunge, sputtering airlines and the heightened risk of recession -- lurks another threat: an end to the late-1990s golden era of low unemployment.

    Until the mid-1990s, most economists thought the "natural," long-run unemployment rate for the modern American economy was about 6%. Anything lower for any extended period of time would cause inflation to gallop out of control, the experts said. In mid-1997, the experts were proved wrong, as the jobless rate fell below 5% for the first time since 1973 -- and prices stayed low. The jobless rate hasn't returned to 5% since. But that is almost certain to change.

    On Friday, the Labor Department released its monthly employment report for September, which said the unemployment rate remained at 4.9%, the same as in August. But the report was based on surveys taken before the wave of post-Sept. 11 layoffs. And even the report's earlier data suggest a considerable weakening of the labor market, pointing to higher joblessness in the future -- and pain for the less-well-off Americans who benefited from the late-1990s boom. Businesses cut payrolls by 199,000 in September, the biggest monthly contraction of jobs since February 1991, during the last recession. Since January, payrolls have fallen by 800,000.

    "October job loss could easily be worse," says Merrill Lynch & Co.'s chief economist, Bruce Steinberg. "The unemployment rate is headed for 6%."

    The ultra-low jobless rate of the late 1990s stemmed from the rapid overall growth of that period. From 1997 through 2000, the economy expanded at a 4% annual pace, well above the 2% to 3% rate most economists had considered the country's speed limit. The technology boom, globalization, the federal government's move from deficits to a surplus -- all of these helped spur a sustained expansion of jobs.

    Faster growth meant factories produced more, stores sold more, and companies of all kinds needed more workers than in any other recent period in American history. Among those who benefited the most were high-school dropouts, racial minorities and immigrants. To cope with short-run labor shortages, companies expanded training, which, in turn, paid long-term dividends to trainees.

    With competition for workers becoming more intense, companies had to raise wages -- and offer benefits -- for many entry-level workers. Poverty rates dropped. Millions of women moved off welfare rolls and onto payrolls. A quarter-century trend toward ever-wider income inequality slowed.

    All of those developments now are threatened. Even before Sept. 11, demand for workers was falling. Since the attack, the labor market has deteriorated sharply, especially in industries such as travel and tourism, which have been among the biggest sources of entry-level jobs in recent years.
    ....
    A surge of layoffs, which began before Sept. 11 and has intensified since, comes at a time when the government safety net has been weakened. The federal government and states have made it harder for people to qualify for welfare and have limited the funds available for benefits.

    Meanwhile, many people who are laid off -- especially those who have just left welfare -- are finding it hard to obtain state unemployment insurance. States often require workers to have held a job for a certain length of time and peg insurance payments to income level.
    .....
    To help cushion the economic blow of Sept. 11, President Bush last week proposed to make additional federal money available to the hardest-hit states to extend the duration of unemployment benefits and to make it easier for unemployed workers to qualify. Democrats in Congress are pushing for a more generous package.

    There is less movement in Washington on providing affordable health insurance to those who lack it, including many of the now-laid-off low-wage workers who can't afford to pay the premiums to continue coverage. Boston's Ms. Vanriel says her Park Plaza insurance runs out in November. She doubts she can afford the $600 monthly payments needed to continue that coverage. Yet she isn't sure she can afford not to: One of her daughters has a lump in her breast, which hasn't been diagnosed, but Ms. Vanriel fears it could be cancer.

    Some good news is mixed with all the bad. The Sept. 11 attack has led some businesses, such as security firms, to step up hiring of entry-level workers. "Our placement rate in New York hasn't really changed much over the last three months," says Peter Cove, founder of America Works Inc., a New York-based firm that specializes in finding jobs for welfare recipients and other hard-to-employ people. "There's been a shift in demand," he says, with airport food-service vendors cutting back but "a real uptick for us at security companies." After one of Mr. Cove's clients, Tremayne Rice, a 20-year-old high-school dropout, lost his $7.50-per-hour maintenance job at New York's John F. Kennedy airport, he quickly found work as a 40-hour-a-week, $7-an-hour property guard elsewhere in New York.

    As long as the unemployment rate doesn't rise too much for too long, some progress from the 1990s will endure. Many of the people who joined the labor force over the past five years but are now losing jobs will be better prepared to find new ones in the future.

    When Ronald Reagan National Airport in Washington was shut down from Sept. 11 to Oct. 4, Sheila Johnson, a 39-year-old mother of three, was laid off from her $5.15-an-hour job as a passenger escort. She's back now, but equally important, she says, having her first paid job in 17 years has given her the confidence to think she might be able to find another one if she has to. "At least I have a foot in the door," she says.

    Getting a foot in the door was a big part of the story of the 1990s.

    The U.S. enjoyed periods of strong growth in the 1970s and 1980s. But a large group was left behind. From late 1974 through 1994, the jobless rate mainly stayed above 6%. Wages and salaries for lower-income and even middle-class workers stagnated, barely rising through the 1980s and early 1990s. Meanwhile, the gap between the best-paid and worst-paid soared. The share of total income paid to the top 5% rose to 21% in 1993 from 15.6% in 1981.

    That changed with the expansion that began in March 1991 and kicked into high gear five years later. By September 2000, the jobless rate had fallen to 3.9% for the first time since 1970. For African-Americans, the rate fell to 7.2% at one point, the lowest level since the government started keeping such statistics in 1972. The percentage of working-age Americans working or seeking work hit a record 67.4%.

    Pay rose. From 1994 through 1999, median household income increased 14%, hitting $42,187 in 1999 before slipping in 2000, to $42,148. By March of 2001, the percentage of American households living below the poverty line had fallen to 11.3%, the lowest level since 1973.

    When President Clinton signed into law sharp cutbacks in public assistance in 1996, critics predicted a surged in poverty, as inexperienced people were pushed into a wary labor market. Instead, the unanticipated rise in demand for workers boosted employment rates for those leaving welfare higher than expected, says Sheila Zadlewski, a researcher at the Urban Institute, a think tank in Washington. Studies published earlier this year found that about 40% of former welfare recipients had found full-time work, she says. Another 20% had found part-time work. The median wage for those workers was about $7.15 an hour, a full $2 above the minimum wage.

    Then, with economy slumping, the planes smashed into the World Trade Center and the Pentagon. Already-weakening demand for the least-skilled, least-experienced workers declined further. The jobless rate for African-Americans in September was 8.7%, more than a full percentage point higher than the recent low. The jobless rate for high school dropouts hit 7.8%, also well above the expansion's low and a sharp jump from August.

    Companies are getting choosier about whom they hire and less generous to those they do hire. During the boom, some employers took unskilled workers and incurred the expense of teaching them job skills. But in recent months, Ecolab Inc. of St. Paul, Minn., has halted most of its on-site math classes. "We are not trading down any more, saying I would like to have someone with a high school degree and five years experience, but I'll settle for someone with the high school degree and no experience," says Diana Lewis, senior vice president of human resources for the manufacturer and distributor of industrial cleaning products.

    In Detroit, not so long ago, some auto makers were hiring inexperienced temporary workers after arranging for them to shadow a company employee for a month. Now, the manufacturers increasingly are demanding temps who have actual experience working for them for at least a few months.

    For a growing number of workers, the job market has dried up completely. In September, 60.6% of unemployed workers had been out of a job for at least five weeks, up from 54.5% a year earlier.
     
     


    New York Times
    September 23, 2001

    The Prospect of a War Without a Wartime Boom

    By RICHARD W. STEVENSON
    WHATEVER else they are, wars are usually good for the economy, at least in the short run. World War II completed the job of pulling the United States out of the Depression. Vietnam helped fuel a nearly decade-long boom during the 1960's.

    This time, however, someone forgot to tell the stock market. When Wall Street got back to business last week, the Dow plummeted 14.3 percent, its worst one-week performance since 1933.

    This, as President Bush has said repeatedly, is a new kind of war. And it will be fought by a nation whose muscle derives in part from having a new kind of economy, one whose response to the war is unlikely to follow any previous script.

    The attacks on the World Trade Center and the Pentagon clearly dealt a sharp blow in the short run to commerce, the financial system and consumer confidence. The business expansion that began in 1991 and reached record length at the beginning of last year, bringing unemployment to 30- year lows and the federal budget surplus to a record high, may finally have come to an end. The airline industry teetered on the brink of financial collapse last week as planes flew almost empty.

    Conceivably, some quick, visible progress on the military front, combined with credible efforts to ensure security at home, could lead to a rapid return to normalcy. But the prospects for such a benign outcome don't seem good.

    It is hard to predict the effect a prolonged campaign against terrorism will have on a form of capitalism built around risk-taking, technological advances, lightning-fast reactions and a willingness to let goods, money and people move freely.

    This is not going to be a conflict in which housewives flock to factories to build fighter planes. It may not even be one in which consumers, rather than going to the mall, sit around for weeks watching cruise missiles streak into foreign capitals on CNN.

    But it could be one in which the national, and global, psychology, now more than ever a vital determinant of economic vibrancy, is affected for a long period. And despite the appeal to investors to buy stocks as a patriotic duty, financial markets, the modern economy's central nervous system, are almost sure to remain jittery if not depressed.

    Consumers, suddenly fearful of losing their jobs or feeling poorer as their stock portfolios erode, could choose not to buy that new car or splurge on that blouse. The willingness to gamble, to invest time, money and energy in an idea, could be blunted, sapping the nation's entrepreneurial spirit. "If it changes the way we do business on a long-term basis by imposing risks on air travel, creating incentives to disperse financial activities and culturally making people more cautious," said Peter Morici, a senior fellow at the Economic Strategy Institute, a research organization, "then we're going to have a terrorist tax on growth. It would rob us of a piece of that new economy."

    After dealing with the immediate crisis of keeping the financial system operating and getting Wall Street up and running again an effort that was encouragingly successful economic policymakers began trying last week to sort out all the uncertainty.

    After initially rushing toward adoption of a big stimulus package, to be paid for out of a budget surplus that had previously been reserved for debt reduction, Congress and the White House pulled back abruptly last week. They did so largely at the urging of Alan Greenspan, the Federal Reserve chairman, who said there was as much risk in overreacting or choosing the wrong antidote as in delaying or acting too timidly.

    The Fed itself acted forcefully after the attacks, cutting interest rates and making sure banks and investment firms had all the cash they needed. Congress and the administration hastily drew up and debated legislation to keep the airlines solvent. And there may still prove to be a need for a combination of new tax cuts and additional spending to spur more economic activity by individuals and businesses, Mr. Greenspan said.

    But the degree of help the economy needs cannot be assessed accurately for a few weeks, he said. And there is a risk, he added, that a rush to prop up the economy would prove counterproductive if the government could no longer afford to make good on its plan to pay off most of the national debt in the next decade. That would leave less money in the economy for investment in businesses, which would drive interest rates higher than they would be otherwise.

    Mr. Greenspan's warning had the effect of torpedoeing an effort by some Republicans to push through a quick passage of tax cuts, including a reduction in the capital gains tax.

    THUS far, despite the mounting toll of layoffs, the loss of hundreds of billions of dollars in stock market wealth and a new consensus among economic forecasters that the United States has entered a recession, Mr. Bush and his team tried to emphasize the positive. Treasury Secretary Paul H. O'Neill even suggested that it might be a good time to buy stocks.

    But investors peered into the future, saw little to cheer about and sold. Companies began delaying or canceling expansion plans, and warning that they would reduce their work forces. Japan, which has been wallowing in a slump for a decade, looked more wobbly than ever, as did other industrialized and developing nations. If the United States falters, it will further hurt the international economic outlook which in turn will deepen problems at home.

    Mr. Greenspan has devoted considerable time in recent years to studying the psychology of economic shocks and panics. One of the economy's strengths is that technology has allowed businesses, investors and consumers to spot change even as it is occurring and respond almost instantaneously. Such speed is usually a good thing. But sometimes, Mr. Greenspan has suggested, it blows our economic circuits.

    "It has become evident time and again that when events become too complex and move too rapidly," Mr. Greenspan said in a speech several years ago, "human beings become demonstrably less able to cope. The failure of the ability to comprehend external events almost invariably induces disengagement from an activity, whether it be fear of entering a dark room, or of market volatility."

    Right now the American economy seems to be poised at that doorway. And no one knows whether the lights on the other side are on or off.


    September 19, 2001

    Steelmakers Push for Trade Protections,
    Calling Sector Key to National Security

    By ROBERT GUY MATTHEWS
    Staff Reporter of THE WALL STREET JOURNAL
     

    WASHINGTON -- The U.S. steel industry, alluding to last week's terrorist attacks, says that safeguarding its health is a matter of national security that warrants unprecedented trade protections and strong sanctions against foreign steelmakers.

    Industry representatives also are calling on financial institutions, which in recent years have shunned most steelmakers, to provide capital to keep operations going.

    Steel lobbyists, union leaders and elected officials from steelmaking states are presenting their arguments this week in hearings here before the International Trade Commission, an independent federal agency charged with determining whether the domestic steel industry has been injured due to a surge of imported steel since 1998.

    Last week's events have provided them with a new argument: that domestic steel is vital in serving the military, rebuilding New York and Washington and maintaining the nation's infrastructure. Some steelmakers, such as Bethlehem Steel Corp., Bethlehem, Pa., and Ipsco Inc., Lisle, Ill., which make heavy plate for shipbuilding, have seen their stocks rise this week.

    "Last Tuesday, our steel crisis, already a national security threat, became a national emergency," Sen. John Rockefeller IV, a West Virginia Democrat, told the ITC board. "Without steel, we cannot guarantee our national security. Without steel we cannot rebuild from our national tragedy."

    The world steel industry is in the middle of one its most unprofitable and volatile periods ever. Domestic steelmakers have been mired in red ink and foreign steelmakers absolutely need to continue selling in the relatively open U.S. market to stay profitable. About 20 U.S. steel makers have filed for Chapter 11 bankruptcy-law protection since 1998, in part due to a glut of steel that sent prices to 20-year lows.

    Concerned with the alarming number of steel bankruptcies, President Bush in June instructed the ITC to launch an investigation under Section 201 of the 1974 trade act and recommend whether he should, in effect, wall off the country from key steel products. The ITC is expected to come up with its recommendations toward the end of the year and President Bush is expected to announce his decision sometime in February.

    Though imports have begun to fall this year, the level is still higher than before 1998. Foreign steelmakers argue that the market is beginning to correct itself because of falling imports and that there is no need for more trade sanctions. Domestic steelmakers argue that the damage already has been done to their companies and that the imports are lower because overall demand is lower.

    Domestic steel makers have tried to cover their debts by raising prices for key steel products, but consumers refused to pay. Very few major steel makers are profitable. Nucor Corp., Charlotte, N.C., and AK Steel Holding Corp., Middletown, Ohio, managed to make money last year because of lower costs. The industry is hovering around 75% capacity, a level too low to be profitable for many companies. And it doesn't look as if the next few quarters will bring any relief. Analysts have downgraded steel stocks because of forecasts of slowing demand.

    Robert Lighthizer, an attorney who represents Pittsburgh-based USX-U.S. Steel Group, Bethlehem and National Steel Corp., Mishawaka, Ind., all domestic integrated companies that have been losing money, said there is no question that the domestic steel industry has been injured. "The cause, foreign imports, is clear to us," he said.

    William Barringer, a lawyer representing foreign steel interests, told the ITC that domestic steelmakers are hurting because of poor investments, inefficient capacity and failure to be competitive. "This is not about national security. And despite the tragic events of last week, this is not about what happened last week."

    Charles Bradford, a steel analyst for Bradford Research, said an infinitesimal amount of steel is used in military applications. He calculates that less than 0.09%, or about 31,000 tons last year, is used for tanks and ships. Generally, airplanes and missiles and other war tools require lighter metals such as aluminum or composites of specialized metals, such as titanium.

    But Leo Gerard, president of the United Steelworkers Union, who has argued for months that steel is vital to national security, says that looking at steel only for military applications is shortsighted. Steel is used in bridges and roads and buildings, he said. "Why should we rebuild America's infrastructure with foreign steel?"

    Mr. Gerard said the union will be sending out a letter as early as Wednesday to Wall Street financial institutions, Senate finance and banking committees and other officials making the case for investing in steel companies and other manufacturers. Lenders have practically abandoned the steel industry, regarding the companies as too high-risk. "The letter will be a little more assertive on the issue of national security," Mr. Gerard said.

    As the ITC hearings continue, dozens of foreign steelmakers have gathered in Paris this week to discuss an initiative to cut capacity from the steel market. It will be a difficult measure to achieve because no steelmaking country wants to close plants and lay off thousands of workers to better balance demand and supply. The world makes about 10% more steel than it needs, and if its economy continues to falter, the gap between supply and demand is sure to get wider. That would hit U.S. steel companies, with their high production costs, the hardest.

    Both foreign and domestic steel makers expect President Bush to institute some kind of sanctions against foreign steel. The real question is which foreign steel products will be heavily taxed or hit with high tariffs.


    Why Married Men Earn More
    (Business Week September 17, 2001)

    What explains the so-called marriage premium--the fact that married men tend to earn more than single men of similar backgrounds and educations? Economists have been divided on the issue.

    Some believe that married men earn more because women tend to select mates with good earnings prospects. Others credit the institution of marriage itself, arguing either that it makes men more responsible and diligent or that it boosts their productivity by freeing them from housework and allowing them to focus more on their jobs.

    In a new study in the journal Economic Inquiry, Hyunbae Chun, of Queens College in New York, and Injae Lee, of New York University, claim to solve the puzzle. Analyzing 1999 survey data covering nearly 2,700 men, they find that married men earn an average of 12.4% more per hour than never-married men, after adjusting for age, work experience, education, and other factors that may affect both wages and marriage prospects.

    The two researchers find no evidence that the marriage premium reflects the better economic prospects of men who tend to get hitched. Rather, it appears related to the state of being married--and specifically to the likelihood that wives shoulder household tasks.

    Chun and Lee report that the wage gap declines as wives put in more hours working outside the home. While married men whose wives aren't employed earn about 31% more per hour than never-married men, for example, men married to women with a full-time job earn only 3.4% more.

    Thus, having a wife who devotes most of her time to raising the kids and other housework evidently pays off for dad in his work on the job. All of which implies that the marriage premium will inevitably shrink as more wives spend longer hours at outside jobs.