Critical thinking is one of the most important skills to learn in any course. One of several questions economists should ask themselves is how variables are defined. Which of the following is an example that illustrates the importance of questioning how economic variables are defined? A New Jersey study shows that when the minimum wage increases, the unemployment rate decreases. The study concludes that an increase in the minimum wage benefits the overall economy. The city of Washington D.C. raises the tax on gasoline because it needs to raise tax revenues and decrease its budget deficit. After the tax raise, the city discovers that overall tax revenues have declined. Data show that average wages in the economy have declined. The study concludes that the average person in the economy is worse off financially. The production possibilities curve shifts out. This means that unemployment has decreased.
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A New Jersey study shows that when the minimum wage increases, the unemployment rate decreases. The study concludes that an increase in the minimum wage benefits the overall economy. Here, we should question how the unemployment rate is defined and measured. Are Show more…
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1. An economist is interested in the effects of exchange rate regimes on economic performance. She gathers the observations in the table below. | | Sample mean | Sample standard deviation | Sample size | |---|---|---|---|---|---| | Countries with: | inflation rate (%) | output growth (%) | inflation rate | output growth | | | fixed exchange rates | 8.4 | 3.1 | 2.01 | 0.46 | 532 | | floating exchange rates | 15.2 | 2.9 | 2.27 | 0.35 | 219 | a. Test the hypothesis that the mean inflation rate of countries with floating exchange rates is 10%. b. Test the hypothesis that the countries with fixed exchange rates have the same mean inflation rates as countries with floating exchange rates. Assume the population variances are different. c. Test the hypothesis that the countries with fixed exchange rates have lower variance in their inflation rates than countries with floating exchange rates. Explain why this might matter. d. Describe the errors that we might have made in deciding whether or not to reject these hypotheses. Provide some intuition for these probabilities and explain how we might reduce them.
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The phenomenon where traditional tools of monetary policy become ineffectual as (nominal) interest rates approach or hit zero (aka the zero lower bound) is known as the liquidity trap, inelastic investment demand, the paradox of thrift, Beibermania, or inelastic money demand.
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