First Short Quiz – THE BASICS: Economics 101 (Micro or Price Theory) and Economics 102 (Macro or Fiscal/Monetary Theory)

[johnkarls]

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The following is offered by someone who majored in economics before going to law school in 1964 – but has been a keen observer for the ensuing 60 years.

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A. Introduction – The “Dismal Science”

1. Has economics been called the “dismal science”?

2. Was this phrase coined in the 17th century to refer to Malthusian economics – that any increase in food production would lead to population increases rather than an increase in the standard of living? And that population increases might not be matched by increases in food production, leading to catastrophe?

3. Could it also be applied to Economics 101 (Microeconomics or Price Theory) because it is the study of shortage?

4. For example, do you wear a meter around your neck that measures the air you breath in order to present you with a monthly bill?

5. But what happens when the supply of something is less than the demand? Is there a price at which demand is curtailed sufficiently that the supply is sufficient?

6. Would it be incorrect to apply “dismal science” to Economics 102 (Macroeconomics or Fiscal/Monetary Theory)?

7. Is this because Macroeconomics or Fiscal/Monetary did NOT exist until relatively recently?

8. In other words, the Great Depression (1929 to World War II) occurred because politicians and economists did NOT know what to do – as a result of which their actions exacerbated the problem?

9. Though, of course, the pols don’t obey the constraints of Fiscal/Monetary Theory (much less any new toy), and they cause inflation and run up the national debt?


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B. Economics 101 – Microeconomics or Price Theory

1. Do many things have no price such as the air you breathe for which you are not charged via a meter worn around your neck?

2. BTW, does that air still have a price in the sense of EPA regulations which impose restrictions on sources of air pollution? After all, don’t those EPA regulations impose a cost on the would-be air polluters?

3. If something does have a price, is it because there would be a shortage in the absence of a price?

4. In other words, does the price serve to auction off the available supply to whomever can pay the most?

5. Is this illustrated in those dreaded (by some students) graphs which typically -

A. show price on the vertical axis,
B. quantity on the horizontal axis,
C. supply represented by a sloping line rising from left to right as price increases,
D. demand represented by a sloping line descending from left to right as price increases, and
E. equilibrium at their intersection which point’s height on the vertical axis is the price and whose distance on the horizontal axis is the quantity?

6. Is the “normal” graph represented by an “X” often “distorted” by one of the lines being nearly (or absolutely) vertical – showing price “inelasticity”?

7. If this is the “demand” line which is price inelastic, does this mean society needs this particular quantity and will pay whatever it takes? Or if it is the “supply” line is price inelastic, does this mean that that is all there is, regardless of how much is bid for it?

8. Does it take long for the economics instructor to tell the students that there is an undisclosed time dimension to the “supply and demand” graph?

9. In other words, that for example the supply line might be moved to the right on the graph by increasing technology?

10. In other words, has the supply of oil & gas at the same price been increased by, for example -

A. the advent of “deep water” offshore drilling,

B. increasing the ability to recover more from an existing reservoir (think how much cooking oil you could recover from your frying pan before you cook and how much you could recover afterwards when it is caked on the bottom and sides),

C. so-called “gas fracking” which has released cheap gas from geological formations in which gas could exist but could NOT flow freely?

11. Or could the instructor tease you with the thought that the demand line could be moved to the left by the invention of something better, so the demand for the old product collapses?


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C. Economics 102 – Fiscal/Monetary Theory

1. Is fiscal/monetary theory only a relatively-recent field?

2. In other words, before the Industrial Revolution, population was overwhelmingly agrarian?

3. Which meant that to survive an economic recession, one need only hunker down on one’s farm where one could survive by eating what the farm produced?

4. Did the Great Depression hit when the American population was no longer primarily agrarian?

5. Had recessions and now the Great Depression been caused by the natural human impulse when believing an economic downturn is about to occur, to cut spending in order to conserve resources for the coming “hard times”?

6. Did this simply exacerbate the problem because it meant that the producers of whatever would have been purchased, are thrown out of work which means what those thrown out of work in turn cannot buy other goods whose producers, in turn, are thrown out of work – in a downward spiral?

7. Indeed, when the Great Depression hit, did politicians (and economists) NOT know what to do – so the Pols tried to balance the national budget thinking it would help?

8. Which was exactly the WRONG thing to do per “Fiscal Theory” because balancing the budget means raising taxes (which curtails demand) and reduces government spending (which also curtails demand)?

9. BTW, do cynics note that World War II ended the Great Depression because now there was beaucoup demand for war materials? So the cynical “watch word” was that periodic wars are necessary to keep the economy humming?

10. From this history, did Macroeconomics quickly develop “Fiscal Theory” which posited that whenever a recession threatens, the Gov should run a deficit in order to underpin the economy with Gov spending while reducing taxes so the population has more to spend?

11. Though, of course, positing that during “good times,” the Gov should run a surplus so the economy does NOT overheat - producing inflation?

12. But, of course, our Pols can NOT be trusted with a new toy, so the Gov now typically ONLY runs deficits?

13. Did the U/Chicago spear-headed by Prof. Milton Friedman then develop “Monetary Theory” which holds that the interest rate has a profound effect on economic activity?

14. Did the Pols do their best to “keep their hands off” this new toy?

15. In other words, did they create the Federal Reserve System which controls the interest rate in the economy – and is charged with keeping inflation at 2%/year?

16. Is this why we currently have a “prime rate” (the rate charged the most-credit-worthy borrowers) of 8.50%?

17. Which, of course, means inter alia that young people can NOT afford to buy their first home and older people can NOT afford to move (which means giving up their old low-rate mortgage and taking on a new high-rate mortgage)?

18. Do our Pols have any regret that they enacted the so-called “Inflation Reduction Act” of 8/16/2022?

19. Whose title is so typical of LIES told by Pols – since, as we studied, the IRA ran tremendous Gov DEFICITS during its first three years, secure in the knowledge that the Pols’ typical game of bundling 10 years’ worth of revenue and only 3 years’ worth of spending in the same legislation GUARANTEES 10 years’ of DEFICIT spending because no POL fails to extend a spending program once it has 3 years of momentum?