The Economics Web Newsletter is for use as a tool when teaching the principles of economics. It specifically references the Wall Street Journal editions of selected McGraw-Hill Principles of Economics texts. Do You Remember presents five or more quick factual questions and answers covering several articles that have appeared in the Wall Street Journal in the week preceding the newsletter. They make good in-class quizzes when reading the Wall Street Journal is required. Article Analysis reprints one article from the Wall Street Journal and poses five or more analytical questions and their answers with references to text chapters.

1. The King of Corn, Francis Childs, may be helping himself, but he may be hurting all farmers collectively. How? Click for answer.
2. What sector of the Mexican economy is exporting more and more to the United States? (It’s not manufacturing.) Click for answer.
3. Was the 6.9% rise in real GDP in the fourth quarter of 1999 the result of a broad base increase in all components or the result of increases in just a few components? Click for answer.
4. What has been the effect on mortgage rates and housing sales of the four increases in the federal funds rate by the FOMC? Click for answer.
5. Characterize the state of the U.S. labor market as reported by Manpower’s survey of 16,000 employers. Click for answer.
6. What has a study by William M. Mercer Inc. revealed about the connection between shareholder returns and CEO compensation? Click for answer.
7. What is the latest news on inflation and growth in the European Union? Click for answer.
8. The stock market places a greater value on stocks from what U.S. state? Click for answer.
9. What fiscal policy change is the Canadian government proposing? Click for answer.
10. Has the euro appreciated or depreciated recently? What might the European Central Bank do in response to this change? Click for answer.
11. What measure is the Unites States government contemplating in an effort to reduce oil prices? Click for answer.
12. Who is the Flat-Tax presidential candidate according to James H. Glassman’s editorial? Click for answer.
13. Which two countries may break from OPEC policy and increase the supply of oil? Click for answer.
14. What Depression-era law was repealed that affects seniors who collect Social Security? Click for answer.

1. Francis Childs is reaping more corn per acre than any other corn farmer. He’s giving out tips to other farmers to do the same. The problem is that as supply increases, price declines by even more so that total farm revenue declines. (See "King of Corn Has Tips for Farmers, but More Isn’t What They Need" February 28, page A1.)
2. The service sector. (See "First Came Assembly, Now, Services Soar" February 28, page A1.)
3. It was the result of increases in all components. See http://www.bea.doc for the full GDP report. (See "Economy Zooming Along As GDP Gets Revised Upward to a 6.9% Pace" February 28, page A2.)
4. The four interest-rate increases since June have raised mortgage rates. Housing sales declined 10.7% percent in January. (See "Housing Sales Slump 10.7% A Higher Interest Rates Increase Mortgage Costs.)
5. The U.S. labor market is tight. 32% of all employers say they need to hire more employees. Go to http://www.manpower.com/news/2Q00.htm for the full report. (See "Worker Shortage Stays Widespread Hiring Study Says," February 28, page A2.)
6. CEOs of companies with the highest shareholder returns were paid much better than CEOs of companies with the poorest shareholder returns. There is a relationship between performance and pay. (See "CEO Pay at Best Performers Soared, Study Says" February 28, page A16.)
7. Reports show that inflation is rising while growth is strengthening. Growth for the EU11 was 2 percent in 1999. Inflation topped 2% in January. (See "Europe Shows Signs of Quickening Inflation, Stronger Growth," February 28, page A21.)
8. Delaware. Companies incorporated in Delaware were valued 5% more than companies from other states from 1991 to 1996. (See "Firms Incorporated in Delaware Are Valued More by Investors" February 28, page C21.)
9. It is proposing to cut taxes 15% over 5 years and increase health and educational expenditures. (See "Canada Plans 5-year 15% tax Cut, Boost in Health, Education Spending," February 29, page A6.)
10. The euro has depreciated recently. The ECB raised short-term interest rates by .25 percentage-point in February and may raise rates again soon. (See "Euro Falls to Record Low Before Rebounding," February 29, page A17.)
11. Releasing U.S. oil reserves in a swap that would sell oil out of the government’s oil reserves at today’s high prices and buy it back later at lower prices when world oil production rises. (See "Clinton Still Weighs Releasing U.S. Oil Reserves," March 1, A2)
12. John McCain. (See "Who’s the Flat-Tax Candidate?" March 1, A26)
13. Mexico and Norway. Neither country is a member of OPEC. (See "Mexico, Norway May Ease Oil Shortage," March 2, A2)
14. Congress repealed the limit on earnings by seniors without having their social security payments reduced. (See "Social Security Work Limit Is Voted Down," March 2, A4)

1. What is the name for the type of macro policy the Canadian government is undertaking?

   The plan, contained in the government's budget for the fiscal year ending March 31, 2001, would chop about 58 billion Canadian dollars (US$40 billion) from personal and corporate taxes combined, representing the biggest tax cut in Canada's history. It follows months of pressure on the government to reduce the heavy tax burden that business leaders have said is driving educated and well-trained Canadians to the U.S. in search of lower taxes and better opportunities.

2. Demonstrate the effect of the proposed changes on equilibrium output using the AS/AD macro model. What will happen to prices and output?

Analysts said the planned cuts still leave Canadians taxed at a far higher rate than Americans. Still, the government's move is a step in the right direction, they said, and reflects concerns the U.S. government also is expected to cut its taxes further. "We couldn't afford for the gap in our respective taxes to get any greater," said John McCallum, chief economist with Royal Bank of Canada.

3. Show how, using microeconomic supply and demand curves, a reduction in the marginal tax rate will affect equilibrium quantity of labor supplied in Canada.

 

4. What effect do you believe the tax policy on the labor market will have on potential output in Canada? Demonstrate the effect on the economy using the AS/AD model.

5. How can the Canadian government project revenue to rise if it is reducing tax rates?

Chapter references appear after the answer to each question. Refer to the following chapters in McConnell and Brue’s Economics and Macroeconomics for help when answering these questions: Chapters 10-12.

1. Canada is undertaking fiscal policy—the deliberate manipulation of taxes and government spending by government to alter real GDP and employment, control inflation, and stimulate economic growth. Return to article.
2. A reduction in taxes and an increase in spending is called expansionary fiscal policy. Expansionary fiscal policy shifts the aggregate demand curve to the right by a multiple of the change in spending and taxes. This is shown in the graph below. Depending upon where the economy is on the aggregate supply curve, the result is either an increase in output, price level or a combination of the two. The graph below shows that the economy is below, but close to, potential so that the reduction in taxes and increase in spending results in both an increase in real output and an increase in the price level.

Return to article

3. A reduction in the marginal tax rate shifts the supply of labor to the right. Evidence of this shift would be the return of Canadian workers from United States back to Canada. This would lower the wage rate in Canada and increase the equilibrium quantity of workers as shown in the graph below.

Return to the article.

4. The fact that labor supply would increase in Canada suggests that potential output will also rise. An increase in potential output will put downward pressure on the price level while increasing equilibrium output. Potential output increases because the level of potential output depends upon the available resources and labor is an important input to production. Graphically, an increase in potential output is represented by a shift of the AS curve to the right as shown in the graph below. As shown here the price level returns to its original level while equilibrium output rises even further.

Return to article.

5. The Canadian government must believe that the reduction in the tax rates will be more than offset by a rise taxable income. This idea is described by the Laffer curve—a curve that depicts the relationship between tax rates and tax revenue. Tax revenues rise as tax rates rise, but after some point, tax revenues decline with further increases in tax rates. This is because higher tax rates reduce total income. It follows that if tax rates are currently beyond the point at which output has declined, a reduction in the tax rates will increase total revenue. Such supply-side economics suggested that a reduction in tax rates in the United States would lead to higher revenue in the 1980s. Instead, the U.S. budget deficit ballooned. Return to article.

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