Business Economics Exam II Questions- What type of survey does the BLS conduct to show that the January 2019 employment increased by 307,000?

Business Economics                                                                            Name: _________________

Exam II




  1. 1. On Friday February 1, 2019, the US Bureau of Labor Statistics (BLS) published the following employment situation for January 2019:


Total nonfarm payroll employment increased by 304,000 in January, and the unemployment rate edged up to 4.0 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing


Both the unemployment rate, at 4.0 percent, and the number of unemployed persons, at 6.5 million, edged up in January. The impact of the partial federal government shutdown contributed to the uptick in these measures. Among the unemployed, the number who reported being on temporary layoff increased by 175,000. This figure includes furloughed federal employees who were classified as unemployed on temporary layoff under the definitions used in the household survey.


Among the major worker groups, the unemployment rate for Hispanics increased to 4.9 percent in January. The jobless rates for adult men (3.7 percent), adult women (3.6 percent), teenagers (12.9 percent), Whites (3.5 percent), Blacks (6.8 percent), and Asians (3.1 percent) showed little change over the month.


In January, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.3 million and accounted for 19.3 percent of the unemployed.


The labor force participation rate, at 63.2 percent, and the employment-population ratio, at 60.7 percent, changed little over the month; both measures were up by 0.5 percentage point over the year.


The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by about one-half million to 5.1 million in January. Nearly all of this increase occurred in the private sector and may reflect the impact of the partial federal government shutdown. (Persons employed part time for economic reasons would have preferred fulltime employment but were working part time because their hours had been reduced or they were unable to find full-time jobs.)


In January, 1.6 million persons were marginally attached to the labor force, essentially unchanged from a year earlier. (Data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.


Among the marginally attached, there were 426,000 discouraged workers in January, little different than a year earlier. (Data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.2 million persons marginally attached to the labor force in January had not searched for work for reasons such as school attendance or family responsibilities.


Please answer the following questions:

1a)                        What type of survey does the BLS conduct to show that the January 2019 employment increased by 307,000?

1b)            What type of survey does the BLS conduct to show that the number of unemployed increased to 6.5 million in January?

1c)                        Please explain why among the major worker groups Januaryunemployment rate for teenagers is the highest (12.9%), while the rate for Asians is the lowest (3.1%), which is lower than Whites at 3.5%?

1d)            The BLS notes that the Januarylong-term unemployed was little changed at 1.3 million and accounted for 19.3% of the unemployed.  Why do you think people who are unemployed longer than 27 weeks have a difficult time finding jobs?

1e)            Why do you think that the labor force participation of 63.2% in January2019 has increased from 69.2% in November 2018? To answer this question, please look up the definition of “labor force participation rate”


End of Question 1


2.         The following consists of 2 Related questions, 2A and 2B. Please answer both 2A and 2B

2A.      On January 22, 2015, the European Central Bank (ECB) put out the following Press Release:

ECB announces expanded asset purchase programme:

  • ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
  • Combined monthly asset purchases to amount to €60 billion
  • Purchases intended to be carried out until at least September 2016
  • Programme designed to fulfil price stability mandate


The Governing Council of the European Central Bank (ECB) today announced an expanded asset purchase programme. Aimed at fulfilling the ECB’s price stability mandate, this programme will see the ECB add the purchase of sovereign bonds to its existing private sector asset purchase programmes in order to address the risks of a too prolonged period of low inflation.


The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response.


Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.


The programme will encompass the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. Combined monthly purchases will amount to €60 billion. They are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.


The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this contributes to an easing of financial conditions.


Based on the ECB Press Release, please explain the following:

1A)           What is the purpose of expanding the asset purchase programme, which was established in October 2014?

2A)           The Press Release mentions that the “purchase programme” (note: this is a British spelling) will include “sovereign bonds”, “asset-backed securities” and “covered bonds”.  Can you explain what are these bonds and securities? For example, what are “sovereign bonds”, etc….

3A)           The Press Release also mentions that the “expanded purchase programme” will last until September 2016 or until the inflation rate reaches the target of 2%.  Do you know the reasons why the ECB announces the end date of the programme and the inflation rate target? (Hint: When you answer this question you should think as a long term investor)



2B       On March 10, 2016, The ECB put out the following Press Release:


ECB adds corporate sector purchase programme (CSPP) to the asset purchase programme (APP) and announces changes to APP.


  • Combined monthly purchases under the APP are to increase as of 1 April 2016 to €80 billion from €60 billion.
  • Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets eligible for regular purchases under a new corporate sector purchase programme (CSPP).
  • The CSPP will be added to the APP and will be included in the combined monthly purchases.
  • The CSPP will further strengthen the pass-through of the Eurosystem’s asset purchases to the financing conditions of the real economy.
  • Purchases are to start towards the end of the second quarter of 2016.


The Governing Council of the European Central Bank (ECB) today decided to establish a new programme to purchase investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area with the aim of further strengthening the pass-through of the Eurosystem’s asset purchases to the financing conditions of the real economy. As a result, and in conjunction with the other non-standard measures in place, the CSPP will provide furthermonetary policy accommodationand contribute to a return of inflation rates to levels below, but close to, 2% in the medium term.

Eligibility under the Eurosystem’s collateral framework – the rules that lay out which assets are acceptable as collateral for monetary policy credit operations – will be a necessary condition for determining the eligibility of assets to be purchased under the CSPP, subject to further criteria. Securities issued by credit institutions and by entities with a parent company which belongs to a banking group will not be eligible.


CSPP purchases will begin towards the end of the second quarter of 2016.


Further technical details on the CSPP will be announced in due course.


The Governing Council also decided to adjust the parameters of the public sector purchase programme (PSPP). The issuer and issue share limits for securities issued by eligible international organisations and multilateral development banks will be increased to 50%. In addition, as of April 2016 the share of such securities purchased under the PSPP will be reduced from 12% to 10% on a monthly basis. To maintain the 20% risk-sharing regime, the ECB’s share of monthly PSPP purchases will be increased from 8% to 10%.



Based on the March 10, 2016 Press Release:

1B)      In the January 22, 2015 Press Release (see Question 1A above) what type of assets did the ECB want to purchase? What type of assets did the ECB want to purchase after March 10, 2016?

2B)      Why did the ECB decide to establish a new programme to purchase investment-grade euro-denominated bonds issued by non-bank corporation?

3B)      The corporate sector purchase programme (CSPP) will provide further monetary policy accommodation.  Please explain how the monetary policy accommodation works.


End of Question 2



  1. 3. This question pertains to the financial collapse that hit Wall Street in 2008 and the subsequent world financial markets.


In March 2008, Mr. Bernanke, Chairman of the Board of Governors, Federal Reserve Bank (Fed), asked J P Morgan Chase, a regulated commercial bank, to bail out Bear and Stearns, an investment bank.  J P Morgan (JPM) bought Bear and Stearns (BS) for $2 a share (it was raised to $10 per share a few weeks later) and it took over all of BS financial assets and liabilities.  In the bailout deal, the Fed guarantees whatever junk assets BS has accumulated on its balance sheet.  Specifically, the Fed has agreed to provide financing of up to $30 billion of less liquid and risky assets held by BS.  Roughly $20 billion of that funding will back collateralized mortgage obligations (CMO) held by BS.


However, in November 2008, Mr. Bernanke and Mr. Geithner, the Secretary of the US Treasury at the time, let Lehman Brothers, another large investment bank, filed for bankruptcy.  There was no bailout.  As a result, the credit markets froze.  The US economy took a nosedive.  The US Congress passed an $800 billion stimulus package and President Obama signed it quickly.  The goal is to revive the economy and to increase employment.


The Fed action creates a significant precedent.

3a)       Please explain why the Fed action is a historical precedent?

(Hints: 1) What types of banks does the Fed regulate? 2) Prior to March 2008, what kind of collateral does the Fed require when a commercial bank comes to the Discount Window to borrow funds?)

3b)       The Fed knew before the bailout that CMOs have been losing their value at an alarming rate, in other words they are quite toxic, but why then did the Fed decide to back these CMOs?

(Hint: Who are holding these CMOs? Please note that CMOs are also categorized as Collateralized Debt Obligations or CDOs)


The US Congress and the President actions to approve the $800 billion stimulus are a first since the Great Depression of the 1930s.

3c)       Please explain how the US Treasury is paying for the huge stimulus package? In other words, how does the US Treasury get the funds to bail out the failed companies, the bankrupted states, and create jobs?


NOTE: In addition to the well-known banks noted above, there are about 968 other banks, credit unions, government sponsored enterprises (e.g. Fannie and Freddie), mortgage services companies, state housing agencies, etc…and 2 auto companies that have received bailouts. For those who are curious, see the whole list and amount of bailout at:


End of Question 3


  1. 4. In response to the 2008 economic recession, in February 2008, President Bush and Congress approved a $168 billion stimulus package that will provide tax rebates to all taxpayers who file their tax returns. The tax stimulus was in addition to a tax rate cut, which was implemented earlier in 2002.  The stimulus checks were mailed in May 2008.
  • In February 2011, under President Obama administration, Congress voted to extend the Bush era tax rate cut to all levels of income.
  • In December 2017, President Trump and Congress voted for a decrease in both corporate and individual tax rates.


Please analyze the stimulus package by using the income multiplier. (A tax rebate is a decrease in autonomous tax, the To in the total tax formula mentioned in class).

Using the derivation of the income multiplier, which we discussed in class, please show the effects of:

5ai)           A tax rebate on the US GDP; and

5aii)          A tax rate cut on the US GDP.

Which tax strategy has a stronger effect in the long term?


End of Question 4



  1. 5. This question pertains to the tools of monetary policy

5a)                        Why does the Fed use open-market operations as its principal tool of monetary management, rather than changes in the required reserve ratios, or changes in the discount rate? (Hint: Think about the matter of “announcement effects”)

5b)            What are the differences in the effects that each technique would have on individual banks, on the commercial banking system as a whole, and on the money supply?


End of Question 5



  1. 6. For 2,000 years on the far away island of Yap in Micronesia, located in the Pacific Ocean, the inhabitants have been using giant stones as money (Note: this is a true story)

6a)                        What are the functions of money?  Can these stones fulfill all or partially the functions of money?

6b)            Because the stones are worthless when broken, the islanders leave the larger ones where they are and simply take note of the fact that ownership has changed.  How is this similar to paying by checks?


Historical Note: The history of the island of Yap in the 20th century is as follows: Seized by Japan in 1915, Yap became a U.S. protectorate after World War II and gained independence in 1986, as part of the Federated States of Micronesia. Since then, the U.S. has provided subsidies that account for 70% of public spending on Yap. In 2011, the U.S. contribution came to $15.5 million. A treaty also gives U.S. military dominion over the area. In the March 9, 2013, issue of the Wall Street Journal, “Is Yap Ready for the World?”, Alex Frangos reports: “The people of Yap, a flyspeck of an island in the western Pacific, learned long ago how to make money the hard way: They carved giant stone currency and ferried it across open ocean in canoes. These days, islanders are split over how to make money in a global economy—and in particular what to do with a tide of Chinese money now washing up on these remote shores.Deng Hong, a Chinese real-estate developer, envisions a billion-dollar, 4,000-room casino-and-golf resort that he promises would quadruple the island’s annual economic output to $200 million”


End of Question 6



  1. You are the president of a commercial bank that is also a member of the Federal Reserve System, and you want to increase your bank’s reserves. But you currently have negative excess reserves, in which case your bank is borrowing from the Fed and the Fed may be putting pressure on you to remove that debt.

7a)                        How would you raise your bank’s reserves?

7b)            What effects would your attempt to raise reserves have on the banking and monetary system?


End of Question 7



  1. 8. This question pertains to the attached February 9, 2018 New York Times entitled “The Era of Fiscal Austerity is Over. Here’s What Big Deficits Mean for the Economy”.


Using the sequence of arrows, which we use in class such as A=>B =>C =>D, could you show the impact of a big deficit on the US economy in each of the following scenario

  1. a) In the short run;
  2. b) In the medium run; and
  3. c) In the long run.


The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the Economy. 2/9/2018, The New York Times


The last seven weeks amount to a sea change in United States economic policy. The era of fiscal austerity is over, and the era of big deficits is back. The trillion dollar question is how it will affect the economy.

In the short run, expect some of the strongest economic growth the country has experienced in years, and some subtle but real benefits from a higher supply of Treasury bonds in a world that is thirsty for them.

In the medium run, there is now more risk of surging inflation and higher interest rates — fears that were behind a steep stock market sell-off in the last two weeks.

In the long run, the United States risks two grave problems. It may find itself with less flexibility to combat the next recession or unexpected crisis. And higher interest payments could prove a burden on the federal Treasury and on economic growth. This is particularly true given that the ballooning debt comes at a time when the economy is already strong and the costs of paying retirement benefits for baby boomers are starting to mount.

It’s hard to overstate how abrupt the shift has been.

When the Congressional Budget Office last forecast the nation’s fiscal future in June, it projected a $689 billion budget deficit in the fiscal year that begins this coming fall. Analysts now think it will turn out to be about $1.2 trillion.

One major reason is the tax law that passed on Dec. 20, which is estimated to reduce federal revenue by about $1.5 trillion over the next decade, or $1 trillion when pro-growth economic effects modeled by the congressional Joint Committee on Taxation are factored in. A budget deal passed in the early hours of Friday morning includes $300 billion in new spending over the next two years for all sorts of government programs and $90 billion in disaster relief, without corresponding cuts elsewhere in the budget.

It is a stark reversal from 2010 to 2016, when congressional Republicans insisted upon spending cuts and the Obama administration insisted on raising taxes (or, more precisely, allowing some of the Bush administration’s tax cuts to expire). Those steps, combined with an improving economy, cut the budget deficit from around 9 percent of G.D.P. in 2010 to 3 percent in 2016.

The Near Term: Strong Growth in 2018

In almost any economic model you choose, the new era of fiscal profligacy will create a near-term economic boost. For example, Evercore ISI, the research arm of the investment bank Evercore, estimates that the combination of tax cuts and spending increases will contribute an extra 0.7 to 0.8 percentage points to the growth rate in 2018, compared with the policy path the nation was on previously.

Economists generally think that these policies will have a lower “multiplier” than these policies would have if they took place during a recession, when there is more spare capacity in the economy. But that doesn’t mean the multiplier becomes zero.

“Some people assume that because this was a bad process and the tax bill is really regressive that it won’t have a short-term growth impact, but I think that’s wrong,” said Adam Posen, president of the Peterson Institute for International Economics. “We shouldn’t confuse whatever distaste one has for the composition of the package for totally overwhelming the multiplier effects.”

Put a different way, it would be very hard for the government to pump an extra half-trillion dollars into the economy in a single year without getting some extra economic activity out of it.

Another potential near-term positive for the global financial system could be the effect of billions of dollars in bonds issued by the Treasury. For years the world has experienced what some analysts call a “safe asset shortage,” too few government bonds and other investments viewed as reliable relative to demand.

This has arguably been a factor in depressed interest rates and sluggish growth across much of the advanced world. More Treasury bonds floating around might reduce those pressures.

The Medium Term: Depends on Economic Slack, and the Fed

Over the next two or three years, things get more murky. What happens will depend on how the economy responds to the additional fiscal stimulus, and how the Fed responds to that.

The big question is whether the economy has the room to keep growing without higher inflation emerging. The unemployment rate is already low at 4.1 percent, so there aren’t exactly hordes of jobless people available to be put back to work. That means there is a chance that all this extra money flooding into the economy doesn’t go toward more economic output but just bids up wages and ultimately consumer prices.

If that happens, the Federal Reserve would almost certainly raise interest rates more than it now plans, essentially engineering an economic slowdown to try to keep inflation from accelerating. In that scenario, the apparent benefits of tax cuts and spending increases would be short-lived.

But there’s no certainty that will happen. It may be that the United States has more growth potential than standard models suggest. Perhaps corporate income tax cuts and looser regulation on business will unleash more capital investment and higher productivity, as conservatives argue. Maybe some of the millions of prime-age adults who have dropped out of the labor force in recent years will come back in, creating more economic potential.

“The really big question mark we have is how much slack there really is in the economy,” said Donald Marron, a scholar at the Urban Institute who was once acting director of the Congressional Budget Office. “If you look at conventional measures, unemployment looks really low, but on the

other hand if you look back to what we used to think of the potential of the economy a few years ago, we may have some room to grow.”

The Long Run: Higher Debt-Service Costs and Less Room to Maneuver

The public debt was already on track to rise relative to the size of the economy before the new tax and spending deals; now it will probably rise faster. The Congressional Budget Office projected last June that the nation’s debt-to-G.D.P. ratio would rise to 91 percent in 2027, from 77 percent in 2017.

The C.B.O. hasn’t updated those numbers to reflect the new tax and spending legislation, but the Committee for a Responsible Federal Budget estimates that it will turn out to be between 99 and 109 percent, depending on whether provisions of the tax law are allowed to expire as they are scheduled to.

But those numbers are just an abstraction. The question is what effects higher debt loads might have for Americans in 2027 and beyond.

Higher debt service costs are one big one. Taxpayers in 2027 were forecast to pay $818 billion a year in interest costs even before the tax cuts and spending increases, or 2.4 percent of G.D.P. That will presumably be higher, because taxpayers will be paying interest costs on more debt, and probably at higher interest rates.

And there is probably some point at which the amount of debt the government takes on crowds out private investment; to the degree that the supply of funds to borrow is finite, every dollar the government borrows is not available to be lent to a homeowner taking out a mortgage or a business looking to expand. That said, in practice, the supply of loanable funds is not finite — households may save more with higher interest rates, for example, and foreign capital might flow in.

The bigger costs of a high national debt may come in how much flexibility policymakers have to respond to a future recession or crisis. If the United States finds itself in a major war or a deep recession, its starting point in terms of debt load will be much higher than it was at the onset of the Iraq War or the 2008 financial crisis.

“It’s about risk management,” Mr. Posen said. “We may need that fiscal capacity for something else.”