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UMW Macro Final Exam -- Take Home Portion

Dear Students,

You should follow the general rules we followed on Midterm 2. This is an open-book, open-collaboration exam, but you must cite any sources or help you receive. Your answers are yours to explicate and defend. Be serious. No credit will be awarded for nonsense.

Ask good questions when you don’t have good answers. I recognize your time is limited. Do the best job you can. It is better to answer fewer questions well, than more questions poorly. Just like in real life.

There will an additional portion of this exam when you come to the exam period on Monday, which should take you no more than half an hour. It will be worth 20 points. It is mandatory or you get no credit for the entire exam.

7 questions, worth up to a total of 100 points. (5 points for an honest attempt, plus 1-X based on the quality of your answer). X is a variable.

There is a podcast linked at the bottom. Listening is worth 10 points.

A bit of motivation:

There is no implication in the foregoing proposition of evolutionary progress or economic growth—only of change. The institutional matrix defines the opportunity set, be it one that makes the highest pay-offs in an economy income redistribution or one that provides the highest pay-offs to productive activity. While every economy provides a mixed set of incentives for both types of activity, the relative weights are crucial factors in its performance. The organizations that come into existence will reflect the pay-off structure. More than that, the direction of their investment in skills and knowledge will equally reflect the underlying incentive structure. If the highest rate of return in an economy is to piracy we can expect that the organizations will invest in skills and knowledge that will make them better pirates. Similarly, if there are high returns to productive activities we will expect organizations to devote resources to investing in skill and knowledge that will increase productivity.

— Douglass North, Understanding the Process of Economic Change, p.61

1. During class, I’ve described the idea of a macroeconomy in several ways. I’ve described a macroeconomy as the way we spend the fruits of our Gross Domestic Product (GDP). Income from GDP is equal to Consumption + Investment + Government + eXports – iMports. These are what we might call “flow” variables in that they are continuously being determined by the actions of individuals, businesses, and governmental actors. Simultaneously, the four economic resources of any economy: labor, land, capital, and entrepreneurship are each respectively receiving wages, rent, interest, and profit. Further, I’ve described macroeconomics as the study of different cost structures that microeconomic actors — individuals and agents — operate within.

What are the relationships between the first two definitions? How is the “cost structure” talk helpful in analyzing this relationship? Use an example of an economy: a family, a theory, or an organization to illustrate your thoughts.

2. The three laws of robotics as given by Asimov are listed at Wikipedia. R. Giskard Reventlov (“R.” is for “Robot”) discovered the zeroth law in a moment of transcendence, in which he realized that an intelligent robot had a higher duty to serve the interests of humanity as a whole, even if that meant harming individual humans, or allowing harm to come to individuals to protect humanity. Reventlov was able to pass this along to his friend R. Daneel Olivaw before Giskard himself was overwhelmed by the transcendence and died, his circuits frying out. Olivaw went on to become a major player in the history of the Galactic Empire and one of his great allies was the psychohistorian, Hari Seldon, whose project, the Foundation, you read about at the beginning of the semester.

Can a robot plan an economy? Use what you’ve learned in this course to explore this question. Think about what a robot is. Think about pattern matching and armchair theorizing. Think about how human systems evolve according to North. Think about our conversation about the facebook. Would you choose the information facebook gives you, if you had all the information facebook has? Do the designers of facebook know how effective their robot creation is?

3. How will you use macroeconomic thinking in your future research, and personal and professional life? Do you now think differently than you did at the beginning of the semester about organizational and social decisions and how they impact your own costs and choices? Please be specific. You can use your experience regarding the structure/nonstructure of this course, the readings (difficulty and content), and success/nonsuccess of your working groups that were established.

4. Read the pieces by Paul Krugman and Mario Rizzo. Have I overemphasized Hayek? Compare the strengths and weaknesses of Krugman and Rizzo’s arguments.

5. In Understanding the Process of Economic Change, p.169, at the beginning of section IV of the “Where are we going” chapter, Douglass North writes, “What I have termed adaptive efficiency is an ongoing condition in which society continues to modify or create new institutions as problems evolve…. An underlying source appears to have been the development of a set of informal institutional constraints that have been powerful restraints against rigid monopoly in all its guises.”

What adaptive efficiencies do you see in the United States? What fixities do you see? How do you think they weigh against each other? How does that inform your optimism or pessimism about the future of the country?

6. Read section 12.4.2 of Leamer. Write a good question about this section and tell me why it is a good question (even if you don’t have the answer).

7. Read the proposal page of CollegeCompetition.org. Why is this a Hayekian project? What questions does it raise for you about its viability? What questions does it raise for you regarding the value and cost of your own education? You may also want to reference the video from Sir Robinson on changing education paradigms. How does education interact with the macroeconomy?

Podcast. Listen to this podcast.


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