Question

Question

In a certain state, the number of individuals age 65 or older has steadily increased with each passing year, while the number of individuals under the age of 18 has steadily decreased. Describe the likely effects on that state's economy if this trend continues.(1 point)
Responses

This trend would have a detrimental effect on economic growth. There may be a labor shortage if too many people retire with not enough people to replace them, stagnating the economy.
This trend would have a detrimental effect on economic growth. There may be a labor shortage if too many people retire with not enough people to replace them, stagnating the economy.

This trend would be beneficial to economic growth. People are living longer, meaning that they will be purchasing consumer goods for longer in their life, growing the economy.
This trend would be beneficial to economic growth. People are living longer, meaning that they will be purchasing consumer goods for longer in their life, growing the economy.

This trend would be beneficial to economic growth. There will be more consumers with steady incomes, meaning more spending, which would grow the economy.
This trend would be beneficial to economic growth. There will be more consumers with steady incomes, meaning more spending, which would grow the economy.

This trend would have a detrimental effect on economic growth. This trend will ultimately lead to a much smaller population, meaning less consumers and less spending, stagnating the economy.

Answer 1

The first response is the most accurate given the context of the trend described. It effectively captures the following key points:

1. Labor Shortage: As the population ages and more individuals reach retirement age (65 or older), there may not be enough younger individuals (under 18) entering the workforce to replace them. This can lead to a shortage of workers, which can hinder economic productivity and growth.

2. Decreasing Population: The overall trend of a declining younger population can contribute to a smaller workforce and potentially a smaller consumer base over time, which can negatively affect overall economic activity.

3. Stagnation of the Economy: With fewer workers available and a shrinking population, the state's economic growth could slow, lagging due to reduced consumer spending and decreased workforce participation.

Therefore, the most fitting response would be: "This trend would have a detrimental effect on economic growth. There may be a labor shortage if too many people retire with not enough people to replace them, stagnating the economy."

Answer 2

Due to a change in monetary policy, the money supply in a certain country is reduced. Bob says that this will likely lead to a decrease in the velocity of money and an increase in the average price level of goods. Is Bob correct? Explain your answer using the equation of exchange.(1 point)
Responses

Bob is not correct. The money supply, the velocity of money, and the average price level of goods always change in the same way as each other.
Bob is not correct. The money supply, the velocity of money, and the average price level of goods always change in the same way as each other.

Bob is correct. The money supply and the velocity of money always change in the same way as each other, which will be the opposite of the change to the average price of goods.
Bob is correct. The money supply and the velocity of money always change in the same way as each other, which will be the opposite of the change to the average price of goods.

Bob is not correct. If both the money supply and the velocity of money decreased, the average price level of goods would likely decrease as well.
Bob is not correct. If both the money supply and the velocity of money decreased, the average price level of goods would likely decrease as well.

Bob is not correct. The money supply and the velocity of money always change in opposite ways.

Answer 3

To evaluate Bob's statement, we can use the equation of exchange, which is represented as:

\[ MV = PQ \]

Where:

• \( M \) = Money supply
• \( V \) = Velocity of money
• \( P \) = Average price level of goods
• \( Q \) = Quantity of goods and services produced (real output)

When the money supply \( M \) is reduced, we need to consider the potential impacts on \( V \) and \( P \):

1. Decrease in Money Supply \( M \): If \( M \) decreases, it puts downward pressure on total spending. If we assume \( Q \), the real output, remains constant in the short run, then the change must be absorbed by \( V \) and \( P \).

2. Velocity of Money \( V \): The velocity of money can be thought of as the rate at which money circulates in the economy. It's not a fixed number and can change based on economic conditions. However, typically, if the money supply decreases, the velocity could either decrease or remain stable. If fewer dollars are in circulation, people may hold onto money rather than spend it, leading to a decrease in \( V \).

3. Average Price Level \( P \): If both \( M \) is decreasing and \( V \) is also decreasing, then the right side of the equation, \( PQ \), will also decrease. If \( Q \) is constant, \( P \) must decrease as well, leading to deflation or a lower average price level of goods.

So let's analyze Bob's claim:

• Bob suggests the money supply decrease will lead to a decrease in the velocity of money and an increase in the average price level of goods, which is incorrect based on the equation of exchange.
• A decrease in money supply generally leads to a decrease in both the velocity of money and average prices (given constant output), not an increase.

Therefore, the correct response is:

Bob is not correct. If both the money supply and the velocity of money decreased, the average price level of goods would likely decrease as well.