Hmwk 2

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Refer to the above data. Nominal GDP in year 3 is:

$450

Refer to the above data. Real GDP in year 3 is:

$150

Refer to the above data. Nominal GDP in year 4 is:

$800

Refer to the above data. Real GDP in year 4 is:

$200

If real GDP in a particular year is $80 billion and nominal GDP is $240 billion, the GDP price index for that year is:

300

Economic growth is best defined as an increase in

either real GDP or real GDP per capita

Which of the following best measures improvements in the standard of living of a nation?

growth of real GDP per capita

Refer to the above table. Between years 1 and 2, real GDP grew by ___ percent in Alta:

5

Refer to the above table. Between years 1 and 2, real GDP per capita grew by ___ percent in Alta:

4

Refer to the above table. Between years 2 and 3

Alta's real GDP grew more rapidly than Zorn's real GDP

Recurring upswings and downswings in an economy's real GDP over time are called

business cycles

The industries or sectors of the economy in which business cycle fluctuations tend to affect

capital goods and durable consumer goods

The phase of the business cycle in which real GDP declines is called:

a recession

In which phase of the business cycle will the economy must likely experience rising real output and falling unemployment rates

expansion

Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is:

frictionally unemployed

Most economists agree that the immediate cause of most business cycle variation is:

an unexpected change in the level of total spending

The GDP gap measures the difference between

actual GDP and potential GDP

For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of:

Okun's law

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about

1.6 percent

Demand-pull inflation

occurs when total spending in the economy is excessive

Cost-push inflation may be caused by

a negative supply shock

Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 percent

If both the real interest rate and the nominal interest rate are 3 percent, then the:

inflation premium is zero

Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from n100 to 105. The person's real income will:

rise by about 15 percent

Inflation means that

prices in the aggregate are rising, although some particular prices may be falling

Why is economic growth important?

Economic growth is important because it is the path to the greater material abundance and higher living standards desired by the vast majority of people.

Why could the difference between a 2.5% and a 3.0% annual growth rate make a great difference over several decades?

Over long periods, the growth of labor productivity underlines an economy's growth of real wages and its standard of living. Growth lessons the burden of scarity. A difference in the growth rate can mean the difference between starvation and mere hunger.

What are the four phases of the business cycle?

Peak, recession, trough, and expansion

How long do business cycles last?

Business cycles sometimes last over several years and vary greatly in duration and intensity.

How do seasonal variations and long-term trends complicate measurement of the business cycle?

Seasonal variations and long-term trends complicate measurement of the business cycle by shocks that include unexpected innovations, unexpected changes in productivity, unexpected changes in the money supply, unexpected changes in the level of total spending on the economy, and financial changes.

Why does the business cycle affect output and employment in capital goods and consumer durable goods industries more severely than in industries producing nondurables?

In the case of capital goods, when an economy goes into recession, producers frequently delay purchasing new equipment and construction of new plants. Business outlook does not warrant increases in the stock of capital goods. When recession strikes, firms patch up their old equipment and make do. As a result, investment in capital goods declines sharply. Firms that have excess plant capacity may not bother replacing all the capital that is depreciating. With consumer durables, when recession occurs and households have to trim their budgets, purchases of durables are often deferred. Families repair their old cars and appliances rather than buying new ones and the firms producing these products suffer.
In contrast, industries producing nondurables are somewhat insulated from the most severe effects of recession. It is difficiult for consumers to cut back on nondurables such as medical and lgl svss, and pawnbrokers. Addjly, it is hard for consumers to postpone nondurables such as food and clothing. The quantity and quality of purchases of nondurables will decline, but not as much as purchases of capital goods and consumer durables.

What factors make it difficult to determine the unemployment rate?

part-time employment and disencouraged workers.

Why is it difficult to distinguish between fricitional, structural, and cyclical unemployment?

Fricitional, structural, and cyclical unemployment are difficult to distinguish because they are somewhat intertwined in that frictionally unemployed workers have marketable skills and either live where jobs exist or are able to move to areas where they do. Structually unemployed workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating. Cyclical unemployment takes place as structural unemployment continues over a long period resulting from insufficient demand for goods and services and society looses real GDP.

Why is unemployment an economic problem?

Because it causes a forgone output when the economy fails to create enough jobs for all who are able and willing to work, and potential production of goods and services are irretrievably lost.

What are the consequences of a negative GDG gap?

The consequences of a negative GDP gap consist of the goods and services forgone by society when its resources are involuntarily idle. The actual GDP falls short of potential GDP. Okum's law suggests that every 1-percentage-point increase in unemployment above the natural rate causes an additional 2 percent negative GDP gap.

What are th noneconomic effects of unemployment?

Non economic effects of unemployment include severe cyclical unemployment, a social catastrophe. Unemployment means idleness and idleness means loss of skills, self-respect, plummeting morale, family disintegration, and sociopolotical unrest. Widespread joblessness including overty, heightens racial and ethnic tensions, and reduces hope for material advancement. Additionally, unemployment can lead to rapid and sometimes violent social and political change. Relatively high unemployment among some racial and ethnic minorities has contributed to unrest and violence in the US and abroad. On an individual level, research links unemployment to increasing suicide, homicide, fatal heart attacks and strokes, and mental illness.

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