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(solution) 1. Jeff buys a used truck from a rental agency to make deliveries


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1. Jeff buys a used truck from a rental agency to make deliveries from his new furniture

 

store. Would this purchase be included in GDP? If so, would it be consumption or

 

investment spending?

 

2. What is a ?recession? and how would a recession affect the level of real GDP and the

 

growth rate of real GDP in a nation?

 

3. How are GDP, total output, total spending, and total income related in an economy?

 

Briefly explain.

 

4. Imagine an economy that produces only pizza and pretzels. In 2010, the price of pizza

 

was $20 and the price of pretzels was $1. In 2011, the price of pizza is $22 and the price

 

of pretzels is $1.10. If 100,000 pizzas and 1,000,000 pretzels were produced in 2010,

 

and 110,000 pizzas and 1,100,000 pretzels are produced in 2011, what is the nominal

 

GDP and real GDP (using 2010 prices) for this economy in 2010 and 2011? Calculate

 

the growth rate of real GDP for this economy during this period. Why is the growth rate

 

of real GDP different than the growth rate of nominal GDP over this period? Can you use

 

the GDP data to calculate the inflation rate from 2010 to 2011?

 

5. On your first day of a summer internship with a pharmaceutical sales company, your

 

boss explains how the company is in the midst of examining its sales data over the past

 

25 years to identify trends of growth and decline. She asks for your opinion on whether

 

the company should use real or nominal sales data. What would you say?

 

6. Would a significant decline in the economic activity of construction workers qualify as a

 

recession?

 

7. What does GDP per capita tell us about a nation's economy? What issues does

 

conventional GDP methodology exclude?

 

8. Explain why GDP does not include the underground economy.

 

9. Anuradha is a recent immigrant from India. She currently works as a software

 

programmer in California's Silicon Valley. Are her earnings counted in India's GDP or

 

America's GDP? What about GNP?

 

10. Korea was divided into North and South Korea at the end of World War II. What

 

similarities did the two nations have at that time? What differences contributed to the fact

 

that South Korea now has a per capita GDP that is over ten times higher than that of

 

North Korea? 11. What factors best explain China's increased rate of growth after 1978?

 

12. How has the recent growth experience in China benefited the ordinary citizen in China?

 

13. Why do economists look at a government's honesty when they study national wealth?

 

14. Explain how ?good institutions? enhance the incentives for entrepreneurship.

 

15. Some of the poorest countries in the world are rich with natural resources. Explain why

 

these resource-rich nations still struggle with low economic growth.

 

16. Explain why per capita real GDP is a better measure of economic growth than real GDP.

 

17. Why are property rights important for economic development?

 

18. What are ?incentives? and why are they important in the growth process?

 

19. Explain what the production function represents in the Solow model.

 

20. What are the positive and negative effects of patents on the creation of new ideas? ? 21. Using a graph showing private marginal cost, private marginal benefit, and social

 

marginal benefit of the research and development of new ideas, show how government

 

subsidies of research and development might mitigate the effect of spillovers. ? 1/2? 22. Consider an economy with production function Y

 

? = 2?K , an investment rate of 10%, and a depreciation rate of 5%. Assume there are no increases in labor, education, or

 

technology. If the capital stock in this economy is currently 9, is this economy above,

 

below, or at its steady state? What does this imply about growth in this economy?

 

23. Explain why patents are important for innovation.

 

24. For over 25 years, China has experienced growth rates averaging 7% or more each

 

year. According to research by economists, this ?miracle? rapid growth occurred because

 

of increases in capital and labor, not increases in technology. In the context of the Solow

 

model, discuss what these findings imply about China's expected growth for the future.

 

25. If an economy with no growth in labor, education, or technology has a steady-state

 

capital stock of 125,000 and a depreciation rate of 5%, what is the level of investment

 

needed to maintain the steady state? 26. In the context of the Solow model (with no growth in labor, education, or technology),

 

explain how an increase in the investment rate will affect an economy's steady state

 

output level and its growth rate.

 

27. Explain why entrepreneurs are often viewed as job destroyers.

 

28. An economy has a steady-state output level of 9. The economy's labor, technology, and

 

education levels are constant and the economy is described by the production function

 

Y= ?K . If the depreciation rate is 6%, what is the steady-state capital stock and what is

 

the investment rate needed to maintain it?

 

29. Explain the impact of unemployment benefits on the unemployment rate

 

30. If the adult population is 200 million, and 100 million are working and 10 million are

 

actively looking for a job, but not working, what is the unemployment rate? What is the

 

labor force participation rate?

 

31. Discuss the major economic factors that explain the rising labor force participation rate of

 

women after World War II.

 

32. Table: Statistics for a Small Economy Type of statistic Number

 

(millions) Population under the age of 16 16 Population over the age of 16 54 Retirees 14 Discouraged workers 3 Frictionally unemployed 1.5 Structurally unemployed 2.5 Cyclically unemployed 6 Refer to the table to answer the following questions.

 

A) How many people are in the country's labor force?

 

B) What is the labor force participation rate?

 

C) What is the unemployment rate?

 

D) What is the natural unemployment rate?

 

E) What is the rate of cyclical unemployment?

 

33. Why would the unemployment rate likely understate the overall decline in an economy's

 

performance, especially in a recession?

 

34.The natural unemployment rates run higher for European countries than the United States.

 

Briefly discuss some of the major reasons.

 

35.?Table: Demographic Data Overall population 600 million Population 65 years or older 82 million Population younger than 16

 

years 71 million Unemployed persons 20 million Employed persons

 

Discouraged workers 330 million

 

25 million Refer to the table. Use these data to calculate the total labor force, the labor force participation

 

rate, and the unemployment rate.

 

36.If Congress passes legislation making it more difficult for firms to fire workers, how will this

 

legislation affect the nation's level of unemployment? (An example might be a law requiring

 

severance pay for fired workers.) Explain.

 

37. If the government wanted to encourage workers over age 60 to retire in order to free up jobs

 

for younger workers, what are two examples of policies that could help to encourage early retirement? Would encouraging older workers to retire be beneficial to the younger workers?

 

Explain. 38. Identify both the factors that can increase structural unemployment and the policies that can

 

decrease it.

 

39. Suppose that you are buying your first home. Current interest rates on a 30-year fixed-rate

 

mortgage are 5%. Lenders expect an inflation rate of 2% over the next 30 years, thus giving

 

them an expected real return of 3%. If actual inflation over the next 30 years is 4% because of a

 

continued rapid expansion of the money supply, would you be better off or worse off by taking

 

out a 30-year fixed-rate mortgage?

 

40. Use the quantity theory of money to explain how an increase in the money supply leads to

 

an increase in the price level.

 

41. Explain the difference between the price level and the rate of inflation.

 

42. Briefly explain this statement: ?In the long run, money is neutral.? Does this statement mean

 

the money supply has no effect at all on real economic activity? Explain.

 

43. Suppose a worker earns twice as much income this year as 5 years ago. Is that worker

 

necessarily better off in terms of the goods and services that can be purchased with that income

 

today? How could you tell?

 

44. List three nations that have experienced hyperinflation. What is the cause of hyperinflation,

 

and how does hyperinflation and velocity interact?

 

45. Discuss the reasons for Zimbabwe's high inflation rate.

 

46. Suppose the Consumer Price Index in 1987 is 428 with a base year of 1967. What does this

 

tell us about prices in 1987?

 

47. Why does volatility in the inflation rate make it harder for businesses to get loans?

 

48. If velocity is constant and the economy's real growth rate is 3%, what rate of money growth

 

will achieve price stability?

 

49. What happened to the U.S. money supply during the early years of the Great Depression? 50. The following question has three parts, which are to be answered independently of each

 

other. Graphically show your response to the following shocks in the AD-AS model:

 

A) If a new round of consumer pessimism abounds, what would happen to the economy's

 

short-run growth rate?

 

B) If there is a positive, but temporary, monetary shock, what would happen to the economy's

 

short-run growth rate?

 

C) If a country's imports temporarily increase, but exports stay the same, what would happen to

 

the economy's short-run growth rate?

 

51. Imagine that an economy experiences a long-lasting banking crisis and that subsequently

 

consumption growth permanently falls. Using the AD-AS model, draw a diagram and explain the

 

effects of the permanent decline in consumption growth on the inflation rate and the real growth

 

rate in both the short run and the long run.

 

52. Using the AD-AS model, show and explain how real GDP growth and inflation would change

 

in both the short run and long run if the growth rate of the money supply increases

 

unexpectedly.

 

53. What types of shocks can be found in the AD-AS model? Why do these shocks not

 

disappear immediately but rather tend to spread across sectors of an economy?

 

54. Assume that a country's money velocity remains constant and that the rate of money growth

 

is 4%.

 

A) What is the rate of spending growth?

 

B) If money growth increases by 1.5 percentage points and consumption growth increases by

 

0.5 percentage points, what is the new rate of spending growth?

 

C) Given your answer in Part B, what is the long-run rate of real GDP growth at an inflation rate

 

of 4%?

 

55. What assumptions about wage and price flexibility are possible in the AD-AS model? What

 

do these different assumptions imply about the slopes of the long-run and short-run aggregate

 

supply curves?

 

56. Why is the long-run aggregate supply curve vertical in the AD-AS model?

 

57. Compare two economies, one that is highly agricultural and another that is highly

 

manufacturing-based. Discuss what types of shocks might be relevant to each of these

 

economies.

 

58. Answer the following three questions about the Great Depression.

 

A) What were the four major shocks that contributed to the Great Depression? B) Using a graph, show how these shocks affected AD.

 

C) Did the monetary authorities have a hand in causing and/or exacerbating the Great

 

Depression? Explain.

 


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