Deck 7: Economic Growth, business Cycles, unemployment, and Inflation

Question 1

Distinguish between the concept of a secular growth trend of the economy,and an increase in output experienced in any given year.

Answer 1

Economic output varies considerably from year to year,as the economy experiences expansions and recessions over the business cycle.The concept of secular growth trend represents the long-term rise in the economy,after "smoothing out" the year to year fluctuations.Secular growth trend reflects changes in underlying growth potential,particularly the growth of population and productivity.

Question 2

What is the difference between the short-run framework and the long-run framework? How does each relate to supply and demand? Explain.

Answer 2

Each framework deals with different problems.The long-run framework deals with economic growth issues.The short-run framework deals with business cycles.Both frameworks deal with unemployment and inflation.In addition each framework emphasizes a different part of the model.The long-run framework focuses on supply; the short-run framework focuses on demand.

Question 3

Non-economists often say that inflation makes the nation poorer.Why are they incorrect? What are two actual costs of inflation?

Answer 3

Whenever prices go up,the buyers are made poorer by the amount of the price increase; but the sellers are made richer by exactly the same amount.Therefore when we consider the nation as a whole,it is neither richer nor poorer because of inflation,though there has been a redistribution of the wealth from buyers to sellers.There are at least two actual costs of inflation.The first is that inflation redistributes income from people who cannot or do not raise their prices to those who do.Though the nation as a whole is not poorer,a feeling of injustice has been created that can adversely affect the workings of the economy.The second cost is that inflation reduces the amount of information that prices convey and causes people to make choices that do not reflect relative prices.If the absolute prices of everything change in the same proportion,relative prices remain the same and decisions should not change.If relative prices change,then people should buy less of those goods that have become relatively more expensive and buy more of those that have become relatively less expensive.During inflation,however,consumers find it difficult to distinguish between a change in absolute prices and a change in relative prices.(LO7)Short Answer Questions

Question 4

What is the business cycle? List (in order of occurrence beginning when GDP is at its highest)the four phases of the business cycle.

Question 5

What is the formal definition of a recession?

Question 6

What is real GDP?

Question 7

What is the business cycle? How is it linked to a secular trend? Describe the four phases of the business cycle.How are these phases linked to the concepts of a "boom",a "recession" and an "expansion"?

Question 8

Macroeconomists have defined three categories (types)of unemployment: cyclical,structural,and frictional.Briefly describe each type.

Question 9

What are the four central problems of macroeconomics?

Question 10

One of the prominent features of a modern market economy is the predominance of wage labor.Wage labor is paid a fixed wage,so that labor income during employment does not depend on the economic success of the firm.Prior to the Industrial Revolution,agricultural work was predominant,and agricultural workers did not work for fixed wages; their income was based on the net revenue of the farm.Explain why the change to wage labor is related to cyclical and structural unemployment.

Question 11

What is the formal definition of the unemployment rate?

Question 12

What are the four central problems of macroeconomics? Which of these problems are analyzed using a short-run framework,which are analyzed using a long-run framework,which are analyzed using both a short-run and long run framework? How do the two frameworks differ?

Question 13

What is inflation and how do we measure it? Which prices do each of the major price indexes actually measure? How can a price index be used to convert nominal output into real output?

Question 14

Distinguish between Keynesian and Classical economists.

Question 15

What are the benefits and costs of economic growth?

Question 16

What is the target rate of unemployment and how does it relate to potential income? According to "Okun's rule of thumb",what will happen to output and income if actual unemployment is 1 percent greater than target unemployment?

Question 17

Real GDP and per capita real output are two indicators used by the government to measure economic growth.Define them,and explain why growth of per capita real output is a more accurate measurement of the growth in the economic welfare of individuals.

Question 18

What is the formal definition of the unemployment rate and how is it calculated? Describe each of the three macroeconomic categories of unemployment: cyclical,structural,and frictional and give an example of each type of unemployment.

Question 19

What was the typical rate of growth of United States GDP during the twentieth century and how did the decades of the 1970s and 1980s differ from that general pattern? Approximately how long (in years)was the typical business cycle in the last half century? How big a drop in GDP was associated with America's worst business cycle,the Great Depression?

Question 20

What are the measurement problems associated with the CPI? What has the government done to overcome these problems?

Question 21

A given basket of goods cost $600 in 2005; $800 in 2006; and $875 in 2007.Construct a price index for all three years using 2006 as a base year.

Question 22

What is the target rate of unemployment? What would happen if unemployment were below this rate?

Question 23

Define the concepts of discouraged workers and underemployment,and explain why,due to their presence,we need to handle the official unemployment figures published by the BLS with care.

Question 24

Explain the difference between real and nominal output.Explain how they are related.

Question 25

Real output is $550 billion and nominal output is $600 billion.What is the value of the price index?

Question 26

What are two costs of inflation?

Question 27

In 2007,the number of working-age adults was 240 million,the labor force was 160 million,and the total number of employed was 150 million.Calculate the following:
(a)Labor force participation rate
(b)Unemployment rate.
(c)Employment rate.

Question 28

Draw a diagram of the phases of a business cycle and label each phase.What is the precise definition of a recession? An expansion?

Question 29

Fill in the blanks of the following table and answer the following questions.
(a)Does the table indicate there is inflation?

Question 30

Why are Classical economists likely to think the unemployment rate reported by the BLS overstates true unemployment?

Question 31

Nominal output has increased from $600 billion to $720 billion.The GDP deflator has risen by 10%.By what dollar amount has real output risen?

Question 32

What is inflation?

Question 33

Suppose an economy currently has total output of $7 trillion and an unemployment rate of 4%.Using Okun's rule of thumb,how would output change if unemployment decreased to 3.5%?

Question 34

Why are Keynesian economists likely to think the unemployment rate reported by the BLS understates true unemployment?

Question 35

Define Okun's rule of thumb.

Question 36

Define the following price indices: PPI,GDP Deflator,CPI,and PCE deflator.

Question 37

List three microeconomic categories of unemployment.

Question 38

Classify each of the following cases as frictional,structural,or cyclical unemployment.
(a)John graduated from college and is currently looking for a job.
(b)A farmer lost his job because the area he lives in was transformed into a highly industrialized zone.
(c)Eliot works in the automobile industry in Detroit.He lost his job because cheaper imported cars have poured into America from Mexico.
(d)Mrs.Dunkin finished raising her children and decided to look for a job.
(e)Elizabeth lost her job because the company she used to work for merged with another company.
(f)David,who is a restaurant manager,lost his job because of a recession.

Question 39

How does the target rate of unemployment relate to potential income?