Download Chapter 4 What Macroeconomics Tries to Explain

Chapter 4 What Macroeconomics Tries to Explain
Review Questions
2.
To make sense of the economy and to create workable models, macroeconomics uses
aggregation—the process of combining distinct things into a single entity. There are
many examples of aggregation in macroeconomics, so answers will vary widely. One
example would be the interest rate—obtained by combining all the different interest rates
in the economy into a single aggregate. Another example is gross domestic product
(GDP)—obtained by combining all the different types of goods and services in the
economy into a single aggregate.
4.
In addition to the growth rate of output, we would need to know the growth rate of the
population. A rise in the average standard of living requires that output grow faster than
the population, so that output per person rises.
Problems and Exercises
2.
a. Real GDP in 2000 would have been $4123 x (1 + 8%)27 = $32,934.78 billion.
b. Output per person in 2000 would have been $117,202.85. It would have increased by
502.64% since 1973, instead of by 69%.
4.
a.
Year
Real GDP
(in billions)
2000
2001
2002
2003
2004
2005
2006
$5,000
$5300
$5618
$5955.08
$6312.38
$6691.13
$7092.60
No, the real GDP line gets steeper because, as real GDP rises from an increasingly
higher and higher level, the same percentage growth rate causes greater and greater
absolute increases in GDP.
b.
Year
Real GDP (in billions)
2000
2001
2002
2003
2004
2005
2006
$5,000
$5300
$5300 x 1.05 = $5565
$5565 x 1.04 = $5787.60
$5961.23
$6080.45
$6141.26
No, the real GDP line gets flatter due to the relatively large decrease in the growth
rate.
Economic Applications and Exercises
2.
a. 1. Because the Labor Department’s consumer price index decreased by 0.3 percent in
April, and only rose by 0.2 percent in June.
2. Moderate inflation would prevent declining profits and set the stage for sustained
recovery.
3. Given the small rise in prices, the Fed would probably not change the
interest rates.
b. Greider believes that the United States is experiencing a low-grade depression that
may last for years. Persistent deflation would create a vicious spiral of negatives-falling profits, more closed factories, shrinking employment and incomes,
accompanied by waves of failing debtors, both corporations and families.