Download Introduction to Economic Growth

Introduction to Economic Growth
and Instability
Topics Covered: Nominal vs. Real income - Economic Growth - Business Cycle –
Unemployment - Inflation
True or False:
1) In an economy characterized by persistent inflation, nominal GDP will usually be
greater than real GDP.
2) If nominal GDP in one year is kd 5,000 billion and the price index is 135, the real GDP
that year is kd 3,704 billion.
3) If the price level rises from 125 to 150 from one year to the next, then the rate of
inflation that year is 15 percent.
4) The nominal interest rate is the sum of the real interest rate and the premium paid to the
lender to offset the expected rate of inflation.
5) If real GDP is 50 and nominal GDP is 100, the GDP price index is 200.
6) Economic growth is defined as the increase in nominal GDP which occurs over a period
of time.
7) If the total population is 175 million, the labor force is 100 million, and 89 million
workers are employed, then the unemployment rate is 11 percent.
8) Official unemployment statistics overstate unemployment because discouraged workers
who are not actively seeking work are counted as unemployed.
9) Okun's law suggests that every 1 percentage point increase in unemployment above the
natural rate of unemployment gives rise to a 2 percent GDP gap.
10) People who work part time, but desire to work full time, are considered to be officially
unemployed.
11) The business cycle is so named because upswings and downswings in business activity
are equal in terms of duration and intensity.
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Multiple choice:
1) The GDP deflator or price index equals :
A)
B)
C)
D)
gross private domestic investment less the consumption of fixed capital
gross national product less net foreign factor income earned in Kuwait .
nominal GDP divided by real GDP .
real GDP divided by nominal GDP.
2) If the price index is 130, this means that :
prices are 130 percent higher than in the base year .
prices are .13 times higher than in the base year .
prices are 30 percent higher than in the base year .
nominal GDP must be inflated to determine the real GDP.
A)
B)
C)
D)
Year
Price Index
1
100
2
95
3
105
4
125
5
125
3)Refer to the above table. Inflation occurs between years :
A)
B)
C)
D)
1 and 2 .
2 and 4 .
4 and 5 .
5 and 6.
4) Refer to the above table. From year 1 to 2 :
A)
B)
C)
D)
there is inflation .
prices are stable .
there is deflation .
there is hyperinflation.
5) Refer to the above table. From year 3 to year 4, the price level is:
A)
B)
C)
D)
Year
1
2
3
increasing.
decreasing.
both increasing and decreasing.
constant.
Nominal GDP
5200
5500
5740
Real GDP
4800
Price Index
112
5000
6) Refer to the above table. What is the GDP price index in Year 1 ?
A)
B)
C)
D)
105.2
108.3
109.6
111.5
6
120
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7) Refer to the above table. What was real GDP in Year 2 ?
A)
B)
C)
D)
kd 4,820
kd 4,875
kd 4,911
kd 5,320
8) Nominal GDP differs from real GDP because :
A)
B)
C)
D)
nominal GDP is based on constant prices .
real GDP is based on current prices .
real GDP is adjusted for changes in the price level .
nominal GDP is adjusted for changes in the price level.
Norminal
GDP
Nominal and
Real GDP
Real
GDP
1996
Time
9) Which of the following statements is correct on the basis of the diagram above ?
A)
B)
C)
D)
Real GDP must be deflated in each year after 1996 to determine nominal GDP .
Nominal GDP must be inflated in each year since 1996 to determine real GDP .
Nominal GDP must be deflated in each year before 1996 to determine real GDP .
Nominal GDP must be inflated in each year before 1996 to determine real GDP.
10) If real GDP declines in a given year, nominal GDP :
A)
B)
C)
D)
must decline .
must increase .
may either rise or fall .
is likely to remain constant.
11) In year 1, nominal GDP for a nation was kd 3,053 billion and the price index was 94. In
year 2, nominal GDP was kd 3,166 billion and the price index was 100. To make
year 1 GDP comparable with the year 2 (base year) GDP, the year 1 GDP must be :
A)
B)
C)
D)
inflated to kd 3,368 billion .
inflated to kd 3,248 billion .
deflated by 11 percent .
inflated by 8 percent.
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12) Which measure of inflation would include consumer goods and capital goods?
A)
B)
C)
D)
the GDP price index
the consumer price index
the Retail Trade Survey
the Survey of Manufactures
13) One year nominal GDP was kd 286 billion and the price index was 88. Real GDP that
year was :
A)
B)
C)
D)
kd 252 billion .
kd 325 billion .
kd 308 billion .
kd 262 billion .
14) If real GDP in a year was kd 3,668 billion and the price index was 112, then nominal
GDP in that year was approximately :
A)
B)
C)
D)
kd 3,846 billion .
kd 3,925 billion .
kd 4,108 billion .
kd 4,379 billion .
15) The rate of economic growth is best defined as the:
A)
B)
C)
D)
percentage increase in real GDP over time.
increase in investment as a percentage of GDP over time.
percentage increase in consumption expenditures over time.
percentage increase in the quality of capital, human, and natural
resources which occurs over time.
16) The best measure of economic growth adjusted for the population of a nation is the
increase in:
A)
B)
C)
D)
aggregate demand over time.
real GDP per worker over time.
real GDP per capita over time.
real GDP per dollar of capital stock over time.
17) Real GDP was kd 9,950 billion in Year 1 and kd 10,270 billion in Year 2. What was
the approximate rate of economic growth from Year 1 to Year 2?
A)
B)
C)
D)
1.6 percent
2.4 percent
3.2 percent
4.3 percent
18) Real GDP was kd 9,950 billion in Year 1 and kd 10,270 billion in Year 2. The population
rose from 270 million in Year 1 to 275 million in Year 2. What was the approximate
increase in real GDP per capita rate from Year 1 to Year 2?
A)
C)
1.3 percent
3.3 percent
B)
D)
2.1 percent
4.2 percent
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19) Nominal GDP was kd 9,500 billion in Year 1 and kd 10,000 billion in Year 2. The GDP
price index was 170 in Year 1 and 175 in Year 2. Between Years 1 and 2, the rate of
growth in real GDP was approximately:
A)
B)
C)
D)
1.6 percent.
2.3 percent.
4.4 percent.
5.3 percent.
20) Data on the growth of real GDP and real GDP per capita understate economic growth
because they :
A)
B)
C)
D)
fail to account for increases in the workweek .
fail to account for improvements in product quality .
do not take into account improvements in education .
take into account changes in resource allocation.
21) The diagram is best described as an idealized :
A)
B)
C)
D)
business cycle .
cyclical variation .
recession cycle .
prosperity cycle.
A
E
B
D
C
Time
22) Refer to the above diagram. The phases of the business cycle from points A to D are,
respectively :
A)
B)
C)
D)
peak, recession, recovery, trough .
trough, recovery, expansion, peak .
expansion, recession, trough, peak .
peak, recession, trough, recovery.
23) Which phase of the business cycle would be most closely associated with an economic
contraction ?
A)
B)
C)
D)
peak
recession
trough
recovery
24) In the recovery phase of a business cycle :
A)
B)
C)
D)
the inflation rate decreases, but productive capacity increases.
the inflation rate and productive capacity decrease .
employment increases, but output decreases .
employment and output increase.
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25) A recession is defined as:
A)
B)
C)
D)
a fall in the natural rate of unemployment.
a rise in the natural rate of unemployment.
a fall in real GDP that lasts six months or longer.
the minimum point in the business cycle before the recovery phase.
26) The level of total spending is the immediate determinant of the :
A)
B)
C)
D)
ratio of private to public goods production .
level of real output and employment .
size of the labor force .
Structure of the labor force .
27) Which is the correct way to calculate the unemployment rate ?
A)
B)
C)
D)
[(unemployed)/(population)] x 100
[(unemployed)/(labor force)] x 100
[(labor force)/(population)] x 100
[(labor force)/(unemployed)] x 100
28) Assuming the total population is 200 million, the labor force is 100 million, and 92
million workers are employed, the unemployment rate is :
A)
B)
C)
D)
4 percent .
6 percent .
8 percent .
10 percent.
29) A nation has a population of 260 million people. Of these, 60 million are retired, in the
military, in institutions, or under 16 years old. There are 188 million who are
employed and 12 million who are unemployed. What is the unemployment rate ?
A)
B)
C)
D)
4 percent
6 percent
9 percent
27 percent
30) In an economy, 35 million workers are employed out of a labor force of 50 million and a
total population of 70 million. The unemployment rate is :
A)
B)
C)
D)
15 percent .
25 percent .
30 percent .
50 percent.
31) The unemployment rate in an economy is 12 percent. The civilian labor force is 50
million. The number of employed workers in the economy is :
A)
B)
C)
D)
38 million .
40 million .
42 million .
44 million.
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32) In calculating the unemployment rate, "discouraged" workers who are not actively
seeking employment are :
A)
B)
C)
D)
excluded .
included .
treated the same as part-time workers .
used to determine the size of the labor force.
33) In calculating the unemployment rate, part-time workers are :
A)
B)
C)
D)
counted as unemployed because they are not working full-time .
counted as employed because they are receiving payment for work .
used to determine the size of the labor force, but not the unemployment rate .
treated the same as "discouraged" workers who are not actively
seeking employment.
34) Official unemployment rate statistics may :
A)
B)
C)
D)
overstate the amount of unemployment by including part-time workers in the
calculations .
understate the amount of unemployment by excluding part-time workers in the
calculations .
overstate the amount of unemployment because of the presence of
"discouraged" workers who are not actively seeking employment .
understate the amount of unemployment because of the presence of
"discouraged" workers who are not actively seeking employment.
35) A headline reads: "Steel industry suffers slump as import competition increases;
unemployment rises." This type of unemployment can best be characterized in
economic terms as :
A)
B)
C)
D)
frictional .
structural .
cyclical .
natural.
36) The best example of a "frictionally unemployed" worker is one who :
A)
B)
C)
D)
reduces productivity by causing frictions in a business .
is laid off during a recessionary period in the economy .
is in the process of voluntarily switching jobs .
is discouraged and not actively seeking work.
37) A headline states: "Real GDP falls again as the economy slumps." This condition is most
likely to produce what type of unemployment ?
A)
B)
C)
D)
structural
cyclical
frictional
natural
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38) The natural rate of unemployment:
A)
B)
C)
D)
means that the economy will always operate at its natural rate.
means that the economy will always realize its potential output.
is equal to the total of frictional and structural unemployment.
is a fixed unemployment rate that does not change over time.
39) The GDP gap measures the amount by which:
A)
B)
C)
D)
nominal GDP exceeds real GDP.
actual GDP exceeds potential GDP.
potential GDP exceeds actual GDP.
actual GDP exceeds national income.
40) The amount by which potential GDP exceeds actual GDP is one measure of the:
A)
B)
C)
D)
natural rate of unemployment.
aggregate cost of unemployment.
difference between real and nominal GDP.
difference between real and nominal income.
41) Okun's law indicates that for:
A)
B)
C)
D)
every 1 percent that the actual unemployment rate exceeds the natural
unemployment rate, there is generated a 2 percent GDP gap.
every 1 percent that the actual unemployment rate exceeds the natural
unemployment rate, there is generated a 5 percent GDP gap.
a 5 percent GDP gap, there is generated a 1 percent increase in the natural
unemployment rate.
a 2 percent GDP gap, there is generated a 2 percent increase in the actual
unemployment rate.
42) If the natural rate of unemployment is 4.5 percent and the actual unemployment rate is
6.5 percent, then Okun's law indicates that the GDP gap is:
A)
B)
C)
D)
2 percent.
3 percent.
4 percent.
6 percent.
43) In an economy nominal GDP is kd 4,000 billion. The actual unemployment rate is 8
percent and the natural rate of unemployment is 6 percent. According to Okun's law
there will be:
A)
B)
C)
D)
kd 80 billion lost in potential output.
kd 100 billion lost in potential output.
kd 160 billion lost in potential output.
kd 300 billion lost in potential output.
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44) Inflation is a rise in:
A)
B)
C)
D)
the general level of prices over time.
the standard of living over time.
industrial production.
real GDP.
45) The consumer price index was 115 one year and 120 the next year. The rate of inflation
from one year to the next was approximately:
A)
B)
C)
D)
2.2 percent.
2.9 percent.
3.4 percent.
4.3 percent.
46) The consumer price index was 247 in year 1 and 272 in year 2. The rate of inflation in
year 2 was:
A)
B)
C)
D)
12 percent.
10 percent.
8 percent.
6 percent.
47) Over a ten-year period, the consumer price index doubled. On the basis of this
information we can say that the average annual rate of inflation over this period was
approximately:
A)
B)
C)
D)
10 percent.
9 percent.
7 percent.
5 percent.
48) If the annual inflation rate is 5 percent a year, about how many years will it take for the
price level to double?
A)
B)
C)
D)
10 years
12 years
14 years
16 years
49) Inflation that occurs when total spending is greater than the economy's ability to produce
output at the existing price level is:
A)
B)
C)
D)
anticipated inflation.
demand-pull inflation.
cost-push inflation.
unanticipated inflation.
50) Inflation caused by a rise in per unit production costs is referred to as:
A)
B)
C)
D)
cost-push inflation.
demand-pull inflation.
unanticipated inflation.
hyperinflation.
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51) You are given the following information about the economy: (1) nominal interest = 8
percent; (2) real rate of interest = 6 percent. The inflation premium is:
A)
B)
C)
D)
2 percent.
6 percent.
8 percent.
14 percent.
52) Demand-pull inflation:
A)
B)
C)
D)
occurs when prices of resources rise, pushing up costs and the price level.
occurs when total spending exceeds the economy's ability to provide output at
the existing price level.
occurs only when the economy has reached its absolute production capacity.
is also called cost-push inflation.
53) "Too much money chasing too few goods" best describes:
A)
B)
C)
D)
the GDP gap.
demand-pull inflation.
the inflation premium.
cost-push inflation.
54) Inflation initiated by increases in wages or other resource prices is labeled:
A)
B)
C)
D)
demand-pull inflation.
demand-push inflation.
cost-push inflation.
cost-pull inflation.
55) Cost-push inflation:
A)
B)
C)
D)
is caused by excessive total spending.
shifts the nation's production possibilities curve leftward.
moves the economy inward from its production possibilities curve.
is a mixed blessing because it has positive effects on real output and
employment.
56) During a period of hyperinflation:
A)
B)
C)
D)
creditors gain because their loans are repaid with dollars of higher value.
people tend to hold goods rather than money.
income is redistributed away from borrowers.
the real value of the national currency rises.
57) Inflation affects:
A)
B)
C)
D)
both the level and the distribution of income.
neither the level nor the distribution of income.
the distribution, but not the level, of income.
the level, but not the distribution, of income.
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Essay Questions:

What is meant by the term business cycle? List the four phases of the business cycle.

What are two criticisms of the unemployment rate? How do these criticisms relate to
the overstating or understating of the unemployment rate?

Explain the differences among the frictional, structural, and cyclical forms of
unemployment.

Define the “full-employment” or “natural” rate of unemployment and give its
approximate percentage rate as economists currently define it.

What is “demand-pull” inflation?

Describe cost-push inflation and its major source.

Some economists believe that creeping (moderate) inflation cannot be accepted
because a gradual increase in prices leads to an ever-rising rate of inflation. Other
economists argue that in order to achieve rapid economic growth, some moderate
price increases are necessary and that rigid price stability would cause considerable
unemployment. Contrast and evaluate these two points of view.
Problems:
(1) The next four questions refer to the following price and output data over a five-year
period for an economy that produces only one good. Assume that year 2 is the base
year.
Year
1
2
3
4
5
Units of
output
16
20
30
36
40
Price
per unit
kd 2
3
4
5
6
(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you
would inflate nominal GDP in finding real GDP.
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(2) The following data show nominal GDP and the appropriate price index for several years.
Compute real GDP for each year and indicate whether you have “inflated” or
“deflated” nominal GDP in finding real GDP. All GDP are in billions.
Year
1
2
3
4
5
6
Nominal
GDP
kd117
124
143
149
178
220
Price level
index
120
104
85
96
112
143
Real GDP
___
___
___
___
___
___
Inflated (I)
Deflated (D)
___
___
___
___
___
___
(3) Suppose an economy's real GDP is kd 50,000 in year 1 and kd 55,000 in year 2. What is
the growth rate of its GDP? Assume that population was 100 in year 1 and 105 in year
2. What is the growth rate in GDP per capita?
(4) Use the following data to calculate: (a) the size of the labor force and (b) the official
unemployment rate.
Total population 1,500; population under age 16 and institutionalized, 360;
not in labor force, 450; unemployed, 69; workers with part-time jobs who are
looking for full-time jobs, 30.