Download Chapter 8 review -answers in bold Suppose an economy`s real GDP

Chapter 8 review -answers in bold
1. Suppose an economy's real GDP is $50,000 in year 1 and $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?
$5,000/$50,000 or 10% in year 1. The per capita growth can be calculated as follows: $500
per capita in year 1 ($50,000/100); $523.81 per capita in year 2 ($55,000/105). The change is
23.81 compared to base of $500 or 23.81/500 = 4.77%. [text: E pp. 136-137; MA pp. 136-137]
2. Which is more important — increasing inputs of resources or increasing the productivity of
those inputs — as the main source of economic growth in the United States? Explain.
Both resource quantity and resource productivity contribute significantly to
increased economic growth in the United States. About a third of the increase in
economic growth comes from increases in resource input and about two-thirds from
increases in resource productivity. Clearly, it is not the quantity of resources that is
most important but the quality of resources and how they are used for production.
[text: E p. 137; MA p. 137]
3. We are in the expansion phase. We are coming out of a recession and employment,
output are both increasing
4. In the table below are statistics showing the labor force and total employment during year
1 and year 5. Make the computations necessary to complete the table. (Number of
persons is in thousands.)
Year 1
Year 5
Labor force
95,450
108,250
Employed
90,325
100,830
Unemployed
______
______
Unemployment rate
______
______
(a) How is it possible that both employment and unemployment increased?
(b) Would you say that year 5 was a year of full employment?
(c) Why is the task of maintaining full employment over the years more than just a problem of
finding jobs for those who happen to be unemployed at any given time?
Year 1
Year 5
Labor force
95,450
108,250
Employed
90,325
100,830
Unemployed
5,125
7,420
Unemployment rate
5.4%
6.8%
(a) The labor force increased more than employment increased.
(b) No, the unemployment rate of 6.8% is greater than the full employment rate of 5–
5.5%.
(c) The number of people looking for work expands. [text: E pp. 140-141; MA pp. 140141]
5. What is “demand-pull” inflation?
“Demand-pull” inflation is the traditional view that inflation is caused by growing total
demand bidding up the prices of output in a period of nearly full or full employment. [text:
E pp. 147-148; MA pp. 147-148]
6. Evaluate the statement: “Inflation only benefits the rich.”
Inflation is not a benefit for society and does not necessarily benefit the rich. The
redistributive effects of inflation on the rich and the poor are arbitrary. Unanticipated
inflation benefits some people in society, such as debtors, and hurts others, such as fixednominal-income receivers, savers, and creditors. The rich are often found in these latter
groups who are hurt by unanticipated inflation. [text: E pp. 150-151; MA pp. 150-151]
7. Explain the difference between real and nominal income. How can you get an
approximation of the percentage change in real income from one time period to another?
Real income is determined by dividing nominal income by the price level expressed in
hundredths. The percentage change in real income can be approximated by subtracting
the percentage change in the price level from the percentage change in nominal income.
[text: E pp. 149-150; MA pp. 149-150]
8. Answer the next four questions based on the following data using year 1 as the base year.
All dollars are in billions.
Year
Nominal income
CPI
1
$3,166
100
2
3,402
104
3
3,774
108
4
3,989
112
(a) Find real income in year 4.
(b) What was the percentage rise in prices between years 1 and 3?
(c) What was the percentage rise in prices between years 2 and 4?
(d) What was the increase in real income from year 3 to year 4 in %?
(a) $3,562
(b) 8%
(c) (112 minus 104) divided by 104 equals 0.077. 0.077 x 100 = 7.7%
(d) Find real income for years 3 and 4. Subtract the two figures and divide by real income
in year 3. Multiply by 100 to express in percent. Result is $3,562 – $3,494 = $68;
$68/$3,494 = 0.019; 0.019 x 100 = 1.9% growth in real income. [text: E pp. 149-150; MA
pp. 149-150]