Download 36A. Key Problem - McGraw Hill Higher Education

AK Macroeconomics – Chapter 4
CHAPTER FOUR
Answers to Self-Test Questions
1. See the following table:
Item
2006
Quantity Price
Carrots
5 mill
Tractors 2 000
Totals
$2
2007
Nominal Quantity Price
GDP
$10 mill 6 mill
$2.50
50000 $100
mill
$110
mill
2 200
2007
Nominal Quantity 2006 Real
GDP
Price GDP
$15 mill 6 mill
$2
$12
mill
52000 $114.4
2 200
50
$110
mill
000
mill
$129.4
$122
mill
mill
Value of real and nominal GDP in 2006 are the same: $110 million.
Value of Nominal GDP in 2007:
$129.4 million
Value of real GDP in 2007:
$122 miilion
Value of the GDP Deflator in 2007: Nominal GDP x 100 = 129.4 x 100 =
Real GDP
122
106.1
2. See following table:
2005
2006
2007
Nominal GDP
443
474
507
Real GDP
374
389
402
GDP Deflator (1997
= 100)
118.4
121.9
126.1
Population (in
millions)
26.1
26.4
27
Real GDP per
capita
14,330
14,735
14,888
3. a) Yes, since the category "working age population" includes everyone over the age of
15, etc. whether or not they are in the labour force.
b) Types of people in the category of “not in the labour force” would be: homemakers,
retirees, those receiving welfare or disability incomes, those who are
independently wealthy and discouraged workers.
c) Yes, if the size of the labour force increases by more than the number of employed
increases.
© 2009 McGraw-Hill Ryerson Limited
22
AK Macroeconomics – Chapter 4
4. a) cyclical; b) frictional; c) structural
5. The size of the labour force would drop by 100 000, as would the number of people
unemployed. The unemployment rate would also fall.
6. The potential GDP is $840. (Since there is 2% cyclical unemployment, using Okun's
Law gives us 2% x 2.5 = 5% multiplied by $800 billion = a GDP gap of $40 billion.
The actual GDP of $800 plus the GDP gap of $40 equals potential GDP of $840.)
7. Increase in real income was 3 percent.
Her nominal income increased by $2,800, or by 2800/40000 x 100, which equals 7
percent. Since the inflation rate was 4 percent, her real income has increased by 7
percent minus 4 percent, or by 3 percent.
8. a) 10 years. The number of years to double is 70 divided by the growth rate (of
prices), i.e. 70/7 = 10.
b) 10 percent. Rearranging the rule of 70 formula gives: growth rate (interest rate) =
70/ # of years to double, i.e. 70/7 = 10.
9. a) Real interest rate: 7%
b) Real income: $10 830. Your real income falls by 5% or $600 to $11 400 in the
first year. It falls a further 5% or $570 in the second year to give a real income of
$10 830.
Answers to Study Guide Questions
1.
2.
3.
4.
5.
6.
False: structural unemployment is likely to be largest in sunset industries.
True
True
False: female participation rates only have been increasing.
False: the higher the redistributive effects.
False demand-pull inflation occurs when the total demand exceeds the capacity to
produce.
7. False: it is equal to the nominal rate less the expected inflation rate.
8. True
9. True
10. True
11. a
12. a
13. b
14. b
15. a
16. a
17. d
18. c
19. d
20. b
© 2009 McGraw-Hill Ryerson Limited
21. a
22. c
23. d
24. d
25. e
26. c
27. b
28. d
29. b
30. b
23
31. b
32. a
33. b
34. b
35. d
AK Macroeconomics – Chapter 4
36A.
Key Problem
a)
1
Item
Hot
Dogs
Table 4.14 (completed)
2
3
4
2006
5
6
7
2007
8
9
10
12
2008
13
14
Qty Prices Nominal Qty Prices Nominal Prices Real Qty Prices Nominal Prices Real
Year GDP
Year GDP Year GDP
Year GDP Year GDP
2006
2007
2006
2008
2006
50 2
100 55 2.40
132
2 110 58 2.50
145
2 116
10
12
120
12
13
156
12
3
Farm
tractors
Parking 4
meters
Totals
100
300
4
95
380
100 400 4
50
200
4
60
240
50
200 5
CDs
11
720
908
144 14 13.50
854
189
12
110
440
100 400
70
350
50
1124
168
250
934
Column 7 in the table is completed by multiplying columns 5 and 6 together.
Columns 8 and 13 are simply a repeat of column 3.
Column 9 is completed by multiplying columns 5 and 8 together.
Column 12 is determined by multiplying columns 10 and 11 together.
Column 14 is determined by multiplying columns 10 and 13 together.
b)
From columns 7 and 12:
c)
2007 = $908;
From columns 9 and 14:
d)
e)
f)
2008 = $1124
2007 = $854;
2008 = $934
Dividing column 7 by column 9 and dividing column 12 by 14 and multiplying
by 100 gives us:
2007 = 106.3;
2008 = 120.3
Inflation rates: 2007 = 6.3%;
2008 = 13.2%
The price index increased by 6.3 percentage points (100 to 106.3) between the
years 2000 and 2001. This index then increased by 14.0 percentage points
(120.3 less 106.3) between 2001 and 2002. This is a percentage increase of 14.0
÷ 106.3 x 100 = 13.2%.
Real GDPs per capita:
2006 = $31 304; 2007 = $35 583;
2008 = $37 360
© 2009 McGraw-Hill Ryerson Limited
24
AK Macroeconomics – Chapter 4
Since Year 2006 is the base year, we can use column 4’s $720 billion divided by
g)
h)
i)
j)
the population of 23 million (720 000 ÷ 23). For 2007, we use column 9’s 854
divided by 24 million and for 2008 column 14’s 934 divided by 25 million.
Growth rate of real GDP per capita:
2007 = 13.7%;
2008 = 5.0%
2007’s real GDP per capita grew by 4279 (35 583 – 31 304). Dividing this
4279 by 31 304 and multiplying by 100 gives us the percentage growth rate.
Real GDP per capita grew by 1777 from 2007 to 2008.
Value of bundles: 2006 $70;
2007 = $77;
2008 = $80
For Year 2006, take 5 hot dogs @ $2 plus 5 CDs @ $12; the next two years are
done in a similar manner using the prices in those years.
Price indexes: 2006 = 100;
2007 = 110; 2008 = 114.3.
The prices in the base year 2006 are, by definition, 100. For Year 2007, take the
total amount spent in that year, $77, and divide it by the base year value of 70
and multiply by 100 to get an index. Similarly, for Year 2008, take $80, divide
by the base year’s 70 and multiply by 100.
Inflation rates: 2007 = 10%; 2008 = 3.9%
110 less 100 is 10; and 114.3 less 110 is 4.3 which, divided by 110 and
multiplied by 100 gives 3.9%
37A.
a) GDP deflators: Year 2006: 105.1 (420/400 x 100);
Year 2007:
108.1
(456/422 x 100); Year 2008 = 111.9 (500/447 x 100)
b) Real GDP per capita: Year 2006: $25 000; (400 billion/16million)
Year 2007: $25 483 (422 billion/16.56 million);
Year 2008: $26 079 (447 billion/17.14 million).
c) Growth rate of real GDP per capita: Year 2007: 1.9% (+483/25000 x 100);
Year 2008: 2.3% (+596/25483 x 100).
38A.
a) Participation rates: Year 2006: 70% ((8.4/12 x 100); Year 2007: 72%
(9/12.5 x 100); Year 2008: 71.9% (9.2/12.8 x 100).
b) Unemployment rates: Year 2006: 8.3% (0.7/8.4 x 100); Year 2007: 8.9%
(0.8/9 x 100); Year 2008 = 9.2% (0.85/9.2 x 100).
c) 2007: 0.7% (+0.8/108.2 x 100); 2008: 1.2% (1.3/109 x 100)
d) 2007: 5% (+1/20 x 100);
2008: 5% (+1.05/21 x 100)
e) 14 years (70/5).
39A. Inflation rates:
40A.
Year 2007: 4.3% (+5/116 x 100);
Year 2008: 5.8%. (+7/121 x 100).
a) Growth rate of population:2007: 3.5% (+0.56/16 x 100);
2008: 3.5% (+0.58/16.56 x 100).
b) 20 years (70/3.5).
© 2009 McGraw-Hill Ryerson Limited
25
AK Macroeconomics – Chapter 4
41A.
a) Real income:
b)
42A.
Year 2006: $24 138 (28 000/116 x 100);
Year 2007: $24 463 (29 600/121 x 100);
Year 2008: $25 000 (32 000/128 x 100).
2007: 1.3% (325/24 138 x 100);
2008 2.2% (537/24 463 x 100).
a) Real interest rate: Year 2006: 1.2% (8 – 6.8);
Year 2007 1.7% (6 – 4.3);
Year 2008: - 0.7% (5.2 – 5.9)
43A.
1.
2.
3.
Country
real GDP per capita
Bergan
Altria
Casper
$24 444
14 592
10 648
(2200/1.2/75 x 1000)
(715/1.4/35 x 1000)
(2875/1.8/150 x 1000)
44A
Economic growth is the increase in an economy’s real GDP per capita for one year
to the next. It can also be defined as the increase in an economy’s capacity to produce
from one year to the next.
45A Frictional unemployment results from people switching jobs (voluntarily or
involuntarily) or looking for their first jobs. Cyclical unemployment is a product of the
business cycle and results in the economy operating below its full-employment
potential.
46A.
a)
Unemployment rate: 10% (1.5/ (11.5 + 2.0 + 1.5) x 100.)
b)
Participation rate: 75% ((11.5 + 2.0 + 1.5)/20.0 x 100.)
c)
Inflation rate: 17% (but we don’t know the annual inflation rate because
we don’t know the number of years since the base year.)
47A.
a)
See the following table:
Table 4.24 (completed)
2006
Nominal GDP
$850
GDP Deflator
109
Real GDP
779.8
Population
30
Real GDP per capita $25 993
b) 5.5% (115 – 109) x 100;
109
© 2009 McGraw-Hill Ryerson Limited
2007
$958
115
833
30.5
$27 311
2008
1038.4
118
880
31
$28 390
c) 3.9% (28 390 – 27 312) x 100
27 312
26
AK Macroeconomics – Chapter 4
48A.
a) Nigel gains because the real interest rate that he pays on the remaining term of
his loan decreases.
b) Lars loses because the purchasing power of his fixed pension decreases.
c) Yoko loses because the real rate of return on her savings decreases.
d) Joan loses because her expected increase in real wages of 3% is wiped out.
e) Robert will gain because the company in which he owns shares is paying a
lower real wage than it expected.
49A.
GDP gaps:
50A
Participation rate =
2006: $45 (3% (cyclical unemployment) x 2.5 x $600);
2007: $15 (1% x 2.5 x $600);
2008: $15.75 (1% x 2.5 x 630).
labour force
x 100
working-age population
Unemployment rate =
number of unemployed x 100
labour force
51A (Two of the following):
a) The level of investment is likely to be low since firms may be discouraged from
spending when faced by the future uncertainty that inflation brings.
b) Inflation requires that menus, catalogues, price lists, web-sites and so on must be
changed which can be very expensive (menu costs).
c) Net exports are likely to be lower if domestic prices increase faster than foreign prices
because it will lead to a decrease in exports and an increase in imports.
52A. An improvement in unemployment might suggest an improvement of economic
conditions if it was the result of discouraged workers starting to look for employment.
Since they are now looking for work – but don’t yet have jobs – the unemployment rate
will increase.
53A.
a) Yes, the size of the labour force will increase by 60 000 due to the fact that
half of those workers (120 000) not previously seeking work are now applying for
the new jobs.
b) Unemployment rate: 12.1%. Unemployed: 610 000; labour force: 5 060 000
c) Unemployment rate: 11.3%. Unemployed: 570 000; labour force: 5 060 000
© 2009 McGraw-Hill Ryerson Limited
27
AK Macroeconomics – Chapter 4
54A Constructing a table for James would give:
Year
1
2
3
4
5
Nominal income
$36 000
37 080
38 192
39 338
40 528
Price index
100.0
101.5
103.0
104.6
106.1
Real income
$36 000
36 532
37 080
37 608
38 198
Alternatively, if you calculate on the basis that his real income increases by 1.5% (3%
increase in nominal income minus the 1.5% inflation rate), her real income after 4 years
(i.e., in year 5) is $38 209.
55A We can figure the answer using Okun’s law :
GDP gap = potential - actual GDP = 450 – 400 = 50
And GDP gap = 2.5 x cyclical unemployment (%) x actual GDP
50 = 2.5 x cyclical unemployment x 400
Rearranging terms gives us: cyclical unemployment =
50
2.5 x 400
= 0.05 (or 5%)
Actual unemployment =natural unemployment + cyclical unemployment = 6% + 5% =
11%
56A a)
See Table 4.26 (completed)
Table 4.26 (completed)
Item
Rice
2006
2007
2007
Quantity Price Nominal Quantity Price Nominal Quantity 2006 RealGDP
GDP
GDP
Price
400
$5
$2000
430
$5.20 $2236
430
$5
$2150
Pajamas 220
Beer
Totals
125
$15
3300
250
$16
4000
250
15
3750
20
2500
130
24
3120
130
20
2600
$7800
© 2009 McGraw-Hill Ryerson Limited
$9356
28
$8500
AK Macroeconomics – Chapter 4
a)
2006
$7800
7800
Nominal GDP
Real GDP
GDP deflator
b) Item
Rice
Beer
Pajamas
Quantity
10
10
2
Prices 2006
$5
20
15
2007
$9356
8500
110 (9356/8500 x 100)
Basket cost
Prices 2007
$50
200
30
$280
$5.20
24
16
CPI in 2007: 324/280 x 100 = 115.7
© 2009 McGraw-Hill Ryerson Limited
29
Basket cost
$52
240
32
$324