Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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