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6
EVERY MACROECONOMIC WORD YOU
HAVE EVER HEARD:
GROSS DOMESTIC PRODUCT, INFLATION,
UNEMPLOYMENT, RECESSION, AND
DEPRESSION
________________________________________________________________________
PROBLEMS
1. A country has the following labor statistics:
_______________________________________________________________________________
Military Personnel ……………………………………………………………. 1.5 million
Population under 16 years old who are working part time …………………… 0.3 million
Population over 16 years old who are working part time …………………….. 4.2 million
Population over 16 years old who are working full time ……………………... 14.3 million
Those without jobs and who are actively seeking jobs ……………………….. 1.5 million
_______________________________________________________________________________
Calculate the following:
a. the workforce _________________________________________________________________________
________________________________________________________________________________________
b. the unemployment rate
________________________________________________________________________________________
2. The data for the average annual tuition are listed in the table on the next page.
a. Use the tuition cost in 1990–91 of $3,016 as your base year cost. Estimate a price index for undergraduate
tuition costs at American institutions of higher education.
b. How have tuition costs changed between 1990–91 and 2005–2006?
c. How have tuition costs changed since 1976–77?
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Chapter 6
AVERAGE ANNUAL UNDERGRADUATE TUITION
PAID BY FULL-TIME-EQUIVALENT STUDENTS IN U.S. DEGREE-GRANTING
INSTITUTIONS
Selected Years 1976–77 to 2005–2006
Tuition and Required Fees
(in-State)
at All Institutions
Tuition and Fee
Price Index
1990–91 = 100
1976–77
$924
____________
1978–79
1,073
____________
1980–81
1,289
____________
1982–83
1,626
____________
1984–85
1,985
____________
1986–87
2,312
____________
1988–89
2,658
____________
1990–91
3,016
____________
1992–93
3,517
____________
1994–95
4,044
____________
1996–97
4,564
____________
1997–98
4,755
____________
1998–99
5,013
1999–00
5,238
____________
____________
2000–01
5,377
____________
2001–02
5,646
____________
2002–03
6,002
2003–04
2004-05
2005-06
6,608
7,122
7,601
____________
____________
____________
____________
Year
Note:
Data are average charges paid by students for the entire academic year. Tuition and fees were
weighted by the number of full-time-equivalent undergraduates.
The data have not been adjusted for changes in the purchasing power of the dollar over time.
Source: Table 313, U.S. Department of Education, National Center for Education Statistics,
http://nces.ed.gov/programs/digest/d06/tables/dt06_319.asp.
Every Macroeconomic Word You Have Ever Heard
3. During the 1970s, there were two oil crises. As the price of energy increased, production and transportation
costs increased throughout the United States. The higher costs were passed onto the consumers in higher
consumer prices. The CPI data from the 1970s and early 1980s are listed in the table below. Calculate the
inflation rates for this turbulent time in our economic history.
CONSUMER PRICE INDEX
All Urban Consumers
Base Year: 1982–1984 =100
Year
CPI
At End of Year
Inflation
Rate
1971
41.1
1972
42.5
____________
1973
46.2
____________
1974
51.9
____________
1975
55.5
____________
1976
58.2
____________
1977
62.1
____________
1978
67.7
____________
1979
76.7
____________
1980
86.3
____________
1981
94.0
____________
1982
97.6
____________
1983
101.3
____________
3.3%
Source: Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average, All Items,
1982–84 = 100, Bureau of Labor Statistics, U.S. Department of Labor,
(ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt).
75
76
Chapter 6
4. Answer the following based on the following data:
____________________________________________________________________________________
Year
Nominal GDP
1
$4,500 billion
GDP Deflator
100
2
4,950
105
3
5,260
108
Real GDP
_______
_______
_______
_______
4
5,390
112
____________________________________________________________________________________
a. What is the base year? __________________________________________________________________
b. Explain. _____________________________________________________________________________
c. Calculate real GDP for years one through four.
d. In what year did real GDP decline?________________________________________________________
Every Macroeconomic Word You Have Ever Heard
77
SELF TEST --- MULTIPLE-CHOICE QUESTIONS
1. The cost of a market basket was $200 in the base year of 1990, and the cost of the same market basket
was $350 in the year 2001. The price index for the year 2001 equals
a. 350.
b. 175.
c. 57.
d. 700.
2. As the post-war period following World War II began, the CPI rose from 18.2 at the end of 1945 to 21.5
at the end of 1946. (Base year: Average 1982–1984 = 100) Estimate the inflation rate in 1946.
a. 1.53%
b. 15.3%
c. 1.81%
d. 18.1%
3. In the midst of the Great Depression, the CPI fell from 14.6 at the end of 1931 to 13.1 at the end of 1932.
(Base year: Average 1982–1984 = 100) Estimate the deflation rate in 1932.
a. -1.15%
b. -11.5%
c. -10.3%
d. -1.03%
4. The CPI is considered by many to overstate the cost of living and the inflation rate. Which of the
following is not considered a reason for this problem?
a. The CPI market basket changes frequently and immediately includes new products.
b. Over time when products are cheaper elsewhere, people change where they buy them.
c. Quality changes as older products disappear, and better quality goods replace them.
d. Product substitutions take place following price changes.
5. Select the correct formula for estimating Real GDP.
a. Real GDP = (GDP  GDPDEF)  100
b. Real GDP = (GDP/ GDPDEF)  100
c. Real GDP = (GDP + GDPDEF)  100
d. Real GDP = (GDP  GDPDEF) / 100
6. The Real GDP does not completely measure the value of all the goods and services which are produced
and consumed in the United States. Which of the following is not considered a reason for this problem?
a. Illegal work
b. Government spending on education
c. Unpaid work done at home
d. Work that is “off the books,” for which the income goes unreported
78
Chapter 6
7. In the first quarter of 1982, the nominal GDP (at an annual level) was $3,193.8 billion and the GDP
Implicit Price Deflator was 64.99 (1996 = 100). Estimate the Real GDP in 1996 constant dollars.
a. $2075.7 billion
b. $3258.8 billion
c. $2034.9 billion
d. $4,914.3 billion
8. In the first quarter of 1971, the nominal GDP (at an annual level) was $1,099.9 billion and the Real GDP
in constant 1996 dollars was $3,666.1 billion. Use the relationship between the Real GDP, nominal GDP,
and the GDP Deflator to estimate the GDP Implicit Price Deflator (1996 = 100).
a. 70.00
b. 333.31
c. 30.00
d. 33.33
9. Assume that the price level increases at the same time that the economy goes into recession, and the
actual level of output declines. Given this information, we know that
a. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP may or may not
increase.
b. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP will definitely fall.
c. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP will definitely
increase.
d. the GDP Price Deflator will rise, the Real GDP will rise, and the nominal GDP will definitely
fall.
10. The Real GDP is not considered a perfect measure of social welfare in the United States. Which of the
following is not considered a reason for this problem?
a. The Real GDP ignores the composition of the output, and it gives equal weight to spending on
military equipment and to spending on health and education.
b. The Real GDP ignores the quality of the environment, which is often affected by production.
c. The Real GDP ignores the value of leisure
d. The Real GDP ignores production outside the geographic boundaries of the United States.
11. Which of the following is not a reason why depressions are less likely to occur in the modern economies
of the twenty-first century?
a. Governments have policies to alter interest rates.
b. Governments have safety nets in the form of unemployment insurance.
c. Governments can increase their regulation of industry.
d. Governments have spending policies.
12. Carol is 15 years of age and works in her father’s firm 15 hours a week. Carol is considered to be
a. underemployed.
b. part of the workforce.
c. subject to the encouraged worker effect.
d. not part of the workforce.
Every Macroeconomic Word You Have Ever Heard
79
13. All of the following are part of the workforce, except
a. military workers.
b. civilian workers who are 50 years of age and who are employed.
c. civilian workers who are 25 years of age and who are unemployed.
d. civilian workers who are over 16 years of age and who are actively seeking employment.
14. All of the following are reasons that the consumer price index can estimate inflation inaccurately, except
a. the market basket changes frequently.
b. quality improvements in electronics are not captured.
c. people have significantly changed the places in which they buy goods.
d. it assumes that people buy the same amount of everything, regardless of price and do not look for
substitutes.
15. All of the following are flaws in measuring the unemployment rate, except that
a. it counts as unemployed those people who are (correctly or incorrectly) encouraged by positive
economic news to look for work before there really is any work.
b. it fails to recognize the plight of workers who are working significantly below their skill level.
c. it only counts people who are over 16 years of age.
d. it does not count as unemployed any people who are so discouraged that they stop looking for
work.
16. James lost his job at his plant when robots were engaged to do the manufacturing. He is currently
unemployed and will have to learn a new trade. James can be considered
a. seasonally unemployed.
b. structurally unemployed.
c. frictionally unemployed.
d. cyclically unemployed.
17. People who are unemployed for a short time in the transition to an equal or better job are said to be
a. seasonally unemployed.
b. structurally unemployed.
c. frictionally unemployed.
d. cyclically unemployed.
18. Which of the following is not a phase in the business cycle?
a. unemployment
b. peak
c. trough
d. recession
19. All of the following are characteristics of a recession, except
a. a moderation in the inflation rate.
b. a strong increase in the employment level.
c. a declining period of at least two consecutive quarters in the business cycle.
d. a reduction in real gross domestic product in the range of 2% to 3 %.
80
Chapter 6
20. Which is not considered a characteristic of a depression?
a. A severe recession usually characterized by financial panic and bank closures
b. Unemployment rates exceeding 20%
c. Prolonged retrenchment in real GDP of 10% or more
d. Significant inflation
21. Which of the following is a chain-based price index that adjusts for the substitution problem?
a. CPI
b. Core CPI
c. PCE deflator
d. PPI
22. What does the traditional CPI include that the Core CPI excludes?
a. substitution effects
b. new goods
c. tuition and textbooks
d. food and energy
Every Macroeconomic Word You Have Ever Heard
81
SELF TEST --- TRUE / FALSE QUESTIONS
T
F
1. Microeconomics is the part of the discipline of economics that deals with national issues and the
economy as a whole.
T
F
2. The CPI is thought to be a very accurate measure of the cost of living and inflation.
T
F
3. The Real GDP has been adjusted for inflation.
T
F
4. If the price level increases, and the output level stays the same, the nominal GDP will increase,
but the Real GDP will remain the same.
T
F
5. The expenditure approach to the GDP measures the GDP by tallying all the income earned from
the production.
T
F
6. The discouraged worker effect, which induces people to stop looking for work because of bad
economic news, can cause the unemployment rate to rise.
T
F
7. Tom has a degree in nursing and is employed as a nurse’s aid. Tom can be considered
underemployed.
T
F
8. Chain-based versions of the CPI reestablish the market basket every year; so new goods enter
the market basket much more quickly.
T
F
9. The unemployment rate is the percentage of the people in the total economy that do not have
jobs and are actively seeking them.
T
F
10. Efforts to solve the inaccuracies of the CPI still leave large errors, so that over 30 years, tax
brackets and CPI-adjusted benefits will be over adjusted by 27 percent.
T
F
11. The Core CPI is the CPI with the impact of food and energy costs removed.
T
F
12. The PPI is the PCE deflator minus the Core CPI.
T
F
13.The expenditure approach is the only approach to calculating GDP.
82
Chapter 6
ANSWERS TO STUDY QUESTIONS
PROBLEMS
1 a. The workforce:
those over 16 and working part time ……….…………………… 4.2 million
those over 16 and working full time ……………………………. 14.3 million
those without jobs and actively seeking jobs……………………. 1.5 million
Total Workforce
20.0 million
b. The unemployment rate is the percentage of people in the workforce that do not have jobs but are actively
seeking employment. The unemployment rate = (1.5 million/ 20.0 million)  100 = 7.5 %
2. a. The data for the price index are listed on the table on the next page.
b. The index of 252.02 for 2005–2006 indicates that between the 2005–2006 academic year and the base year
of 1990–91, tuition costs have increased by 152.02%.
c. Tuition costs in 2005–2006 are over 8.2 times the 1976–77 level, since $7601/ $924 = 8.23 and
252.02/ 30.64 = 8.23. During this time period, tuition costs increased by 722.52%, since the percentage
change in tuition equals [(7601 - 924)/ 924]  100 = 722.52%.
3. The inflation rate data are reported in the table on page 81. Note the high “double-digit” rates of inflation in
1974, 1979, and 1980.
_________________________________________________________________________________
4.
Year
1
2
3
4
Nominal GDP
$4,500 bil.
4,950
5,260
5,390
GDP Deflator
100
105
108
112
Real GDP Calculation
($4,500/100) ∙ 100
(4,950/105) ∙ 100
(5,260/108) ∙ 100
(5,390/112) ∙ 100
Real GDP
=
=
=
=
$ 4,500.00 bil.
4,714.29
4,870.37
4,812.50
_______________________________________________________________________________________________________________
a. Year 1
b. Year 1 is the base year, because the price index (the GDP Deflator) is equal to 100.
c. See results listed in the table above.
d. Real GDP in year 3 was $4,870.37 billion and in year 4, Real GDP declined to $4,812.5 billion.
Every Macroeconomic Word You Have Ever Heard
AVERAGE ANNUAL UNDERGRADUATE TUITION
PAID BY FULL-TIME-EQUIVALENT STUDENTS IN U.S. DEGREE-GRANTING
INSTITUTIONS
Selected Years 1976-77 to 2005-06
Tuition and Required Fees
(in-State)
at All Institutions
Tuition and Fee
Price Index
1990–91 = 100
1976–77
1978–79
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
$924
1,073
1,289
1,626
1,985
2,312
2,658
3,016
3,517
4,044
30.64
35.58
42.74
53.91
65.82
76.66
88.13
100.00
116.61
134.08
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004-05
2005-06
4,564
4,755
5,013
5,238
5,377
5,646
6,002
6,608
7,122
7,601
151.33
157.66
166.21
173.67
178.28
187.20
199.01
218.07
234.58
252.02
Year
The data have not been adjusted for changes in the purchasing power of the dollar over time.
Source: Table 313, U.S. Department of Education, National Center for Education Statistics,
http://nces.ed.gov/programs/digest/d06/tables/dt06_319.asp.
83
84
Chapter 6
CONSUMER PRICE INDEX
All Urban Consumers
Base Year: 1982–1984 = 100
CPI
At End of Year
Year
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Inflation
Rate
41.1
42.5
46.2
51.9
55.5
58.2
62.1
67.7
76.7
86.3
94.0
97.6
101.3
3.3%
3.4
8.7
12.3
6.9
4.9
6.7
9.0
13.3
12.5
8.9
3.8
3.8
Source: Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average, All Items,
1982-84 = 100, Bureau of Labor Statistics, U.S. Department of Labor,
(ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt).
MULTIPLE-CHOICE QUESTIONS
1.
2.
3.
4.
5.
B
D
C
A
B
6.
7.
8.
9.
10.
B
D
C
A
D
11.
12.
13.
14.
15.
C
D
A
A
C
TRUE / FALSE QUESTIONS
1.
2.
3.
4.
5.
F
F
T
T
F
6.
7.
8.
9.
10.
F
T
T
F
T
11. T
12. F
13. F
16.
17.
18.
19.
20.
B
C
A
B
D
21. B
22. D