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CHAPTER 8
Introduction to Economic Growth and Instability
A. Short-Answer, Essays, and Problems
New
1. State two definitions of economic growth.
New
2. 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?
New
3. Suppose an economy's real GDP is $100,000 in year 1 and $110,000 in year 2. What is
the growth rate of its GDP? Assume that population was 200 in year 1 and 205 in year 2.
What is the growth rate in GDP per capita?
New
4. Explain why even small changes in the rate of economic growth are significant. Use the
"rule of 70" to demonstrate the point.
New
5. 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.
New
6. Summarize the historical growth record of the United States over the past 50 years in
terms of real GDP growth and in terms of real GDP per capita growth.
7. What is meant by the term business cycle? List the four phases of the business cycle.
8. What phase of the business cycle is our economy experiencing at the present time?
Justify your answer.
9. “The increasing importance of durable goods has made our economy more vulnerable to
cyclical fluctuations.” Explain and evaluate.
10. Which types of industries are hit hardest by a recession? Explain.
11. In the table below are statistics showing the labor force and total employment in month
1 and month 2 of the same year. Make the computations necessary to complete the
table. (Number of persons is in thousands.)
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Chapter 8
Labor force
Employed
Unemployed
Unemployment rate (%)
Month 1
136,297
129,558
_____
_____
Month 2
137,065
129,526
_____
_____
12. 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
95,450
90,325
______
______
Labor force
Employed
Unemployed
Unemployment rate
Year 5
108,250
100,830
______
______
(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?
New 13. If the population is 267 million, the labor force is 136 million, and the number measured
as unemployed is 6.8 million, what is the rate of unemployment?
14. Use the following data to calculate: (a) the size of the labor force and (b) the official
unemployment rate.
15. What are two criticisms of the unemployment rate? How do these criticisms relate to
the overstating or understating of the unemployment rate?
16. Explain the differences among the frictional, structural, and cyclical forms of
unemployment.
17. Define the “full-employment” or “natural” rate of unemployment and give its
approximate percentage rate as economists currently define it.
18. “The economic cost of unemployment is measured by the GDP gap.” Explain this
statement.
19. What is Okun’s law? Give an example of how it works.
20. Discuss the unequal burden of unemployment for different demographic groups in the
United States.
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Introduction to Economic Growth and Instability
21. Calculate the rate of inflation between Year 1 and Year 2. The price index in Year 1
was 124.0. It was 130.7 in Year 2.
22. The table below shows the price index in the economy at the end of four different years.
(a) What is the rate of inflation in years 2, 3, and 4? (b) Using the “rule of 70,” how
many years would it take for the prices to double at each of these three inflation rates?
Year
1
2
3
4
Rate of
inflation
____
____
____
____
Price index
100
108
120
132
Years to double
____
____
____
____
23. What is “demand-pull” inflation?
24. Inflation is frequently described as “too much money chasing too few goods.” Is this an
acceptable definition?
25. Describe cost-push inflation and its major source.
26. “Inflation is a harsh and arbitrary form of taxation.” Do you agree? If so, who pays this
tax?
27. Evaluate the statement: “Inflation only benefits the rich.”
28. 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?
29. Answer the next four questions based on the following data using year 1 as the base
year. All dollars are in billions.
Year
1
2
3
4
Nominal income
$3,166
3,402
3,774
3,989
CPI
100
104
108
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 %?
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30. Assume that nominal income is $35,000 and the price index is 1.20 in year 1. In year 2,
nominal income rises to $38,000 and the price index rises to 1.25. What was the
percentage change in real income from year 1 to year 2? What was the absolute amount
of increase in real income? Make your calculations of the percentage change in real
income and the absolute change in real income using the approximation formula and
using the more precise method with index numbers.
31. Explain the difference between nominal and real interest rates.
32. 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.
33. What is hyperinflation and what are its effects?
New 34. (Last Word) What is the relationship between stock prices and macroeconomic
instability?
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