Questions and Answers of Economics Principles and Policy

How, in general, can a financial crisis lead to a recession?How, in general, can a major new invention lead to an expansion?LO1
What are the four phases of the business cycle? How long do business cycles last? Why does the business cycle affect output and employment in capital goods industries and consumer durable goods
Hyperinflation, caused by highly imprudent expansions of the money supply, may undermine the monetary system and cause severe declines in real output.
Cost-push inflation reduces real output and employment.Proponents of zero inflation argue that even mild demandpull inflation (1 to 3 percent) reduces the economy’s real output. Other economists
When inflation is anticipated, lenders add an inflation premium to the interest rate charged on loans. The nominal interest rate thus reflects the real interest rate plus the inflation premium (the
Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, and savers. If inflation is anticipated, individuals and businesses may be able to
Economists discern both demand-pull and cost-push (supplyside)inflation. Demand-pull inflation results from an excess of total spending relative to the economy’s capacity to produce.The main source
Unemployment rates and inflation rates vary widely globally.Unemployment rates differ because nations have different natural rates of unemployment and often are in different phases of their business
Inflation is a rise in the general price level and is measured in the United States by the Consumer Price Index (CPI).When inflation occurs, each dollar of income will buy fewer goods and services
The GDP gap, which can be either a positive or a negative value, is found by subtracting potential GDP from actual GDP. The economic cost of unemployment, as measured by the GDP gap, consists of the
Economists distinguish between frictional, structural, and cyclical unemployment. The full-employment or natural rate of unemployment, which is made up of frictional and structural unemployment, is
The business cycle affects all sectors of the economy, though in varying ways and degrees. The cycle has greater effects on output and employment in the capital goods and durable consumer goods
Although economists explain the business cycle in terms of underlying causal factors such as major innovations, productivity shocks, money creation, and financial crises, they generally agree that
The United States and other industrial economies have gone through periods of fluctuations in real GDP, employment, and the price level. Although they have certain phases in common—peak, recession,
Explain the types of unemployment and inflation and their various economic impacts.
Illustrate how unemployment and inflation are measured.
Describe the business cycle and its primary phases.
The per-unit cost of an item is its average total cost (5 total cost/quantity). Suppose that a new cell phone application costs $100,000 to develop and only $.50 per unit to deliver to each cell
Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked. What is New Zombie’s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10
Refer to Figure 25.2 and assume that the values for points a , b , and c are $10 billion, $20 billion, and $18 billion respectively.If the economy moves from point a to point b over a 10-year period,
Assume that a “leader country” has real GDP per capita of$40,000, whereas a “follower country” has real GDP per capita of $20,000. Next suppose that the growth of real GDP per capita falls to
What annual growth rate is needed for a country to double its output in 7 years? In 35 years? In 70 years? In 140 years? LO1
Suppose an economy’s real GDP is $30,000 in year 1 and$31,200 in year 2. What is the growth rate of its real GDP?Assume that population is 100 in year 1 and 102 in year 2.What is the growth rate of
LAST WORD Based on the information in this chapter, contrast the economic growth rates of the United States and China over the last 25 years. How does the real GDP per capita of China compare with
What, if any, are the benefits and costs of economic growth, particularly as measured by real GDP per capita? LO6
Relate each of the following to the recent increase in the trend rate of productivity growth: LO5a. Information technology.b. Increasing returns.c. Network effects.d. Global competition.
Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage. LO5
True or false? If false, explain why. LO4a. Technological advance, which to date has played a relatively small role in U.S. economic growth, is destined to play a more important role in the future.b.
What is growth accounting? To what extent have increases in U.S. real GDP resulted from more labor inputs? From greater labor productivity? Rearrange the following contributors to the growth of
Suppose that Alpha and Omega have identically sized working-age populations but that total annual hours of work are much greater in Alpha than in Omega. Provide two possible reasons for this
What are the four supply factors of economic growth?What is the demand factor? What is the efficiency factor?Illustrate these factors in terms of the production possibilities curve. LO3
Why are some countries today much poorer than other countries? Are today’s poor countries destined to always be poorer than today’s rich countries? If so, explain why. If not, explain how
When and where did modern economic growth first happen?What are the major institutional factors that form the foundation for modern economic growth? What do they have in common? LO2
How is economic growth measured? Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades? LO1
Critics of rapid growth say that it adds to environmental degradation, increases human stress, and exhausts the earth’s finite supply of natural resources. Defenders of rapid growth say that it is
Skeptics wonder if the recent rise in the average rate of productivity growth is permanent, and suggest a wait-and-see approach. They point out that surges in productivity and real GDP growth have
The main sources of increasing returns in recent years are( a ) the use of more specialized inputs as firms grow, ( b ) the spreading of development costs, ( c ) simultaneous consumption by
This post-1995 increase in the average rate of productivity growth is based on ( a ) rapid technological change in the form of the microchip and information technology, ( b ) increasing returns and
Over long time periods, the growth of labor productivity underlies an economy’s growth of real wages and its standard of living. U.S. productivity rose by 2.8 percent annually between 1995 and
Growth accounting attributes increases in real GDP either to increases in the amount of labor being employed or to increases in the productivity of the labor being employed.Increases in U.S. real GDP
The growth of a nation’s capacity to produce output can be illustrated graphically by an outward shift of its production possibilities curve.
The determinants of economic growth to which we can attribute changes in growth rates include four supply factors(changes in the quantity and quality of natural resources, changes in the quantity and
It is possible, however, for countries that are currently poor to grow faster than countries that are currently rich because the growth of real GDP per capita for rich countries is limited to about 2
Because some nations have experienced nearly two centuries of modern economic growth while others have only recently begun to experience modern economic growth, some countries today are much richer
Sustained increases in real GDP per capita did not happen until the past two centuries, when England and then other countries began to experience modern economic growth, which is characterized by
A nation’s economic growth can be measured either as an increase in real GDP over time or as an increase in real GDP per capita over time. Real GDP in the United States has grown at an average
Explain why the trend rate of U.S. productivity growth has increased since the earlier 1973–1995 period.
Assume that the total value of the following items is $600 billion in a specific year for Upper Mongoose: net exports 5$50 billion; value of new goods and services produced in the underground economy
The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal
Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price
Using the following national income accounting data, compute ( a ) GDP, ( b ) NDP, and ( c ) NI. All figures are in billions. LO2 Compensation of employees $194.2 U.S. exports of goods and services
To the right is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income
Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final
If in some country personal consumption expenditures in a specific year are $50 billion, purchases of stocks and bonds are $30 billion, net exports are −$10 billion, government purchases are $20
Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2
LAST WORD What government agency compiles the U.S.NIPA tables? In what U.S. department is it located? Of the several specific sources of information, name one source for each of the four components
Which of the following are included or excluded in this year’s GDP? Explain your answer in each case. LO4a. Interest received on an AT&T corporate bond.b. Social Security payments received by a
Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index and what is
Define net exports. Explain how U.S. exports and imports each affect domestic production. How are net exports determined? Explain how net exports might be a negative amount. LO2
Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. Explain:“Though net
What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of
Why are changes in inventories included as part of investment spending? Suppose inventories declined by $1 billion during 2010. How would this affect the size of gross private domestic investment and
Provide three examples of each: consumer durable goods, consumer nondurable goods, and services. LO1
Explain why an economy’s output, in essence, is also its income. LO1
Why do economists include only final goods and services in measuring GDP for a particular year? Why don’t they include the value of the stocks and bonds bought and sold?Why don’t they include the
Which of the following goods are usually intermediate goods and which are usually final goods: running shoes, cotton fibers, watches, textbooks, coal, sunscreen lotion, lumber? LO1
Why do national-income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time
In what ways are national-income statistics useful? LO1
GDP is a reasonably accurate and very useful indicator of a nation’s economic performance, but it has its limitations. It fails to account for nonmarket and illegal transactions, changes in leisure
Nominal (current-dollar) GDP measures each year’s output valued in terms of the prices prevailing in that year.Real (constant-dollar) GDP measures each year’s output in terms of the prices that
Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiplying the
Other national accounts are derived from GDP. Net domestic product (NDP) is GDP less the consumption of fixed capital. National income (NI) is total income earned by a nation’s resource suppliers
By the income or allocations approach, GDP is calculated as the sum of compensation to employees, rents, interest, proprietors’income, corporate profits, taxes on production and imports minus net
Gross investment is divided into (a) replacement investment(required to maintain the nation’s stock of capital at its existing level) and (b) net investment (the net increase in the stock of
Personal consumption expenditures consist of expenditures on goods (durable goods and nondurable goods) and services.About 60 percent of consumer expenditures in the United States are on services,
By the expenditures approach, GDP is determined by adding consumer purchases of goods and services, gross investment spending by businesses, government purchases, and net exports: GDP 5 C 1 I g 1 G 1
GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output.
Final goods are those purchased by end users, whereas intermediate goods are those purchased for resale or for further processing or manufacturing. Intermediate goods, nonproduction transactions, and
Gross domestic product (GDP), a basic measure of an economy’s economic performance, is the market value of all final goods and services produced within the borders of a nation in a year.
Refer to Figure 23.1b and assume that price is fixed at$37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is D M and Buzzer wants to perfectly match its output
Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and
A mathematical approximation called the rule of 70 tells us that the number of years that it will take something that is growing to double in size is approximately equal to the number 70 divided by
Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $100 million to$200 million between one year and the next. Assuming that the price of gold
Suppose that the annual rates of growth of real GDP of Econoland over a five-year period were sequentially as follows:3 percent, 1 percent, −2 percent, 4 percent, and 5 percent.What was the average
LAST WORD Why do some economists believe that better inventory control software and systems may help to reduce the frequency and severity of recessions caused by mild demand shocks? How could those
Catalog companies are committed to selling at the prices printed in their catalogs. If a catalog company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters?
Why, in general, do shocks force people to make changes?Give at least two examples from your own experience. LO5
How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expected the future
Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does
Did economic output start growing faster than population from the beginning of the human inhabitation of the earth?When did modern economic growth begin? Have all of the world’s nations experienced
Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government
Why do you think macroeconomists focus on just a few key statistics when trying to understand the health and trajectory of an economy? Would it be better to try to examine all possible data? LO2
Draw a graph with “Level of real output” on the vertical axis and “Time” on the horizontal axis. If the long-run trend line of economic growth for the United States were to appear on your
Prices are inflexible in the short run for various reasons, two of which are discussed in this chapter. First, firms often attempt to set and maintain stable prices to please customers who like
Sticky prices combine with shocks to drive short-run fluctuations in output and employment. Consider a negative demand shock in which demand is unexpectedly low. Because prices are fixed, the
If prices were always flexible and capable of rapid adjustment, then dealing with situations in which quantities demanded did not equal quantities supplied would always be easy since prices could
Expectations have an important effect on the economy for two reasons. First, if people and businesses are more positive about the future, they will save and invest more. Second, individuals and firms
Macroeconomists believe that one of the keys to modern economic growth is the promotion of saving and investment (for economists, the purchase of capital goods). Investment activities increase the
Before the Industrial Revolution, living standards did not show any sustained increases over time. Economies grew, but any increase in output tended to be offset by an equally large increase in the
Macroeconomists focus their attention on three key economic statistics: real GDP, unemployment, and inflation.Real GDP measures the value of all final goods and services produced in a country during

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