Home > (Key Question) Suppose an economy's real GDP is $30,000 in year 1 and $31,200 in year 2
DEREE COLLEGE
DEPARTMENT OF ECONOMICS
EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002
M-W-F 13:00-13:50
Dr. Andreas Kontoleon Office hours:
Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00
(Answer Sheet)
Growth rate of real GDP = 4 percent (= $31,200 - $30,000)/$30,000). GDP per capita in year 1 = $300 (= $30,000/100). GDP per capita in year 2 = $305.88 (= $31,200/102). Growth rate of GDP per capita is 1.96 percent = ($305.88 - $300)/300).
Remember: part workers are not considered as unemployed and hence they do enter the calculation of the official unemployment rate.
First find the amount of cyclical unemployment: 9-5=4 and then apply Okun’s Law:
Then
Dividing 70 by the annual percentage rate of increase of any variable (for instance, the rate of
inflation or population growth) will give the approximate number of years for doubling of the
variable.
a. A pensioned railroad worker
b. A department-store clerk
c. A unionized automobile assembly-line worker
d. A heavily indebted farmer
e. A retired business executive whose current income comes entirely from interest on government bonds
(a) Assuming the pensioned railway worker has no other income and that the pension is not indexed against inflation, the retired worker’s real income would decrease by approximately 10 percent of its former value.
(b) Assuming the clerk was unionized and the contract had over a year to run, the clerk’s real income would decrease in the same manner as the pensioner. However, the clerk could expect to recoup at least part of the loss at contract renewal time. In the more likely event of the clerk not being unionized, the clerk’s real income would decrease, possibly by as much as the pensioned railroad worker.
(c) Since the UAW worker is unionized, the loss in the first year would be the same as in (b) but we can be sure—barring a deep recession—that the loss will be made up at contract renewal time plus the usual real increase that may or may not be related to increased productivity. If the contract had a cost-of-living allowance clause in it, the wage would automatically be raised at the end of the year to cover the loss in purchasing power. Next year’s wage would rise by 10 percent.
(d) If the inflation is also in the price the farmer gets for his products, he could gain. But more likely the price increases are mostly in what he buys, since farm machinery, fertilizer, etc., tend to be sold by less competitive sellers with more power to raise their prices. The farmer faces a lot of competition and has to rely on the market price to go up—the farmer has little control over prices on an individual basis. Moreover, if interest rates on the farmer’s new debts have gone up with the prices, the farmer could be even worse off. The other side of the coin is that if no new borrowing is necessary, the inflation will reduce the real burden of the farmer’s debt, because the purchasing power declines on the fixed payments he contracted to make before inflation.
(e) The retired executive is in the same boat as the pensioned railroad worker, except that the executive’s income from the bonds or other interest bearing assets is probably greater than that of the worker from the pension. The increase in inflation has most probably been accompanied by rising interest rates, with a proportional drop in the price of bonds. Therefore, the retired executive would suffer a capital loss if he or she decided to cash in some of the bonds at this time and the fixed interest received on these existing bonds is worth less in terms of purchasing power. In other words, the executive, although wealthier than the retired worker, may be affected just as much or more from inflation.
(f) Assuming the store owner’s prices and revenues have been keeping pace with inflation, his or her real income will not change unless the costs have risen more than the product prices.
Rate of
Year Price index inflation Years to double
1 100 ____ ____
2 108 ____ ____
3 120 ____ ____
4 132 ____ ____
Year Price index inflation Years to double
1 100
2 108 8.0% Approx. 8.8
3 120 11.1 Approx. 6.3
4 132 10.0 Approx. 7
(a) To get the rate of inflation, subtract last year’s index from this year’s index (108 – 100 for year 2); divide this result (8) by last year’s index (100) to get 0.08; multiply by 100 to change to percent (8%).
A) aggregate demand over time.
B) real GDP per worker over time.
C) real GDP per capita over time.
D) real GDP per dollar of capital stock over time.
Ans: C
A) 21 years.
B) 23 years.
C) 29 years.
D) 42 years.
Ans: B
A) a fall in the natural rate of unemployment.
B) a rise in the natural rate of unemployment.
C) a fall in real GDP that lasts six months or longer.
D) the minimum point in the business cycle before the recovery phase.
Ans: C
A) overstate the amount of unemployment by including part-time workers in the calculations.
B) understate the amount of unemployment by excluding part-time workers in the calculations.
C) overstate the amount of unemployment because of the presence of "discouraged" workers who are not actively seeking employment.
D) understate the amount of unemployment because of the presence of "discouraged" workers who are not actively seeking employment.
Ans: D
A) natural rate of unemployment.
B) aggregate cost of unemployment.
C) difference between real and nominal GDP.
D) difference between real and nominal income.
Ans: B
A) cost-push inflation.
B) demand-pull inflation.
C) unanticipated inflation.
D) hyperinflation.
Ans: A
A) $11,146.
B) $12,712.
C) $13,385.
D) $14,249.
Ans: B
A) 2 percent.
B) 4 percent.
C) 6 percent.
D) 10 percent.
Ans: D
A) when there is an unanticipated decrease in inflation
B) when there is an anticipated increase in inflation
C) when there is an unanticipated increase in inflation
D) when there is an anticipated decrease in inflation
Ans: A
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