Chapter 2

Question 1

What were developed as measures of aggregate output at the end of World War II?

Answer 1

National income and product accounts were developed as measures of aggregate output at the end of World War II.

Question 2

What specific measure is used to quantify aggregate output in the economy?

Answer 2

The measure used to quantify aggregate output in the economy is called gross domestic product (GDP).

Question 3

How would you define aggregate output in the economy?

Answer 3

Aggregate output in the economy is defined as the total value of all goods and services produced within a country’s borders during a specific period, typically measured as gross domestic product (GDP).

Question 4

Describe:

GDP from production side

Answer 4

The value added by a firm is the value of its production minus the value of the intermediate goods used in production.

Question 5

Describe:

Gross Domestic Product (GDP) from the income side

Answer 5

GDP from the income side is the sum of incomes in the economy during a given period.

Aggregate production and aggregate income are always equal.

Question 6

What does it mean when we say that the value of final goods and services produced in the economy is equal to the income earned by the factors of production?

Answer 6

It means that all the value generated in an economy (through the production of goods and services) is distributed as income to the factors of production, which are labor and capital.

Question 7

How is Nominal GDP calculated?

Answer 7

Nominal GDP is calculated as the sum of the quantities of final goods produced multiplied by their current prices.

Question 8

What are the two primary reasons for an increase in Nominal GDP?

Answer 8

An increase in Nominal GDP occurs due to the production of most goods increasing and the prices of most goods increasing.

Question 9

What is the primary objective when measuring Real GDP?

Answer 9

The primary goal when measuring Real GDP is to assess production and its changes over time.

Question 10

How is Real GDP calculated?

Answer 10

Real GDP is calculated as the sum of quantities of final goods multiplied by constant (not current) prices.

Question 11

What is the significance of calculating Real GDP in base year prices, as demonstrated by the data from 2008, 2009, and 2010?

Answer 11

Calculating Real GDP in base year prices allows us to measure the quantity of goods and services produced while controlling for changes in price level. This provides a more accurate measure of economic growth over time.

For example, the data from 2008, 2009, and 2010 shows how much the economy grew or contracted each year in terms of production, not prices.

Question 12

When calculating Real GDP for multiple goods, what are the natural weights used to construct the weighted average of the output of all final goods?

Answer 12

The natural weights used for constructing the weighted average of the output of all final goods are the relative prices of the goods.

Question 13

What does Real GDP in chained (2009) dollars reflect in terms of relative prices?

Answer 13

Real GDP in chained (2009) dollars reflects relative prices that change over time.

Question 14

What are some alternative names for Nominal GDP?

Answer 14

Nominal GDP is also known as dollar GDP, GDP in current dollars.

Question 15

What are some alternative names for Real GDP?

Answer 15

Real GDP is also referred to as GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, GDP in chained (2009) dollars, or GDP in 2009 dollars.

Question 16

How is GDP growth in a specific year (t) calculated?

Answer 16

GDP growth in year t is calculated as (Yt - Yt-1) divided by Yt-1.

Question 17

What has been the most severe recession in the U.S. economy from 1960 to 2014?

Answer 17

2008-2009 recession.

Question 18

How is the unemployment rate calculated, and what does it measure?

Answer 18

The unemployment rate is calculated as the ratio of the number of people who are unemployed to the number of people in the labor force. It measures the proportion of the labor force that is currently unemployed.

Question 19

What defines a person as unemployed in terms of the unemployment rate?

Answer 19

A person is considered unemployed if they do not have a job and have been actively looking for a job in the last four weeks.

Question 20

What is the term used to describe individuals who have given up looking for a job and are no longer counted as unemployed?

Answer 20

“discouraged workers.”

Question 21

hat does the participation rate measure, and how is it calculated?

Answer 21

The participation rate measures the ratio of the labor force to the total population of working age.

Question 22

How are higher unemployment rates typically associated with the participation rate, and why?

Answer 22

Higher unemployment rates are typically associated with a lower participation rate due to the presence of discouraged workers who have stopped actively seeking employment.

Question 23

Why do economists care about unemployment?

Answer 23

Economists care about unemployment because it has a direct effect on the welfare of the unemployed, signals inefficiencies in the use of human resources, and can also lead to labor shortages when unemployment is very low.

Question 24

What is the range within which the U.S. unemployment rate has fluctuated since 1960?

Answer 24

Since 1960, the U.S. unemployment rate has fluctuated between 3% and 10%.

Question 25

How does the unemployment rate typically behave during economic expansions and recessions?

Answer 25

During economic expansions, the unemployment rate tends to decrease, while it goes up during recessions

Question 26

How is inflation defined, and what does it represent?

Answer 26

Inflation is defined as a sustained rise in the general level of prices, representing the price level’s increase over time.

Question 27

What term is used to describe a sustained decline in the price level, and what does it represent?

Answer 27

A sustained decline in the price level, characterized by a negative inflation rate, is referred to as deflation. Deflation represents a situation where prices are decreasing over time.

Question 28

How is the GDP deflator in year t (Pt) calculated, and what does it represent?

Answer 28

The GDP deflator in year t (Pt) is calculated as the ratio of nominal GDP to real GDP in year t, and it represents an index number with no economic interpretation.

Question 29

What does the rate of change of the GDP deflator (πt) represent, and how is it calculated?

Answer 29

The rate of change of the GDP deflator (πt) represents the rate of inflation, and it is calculated as the difference between Pt and Pt-1 divided by Pt-1.

Question 30

What is the relationship between nominal GDP, real GDP, and the GDP deflator, and how is it defined?

Answer 30

The relationship between nominal GDP, real GDP, and the GDP deflator is defined as Nominal GDP (denoted as $Yt) equals the GDP deflator (Pt) multiplied by real GDP (Yt). Mathematically, it can be expressed as $Yt = PtYt.

Question 31

How is the rate of growth of nominal GDP related to the rate of inflation and the rate of growth of real GDP?

Answer 31

The rate of growth of nominal GDP is equal to the rate of inflation plus the rate of growth of real GDP.

Question 32

Why is the set of goods produced in the economy not the same as the set of goods purchased by consumers?

Answer 32

because some goods in GDP are sold to firms, the government, or foreigners, and some goods bought by consumers are imported from abroad.

Question 33

What does the Consumer Price Index (CPI) measure, and who publishes it?

Answer 33

The Consumer Price Index (CPI) measures the cost of living, and it is published monthly by CAPMUS

The CPI gives the cost of a specific list of goods and
services over time.

Question 34

what caused the divergence between the CPI and GDP deflator in 1979 and 1980?

Answer 34

The increase in the CPI was significantly larger than the increase in the GDP deflator in 1979 and 1980 due to the rising prices of imported goods compared to domestically produced goods.

Question 35

How did the CPI and GDP deflator generally behave over time?

Answer 35

Most of the time, the CPI and GDP deflator moved together, exhibiting a similar trend in inflation rates.

Question 36

What is pure inflation, and how does it affect prices and wages?

Answer 36

Pure inflation is a proportional increase in all prices and wages. It causes only a minor inconvenience as relative prices remain unaffected, and real wages (wages measured by goods rather than dollars) would be unaffected.

Question 37

Is “pure inflation” a real phenomenon?

Answer 37

No, there is no such thing as pure inflation; it is a theoretical concept.

Question 38

Why do economists care about inflation?

Answer 38

Economists care about inflation because it can affect income distribution when not all prices and wages rise proportionally.

Question 39

What are some of the distortions caused by inflation?

Answer 39

Inflation leads to distortions due to uncertainty, some prices that are fixed by law or regulation, and its interaction with taxation, which can result in bracket creep in taxes.

Question 40

What is the generally preferred range for the “best” rate of inflation according to most economists?

Answer 40

Most economists believe the “best” rate of inflation is a low and stable rate of inflation between 1% and 4%.

Question 41

What is Okun’s Law, and who was the economist associated with its examination?

Answer 41

Okun’s Law is a relationship that was first examined by U.S. economist Arthur Okun.

Question 42

How is higher-than-usual output growth related to the unemployment rate according to Okun’s Law?

Answer 42

Higher-than-usual output growth is associated with a reduction in the unemployment rate according to Okun’s Law.

Question 43

Describe the chart illustrating changes in the Unemployment Rate versus Growth in the United States from 1960 to 2014. Why is it downward sloping?

Answer 43

The chart displays a downward-sloping line, indicating an inverse relationship between output growth and the unemployment rate. This downward slope reflects the principles of Okun’s Law, where higher output growth corresponds to lower unemployment rates and vice versa.

Question 44

Explain the significance of the slope in the chart, which is -0.4. Why does the line have this slope?

Okun’s Law

Answer 44

The slope of -0.4 in the chart signifies that, on average, a 1% increase in the growth rate results in a 0.4% decrease in the unemployment rate. This slope quantifies the empirical relationship observed in Okun’s Law, where changes in output growth directly affect the unemployment rate.

Question 45

At what point does the line intersect the horizontal axis, and why is this intersection relevant for maintaining a constant unemployment rate?

okun’s law

Answer 45

The line in the chart intersects the horizontal axis at an output growth rate of 3%. This intersection is relevant because it indicates that to maintain a constant unemployment rate, the economy needs to sustain a growth rate of 3%.

Question 46

Describe Figure 2-6, which illustrates changes in the Inflation Rate versus the Unemployment Rate in the United States from 1960 to 2014. Why is it downward sloping?

Answer 46

Figure 2-6 displays a downward-sloping line, representing the relationship between the inflation rate and the unemployment rate. This downward slope indicates that a low unemployment rate leads to an increase in the inflation rate, while a high unemployment rate leads to a decrease in the inflation rate. This pattern is consistent with the principles of the Phillips Curve.

Question 47

What is the significance of the slope of the line in Figure 2-6, which suggests a negative relationship between unemployment and inflation?

Answer 47

The slope of the line in Figure 2-6 indicates that, on average, higher unemployment rates are associated with a decrease in inflation, and lower unemployment rates are associated with an increase in inflation. This slope quantifies the empirical relationship described by the Phillips Curve.

Question 48

Where does the line in Figure 2-6 intersect the horizontal axis, and why is this intersection important in understanding inflation dynamics?

Answer 48

The line in Figure 2-6 intersects the horizontal axis at an unemployment rate of about 6%. This intersection is significant because it suggests that inflation typically increases when unemployment is below 6%, indicating an overheating economy operating above its potential. Conversely, when unemployment is above 6%, inflation tends to decrease, indicating an economy operating below its potential

Question 49

What primarily drives year-to-year movements in output in the short run?

Answer 49

In the short run (e.g., a few years), year-to-year movements in output are primarily driven by movements in demand

Question 50

In the medium run (e.g., a decade), what factors tend to determine the level of output in the economy?

Answer 50

In the medium run, the level of output in the economy tends to be determined by supply factors, such as the capital stock, the level of technology, and the size and skills of the labor force.

Question 51

What factors influence the long-run performance of the economy over several decades or more?

Answer 51

In the long run (e.g., a few decades or more), the performance of the economy depends on factors such as its ability to innovate and introduce new technologies, the rate of savings, the quality of the country’s education system, the quality of the government, and other long-term structural factors