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1. Distinguish between the concept of actual unemployment and natural rate of unemployment (NAIRU: Non-accelerating inflation rate of unemployment) with examples. If the current actual unemployment rate is 6.6% (www.bls.gov), how do you compare this rate with NAIRU you have learned about in the text book?

2. Draw a AD and AS diagram and show the equilibrium level of RGDP which is at a point below the full employment level of RGDP(= NAIRU). Give a brief statement on the condition of the economy at that level (recession or inflation? Why?).

3. Suppose the actual RGDP for the US economy in Y2003 and in Y2004 are respectively $10,580.7 billion and $10, 994.3 billion. Estimate the growth rate of RGDP in percentage terms between these two years. (Hint Growth rate = (Yt- Yt-1)/Yt-1 *100).

4) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment" and becomes especially steeply sloped beyond "full employment" RGDP (hint: this topic is not discussed in your text... you will need to understand this week's lecture notes to answer this).

5) Why might the rate at which the Aggregate Supply curve shifts vertically upward increase when an economy produces beyond full employment. (Hint: think about the effect of very low unemployment rates on the balance of bargaining power between employers and workers)

6) Explain why inflation rates are likely to rise when an economy expands beyond full employment capacity output. Draw an aggregate supply-aggregate demand diagram to illustrate your answer. (Hint: utilize your answers to #4 & #5 to answer this question)

7) Suppose worker productivity increased at the rate of 1.9% per year. If the labor force grew by 1.5% per year, what rate of increase in RGDP would be sustainable without increasing inflation pressures?

8) In the period 2000-2003, the RGDP (real GDP adjusted for inflation) growth rate in the US averaged 2.39% per year, while inflation rates remained at around 2.53% per year. In the latter half of the 1970's, by contrast, inflation rates accelerated markedly even though annual growth in RGDP did not exceed 3%. Now in 2011 the US economy is slowly recovering from the great recession, what will determine whether it can in the coming years a strong growth performance similar to 2003-2006 without triggering a noticeable acceleration of inflation?

9) Illustrate how each of the following events would shift the AS schedule and potential RGDP, thereby altering equilibrium prices and output levels in the economy. Use an aggregate supply-aggregate demand diagram in your explanation and assume that the economy is initially at full employment.

 

 Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering this question. We will discuss AD shifts in next week's lesson.

 

a) an increase in the general level of money wages

 

b) an increase in the price of imported oil and related energy products.

 

c) a decrease in the level of US interest rates

 

d) an increase in the productivity of labor

 

e) an increase in the expected inflation rate

 

f) an increase in the labor force growth rate

10) Draw an "aggregate supply-aggregate demand" diagram that shows an economy suffering from high levels of unemployment. Show the effects of the following events on the Aggregate Demand curve.

a) An increase in RGDP in Europe and Japan

b) A decline in U.S. households? expectations of their future income.

c) A reduction in Medicaid and Medicare benefit levels.

d) An increase in business expectations of future aggregate demand growth

e) An increase in government spending on military hardware

f) A sharp decline in the value of foreign currencies relative to the value of the $.

g) A decline in the prices of real estate and existing residential housing.

h) A rise in the price level due to a sharp increase in the price of oil.

11) Explain carefully why an initial change in aggregate demand will shift the aggregate demand function by a multiple of the initial change in output.

12) Suppose that two economies initially have the same level of real income and both suffer unanticipated declines in their sales of exports of $50 billion. Country ?A? has higher tax rates and a higher level of government spending than economy ?B?. Otherwise, the two economies are similar in every respect. Which country will suffer the greatest decline in employment as a result of the decline in exports? (Hint: think about multiplier effects and which country will have the higher multiplier!)

13) Agree or disagree and explain: ?The Aggregate Demand for goods and services in an economy must at every moment equal the value of Real Gross Domestic Product because both are defined to be the sum of (C+I+G+X-IM).?

14) Why do economists attempting to forecast short run future changes in real GDP and employment look closely at data on business inventories and unfilled orders?

What conclusion could be drawn if the volume of unfilled orders and average length of delivery times decreased while inventories increased dramatically?

15) Agree or disagree and explain. "The AD schedule slopes downward because real income rises as the price level declines and everybody buys more as their real income rises."

 

16) Use the data in the Table to answer the questions asked in 16a and 16b on each of the 3 variables for the US economy:

 

a. Calculate the changes in inflation rates, unemployment rates and the RGDP growth rates for the years from Year 2007 through 2014 and show them in a new column next to each of the values of the three variables (a template of the table is given below).                                                               5 pts

                                                                                                                       

Year

Real GDP

RGDP growth rate in %

Unemployment Rate

Change in U rate in %

CPIIndices

Inflation rate in %

2006

14,613.8

-

4.6%

-

201.6

-

2007

14,873.7

?

4.6%

?

207.3

?

2008

14,830.4

?

5.8%

?

215.3

?

2009

14,418.7

?

9.3%

?

214.53

?

2010

14,783.8

?

9.6%

?

218.05

?

2011

15,020.6

?

8.9%

?

224.93

?

2012

15,354.6

?

8.1%

?

229.59

?

2013

15,583.3

?

7.4%

?

232.96

?

2014

15,961.7

 ?

6.2

 ?

236.74

 ?

 2015         16,341.8      ?                          5.3                        ?                      237.02           ?             

Source: for CPI and U-Rate date: www.bls.gov

For RGDP data: www.bea.gov

 

b. Based on those calculations, briefly describe the overall economic performance over the last 8 years  (2007-2014) and critically predict about these three macroeconomic variables for 2016-17.                 5 pts                       

 Hint: While predicting the trend for 2016-17 (based on the growth rates and trend you estimated in the table above), it is imperative to observe the most recent data on these three variables.                                   

 


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