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Chapter 20 Problem Set

The document contains a problem set focused on macroeconomic concepts such as inflation, unemployment, and economic growth, with specific questions related to these topics. It explores the dynamics of the economy in relation to historical data, government policies, and comparative analysis between different countries. Additionally, it discusses the implications of economic changes and the role of government intervention in stabilizing the economy.

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9 views3 pages

Chapter 20 Problem Set

The document contains a problem set focused on macroeconomic concepts such as inflation, unemployment, and economic growth, with specific questions related to these topics. It explores the dynamics of the economy in relation to historical data, government policies, and comparative analysis between different countries. Additionally, it discusses the implications of economic changes and the role of government intervention in stabilizing the economy.

Uploaded by

Joe Sfeir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 20 Problem Set

20.1 MACROECONOMIC CONCERNS

1.1 Define inflation. Assume that you live in a simple economy in which only
three goods are produced and traded: cashews, pecans, and almonds.
Suppose that on January 1, 2015, cashews sold for $12.50 per pound, pecans
were $4.00 per pound, and almonds were $5.50 per pound. At the end of the
year, you discover that the cashew crop was lower than expected and that
cashew prices had increased to $17.00 per pound, but pecan prices stayed at
$4.00 and almond prices had actually fallen to $3.00. Can you say what
happened to the overall "price level"? How might you construct a measure of
the "change in the price level"? What additional information might you need
to construct your measure

1.2 Define unemployment. Should everyone who does not hold a job be
considered "unemployed"? To help with your answer, draw a supply and
demand diagram depicting the labor market. What is measured along the
demand curve? What factors determine the quantity of labor demanded
during a given period? What is measured along the labor supply curve? What
factors determine the quantity of labor supplied by households during a given
period? What is the opportunity cost of holding a job?

1.3 According to Eurostat, the European Union (EU) statistical office, the
unemployment rate in the EU (composed of 28 countries) has steadily
increased in the years following the 2007–08 global financial crisis, from a low
of 7 percent in 2007 to a peak of 10.9 percent in 2013, with a small reversal
in 2014. Yet the average growth rate in the EU 28 countries has followed a
much less regular path, decreasing from a peak of 3.1 percent in 2007 to a
low of −4.4 percent in 2009 (a recessionary year), returning positive in 2010
and 2011 (respectively, 2.1 percent and 1.7 percent), but turning negative
again in 2012 (−0.5 percent), then slightly positive in 2013 (0.2 percent) and
slightly accelerating in 2014 (1.4 percent). How can you explain these
contrasting trends?

1.4 Describe the state of the economy in the country where you live, both in
dynamic terms—comparing this year with the last few years—and in
comparative terms, with other countries of a similar income category. Is
economic growth strong or weak? Is unemployment high or low? Is inflation
excessive or not? How have economic growth, unemployment, and inflation
evolved over the past few years?

1.5 Explain briefly how macroeconomics is different from microeconomics. Why


would an economist choose to specialize in one rather than the other? How
might they want to use economic theory to guide them in their work, and why
might they want to do so?
1.6 A 2001 study by Berndt and Rappaport found that between 1976 and 1999,
the average price of desktop computers in the United States had declined
such that the 1999 price was only 0.069 percent of the 1976 price—a 1,445-
fold decrease over a twenty-three-year period. Does this imply that U.S.
consumers' purchasing power has increased 1,445 times during the same
period? What do increases or decreases in individual goods' price levels tell
us about inflation? About consumers' purchasing power?

20.2 THE COMPONENTS OF THE MACROECONOMY

2.1 Several member states of the European Union have adopted, since 2009–10,
contractionary fiscal policy measures consisting of cuts in government
spending and increases in taxation. These policies, often dubbed "austerity"
policies by their opponents, have led the electorate to question their
opportunity in a context of slow economic growth and high unemployment.
Why?

2.2 In which market areas can each of the following goods and services be
traded?
a. A government bond.
b. A haircut at your local hairdresser.
c. Your skills as an economist.
d. A pair of second-hand shoes at the local market.
e. The average goals scored by a famous soccer player.
f. An insurance contract for your car.

20.3 A BRIEF HISTORY OF MACROECONOMICS

3.1 Many of the expansionary periods during the twentieth century occurred
during wars. Why do you think this is true?

3.2 John Maynard Keynes was the first to show that government policy could be
used to change aggregate output and prevent recession by stabilizing the
economy. Describe the economy of the world at the time Keynes was writing.
Describe the economy of the United States today. What measures are being
proposed by potential presidential candidates for the election of 2016 to
stimulate growth in the economy? Do any of these proposed policies follow
the policies proposed by John Maynard Keynes? If so, which policies and from
which candidates?

3.3 Assume that the demand for flight attendants increases significantly as a
result of an increase in demand for air travel. Explain what will happen to
unemployment using both classical and Keynesian reasoning.

3.4 Explain why the length and severity of the Great Depression necessitated a
fundamental rethinking of the operations of the macroeconomy.
20.4 THE U.S. ECONOMY SINCE 1970.

4.1 The Economics in Practice describes prosperity and recession as they are
depicted in literature. Looking at data on GDP growth released by the
Organization for Economic Cooperation and Development in its Interim
Economic Outlook (available at
http://www.oecd.org/eco/outlook/economicoutlook.htm), how would you
compare the economic performance of "emerging markets" such as Brazil,
China, and Russia with respect to advanced industrial economies such as
Germany, the United Kingdom, and the United States over the past year or
two? Are these economies expanding or shrinking?

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