Solutions for Macroeconomics
What does it mean to say that quarterly growth rates are reported "at an annualized
rate?" - ANSWERSIt means the actual growth rate for the quarter has been multiplied
by four. If the economy grew at the same rate all year as it did in that quarter, it would
be the yearly growth rate.
It means the actual growth rate for the quarter has been multiplied by four. If the
economy grew at the same rate all year as it did in that quarter, it would be the yearly
growth rate. - ANSWERS
What is the highest point of a business cycle called? The lowest point? - ANSWERSThe
highest point is called the "peak," and the lowest point is called the "trough.
With respect to business cycles, what is an "expansion?" What is a "contraction?" -
ANSWERSAn expansion is a period of time when real GDP is rising. A contraction is a
period of time when real GDP is falling. Contractions are also known as recessions.
Do business cycles occur at regular intervals? - ANSWERSNo. The length of
contractions and expansions varies greatly. For example, in the last century the shortest
contraction lasted only six months, while the longest contraction lasted 43 months.
Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it
possible for GDP to fall while per capita GDP is rising? - ANSWERSYes. The answer to
both questions depends on whether GDP is growing faster or slower than population. If
population grows faster than GDP, GDP increases, while GDP per capita decreases. If
GDP falls, but population falls faster, then GDP decreases, while GDP per capita
increases.
The Central African Republic has a GDP of 1,107,689 million CFA francs and a
population of 4.862 million. The exchange rate is 284.681CFA francs per dollar.
Calculate the GDP per capita of the Central African Republic in terms of dollars. -
ANSWERSStart with Central African Republic's GDP measured in francs. Divide it by
the exchange rate to convert to U.S. dollars, and then divide by population to
obtain the per capita figure. That is, 1,107,689 million francs/ 284.681 francs per dollar /
4.862 million people = $800.28 GDP per capita.
Explain briefly whether each of the following would cause GDP to overstate or
understate the degree of change in the broad standard of living.
a. The environment becomes dirtier
b. The crime rate declines
c. A greater variety of goods become available to consumers d. Infant mortality declines
- ANSWERSa. A dirtier environment would reduce the broad standard of living, but not
be counted in GDP, so a rise in GDP would overstate the standard of living.
b. A lower crime rate would raise the broad standard of living, but not be counted
directly in GDP, and so a rise in GDP would understate the standard of living.
, c. A greater variety of goods would raise the broad standard of living, but not be
counted directly in GDP, and so a rise in GDP would understate the rise in the standard
of living.
d. A decline in infant mortality would raise the broad standard of living, but not be
counted directly in GDP, and so a rise in GDP would understate the rise in the standard
of living.
What are the main components of measuring GDP with what is demanded? -
ANSWERSConsumption, Investment, Government Purchases, and Net Exports.
What are the main components of measuring GDP with what is produced? -
ANSWERSDurable Goods, Nondurable Goods, Services, Structures, and Changes in
Inventories.
Why doesn't the investment component of GDP include purchases of financial assets
such as stocks and bonds? - ANSWERSGDP measures output of real goods and
services. Stocks and bonds represent ownership and claims to income. Stocks and
bonds may facilitate investment, but they are not goods and services.
What is the difference between a series of economic data over time measured in
nominal terms versus the same data series over time measured in real terms? -
ANSWERSNominal values are measured with whatever prices existed at the time. Real
values have been adjusted for inflation. For example, if the price of an item doubles
over a period of time, the nominal value would double. But if the overall price level had
also doubled, the good's price would not have changed relative to the prices of other
goods. So the real value of the good would be unchanged.
In the country of Ophir, the GDP deflator is 175. What does this tell us about prices now
compared to prices in the base year? If nominal GDP in Ophir is $87,500, what is real
GDP? - ANSWERSBy definition, the GDP Deflator in the base year is 100.
Consequently, prices are now 75% higher than in the base year. I.e., (175 - 100)/100 =
0.75 = 75%.
To convert nominal GDP into real GDP, divide nominal GDP by the GDP deflator
divided by 100. In this case,
Real GDP = $87,500 divided by 175/100, or $87,500/1.75 = $50,000.
What are the typical patterns of GDP for a high-income economy like the United States
in the long run and the short run? - ANSWERSThe long-run trend is for GDP to rise
over time. In the short run, however, GDP can fluctuate up and down.
What are the two main difficulties that arise when comparing standards of living in
different countries using GDP? - ANSWERSGDP statistics from different countries are
expressed in different currencies. So the first thing that must be done is to convert the
GDP statistic into a common currency. A second problem is that countries have different
populations. If GDP is used to compare standards of living, it must be converted into
GDP per person.
What does it mean to say that quarterly growth rates are reported "at an annualized
rate?" - ANSWERSIt means the actual growth rate for the quarter has been multiplied
by four. If the economy grew at the same rate all year as it did in that quarter, it would
be the yearly growth rate.
It means the actual growth rate for the quarter has been multiplied by four. If the
economy grew at the same rate all year as it did in that quarter, it would be the yearly
growth rate. - ANSWERS
What is the highest point of a business cycle called? The lowest point? - ANSWERSThe
highest point is called the "peak," and the lowest point is called the "trough.
With respect to business cycles, what is an "expansion?" What is a "contraction?" -
ANSWERSAn expansion is a period of time when real GDP is rising. A contraction is a
period of time when real GDP is falling. Contractions are also known as recessions.
Do business cycles occur at regular intervals? - ANSWERSNo. The length of
contractions and expansions varies greatly. For example, in the last century the shortest
contraction lasted only six months, while the longest contraction lasted 43 months.
Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it
possible for GDP to fall while per capita GDP is rising? - ANSWERSYes. The answer to
both questions depends on whether GDP is growing faster or slower than population. If
population grows faster than GDP, GDP increases, while GDP per capita decreases. If
GDP falls, but population falls faster, then GDP decreases, while GDP per capita
increases.
The Central African Republic has a GDP of 1,107,689 million CFA francs and a
population of 4.862 million. The exchange rate is 284.681CFA francs per dollar.
Calculate the GDP per capita of the Central African Republic in terms of dollars. -
ANSWERSStart with Central African Republic's GDP measured in francs. Divide it by
the exchange rate to convert to U.S. dollars, and then divide by population to
obtain the per capita figure. That is, 1,107,689 million francs/ 284.681 francs per dollar /
4.862 million people = $800.28 GDP per capita.
Explain briefly whether each of the following would cause GDP to overstate or
understate the degree of change in the broad standard of living.
a. The environment becomes dirtier
b. The crime rate declines
c. A greater variety of goods become available to consumers d. Infant mortality declines
- ANSWERSa. A dirtier environment would reduce the broad standard of living, but not
be counted in GDP, so a rise in GDP would overstate the standard of living.
b. A lower crime rate would raise the broad standard of living, but not be counted
directly in GDP, and so a rise in GDP would understate the standard of living.
, c. A greater variety of goods would raise the broad standard of living, but not be
counted directly in GDP, and so a rise in GDP would understate the rise in the standard
of living.
d. A decline in infant mortality would raise the broad standard of living, but not be
counted directly in GDP, and so a rise in GDP would understate the rise in the standard
of living.
What are the main components of measuring GDP with what is demanded? -
ANSWERSConsumption, Investment, Government Purchases, and Net Exports.
What are the main components of measuring GDP with what is produced? -
ANSWERSDurable Goods, Nondurable Goods, Services, Structures, and Changes in
Inventories.
Why doesn't the investment component of GDP include purchases of financial assets
such as stocks and bonds? - ANSWERSGDP measures output of real goods and
services. Stocks and bonds represent ownership and claims to income. Stocks and
bonds may facilitate investment, but they are not goods and services.
What is the difference between a series of economic data over time measured in
nominal terms versus the same data series over time measured in real terms? -
ANSWERSNominal values are measured with whatever prices existed at the time. Real
values have been adjusted for inflation. For example, if the price of an item doubles
over a period of time, the nominal value would double. But if the overall price level had
also doubled, the good's price would not have changed relative to the prices of other
goods. So the real value of the good would be unchanged.
In the country of Ophir, the GDP deflator is 175. What does this tell us about prices now
compared to prices in the base year? If nominal GDP in Ophir is $87,500, what is real
GDP? - ANSWERSBy definition, the GDP Deflator in the base year is 100.
Consequently, prices are now 75% higher than in the base year. I.e., (175 - 100)/100 =
0.75 = 75%.
To convert nominal GDP into real GDP, divide nominal GDP by the GDP deflator
divided by 100. In this case,
Real GDP = $87,500 divided by 175/100, or $87,500/1.75 = $50,000.
What are the typical patterns of GDP for a high-income economy like the United States
in the long run and the short run? - ANSWERSThe long-run trend is for GDP to rise
over time. In the short run, however, GDP can fluctuate up and down.
What are the two main difficulties that arise when comparing standards of living in
different countries using GDP? - ANSWERSGDP statistics from different countries are
expressed in different currencies. So the first thing that must be done is to convert the
GDP statistic into a common currency. A second problem is that countries have different
populations. If GDP is used to compare standards of living, it must be converted into
GDP per person.
