Economics Exam - Essay Questions
2025 With 100% Correct Answers
Imagine that the economy is entering a recession. Explain what we would expect to happen to
real GDP, inflation, the unemployment rate, and interest rates as the business cycle trends
downward. - CORRECT ANSWER✔✔If the economy is entering a recession, unemployment rates
would increase, inflation decreases, real GDP would decrease, and interest rates would
decrease as the government's attempt to stimulate spending by cutting interest rates.
What is "Potential GDP"? How is it different than Real GDP? - CORRECT ANSWER✔✔"Potential
GDP" is the amount of output that we would produce at cruising speed. "Real GDP" is the actual
amount of output we produce. Nominal GDP gives us the GDP with current prices and creates
inflation.
What is the "natural rate" of unemployment? What conditions must be met before we can say
that we have reached it? Explain. - CORRECT ANSWER✔✔It is the amount of unemployment
necessary for a healthy economy, it is found at cruising speed, making cyclical unemployment =
0. It is called the "natural" rate, because it changes according to the capital base; how many
employees are needed? At the natural rate of unemployment, the only people not employed
are people lacking job skills and people that simply have not found "their" job yet or are not
looking. Also, Frictional Unemployment- between jobs.
We said in class that the CPI has its limitation, or "biases." What are three ways that the
measurement of CPI flawed. Explain. - CORRECT ANSWER✔✔Think of CPI as a basket. We
assume you buy the same products every month, but the price of all of it together fluctuates.
CPI is what it costs a person based on their income. Problem: the products don't change over
time, but the CPI does, so it does not make sense to say it is "static".
Many politician say that they want to 'reduce unemployment.' Why would it not be a good thing
for the unemployment rate to be 0%? - CORRECT ANSWER✔✔If the unemployment rate gets
too low, businesses have to compete for workers; therefore, they must increase their wages,
2025 With 100% Correct Answers
Imagine that the economy is entering a recession. Explain what we would expect to happen to
real GDP, inflation, the unemployment rate, and interest rates as the business cycle trends
downward. - CORRECT ANSWER✔✔If the economy is entering a recession, unemployment rates
would increase, inflation decreases, real GDP would decrease, and interest rates would
decrease as the government's attempt to stimulate spending by cutting interest rates.
What is "Potential GDP"? How is it different than Real GDP? - CORRECT ANSWER✔✔"Potential
GDP" is the amount of output that we would produce at cruising speed. "Real GDP" is the actual
amount of output we produce. Nominal GDP gives us the GDP with current prices and creates
inflation.
What is the "natural rate" of unemployment? What conditions must be met before we can say
that we have reached it? Explain. - CORRECT ANSWER✔✔It is the amount of unemployment
necessary for a healthy economy, it is found at cruising speed, making cyclical unemployment =
0. It is called the "natural" rate, because it changes according to the capital base; how many
employees are needed? At the natural rate of unemployment, the only people not employed
are people lacking job skills and people that simply have not found "their" job yet or are not
looking. Also, Frictional Unemployment- between jobs.
We said in class that the CPI has its limitation, or "biases." What are three ways that the
measurement of CPI flawed. Explain. - CORRECT ANSWER✔✔Think of CPI as a basket. We
assume you buy the same products every month, but the price of all of it together fluctuates.
CPI is what it costs a person based on their income. Problem: the products don't change over
time, but the CPI does, so it does not make sense to say it is "static".
Many politician say that they want to 'reduce unemployment.' Why would it not be a good thing
for the unemployment rate to be 0%? - CORRECT ANSWER✔✔If the unemployment rate gets
too low, businesses have to compete for workers; therefore, they must increase their wages,
