Deck 7: Measuring and Describing the Aggregate Economy

Question 1

In H. G. Wells's Time Machine, a late-Victorian time traveler arrives in England some time in the future to find a new race of people, the Eloi, in their idleness. Their idleness is, however, supported by another race, the Morlocks, underground slaves who produce the output. If technology were such that the Elois' lifestyle could be sustained by machines, not slaves, is it a lifestyle that would be desirable? What implications does the above discussion have for unemployment?

Answer 1

Unemployment rate is the percentage of total number of unemployed people who are activelyElois have Morlocks as their slave and slavery in itself cannot be equated to employment. So, if Elois start using machines, then the unemployment rate will not increase but fall as now Morlocks can do some work which is counted under employment, not slavery. Now Elois can get their work done by machines and Morlocks could do something which is necessary for them and could be counted as employment.

Question 2

It is unfair, but true, that bad things happen. Unfortunately, to attempt to prevent unavoidable bad things can actually make things worse, not better. How might the above ideas be relevant to how society deals with business cycles? (Austrian)

Answer 2

Output is the overall goods and services produced by a country in a time period. Growth rate is the percentage change in output in the given period of time. Per capita output is total output divided by the population of that country.
When it comes to government intervention in economy then there are two common opposite thoughts travelling within different economists. One section of economists believe that government intervention is necessary to control the effects of business cycles, while others believe that government intervention is not useful and so is not needed. As per Austrian school of thought of economics, the government intervention creates more problems than the benefits they provide, so economy should be allowed to run its usual course even in the case of business cycles.

Question 3

What are two ways in which

Answer 3

Macroeconomics which is study of economy as a whole is studied in two perspective, that are short-run which focuses on demand side economics andThe

Question 4

If unemployment fell to 1.2 percent in World War II, why couldn't it be reduced to 1.2 percent today?

Question 5

Wesley Mitchell, a founder of Institutional economics, said that to understand the business cycle, a distinction must be made between making goods and making money. All societies make goods. In the modern money economy, those who control the production and distribution of goods will only allow economic activity to occur if they can "make money." He used this line of reasoning to conclude that what drives the business cycle are business expectations; production, and thus increased employment today, will only be allowed if business expects to sell those goods at a profit tomorrow. Is his proposition reasonable? Explain. (Institutionalist)

Question 6

How does the U.S. per capita growth rate since 1950 compare to growth rates in other areas around the world?

Question 7

In 1991, Japanese workers' average tenure with a firm was 10.9 years; in 1991 in the United States the average tenure of workers was 6.7 years.
a. What are two possible explanations for these differences?
b. Which system is better?
c. In the mid-1990s, Japan experienced a recession while the United States' economy grew. What effect did this likely have on these ratios?

Question 8

Since the Great Depression, the United States has been able to avoid severe economic downturns.
a. What macroeconomic policies do you think have allowed us to avoid another Great Depression?
b. Would you classify those policies as being Classical or Keynesian?
c. Are such policies still relevant today? (Post-Keynesian)

Question 9

What is the difference between real output and potential output?

Question 10

The text presents the target rate of unemployment as being about 5 percent. William Vickrey, a Nobel Prize- winning economist, argued that the target unemployment rate should be seen as being between 1 percent and 2 percent. Only an unemployment rate thata. What is the appropriate target unemployment rate?
b. Explain your position.
c. What policies would you recommend to counteract the human tragedy of unemployment? (Radical)

Question 11

The Bureau of Labor Statistics reported that in April 2009 the total labor force was 154,731,000 of a possible 235,272,000 working-age adults. The total number of unemployed was 13,724,000. From this information, calculate the following:
a. Labor force participation rate.
b. Unemployment rate.
c. Employment-population ratio.

Question 12

Studies have shown that women tend to pay more than men for things such as auto repairs, haircuts, and dry cleaning.
a. Why do you think this is?
b. How does this fact affect the usefulness of aggregate statistics such as the consumer price index (CPI)? (Feminist)

Question 13

Draw a representative business cycle, and label each of the four phases.

Question 14

The index of leading indicators has predicted all past recessions. Nonetheless it's not especially useful for predicting recessions. Explain.

Question 15

Distinguish between structural unemployment and cyclical unemployment.

Question 16

What type of unemployment is best studied within the

Question 17

What type of unemployment is best studied under the short-run framework?

Question 18

Does the unemployment rate underestimate or overestimate the unemployment problem? Explain.

Question 19

If unemployment rises by 2 percentage points, what will likely happen to output in the United States? (Use Okun's rule of thumb.)

Question 20

If nominal output is $250 and the price index is 150, what is real output?

Question 21

If nominal output rose 15 percent and the price index rose 2 percent, how much did real output increase?

Question 22

Answer the following questions about real output, nominal output, and inflation:
a. The price level of a basket of goods in 2008 was $64. The price level of that same basket of goods in 2009 was $68. If 2008 is the base year, what was the price index in 2009?
b. If nominal output is $300 billion and the price index is 115, what is real output?
c. Inflation is 5 percent; real output rises 2 percent. What would you expect to happen to nominal output?
d. Real output rose 3 percent and nominal output rose 7 percent. What happened to inflation?

Question 23

If nominal output rises from $13.5 billion to $14 billion and the GDP deflator rises from 100 to 105,
a. What is the percentage increase in nominal output?
b. What is the percentage increase in the price index?
c. What has happened to real output?
d. By how much would the price index have had to rise for real income to remain constant?

Question 24

Why are expectations central to understanding inflation?

Question 25

Inflation, on average, makes people neither richer nor poorer. Therefore it has no cost. True or false? Explain.

Question 26

Why would you expect that inflation would generally be associated with