Chapter 4 What Macroeconomics Tries to Explain

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Oct 28, 2013 (3 years and 9 months ago)

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Chapter 4 What Macroeconomics Tries to Explain

Review Questions


2.

To make sense of the economy and to create workable models, macroeconomics uses
aggregation

the process of combining distinct things into a single entity. There are
many examples of aggre
gation in macroeconomics, so answers will vary widely. One
example would be the interest rate

obtained by combining all the different interest rates
in the economy into a single aggregate. Another example is gross domestic product
(GDP)

obtained by combini
ng all the different types of goods and services in the
economy into a single aggregate.


4.

In addition to the growth rate of output, we would need to know the growth rate of the
population. A rise in the average standard of living requires that output gr
ow
faster

than
the population, so that
output per person
rises.

Problems and Exercises


2.

a.

Real GDP in 2000 would have been $4123 x (1 + 8%)
27

= $32,934.78 billion.

b.

Output per person in 2000 would have been $117,202.85. It would have increased by
502.64
% since 1973, instead of by 69%.

4
.

a.


Year

Real GDP

(in billions)

2000

$5,000

2001

$5300

2002

$5618

2003

$5955.08

2004

$6312.38

2005

$6691.13

2006

$7092.60


No, the real GDP line gets steeper because, as real GDP rises from an increasingly
highe
r and higher level, the same
percentage

growth rate causes greater and greater
absolute

increases in GDP.

b.


Year

Real GDP (in billions)

2000

$5,000

2001

$5300

2002

$5300 x 1.05 = $5565

2003

$5565 x 1.04 = $5787.60

2004

$5961.23

2005

$6080.45

2006

$6141.26


No, the real GDP line gets flatter due to the relatively large decrease in the growth
rate.

Economic Applications and Exercises

2.

a. 1. Because the Labor Department’s consumer price index decreased by 0.3 percent in
April, and only rose
by 0.2 percent in June.



2.

Moderate inflation would prevent declining profits and set the stage for sustained
recovery.




3. Given the small rise in prices, the Fed would probably not change the
interest rates.


b.

Greider believes that the United St
ates is experiencing a low
-
grade depression that
may last for years. Persistent deflation would create a vicious spiral of negatives
--
falling profits, more closed factories, shrinking employment and incomes,
accompanied by
waves of failing debtors, both co
rporations and families.