AK Macroeconomics – Chapter 4
CHAPTER FOUR
Answers to Self-Test Questions
1. a) 10 million (employed of 9 + unemployed of 1)
b) 66.66% (labour force/working age population x 100 = 10/15 x 100)
c) 10% (unemployed/labour force x 100 = 1/10 x 100)
2. a) 24 million (participation rate x working age population = 75% x 32 million)
b) 4 million (Labour force – employed = 24 – 20)
c) 16.66% (unemployed/labour force x 100 = 4/24 x 100)
3. a) Yes, since the category "working age population" includes everyone over the age of
15, etc. whether or not they are in the labour force.
b) Types of people in the category of “not in the labour force” would be: homemakers,
retirees, those receiving welfare or disability incomes, those who are
independently wealthy and discouraged workers.
c) Yes, if the size of the labour force increases by more than the number of employed
increases.
4. a) cyclical; b) frictional; c) structural
5. The size of the labour force would drop by 100 000, as would the number of people
unemployed. The unemployment rate would also fall.
6. The potential GDP is $840. (Since there is 2% cyclical unemployment, using Okun's
Law gives us 2% x 2.5 = 5% multiplied by $800 billion = a GDP gap of $40 billion.
The actual GDP of $800 plus the GDP gap of $40 equals potential GDP of $840.)
7.
Nominal GDP ($billion)
Real GDP ($billion)
GDP deflator (2002 = 100)
Population (millions)
Real GDP per capita
2010
443
374
118.4_
26.1
$14 330
2011
474.2
389
121.9
26.4
14 735
2012
507
402.1
126.1
27
14 893
8. Increase in real income was 3 percent.
Her nominal income increased by $2,800, or by 2800/40000 x 100, which equals 7
percent. Since the inflation rate was 4 percent, her real income has increased by 7
percent minus 4 percent, or by 3 percent.
9. a) 10 years. The number of years to double is 70 divided by the growth rate (of
prices), i.e. 70/7 = 10.
29
AK Macroeconomics – Chapter 4
b) 10 percent. Rearranging the rule of 70 formula gives: growth rate (interest rate) =
70/ # of years to double, i.e. 70/7 = 10.
10. a) Real interest rate: 7%
b) Real income: $10 830. Your real income falls by 5% or $600 to $11 400 in the
first year. It falls a further 5% or $570 in the second year to give a real income of
$10 830.
Answers to Study Guide Questions
1.
2.
3.
4.
5.
6.
False: structural unemployment is likely to be largest in sunset industries.
True
True
False: female participation rates only have been increasing.
False: the higher the redistributive effects.
False demand-pull inflation occurs when the total demand exceeds the capacity to
produce.
7. False: it is equal to the nominal rate less the expected inflation rate.
8. True
9. True
10. True
11. a
12. a
13. c
14. b
15. a
36A.
16. a
17. d
18. c
19. d
20. b
2
3
4
5
6
7
8
9
10
11
2011
Qty
Prices
Year
2010
Nominal
GDP
Pizzas
30
12
Movie
tickets
20
Farm
tractors
Parking
meters
Totals
31. b
32. a
33. b
34. b
35. d
Table 4.11 (completed)
2010
Item
26. c
27. b
28. d
29. b
30. b
Key Problem
a)
1
21. a
22. c
23. d
24. d
25. e
12
13
14
Nominal
GDP
Prices
Year
2010
Real
GDP
2012
Qty
Prices
Year
2011
Nominal
GDP
Prices
Year
2010
Real
GDP
Qty
360
35
13
455
12
420
40
14
560
12
480
10
200
22
11
242
10
220
24
12
288
10
240
3
100
300
4
95
380
100
400
4
110
440
100
400
4
50
200
4
60
240
50
200
5
70
350
50
250
1060
1317
30
1240
Prices
Year
2012
1638
1370
AK Macroeconomics – Chapter 4
Column 7 in the table is completed by multiplying columns 5 and 6 together.
Columns 8 and 13 are simply a repeat of column 3.
Column 9 is completed by multiplying columns 5 and 8 together.
Column 12 is determined by multiplying columns 10 and 11 together.
Column 14 is determined by multiplying columns 10 and 13 together.
b)
From columns 4, 7 and 12:
2010: $ __1060_______ ; 2011: $ ____1317_____ ; . 2012: $ _____1638____
c)
From columns 4, 9 and 14:
2010: $ __1060_______ ; 2011: $ ____1240_____ ; . 2012: $ _____1370____
d)
Nominal GDP/real GDP x 100 for each year:
2010: ______100___ ;
e)
Inflation rate =
2011
f)
=
6.2% (6.2/100 x 100);
2012
x 100
= 12.6% (13.4/106.2 x100).
110 ; 2011: $ 120 ; 2012: $ 130
Price Index = (value of bundle in current year/ value of bundle in base year) x 100
Price indexes:
h)
(price index this year – price index last year)
price index last year
5 pizzas + 5 movie tickets would cost each year:
2010: $
g)
2011: _____106.2_______ ; . 2012: _____119.6____
Inflation rate =
2010 = 100 (110/110 x100);
2011 = 109.1; (120/110 x 100)
2012 = 118.2. (130/110 x 100)
(price index this year – price index last year)
price index last year
2011 = 9.1% (9.1/100 x 100); 2012 = 8.3% (9.1/109.1 x 100)
32
x 100
AK Macroeconomics – Chapter 4
37A. a) GDP deflators: Year 2010: 105.1 (420/400 x 100);
Year 2011:
108.1
(456/422 x 100); Year 2012 = 111.9 (500/447 x 100)
b) Real GDP per capita: Year 2010: $25 000; (400 billion/16million)
Year 2011: $25 483 (422 billion/16.56 million);
Year 2012: $26 079 (447 billion/17.14 million).
c) Growth rate of real GDP per capita: Year 2011: 1.9% (+483/25000 x 100);
Year 2012: 2.3% (+596/25483 x 100).
38A.
a) Participation rates: Year 2010: 70% ((8.4/12 x 100); Year 2011: 72%
(9/12.5 x 100); Year 2012: 71.9% (9.2/12.8 x 100).
b) Unemployment rates: Year 2010: 8.3% (0.7/8.4 x 100); Year 2011: 8.9%
(0.8/9 x 100); Year 2012 = 9.2% (0.85/9.2 x 100).
c) 2011: 0.7% (+0.8/108.2 x 100); 2012: 1.2% (1.3/109 x 100)
d) 2011: 5% (+1/20 x 100);
2012: 5% (+1.05/21 x 100)
e) 14 years (70/5).
39A.
Inflation rates: Year 2010: 4.3% (+5/116 x 100);
Year 2011: 5.8%. (+7/121 x 100).
40A.
a) Growth rate of population:2010: 3.5% (+0.56/16 x 100);
2011: 3.5% (+0.58/16.56 x 100).
b) 20 years (70/3.5).
41A.
a) Real income:
b)
Year 2009: $24 138 (28 000/116 x 100);
Year 2010: $24 463 (29 600/121 x 100);
Year 2011: $25 000 (32 000/128 x 100).
2010: 1.3% (325/24 138 x 100);
2011 2.2% (537/24 463 x 100).
42A.
a) Real interest rate: Year 2009: 1.2% (8 – 6.8);
Year 2010 1.7% (6 – 4.3);
Year 2011: - 0.7% (5.2 – 5.9)
43A.
Table 4.18 (Completed)
Country
1.
2.
3.
Bergan
Altria
Casper
real GDP per capita
$24 444
14 592
10 648
(2200/1.2/75 x 1000)
(715/1.4/35 x 1000)
(2875/1.8/150 x 1000)
33
AK Macroeconomics – Chapter 4
44A
The GDP deflator is the name of the price index used to calculate inflation based
on the goods and services included in the GDP. It is an implicit index calculated by
dividing nominal GDP by real GDP and multiplying by 100.
45A Frictional unemployment results from people switching jobs (voluntarily or
involuntarily) or looking for their first jobs. Cyclical unemployment is a product of the
business cycle and results in the economy operating below its full-employment
potential.
46A.
a)
b)
c)
Unemployment rate: 10% (1.5/ (11.5 + 2.0 + 1.5) x 100.)
Participation rate: 75% ((11.5 + 2.0 + 1.5)/20.0 x 100.)
Inflation rate: 17% (but we don’t know the annual inflation rate because
we don’t know the number of years since the base year.)
47A.
a)
See the following table:
Table 4.20 (completed)
2009
Nominal GDP
$850
GDP Deflator
109
Real GDP
779.8
Population
30
Real GDP per capita $25 993
b) 5.5% = (115 – 109) x 100;
109
2010
$958
115
833
30.5
$27 311
2011
1038.4
118
880
31
$28 390
c) 3.9% = (28 390 – 27 312) x 100
27 312
48A.
a) Nigel gains because the real interest rate that he pays on the remaining term of
his loan decreases.
b) Lars loses because the purchasing power of his fixed pension decreases.
c) Yoko loses because the real rate of return on her savings decreases.
d) Joan loses because her expected increase in real wages of 3% is wiped out.
e) Robert will gain because the company in which he owns shares is paying a
lower real wage than it expected.
49A.
GDP gaps:
2009: $45 (3% (cyclical unemployment) x 2.5 x $600);
2010: $15 (1% x 2.5 x $600);
2011: $15.75 (1% x 2.5 x 630).
34
AK Macroeconomics – Chapter 4
50A
Participation rate =
Unemployment rate =
labour force
x 100
working-age population
number of unemployed x 100
labour force
51A (Two of the following):
a) The level of investment is likely to be low since firms may be discouraged from
spending when faced by the future uncertainty that inflation brings.
b) Inflation requires that menus, catalogues, price lists, web-sites and so on must be
changed which can be very expensive (menu costs).
c)
Net exports are likely to be lower if domestic prices increase faster than foreign
prices because it will lead to a decrease in exports and an increase in imports.
52A.
An improvement in unemployment might suggest an improvement of economic
conditions if it was the result of discouraged workers starting to look for
employment. Since they are now looking for work – but don’t yet have jobs – the
unemployment rate will increase.
53A.
a) Yes, the size of the labour force will increase by 60 000 due to the fact that
half of those workers (120 000) not previously seeking work are now applying for
the new jobs.
b) Unemployment rate: 12.1%. Unemployed: 610 000; labour force: 5 060 000
c) Unemployment rate: 11.3%. Unemployed: 570 000; labour force: 5 060 000
54A Constructing a table for James would give:
Year
1
2
3
4
5
Nominal income
$36 000
37 080
38 192
39 338
40 528
Price index
100.0
101.5
103.0
104.6
106.1
Real income
$36 000
36 532
37 080
37 608
38 198
Alternatively, if you calculate on the basis that his real income increases by 1.5% (3%
increase in nominal income minus the 1.5% inflation rate), her real income after 4 years
(i.e., in year 5) is $38 209.
(Be careful with the price index; you can’t simply add on 1.5 each year. The index
increases by 1.5% from what it was the year before. So year 3, for instance, is 101.5 x
1.015 = 103.0225 (rounded to 103.0). Year 4 it is 103.0225 x 1.015 = 104.567 and so
on.)
35
AK Macroeconomics – Chapter 4
55A We can figure the answer using Okun’s law :
GDP gap = potential - actual GDP = 450 – 400 = 50
And GDP gap = 2.5 x cyclical unemployment (%) x actual GDP
50 = 2.5 x cyclical unemployment x 400
Rearranging terms gives us: cyclical unemployment =
50
2.5 x 400
= 0.05 (or 5%)
Actual unemployment = natural unemployment + cyclical unemployment = 6% + 5% =
11%
56A a)
See Table 4.22 (completed)
Table 4.22 (completed)
Item
Rice
2009
2010
2010
Quantity Price Nominal Quantity Price Nominal Quantity 2009 RealGDP
GDP
GDP
Price
400
$5
$2000
430
$5.20 $2236
430
$5
$2150
Pajamas 220
Beer
125
$15
3300
250
$16
4000
250
15
3750
20
2500
130
24
3120
130
20
2600
Totals
$7800
a)
2009
$7800
7800
Nominal GDP
Real GDP
GDP deflator
b) Item
Rice
Beer
Pajamas
Quantity
10
10
2
$9356
Prices 2009
$5
20
15
$8500
2010
$9356
8500
110 (9356/8500 x 100)
Basket cost
Prices 2010
$50
200
30
$280
$5.20
24
16
CPI in 2010: 324/280 x 100 = 115.7
36
Basket cost
$52
240
32
$324