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Homework answers / question archive / Chapter 1 1)What is a business cycle? How does the unemployment rate behave over the course of a business cycle? Does the unemployment rate ever reach zero?           2

Chapter 1 1)What is a business cycle? How does the unemployment rate behave over the course of a business cycle? Does the unemployment rate ever reach zero?           2


Chapter 1

1)What is a business cycle? How does the unemployment rate behave over the course of a business cycle? Does the unemployment rate ever reach zero?






2. Historically, when has the Federal government been most likely to run budget deficits? What has been the recent experience?



3. Define trade deficit and trade surplus. In recent years, has the U.S. economy had trade deficits or trade surpluses? What was the U.S. experience from 1900 to 1970?



4. List the principal professional activities of macroeconomists. What role does macroeconomic research play in each of these activities?



5. In 2002, President George W. Bush imposed tariffs on certain types of imported steel. He argued that foreign steel producers were dumping their steel on the U.S. market at low prices. The foreign steel producers were able to sell steel cheaply because they received subsidies from their governments. The Bush administration argued that the influx of steel was disrupting the U.S. economy, harming the domestic steel industry, and causing unemployment among U.S. steel workers. What might a classical economist say in response to these claims? Would a Keynesian economist be more or less sympathetic to the imposition of tariffs? Why?




Chapter 2


1. What are the three approaches to measuring economic activity? Why do they give the same answer?


2. What is the difference between intermediate and final goods and services? In which of these categories do capital goods, such as factories and machines, fall? Why is the distinction between intermediate and final goods important for measuring GDP?


3. Define private saving. How is private saving used in the economy? What is the relationship between private saving and national saving?


4. What is national wealth, and why is it important? How is national wealth linked to national saving?


5. Describe how the CPI and CPI inflation are calculated. What are some reasons that CPI inflation may overstate true inflation?


6. Explain the differences among the nominal interest rate, the real interest rate, and the expected real interest rate. Which interest rate concept is the most important for the decisions made by borrowers and lenders? Why?

7 A reputable study shows that a particular new work­place safety regulation will reduce the growth of real GDP. Is this an argument against implementing the regulation? Explain.


8 Economists have tried to measure the GDPs of virtually all the world's nations. This problem asks you to think about some practical issues that arise in that effort.


9. What problem does government control of prices create for economists attempting to measure a country's GDP? Suggest a strategy for dealing with this problem.



10. Government saving is defined as T - (G + TR + INT ), where G is government purchases. But suppose that we split government purchases into two parts: government consumption expenditures (GCE) and government investment (Gl) and that we define a new version of government saving, which is T - (GCE + TR + INT ). With this new definition of government saving, which treats government investment similarly to private investment, how would the uses-of-savings identity be modified?




Chapter 3


1. What is a production function? What are some factors that can cause a nation's production function to shift over time? What do you have to know besides an economy's production function to know how much output the economy can produce?



2. The production function slopes upward, but its slope declines from left to right. Give an economic interpretation of each of these properties of the production function.



3. What is the MPN curve? How is the MPN curve related to the production function? How is it related to labor demand?



4.  Use the concepts of income effect and substitution effect to explain why a temporary increase in the real wage increases the amount of labor supplied, but a permanent increase in the real wage may decrease the quantity of labor supplied.



5. Define full employment output. How is full-employment output affected by an increase in labor supply? By a beneficial supply shock?




6. Why is the classical model of the labor market discussed in this chapter not very useful for studying unemployment?



7. What is frictional unemployment? Why is a certain amount of frictional unemployment probably necessary in a well-functioning economy?


8. Define the natural rate of unemployment and cyclical unemployment. What does negative cyclical unemployment mean?



9. What is Okun's law? If the unemployment rate increases by 2 percentage points between this year and next year, by how much will output change during the same period? Assume that the natural unemployment rate and full-employment output are constant.



10. How would each of the following affect the current level of full-employment output? Explain.


 a. A large number of immigrants enter the country.


b. Energy supplies become depleted.


c. New teaching techniques improve the educational performance of high school seniors.


d. A new law mandates the shutdown of some unsafe forms of capita.



11. During the 1980s and 1990s the average rate of unemployment in Europe was high. Some economists claimed that this rate was in part the result of "real-wage rigidity," a situation in which unions kept real wages above their market-clearing levels.



A. What is the effect of real-wage rigidity on the output actually supplied by firms, relative to the output they would supply if there were no real­ wage rigidity?



12. How would each of the following affect Helena Hand­ basket's supply of labor?


a.      The value of Helena's home triples in an unexpectedly hot real estate market.


b. Originally an unskilled worker, Helena acquires skills that give her access to a higher-paying job. Assume that her preferences about leisure are not affected by the change in jobs.


c. A temporary income tax surcharge raises the percentage of her income that she must pay in taxes, for the current year only. (Taxes are proportional to income in Helena's country.)



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