ps2ans - Economics 205: Principles of Macroeconomics Mark...

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Economics 205: Principles of Macroeconomics Mark Moore Fall 2008 Problem Set 2: Solutions 1. Suppose initial GDP in both countries is Y 0 . After 25 years: GDP in country A= Y 0 (1+.02) 25 1.64 Y 0 GDP in country B= Y 0 (1+.03) 25 2.09 Y 0 Country B's economy is (2.09-1.64)/1.64 = 27% larger than country A's economy, not 25%, because growth compounds. 2. As we would expect, the unemployment rate fell over the period 1994-2000 (when GDP probably grew faster than potential GDP), and rose over the period 2000-2003 (when actual GDP probably grew slower than potential GDP). 3. Country A: 1.1% + 2% = 3.1% Country B: 1.1% + 2.5% = 3.6% 4. a. 14% - 0 % = 14% b. 14% - 3 % = 11% c. 14% - 6 % = 8 % d. 14% - 12 % = 2% e. 14% - 16% = - 2 % The real interest rate can be negative. The nominal interest rate cannot. Strictly speaking, these are ex post (after the fact) real interest rates. The real interest rate that matters for decision-making uses expected inflation rather than actual inflation, since actual inflation cannot be known in advance. 5.
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ps2ans - Economics 205: Principles of Macroeconomics Mark...

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