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EC3003 – MACROECONOMIC THEORY EXAMINATION 1 – Take home FALL, 2008 Answer each of the following questions. Please cite any references that are used in the analysis. Each question is worth 10 points. 1. Define and discuss the economic goals of full employment, price stability and economic growth. Discuss whether or not the goals are compatible or competitive. Use any evidence that is available to support your discussion. Goal 1: Full Employment Anyone who wishes to work can find a job, anyone that owns a piece of capital can put it to work at a “fair” return, and anyone who owns land can put it to use and receive a “fair” return. The measure used to asses this economic goal is the unemployment rate. The unemployment rate is a ratio with the numerator being the number of people seeking work, but not finding it. The denominator is the total labor force comprised of the total population less those under 16 years of age, less the institutionalized population, less those not in the labor force such as house spouses, and less those unable to work, such as senior citizens, and the list goes on and on. A lower unemployment rate is desirable in any economy and a higher rate is more undesirable. Goal 2: Price Stability Price stability is defined as the absence of “excessive” inflation. Inflation is defined as an increase in average prices in an economy. The actual measure of inflation is the inflation rate as determined by the Consumer Price Index, CPI. The CPI in any given period shows the average prices of a “typical” set of goods bought by consumers relative to some base period. Obviously, lower inflation rates are more desirable than higher ones. Goal 3: Economic Growth Economic growth is measured by gross domestic product, GDP. Growth is defined as a positive change in real GDP. A satisfactory rate of economic growth is one where positive per capita rates of growth in real GDP take place. Basically, the economy grows faster than the population, making the standards of living better for many individuals in the economy. Economic growth is important for two reasons. First, economic growth improves the overall standards of living and second, it is one way to reduce poverty
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This note was uploaded on 12/06/2009 for the course EC 2110 taught by Professor Jones during the Spring '09 term at Michigan Technological University.

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