Final_S04

Final_S04 - ECON2 Prof. Jack Hou Spring 2004 Final Exam...

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ECON2 – Prof. Jack Hou Spring 2004 Final Exam – Answer Key Part II . Definitions 1. Discount rate, Federal Funds rate. The discount rate is the interest rate at which the Fed stands ready to lend reserves to depositary institutions; the Federal funds rate is the interest rate that the banks charge each other on overnight loans of reserves. 2. Natural rate of unemployment, cyclical unemployment. NRU is the unemployment rate at full employment; the cyclical unemployment is the fluctuating unemployment over the business cycle. The NRU doesn’t include the cyclical unemployment. 3. GDP deflator, CPI. The GDP deflator is an average of current-year prices expressed as a percentage of base-year prices, based on nominal and real GDP; the CPI is a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services. 4. Automatic stabilizers, fiscal drag. Automatic stabilizers are automatic mechanisms that work to stabilize real GDP without explicit action by the government. A fiscal drag is a discretionary change in government spending and/or taxes used to change real GDP. 5. Structural deficit, Cyclical deficit. The structural deficit is the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP. The cyclical deficit is the actual deficit minus the structural deficit. That is, the cyclical deficit if the part of the budget deficit that arises purely because real GDP doesn’t equal potential GDP. Part III. Short Essays (Choose 2 out of 3) 1. Do BOTH of the following two independent parts. A) Discuss some of the reasons why the “official” unemployment rate may not correctly reflect the actual rate of unemployment. ANS: There are two reasons why official unemployment rate may not reflect actual unemployment rate: (1) Part-time workers are considered as fully employed. Part of this workers want to work full-time but don’t find this type of work. This understates the unemployment rate. (2 points) (2) Discouraged workers: individuals that are willing to work but are not actively
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seeking work are not considered as unemployed. You must be actively seeking for job to be counted as unemployed. This understates the unemployment rate.
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Final_S04 - ECON2 Prof. Jack Hou Spring 2004 Final Exam...

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