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# 22 - CHAPTER 22 THE GOALS OF MACROECONOMIC POLICY 1 After...

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C HAPTER 22 T HE G OALS OF M ACROECONOMIC P OLICY 1. After 25 years Country A’s economy has grown by 64%. After 25 years Country B’s economy has grown by 85%. Country B’s economy is roughly 33% larger than that of Country A (85%- 64%)/(64%) = 32.8%. Country A’s growth = (1.02) 25 = 1.64 Country B’s growth = (1.025) 25 = 1.85 The gap between the GDPs of the two countries is not 12.5% due to the compounding effect of a continually higher growth rate. 2. If output has not kept pace with the increase in hours worked productivity has decreased. In this example productivity has decreased by approximately 8% (25%/30% = 8.33%). 3. Unemployment should have decreased, which it did. 4. The destruction of the factories reduces Poorland’s potential GDP. The acquisition and use of the advanced technology will boost Poorland’s productive capability and hence its potential GDP. 5. The growth rate of potential GDP is equal to the sum of the growth rate of the labor force and the growth rate of labor productivity. Thus the growth rate of potential GDP for Country A is 3.5% (1.5% + 2%); the growth rate of potential GDP for Country B is 4% (1.5% + 2.5%).

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22 - CHAPTER 22 THE GOALS OF MACROECONOMIC POLICY 1 After...

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