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d792b521b316c53b5680dcb1e6281700

d792b521b316c53b5680dcb1e6281700 - Chapter 22 Economic...

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Chapter 22: Economic Growth, Business Cycles, Unemployment, and Inflation Questions for Thought and Review 1. Economic growth is measured by increases in total output and increases in output per person. 2. The U.S. per capita growth rate of 1.5 to 2.0 percent per year is lower than those of Japan (4.8 percent per year) and China (3.4 percent per year), close to those of Western Europe (2.5 percent per year) and Latin America (1.4 percent per year), and higher than those of Eastern Europe (1.0 percent per year) and Africa (0.8 percent per year). 3. Real output is a measure of the total goods and services an economy actually produces stated in constant prices. Potential output is a measure of the total goods and services an economy is capable of producing given its resources and institutions. 4. A representative business cycle is shown in the accompanying graph. Each of the four phases—peak, downturn, trough, and upturn—is clearly labeled. 7. Structural unemployment results from the institutional structure of the economy or changes in the economy itself, while cyclical unemployment results from fluctuations in economic activity (business cycles.) 8. Structural unemployment, because it results from changes in the structure of the economy, is best studied in the long-run framework. Cyclical unemployment, which results from fluctuations in economic activity, is best studied in the short- run framework. 9. Some economists argue that the unemployment rate undercounts unemployment because people who have gotten frustrated and stopped trying to find jobs are considered voluntarily idle and are not counted as unemployed; also, the
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unemployment rate doesn’t include people who are underemployed. Others point out that, because of unemployment insurance, people often say they are looking for work when they really aren't, and therefore unemployment is overstated. So there are tendencies both to overestimate and underestimate the problem. 10. Okun’s rule of thumb states that a 1 percentage point change in the unemployment rate will cause income to change in the opposite direction by 2 percent. Thus, a 2 percentage point rise in unemployment will likely cause income to decrease by 4 percent. 11. Real output is $166.67 (250/150 X100 = $166.67). 12. Real output rose 13 percent (15 – 2). 13. Expectations are central to understanding inflation because the ultimate change in prices is due both to the prices that producers would like and the inflation that they expect. Because expectations of inflation can be self-fulfilling in this way, they play an important role in any ongoing inflation, and can “snowball” a small inflationary pressure into accelerating inflation. 14. False. While inflation doesn’t make the nation any poorer on average, it does have costs. Its costs include increased transactions costs, capricious distributional effects, the destruction of the informational value of prices, and the breaking down of the institutional structure within which markets work.
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