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Unformatted text preview: Review for ﬁrst challenge: Solutions
Short answer questions (1-2 sentences)
The participation rate is:
participation rate = 125
· 100 =
· = 62.5%
200 (1) The GDP per working age person is:
GDP per capita = $10, 000, 000
= $50, 000.
200 (2) Income per capita is $50,000.
productivity = $10, 000, 000
200 · 125 (3) The average worker produces $400 worth of goods per hour.
Real GDP does not include these items. However, spending related to these items is included:
health care spending, education spending, and spending on leisure. Therefore, countries with
higher GDP per capita tend to have better health, higher quality education, etc.
Question 3. 1 S′
S = Y − C − T + ( T − G ↑) ↓ 2
1 D = I +X −M LOANS ($) Figure 1: Increase in government spending reduces national savings.
From the graph an increase in government spending ﬁnanced by borrowing reduces public
savings and therefore national savings, regardless of the interest rate. This is a shift to the
left of the savings curve (1). Demand for loans exceeds supply, so the interest rate rises (2).
The increase in interest rates reduces investment spending (move along the demand for loans
curve to the new equilibirum).
The nominal rate measures the dollars lenders are paid in interest. The real rate measures
what those dollars can buy. The prime rate is the overnight lending rate from banks to large
corporations. It is nominal.
Question 5. 2 w
ﬂoor DL ′ DL
employed Not participating
Not Participating Natural unemployment cyclical
unemployment Figure 2: Recession increases unemployed when a wage ﬂoor exists.
Insider laws create unemployment. By restricting ﬁring, employers are prevented from hiring
the unemployed at a lower wage. 3 ...
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