DOC PREVIEW
AMU ECON 201 - Answers to Text Questions and Problems
Pages 13

This preview shows page 1-2-3-4 out of 13 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services are affected least. Automobiles are durable goods, so the automobile producer would probably see its profits reduced the most, while the barbershop (which provides a service) will see the smallest decline in profit. Boots and shoes are “semi-durable”, since a pair of shoes may last for several years and people can put off purchases of these for a while if necessary. Thus the boot manufacturer’s losses are likely to fall in between those of the other two firms. 4. The natural unemployment rate is the sum of structural and frictional unemployment and excludes cyclical unemployment. Hence, the natural unemployment rate by definition should not be affected by a recession. Also by definition, the cyclical unemployment rate rises in recession. Inflation tends to decline in the period following a recession. Finally, poll ratings of presidents tend to be strongly correlated with the state of the economy, so a recession will probably reduce a president’s popularity. 5. Potential output, or potential GDP, is the maximum sustainable amount of output (real GDP) that an economy can produce. Because inputs can be used at greater than normal rates for a time (for example, workers can work overtime and machines can be used at night or on weekends), it is possible for the economy to produce an amount exceeding potential output. 7. False. When output equals potential output, the unemployment rate equals the natural unemployment rate. Cyclical unemployment is zero when output equals potential output, but frictional and structural unemployment still exist. Answers to Problems 3. NOTE: this is different than in the galley proofs. We decided to extend the data to 2007. The data from the problem along with the output gap, the type of gap and the growth rate of real GDP are given in the table below: Year Real GDP Potential GDP Output gap Type of gap Growth rate of real GDP 1999 $9,470 $9,248 2.4% expansionary 2000 $9,817 $9,590 2.4% expansionary 3.7% 2001 $9,891 $9,927 -0.4% recessionary 0.8% 2002 $10,049 $10,227 -1.7% recessionary 1.6% 2003 $10,301 $10,501 -1.9% recessionary 2.5% 2004 $10,676 $10,777 -0.9% recessionary 3.6% 2005 $11,003 $11,068 -0.6% recessionary 3.1% 2006 $11,319 $11,372 -0.5% recessionary 2.9% 2007 $11,567 $11,687 -1.0% recessionary 2.2%The growth rate of GDP slowed to 0.8% in 2001; growth accelerated from 2002 to 2004, corresponding to the official dating of the recession. Note, however, that a recessionary gap continued throughout the 2001-2007 period, meaning that despite the resumption of normal growth rates the economy never caught up with potential after the 2001 recession. 5. Working with Okun’s law: a. In 2010, real GDP is 2% below potential GDP, so cyclical unemployment is 1%. Since the actual unemployment rate is 6%, the natural rate must be 5%. b. In 2011, the natural rate equals the actual rate, so cyclical unemployment equals zero. Okun’s law implies that the output gap is therefore zero, and potential output equals the actual output level of 8,100. c. In 2012, cyclical unemployment equals 4% - 4.5% = -0.5%, so by Okun’s Law the output is gap is 1%. This implies that real GDP is 1% larger than potential GDP, so real GDP must equal 8,282 (= (1.01)(8200)). d. In 2013, the output gap is 2% since real GDP is 2% above potential GDP. Using Okun’s law, this implies that cyclical unemployment is –1%. Since the natural unemployment rate is 5%, actual unemployment is 4%. Chapter 23 Answers to Review Questions 1. The key assumption of the basic Keynesian model is that in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet demand implies that changes in demand affect output in the short run. 2. There are many possible examples. Goods that are standardized and are bought and sold in large quantities, such as wheat or other commodities, tend to have rapidly adjusting prices since the benefits of setting up active auction markets for such goods usually exceeds the costs. Goods such as dresses or skirts, which are not standardized (they vary in size, color, style) and which are usually sold in retail stores one by one, tend to have prices that are changed less frequently. 3. Planned aggregate expenditure (PAE) is total planned spending on final goods and services. It consists of consumption spending, investment spending, and government purchases of goods and services, and net exports (exports less imports). Changes in output are cause changes in the income received by producers, which in turn affects consumption spending through the consumption function. Since consumption is a component of PAE, changes in output lead to changes in PAE. 4. Planned spending includes planned additions to inventories to firms. When firms’ actual sales differ from planned sales, the resulting additions to inventory will differ from what was planned, and actual spending will differ from planned spending. For example, suppose a firm planned to produce 100 units, sell 90 units to the public, and add 10 units to its inventory. But in fact the firm sells only 80 units and thus must add 20 units to inventory. The firm’s planned inventory investment (a component of investment and thus total spending) was 10 units, but its actual inventory investment was 20 units. So the firm’s actual investment spending (inclusive of inventory investment) is greater than it planned. On the other hand, if the firm sold all 100units, it would add nothing to inventory, and its actual investment (including inventory investment) would be less than planned. 5. Figure 23.2 shows a consumption function. Consumption (C), is on the vertical axis and disposable income (Y – T), is on the horizontal axis. a. A movement from left to right along the consumption function shows that consumption increases as disposable income increases. b. A parallel shift upward of the consumption function indicates that people are consuming more at any given level of disposable income. This implies that some factor other than a change in disposable income is stimulating consumption. 6. Figure 23.4 shows the Keynesian cross diagram. The 45-degree line captures the definition of short-run equilibrium output, Y = PAE;


View Full Document

AMU ECON 201 - Answers to Text Questions and Problems

Course: Econ 201-
Pages: 13
Download Answers to Text Questions and Problems
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Answers to Text Questions and Problems and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Answers to Text Questions and Problems 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?