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The purpose of the Unit Exercises is to assess the student's ability to apply the economics concepts learned in the unit to practical problem-solving scenarios.
Instructions
At the end of each chapter is a series of Unit Exercises. Students are to complete the exercises in Word (or some other compatible word processor) and submit by 11:00 p.m. on Sunday of Unit 2.
1. Consider the macroeconomic data shown below for a hypothetical country's economy.
Real GDP (billions of $)
Output Gap
(% of potential)
Unemployment Rate
(% of labour force)
YEAR
Actual
Potential
2003
1172
1192
11.0
2004
1188
1200
10.0
2005
1201
1209
9.0
2006
1215
1219
8.2
2007
1230
1226
7.6
2008
1244
1240
7.2
2009
1257
1251
7.1
2010
1269
1262
7.3
2011
1274
a. Compute the output gap for each year.b. In several years actual GDP exceeded potential GDP. Explain how GDP can exceed potential GDP.c. In this example, real GDP has not fallen from year to year but at times it happens. When real GDP falls from year to year what do economists call such periods?d. What is the unemployment rate when this economy is at "full employment"? What kind of unemployment exists at this time?
2. Consider the following data for a hypothetical economy that produces two goods: milk and honey.
Quantity Produced
Prices
Milk (litres)
Honey (kg)
Milk ($/litre)
Honey ($/kg)
Year 1
110
45
2
6
Year 2
125
40
3
7
a. Compute nominal GDP for each year in this economy.b. Using year 1 as the base year, compute real GDP for each year. What is the percentage change in real GDP from year 1 to year 2?c. Using year 1 as the base year, compute the price deflator for each year.d. Now compute the GDP deflator for each year, using year 2 as the base year.e. Explain why the measures of real GDP growth (and growth in the deflator) depend on the choice of base year.
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