Chapter 2, Problem 1QAP

a.

To determine

whether it is true, false or uncertain thatGDP of U.S. was 32 times higher in 2014 than it was in 1960.

Answer to Problem 1QAP

The above statement is False.

Explanation of Solution

In the year of 1960, the GDP was $543 billion than compared to the year of 2014 when it was $17400 billion. However, the rise in the levels of the output between the years of 1960 and 2014 cannot be said to be considered to have risen by 32 times, though it may seem so. This is because much of the increase between these years was more in terms of the rise of the prices than the rise in the output. Hence in order to assess the change in the GDP with time, real GDP method is used instead of the nominal GDP method.

Economics Concept Introduction

Introduction:

In drawing the comparisons between the levels of GDP in the year 1960 and in the year 2014, the concept of real and nominal GDP must be considered. In the nominal GDP, the current prices of market are considered and hence it will take into account that the inflation or the deflation which has occurred during the current year.

The real GDP on the other hand is the form of GDP in which the inflation or the deflation for the current year is adjusted in determining the GDP. It is a more realistic form of calculating the GDP as it considers the real change in the levels of the price and hence presents a more accurate picture of the economic growth.

b.

To determine

whether true, false or uncertain: if the unemployment rate is high, the participation rate will also be high.

Answer to Problem 1QAP

The above statement is False.

Explanation of Solution

The unemployment rate and the participation rate are not dependent upon each other and are two different concepts. Hence it will not be right to establish a direct and interdependent relation between the two completely distinctive concepts.

Economics Concept Introduction

Introduction:

Unemployment rate is the rate of the unemployed workers in the total labor force of any economy. It is the ratio of the number of the people who are unemployed to the total number of the people in the labor force. The participation rate on the other hand is considered to be the ratio in which the people who are employed or who are seeking for the employment in the economy to the labor force of the country.

c.

To determine

whether true, false or uncertain: the unemployment rate tends to fall during expansions and rise during recessions.

Answer to Problem 1QAP

The above statement is True.

Explanation of Solution

The unemployment rate is the rate of people unemployed to the labor force of any country. Thus, it is right enough to state that during the time of the expansion there is the rise in the employment opportunities in any economy and hence the rate of the unemployment reduces in such period. On the other hand, during the time of the recession in the market in any economy there is the rise in the unemployment.

Economics Concept Introduction

Introduction:

During the time of the high production there are more job opportunities in the market and expansion will happen only in the sound economic conditions when there is enough opportunities for the market and the enterprises to grow. On the other hand, during the time of the recession there are job losses and hence unemployment increases. During the time of recession, the economical condition of any economy is not viable to support the growth of the market and hence there is the decline in the economical activities of the economy.

d.

To determine

The statement “If the Japanese CPI is currently at 108 and the U.S. CPI is at 104, then the Japanese rate of inflation is higher than the U.S. rate of inflation.” is true, uncertain or false.

Answer to Problem 1QAP

The above statement is False.

Explanation of Solution

It is important to note that the changes in the levels of the price through Consumer Price Index are used to determine the changes that occur in one country over the period. It is not used to make the inter country comparisons and hence the changes in the inflation rate of Japan cannot be compared with the change in the U.S.A by considering CPI as a method.

Economics Concept Introduction

Introduction:

The Consumer Price Index is one of the most common phenomena to statistically identify the level of the inflation or the deflation between the various periods. It is a measure which considers the weighted average of the basket of the goods and services of the consumer, such as transportation, medical care and food. The change in the level of CPI is used to determine the changes in the prices of the cost of the living.

f.

To determine

whether the rate of inflation which is computed using CPI is better than compared to rate of inflation which is computed using the GDP calculator.

Answer to Problem 1QAP

The statement isTrue.

Explanation of Solution

In the cases when the growth of the output is below the normal levels, it is an indication of adverse economic conditions in an economy. Thus, in the cases when the output growth is below the normal levels, there is bound to have rise in the levels of the unemployment in the economy which is further substantiated by the Okun’s law.

Economics Concept Introduction

Introduction: The Okun’s law suggeststhat when the growth in the output, there is the decline in the unemployment. Thus, as per this law, in the cases when there is the decline in the output, there is the growth in the unemployment.

g.

To determine

whether the statement “The periods of negative GDP growth are called recessions” is true or false.

Answer to Problem 1QAP

The above given statement is True.

Explanation of Solution

During the period of recession there is the significant decline in the economy of the country with the decline in the output of the country which thus increases the unemployment. Thus, the above statement is true as recession is characterized by the negative growth in the output production in the economy.

Economics Concept Introduction

Introduction:

Recessions are said to be the period in which the economy of any country falls in a significant manner. During the recessions, there is the negative growth in the GDP of the country for at least a period of six months, i.e. two quarters.

i.

To determine

whether the statement “The Phillips Curve is a relation between the level of prices and the level of unemployment” is true or false.

Answer to Problem 1QAP

The above given statement is False.

Explanation of Solution

Thus, there is no relation between the levels of prices and the level of unemployment in the Philips Curve.

Economics Concept Introduction

Introduction:

The Philips Curve is the curve which establishes the relationship between the inflation and the level of the unemployment. On the x- axis is the rate of unemployment and on the y-axis is the change in the inflation rate. In the case when the slope slides downwards, it indicates the declining unemployment rate with the declining rate in inflation.