Chapter 9, Problem 1QAP

a)

To determine

The validity of the statement that the IS curve would shift upwards when ‘G’, ‘T’ and ‘x’ values increase.

Answer to Problem 1QAP

False

Explanation of Solution

It is false to say that the IS curve would shift upwards when all aspects of ‘G’, ‘T’ and ‘x’ increases. When there is an increase in government spending the curve would shift to the right. However, an increase in taxes would shift the curve to the left. Assuming that exports are denoted by ‘x’, given that ‘x’ increases, the curve will shift to the right. As tax increases makes the curve shift to the left, the statement is false.

Economics Concept Introduction

Introduction:The IS curve is a downward sloping curve that represents all the possible combinations of income, which is denoted by Y and the interest rate which is denoted by r. It shall ideally show the equilibrium point of the market for goods and services within an economy.

b)

To determine

The validity of the statement that provided (U-Un) is bigger than zero, (Y-Yn) would also be bigger than zero.

Answer to Problem 1QAP

False

Explanation of Solution

Provided that the rate of unemployment takes a higher figure than the rate of natural unemployment, then the output would be negative. The reason behind it is that such a situation suggests an inefficient use of labor.

Economics Concept Introduction

Introduction:Natural rate of unemployment is the lowest unemployment level an economy could have. It prevails due to the structure of the labor force of an economy. For example, there may be individuals who lack the skills required to do a job and thus, unemployed.

c)

To determine

The validity of the statement that provided that (U-Un) is at the level of zero, then output level is at potential.

Answer to Problem 1QAP

True

Explanation of Solution

The statement could be considered as true as Yn denotes the level of output at the rate of natural unemployment. Yn could also be called as the potential output and thus the statement is true.

Economics Concept Introduction

Introduction:Yn denotes the output level at the natural rate of unemployment. The meaning of natural unemployment is the lowest possible unemployment level in an economy. It happens due to the features of the labor force of the economy. For example, there may be a certain level of unemployment if a particular job or profession is being replaced by technology.

d)

To determine

The validity of the statement that provided that (U-Un) is below zero, then there would be a negative gap in the output.

Answer to Problem 1QAP

False

Explanation of Solution

The statement could be considered as false. Provided that the level of unemployment of given economy is higher than its usual level, then it could be concluded that the output level is below the potential level.

Economics Concept Introduction

Introduction:Unemployment and natural unemployment are two important economic variables. Unemployment being the more common one suggests the number of individuals above a specific age, without suitable employment during the reference period and are available for work. Natural unemployment prevails due to structural features.

e)

To determine

The validity of the statement that expected inflation would be lower than inflation provided that the output gap is positive.

Answer to Problem 1QAP

True

Explanation of Solution

When the actual output level of an economy exceeds its potential output level, it would be called as a positive gap in output. In such an instance the expected inflation would be lower than the actual inflation rate. The reason for this is the aggregate demand of the economy being higher than the output level at full employment capacity.

Economics Concept Introduction

Introduction:Inflation could be defined as the increase in general price levels of the goods and services of an economy. Expected inflation is the anticipated inflation rate of the participants of an economy for a future period of time. These are much connected to the economy’s output or the production level.

f)

To determine

The validity of the statement that the rate of unemployment would drop by one percentage point following a one percentage point increase in output growth as per Okun’s law.

Answer to Problem 1QAP

False

Explanation of Solution

The statement could be considered as false. According to the Okun’s law, every one percentage point raise in the level of output growth, the rate of unemployment would drop by four percentage points.

Economics Concept Introduction

Introduction:Okun’s law is an economic theory that is associated with the economic variables of unemployment and production or output. It states how the changes in one variable affects the other.

g)

To determine

The validity of the statement that inflation is stable at the rate of natural unemployment.

Answer to Problem 1QAP

True

Explanation of Solution

The statement could be considered as true as the inflation rate is said to be stable at the natural rate of unemployment. It is the point where the Phillips curve would cut the horizontal axis. Thus, at that point, inflation is considered to be stable.

Economics Concept Introduction

Introduction:Inflation and unemployment are two important economic variable used in economic analysis and policy making. Natural rate of unemployment is also an associated concept. It states of the lowest possible unemployment rate that could prevail in an economy.

h)

To determine

The validity of the statement that the inflation rate pertaining to a medium term equilibrium is stable.

Answer to Problem 1QAP

False

Explanation of Solution

When an economy is at equilibrium in the midterm, there would be a burst in the level of inflation due to the inflationary pressures that have been building up due to the currency being depreciated. The nominal rate of interest has to be equal to r + p in the midterm as anticipated inflation needs to be satisfied in an equilibrium of medium term.

Economics Concept Introduction

Introduction:The rate of inflation is among the most important economic variables used in any economy. It is the percentage increase of the general price levels of the economy’s goods and services.

i)

To determine

The validity of the statement that the Central bank of a country has the discretion to maintain the level of output same as the level of potential output.

Answer to Problem 1QAP

True

Explanation of Solution

The statement could be considered to as true. If the actual aggregate level of output of an economy is equal to its potential output level, the natural unemployment rate of that economy would be equal to the actual rate of unemployment.

Economics Concept Introduction

Introduction:The Central bank could be considered as the hub of an economy. It is where the economic analysis and policy making takes place. It is being subject to debate that the Central bank carries the discretion in making equal the level of output and the level of potential output.

j)

To determine

The validity of the statement that it would be much easier to the Central bank of an economy to maintain the output level at the potential mark given that expected inflation is anchored.

Answer to Problem 1QAP

True

Explanation of Solution

The statement could be considered as true. Provided that the expected level of inflation in a given economy is anchored, it would not be necessary for the Central bank to create a situation of a recession in keeping the rate of inflation stable.

Economics Concept Introduction

Introduction:Output and inflation are two economic variables that go hand in hand. Output is the amount of goods produced by an economy within a given period of time. Expected inflation is the anticipated level of what the prices of goods and services would be.

k)

To determine

The validity of the statement that there would be an increase in the rate of natural unemployment if there is a material increase in the oil prices.

Answer to Problem 1QAP

False

Explanation of Solution

The statement could be considered as false. The reason is the negative relationship that prevails between inflation and unemployment. Following a demand increase, price levels would also go up. As a result, suppliers would start producing more. This, in turn shall bring down the level of unemployment as there would be more job opportunities for the participants of an economy.

Economics Concept Introduction

Introduction:Natural rate of unemployment is the minimum possible unemployment level an economy could have. It could prevail due to some participants of the economy being unemployed, lacking the skills needed to be employed. Further, if a certain employment category has been replaced by technology, a portion of the labor force would lose their jobs and be unemployed.