# Economics

All of these questions should be answerable in one sentence, or by a single calculation. But they will require some thought on your part.

Question 1: First, a simple practice calculations in Real and Nominal Growth and the Inflation Rate since this kind calculation will appear on your midterm.

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(a) What is the real GDP growth rate from 2005 to 2006?

(b) What is the Nominal GDP growth rate from 2005 to 2006?

(c) What is the inflation rate from 2005 to 2006? (It will be the difference between nominal growth and real growth.)

Question 2: Interpreting GDP growth

Recall that as you approach the peak of a business cycle, real growth is positive but slowing down.Prices do not fall (negative inflation rate) until the economy is into its downturn. Where does the peak of the cycle occur in this quarterly data? In other words, when do prices start to reflect the downturn by falling?

(a) Look at the Inventory/Sales picture, Graph Set #1, showing the I/S ratio from 2002 to 2011. If a build-up of inventories acquired at high marginal cost is a first sign of impending recession, when should our economy have sounded the alarm that trouble was coming?

(b) You see from this graph that the I/S ratio was also high in 2004. The ratio can climb if inventories increase (in anticipation of future sales) or if sales decline (due to recession). Judging from the subsequent GDP growth rates for 2005 and 2006, Data Set #1, what do you think was the business expectation in 2004?

Question 4: Unemployment and Labor Force Participation

(a) Look at the Unemployment rate in 2005 and 2006 on Data Set #1. If rising unemployment is a first sign on impending recession, when should our economy have sounded the alarm that trouble was coming? Does this information agree with the information from GDP growth rates, prices, and the Inventory/Sales ratio?

(b) Look at the growth rate in the Civilian Labor Force and the Labor Force Participation Rate from March 2007 to December 2009, Graph Set #1. Is there a ‘discouraged worker’ phenomenon?

Question 5: Profiling the Business Cycle

According to Wesley Claire Mitchell’s profile of the business cycle, events should occur in the following order:

1. Real GDP growth slows down but remains positive
2. Real GDP growth becomes negative
3. Inventory/Sales ratio climbs due to falling sales against acquired inventory
4. Unemployment rises
5. Prices fall (deflation, i.e. a negative inflation rate)
6. Inventory/Sales ratio flattens out as inventories are eliminated
7. Prices flatten out (zero or low positive rate of inflation)
8. Civilian Labor Force may decline, causing unemployment rate to drop temporarily
9. Real GDP growth flattens out (zero or low positive rate of growth)

Try to put an approximate date to each of these events from the information in Data Set #1. Did the crisis proceed according to Mitchell’s profile?