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AP Macroeconomics

Homework: Chapter Eight, pp. 125-171

Due ________________________

Answer all of the following in COMPLETE, WELL-WRITTEN, sentences.

1. What is the business cycle? Describe each of its four phases. Draw the business cycle (as in
Figure 8-2) and memorize it.

2. What explanations do economists use to explain the business cycle?

3. What are durable goods? Why are firms that produce durable and capital goods more
dramatically affected by the business cycle than, say, services?

4. Detail the types of unemployment.

5. What is the full employment rate/the natural rate of unemployment? Why are economists and
policy-makers most concerned with cyclical unemployment?

6. What is potential output and why is it associated with the natural rate of unemployment?

7. Why has the full employment rate changed over time?

8. What is the labor force? Who is in the labor force? Who is not?

9. How is the unemployment rate determined? Why do some criticize the measurement of the
unemployment rate? What/whom does it leave out?

10. Using the following data, determine: 1) the size of the labor force; and 2) the unemployment
rate. Population: 300 million. Population under 16 or institutionalized: 120 million.
Unemployed: 17 million. Part-time workers looking for full-time jobs: 12 million. Discouraged
workers: 6 million.

11. What is the GDP gap? Why does it occur? What is potential GDP and how does it differ from
actual GDP? What are the costs to society?

12. Describe Okuns law.


13. If the natural rate of unemployment is 5% and the actual rate of unemployment is 10%,
according to Okuns law, what is the GDP gap? If nominal GDP is $14 trillion, how much out put
(in dollar terms) is the economy foregoing?

14. What is inflation? What is the inflation rate?

15. What is the rule of 70?

16. What is demand-pull inflation and what causes it?

17. What is cost-push inflation and what causes it?

18. What is the difference between nominal and real income?

19. What is the difference between the effects of anticipated and unanticipated inflation?

20. Who is hurt by high unanticipated inflation? Why? Who is helped by it? Why?

21. Why is anticipated inflation less damaging in the short-run? (Define a COLA.)

22. What is the difference between real and nominal interest rates?

23. Why do some economists believe a small amount of inflation is tolerable and even good?

24. Describe the effects of cost-push inflation on unemployment.

25. What is hyperinflation and how does it occur? What can it do to an entire economy?

26. Describe what a wage-price spiral is.