Paper instructions:

Discuss the effects of unemployment on the economy

1.1. (Measuring Unemployment) Determine the impact on each of thefollowing if 2 million formerly unemployed workers decide to returnto school full time and stop looking for work:
a. The labor force participation rate
b. The size of the labor force
c. The unemployment rate

1.2. (Measuring Unemployment) Suppose that the U.S.noninstitutionaladult population is 230 million and the labor force participation rateis 67 percent.
a. What would be the size of the U.S. labor force?
b. If 85 million adults are not working, what is the unemploymentrate?

1.3. (Types of Unemployment) Determine whether each of the followingwould be considered frictional, structural, seasonal, or cyclicalunemployment:
a. A UPS employee who was hired for the Christmas season is laidoff after Christmas.
b. A worker is laid off due to reduced aggregate demand in theeconomy.
c. A worker in a DVD rental store becomes unemployed as video-on-demand cable service becomes more popular.
d. A new college graduate is looking for employment.

LO2–Discuss the effects of inflation on the economy

2.1. (Inflation) Here are some recent data on the U.S. consumer priceindex:

Year CPI Year CPI Year CPI
1988 118.3 1994 148.2 2000 172.2
1989 124.0 1995 152.4 2001 177.1
1990 130.7 1996 156.9 2002 179.9
1991 136.2 1997 160.5 2003 184.0
1992 140.3 1998 163.0 2004 188.9
1993 144.5 1999 166.6 2005 195.3
2006 201.8

Compute the inflation rate for each year 1989–2006 and determinewhich were years of inflation. In which years did deflation occur?In which years did disinflation occur? Was there hyperinflation inany year?

2.2. (Sources of Inflation) Using the concepts of aggregate supply andaggregate demand, explain why inflation usually increases duringwartime.

LO1 –Explain how aggregate supply operates in the short run

1.1. (Natural Rate of Unemployment) What is the relationship betweenpotential output and the natural rate of unemployment?
a. If the economy currently has a frictional unemployment rate of 2 percent, structural unemployment of 2 percent, seasonal unemployment of 0.5 percent, and cyclical unemployment of 2 percent, what is the natural rate of unemployment? Where is the economy operating relative to its potential GDP?
b. What happens to the natural rate of unemployment and potential GDP if cyclical unemployment rises to 3 percent with other types of unemployment unchanged from part (a)?
c. What happens to the natural rate of unemployment and potential GDP if structural unemployment falls to 1.5 percent with other types of unemployment unchanged from part (a)?
2.2. (Long-Run Adjustment) The ability of the economy to eliminate anyimbalances between actual and potential output is sometimescalled self-correction. Using an aggregate supply and aggregatedemand diagram, show why this self-correction process involvesonly temporary periods of inflation or deflation.

LO3 –Analyze shifts of the aggregate supply curve

3.1. (Changes in Aggregate Supply) List three factors that can changethe economy’s potential output. What is the impact of shifts of theaggregate demand curve on potential output? Illustrate youranswers with a diagram.

3.2. (Supply Shocks) Give an example of an adverse supply shock andillustrate graphically. Now do the same for a beneficial supply shock.
LO2 –Describe how aggregate supply affects fiscal policy

2.1. (Fiscal Policy) Chapter 12 shows that increased government purchases,with taxes held constant, can eliminate a contractionarygap. How could a tax cut achieve the same result? Would the taxcut have to be larger than the increase in government purchases?Why or why not?

2.2. (Fiscal Policy with an Expansionary Gap) Using the aggregatedemand–aggregate supply model, illustrate an economy with anexpansionary gap. If the government is to close the gap by changinggovernment purchases, should it increase or decrease thosepurchases? In the long run, what happens to the level of real GDPas a result of government intervention? What happens to the pricelevel? Illustrate this on an AD–AS diagram, assuming that the governmentchanges its purchases by exactly the amount necessary toclose the gap.

LO3 –Discuss the evolution of fiscal policy

3.1. (Evolution of Fiscal Policy) What did classical economists assumeabout the flexibility of prices, wages, and interest rates? What didthis assumption imply about the self-correcting tendencies in aneconomy in recession? What disagreements didKeynes have withclassical economists?
LO1 –Examine the federal budget process

1.1. (The Federal Budget Process) The federal budget passed byCongress and signed by the president shows the relationshipbetween budgeted expenditures and projected revenues. Why doesthe budget require a forecast of the economy? Under what circumstanceswould actual government spending and tax revenue fail tomatch the budget as approved?

LO2 –Discuss the fiscal impact of the federal budget

2.1. (Budget Philosophies) Explain the differences among an annuallybalanced budget, a cyclically balanced budget, and functionalfinance. How does each affect economicfluctuations?