GDP, economic growth, unemployment and inflation

  1. Suppose 1 800 000 people are employed, 40 000 people are unemployed, and an additional
    250 000 people are not in the labour force but are of working age. What is the formula for the
    unemployment rate? Calculate the unemployment rate and briefly explain how you did this.
    What is the formula for the labour force participation rate? Calculate the labour force
    participation rate and briefly explain how you did this. (2 marks).– Word count 150
    The following table sets out simulated (not actual) data for the CPI index for each quarter from
    March 2009 to March 2018. Use this information to answer questions 2, 3 and 4 below.
    Quarter Consumer price
    index; All groups –
    Mar-2009 90.5
    Jun-2009 90.2
    Sep-2009 90.7
    Dec-2009 91.7
    Mar-2010 92.6
    Jun-2010 93.3
    Sep-2010 93.8
    Dec-2010 94.5
    Mar-2011 96.3
    Jun-2011 98.2
    Sep-2011 99.8
    Dec-2011 100.8
    Mar-2012 99.9
    Jun-2012 100.4
    Sep-2012 101.3
    Dec-2012 101.5
    Mar-2013 103.1
    Jun-2013 103.8
    Sep-2013 104.0
    Dec-2013 105.8
    Mar-2014 105.4
    Jun-2014 105.9
    Sep-2014 106.8
    Dec-2014 1
    Sep-2016 109.4
    Dec-2016 110.0
    Mar-2017 110.8
    Jun-2017 111.3
    Sep-2017 111.7
    Dec-2017 112.5
    Mar-2018 112.9
  2. Calculate the year-end (or annual) inflation rate for the March 2016 quarter to two decimal
    places. Show all workings including the formula used. (1 mark) – Word count 30
  3. Using excel calculate the year-end inflation rate for each quarter for the period March 2010 to
    March 2018. Paste your spreadsheet with the answers into the assignment. (2 marks) –
    Spreadsheet only. Answers to 1 decimal place.
  4. Using Excel, prepare a graph of the year-end inflation rate for each quarter for the period March
    2010 to March 2018. Paste your graph into the assignment. Make sure you carefully label your
    graph including an appropriate title, axis labels and legend. (1 mark) – Graph only
  5. Explain why inflation make nominal GDP a poor measure of the increase in total production
    from one year to the next? (1 mark) – Word count 80
  6. Suppose that a very simple economy produces three goods: pizzas, haircuts and backpacks.
    Suppose the quantities produced and their corresponding prices for 2015 and 2019 are as
    shown in the table. Use the information in the table to compute nominal GDP in the year
  7. Calculate real GDP in 2019 assuming the base year is 2015. Compare and explain the two
    results. (2 marks) – Word count 200
    Product Quantity Price Quantity Price
    Pizzas 200 10 150 12
    Haircuts 80 20 85 25
    Backpacks 40 50 30 70
    2015 2019
    Task 7: Business Cycle and Aggregate Demand & Supply
  8. Starting from long-run equilibrium, use the basic (static) aggregate demand and aggregate
    supply diagram to show what happens in both the short run and the long run when there is an
    increase in consumer confidence. Explain your diagram. (2 marks). – Word count 150
    Explain how each of the following events in questions 2 and 3 would affect the aggregate demand
    curve. No graph required
  9. Domestic prices decrease, which decreases interest rates. (1 mark) – Word count 50
  10. Lower levels of investment by businesses. (1 mark) – Word count 50
  11. Consider the situation where there has been a decline in real GDP growth rates, inflation, and
    employment rates. What part of the business cycle do you think the economy is currently in?
    what other indicators could you use to confirm this? (1 mark) – Word count 80
    Read the following excerpt and answer the following question
    China wants its middle class to spend big … but they have bills to pay
    China’s middle class is something of a mythical entity, with wide-ranging estimates of its
    size and economic power. Optimists believe a large and growing middle class has the
    ability to lift China and even the world to a more prosperous level, while pessimists foresee
    an increasingly burdened group that could cause the economy to stagnate and even lead
    to political chaos.
    Beijing wants the middle class to come to the rescue of China’s economy. But rising costs,
    mounting household debt, worries about their future income as the economy slows and
    doubts over whether the government can adequately provide for the ageing population
    have made consumers cautious. In many cases, they are doing the opposite of what the
    government wants and pulling back from spending. Whether this so-called consumption
    downgrade is broad-based – and a threat to Beijing’s economic plans – or not is a matter
    of intense debate in Chinese policymaking circles. But it is clear that many in China’s
    middle class are struggling to make ends meet. …………
    China is now betting that its middle class – the largest in the world with more than 400
    million consumers, according to the authorities’ estimate – will increase their discretionary
    spending on products and services and help stabilise the economy amid the trade war with
    the United States. The National Development and Reform Commission, the government’s
    powerful planning agency, last month announced that it had organised a special forum to
    study increasing salaries for lower-middle, middle- and upper-middle income groups,
    whose average annual individual disposable earnings range from 13,843 yuan to 34,547
    Author: Orange Wang; South China Morning Post (International Edition) – 13 October, 2018.
  12. Explain, using the AD/AS framework and with the aid of a graph, how a trade war with the US
    will impact on China’s GDP. Using the AD/AS graph now explain how the middle class can
    come to the rescue of China’s economy. Using economic terms what are the reasons why the
    middle class may not increase spending as hoped by the Chinese government? [hint: trade war
    will increase prices of Chinese goods in the US] (4 marks). – Word count 350

Sample Solution