## Questions

### Sally and Joe recently graduated from college, both majoring in history.

1. Sally and Joe recently graduated from college, both majoring in history. Joe took a prestigious job as a legal clerk. Sally took a job as a specialist in fighting forest fires. Both received additional training before entering their jobs. Who will likely earn a higher salary and why?
2. Joanne states: “The best way to increase the wages of workers is to increase worker productivity.” Is Joanne correct? Why or why not?
3. Some people inherit money and wealth that they did nothing to earn. Why don’t we tax inheritance at 100 percent?
4. The mythical country of Quitar has just established a policy to give very generous in-kind benefits to the nation’s poor, currently defined as those earning less than \$10,000 a year. Several years later, the poverty rate has not fallen. Why not?
5. Your grandfather tells you that he earned \$.50 per hour at his job when he was a boy in 1929.
a. Given that the CPI was 17.1 in 1929 and 184.0 in 2003, how much would you have to make inn2003 to have the same real hourly wage?

b. You made \$5.50 an hour working during 2003. Were you better off than your grandfather in terms of purchasing power? Explain.

c. Your grandfather also tells you that a soda cost \$.05 in 1929, and you know a soda cost \$.55 in 2003. You decide to use the price of a soda as the price index. How much would the 2003 “soda equivalent” of \$.50 per hour in 1929 be?

1. Nominal gross domestic product for the United States was \$7,661.6 billion in 1996 and \$8,110.9 billion in 1997. The GDP deflator was 109.5 in 1996 and 111.6 in 1997. Given the above data, complete the following questions, show your work: (20 points)
a. What was the 1997 real GDP expressed in 1996 prices?
b. What were the 1996 and 1997 GDPs expressed in base-year prices?
c. What was the percent change in the nominal GDP between 1996 and 1997?
d. What was the percent change in real GDP between 1996 and 1997?
e. What was inflation between 1996 and 1997?
2. A country with a civilian population of 120,000 (all over age 16) has 100,000 employed and 10,000 unemployed persons, of which 5,000 are frictionally unemployed and another 3,000 structurally unemployed. Given the above data, complete the following questions, show your work: (20 points)
a. What is the size of the labor force?
b. What is the actual unemployment rate?
c. What is the labor force participation rate?
d. What is the employment/population ratio?
e. What is the natural rate of unemployment?
f. Is this economy in a recession or a boom? Explain.
3. Virtually all economists and policymakers agree that, within limits, higher employment is better. If this is true, couldn’t the government create more employment by hiring people to dig holes and fill them in again? Is this good economic policy?
4. Inflation isn’t costly just because prices are going up. After all, inflation means salaries andNwages are going up as well. If higher prices are not the problem, discuss two important aspects of nflation that are costly.
5. What is the difference between short-run equilibrium and long-run equilibrium in the goods and services market?

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