Question

14. Suppose the economy moves from point A in year 1 to point B in year 2 120 119- LRAS LRAS SRAS, 118 a. The growth rate of potential GDP from year 1 to year 2 is %. (Enter your response rounded to two decimal places) SRASZ b. The unemployment rate in year 2 is (1) in year 1 117 116- 115- 114 © 114...... 113 112 112_***** ...B Price level(GDP deflator 2009=100) A c. The inflation rate in year 2 is %. (Enter your response rounded to two decimal places.) 111 110- 109 108 AD2 d. The growth rate of real GDP from year 1 to year 2 is %. (Enter your response rounded to two decimal places.) 107 AD 106- 105 17.4 17.6 17.8 Real GDP(trillions of 2009 dollars) (1) O smaller than the same as O greater than 10 Iring the information below.compute the M1 money supply

Answer 1

(a)

Potential GDP in Year 1 = $17.4 trillion

Potential GDP in Year 2 = $17.8 trillion

Calculate the growth rate of potential GDP from Year 1 to Year 2 -

Growth rate = [(Potential GDP in Year 2 - Potential GDP in Year 1)/Potential GDP in Year 1] * 100

Growth rate = [($17.8 trillion - $17.4 trillion)/$17.4 trillion] * 100

Growth rate = 2.30%

Thus,

The growth rate of potential GDP from year 1 to year 2 is 2.30%.

(b)

The real GDP in Year 1 is equal to the potential GDP in Year 1. So, the unemployment rate in Year 1 was equal to the natural rate of unemployment.

In Year 2, the real GDP is less than the potential GDP. So, the unemployment rate in Year 2 is greater than the natural rate of unemployemnt.

So,

The unemployment rate in year 2 is greater than in year 1.

(c)

Price level in Year 1 = 112

Price level in Year 2 = 114

Calculate the inflation rate -

Inflation rate = [(Price level in Year 2 - Price level in Year 1)/Price level in Year 1] * 100

Inflation rate = [(114 - 112)/112] * 100

Inflation rate = 1.78%.

Thus,

The inflation rate in year 2 is 1.78%.

(d)

Real GDP in Year 1 = $17.4 trillion

Real GDP in Year 2 = $17.6 trillion

Calculate the growth rate of real GDP from Year 1 to Year 2 -

Growth rate = [(Real GDP in Year 2 - Real GDP in Year 1)/Real GDP in Year 1] * 100

Growth rate = [($17.6 trillion - $17.4 trillion)/$17.4 trillion] * 100

Growth rate = 1.15%

Thus,

The growth rate of real GDP from year 1 to year 2 is 1.15%