1. You read the following information about the economy:
Real GDP up three percent from a year ago.
Unemployment rate of 6.1 percent.
Consumer Price Index up six percent from a year ago.
Index of Leading Indicators up for the last six months.
Prime interest rate of ten percent, up from seven percent a year ago.
a. Explain what each of these economic indicators measures and what the significance of the current data is for the economy.
b. These indicators should paint a picture of the entire economy. Describe that picture.
2. The following headline appeared in 1986: "Inflation Rate at 1.1%; Lowest Rate in 2 Decades."
a. What is meant by inflation ?
b. How did the statisticians arrive at 1.1 percent? What measure did they probably use?
c. What does this headline imply about inflation during the 20 years before 1986?
3. True, false, or uncertain, and why?
"If you won a million dollars in the lottery, you wouldn't have the economic problem of scarcity."
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1. a.
- Real GDP (Gross Domestic Product) measures the total value of goods and services produced in a country over a specific time period. An increase of three percent from a year ago indicates economic growth.
- Unemployment rate measures the percentage of people in the labor force who are actively seeking employment but unable to find jobs. A rate of 6.1 percent suggests some level of underutilization of labor resources.
- Consumer Price Index (CPI) measures the average change in prices of a basket of goods and services commonly purchased by consumers. An increase of six percent from a year ago indicates inflationary pressure and reduced purchasing power.
- Index of Leading Indicators is a composite index that predicts changes in the economy's overall direction. If it is up for the last six months, it suggests a positive outlook and potential economic expansion.
- Prime interest rate represents the rate at which banks lend to their most creditworthy customers. An increase from seven percent to ten percent in a year indicates tightening monetary policy and increased borrowing costs.
b. Based on the given information, the economy appears to be experiencing growth and expansion, as evidenced by the increase in real GDP and positive trends in the Index of Leading Indicators. However, the rising unemployment rate suggests some challenges in the labor market. Additionally, the high consumer price inflation and higher prime interest rate indicate potential risks and pressures on consumers' purchasing power and borrowing costs.
2. a. Inflation refers to the sustained increase in the overall level of prices for goods and services in an economy over a period of time. It reflects a decrease in the purchasing power of money.
b. The statisticians likely arrived at the 1.1 percent inflation rate by using the Consumer Price Index (CPI) or a similar measure. The CPI measures the average change in prices of a basket of goods and services over time. By comparing the prices in 1986 with previous years, they can calculate the inflation rate.
c. The headline implies that the inflation rate in 1986 was the lowest in the past 20 years. It suggests that inflation rates were higher in the previous two decades compared to 1986. However, without further information, we cannot determine the exact inflation rates over that period.
3. False. Even if you won a million dollars in the lottery, you would still face the economic problem of scarcity. Scarcity refers to limited resources relative to unlimited wants and needs. Winning a million dollars may increase your purchasing power, but it does not eliminate the constraint of scarcity. You would still need to make choices and allocate resources wisely to fulfill your desires and needs, given the finite nature of resources available to society as a whole.