What is the simple equation that gives us a basic understanding

1. What is the simple equation that gives us a basic understanding of the long- run potential of an economy? Briefly explain why each matters

2. What are the factors of production in a macro production function and what role do these factors play in the long-run success of an economy?

3. Looking at the practical core of macroeconomics, what role does spending play in the economy? Assume there is much fear of a new recession. In light of this core idea about the short-run economy, what policy might the federal government implement with regard to taxes and spending to help stop the economy from falling into recession?

4. Assume that you are discussing macroeconomics with a member of your family back in London and the issue of the Bank of England comes up. Your relative thinks the central bank of the UK is unimportant to him because he cannot bank there and it has no effect on his life over the next year. What might you tell him to change his mind?

5. The country of Turkey, between 1988 and 2003 had inflation of about 60% per year, peaking at 125% in the mid-1990s. What was its likely cause?

6. In a few sentences, tell me exactly what the economist’s concept of the Classical Business Cycle measures and represents?

7. Deciding when the turning points occur in the business cycle could have profound political effects even if the economic implications are minor.

Speculate in a few sentences on how setting the date of the beginning or end of a recession could be used for political gain. To avoid this problem in the US explain who it is that determines the dates of the turning points of the Classical Business Cycle. What data does this organization use in addition to GDP to determine these dates?

8. The Classical Cycle contains five different phases. What are those five phases? Speculate on which of these phases are most important to firms and policy makers and explain your position.

9. Why is a distinction made between the recovery and the expansion phases if GDP is rising in both phases?

10. Now let’s consider the other model of the business cycle called the Growth Cycle. What does the Growth Cycle measure and represent, and thus how is different from the Classical Cycle? What would we expect to see in the economy with regard to unemployment, inflationary pressures, and interest rates if we spent four consecutive quarters in the Growth Recession phase of the Growth Cycle?

11. Commentators love to take data and then draw conclusions from the data that may or may not be warranted. Assume that potential GDP for the country of Atlantis is 4.5%, and that you have only one data point: growth of actual GDP = 6.5%. Can you make any inferences from this one data point? Why or why not?

12. The level of potential GDP for the US in the Growth Cycle model was assumed by most analysts to be 3.5% in the late 1990s and the early 2000s.

Now it is estimated that potential is only 1.8 - 2.0%. List and briefly describe the possible reasons for decline in potential, and then speculate as to which of these reasons is the most likely cause.