Question 1 (2 points)

China invests almost 50 percent of its annual production in new capital compared to 15 percent in the United States. Capital per hour of labor in China is about 25 percent of that in the United States. Explain which economy has the higher real GDP per hour of labor, the faster growth rate of labor productivity, and which experiences the more severe diminishing returns.


Question 2 (2 points)

If the velocity of circulation is constant, real GDP is growing at 3 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 7 percent a year, calculate the inflation rate, the growth rate of money, and the growth rate of nominal GDP.


Question 3 (2 points)

Because fluctuations in the world oil price make the U.S. short-run macroeconomic equilibrium fluctuate, someone suggests that the government should vary the tax rate on oil, lowering the tax when the world oil price rises and in- creasing the tax when the world oil price falls, to stabilize the oil price in the U.S. market. How would such an action influence aggregate demand?


Question 4 (2 points)

Describe the supply-side effects of a fiscal stimulus and explain how a tax cut will influence potential GDP.


Question 5 (2 points)

The Congressional Budget Office (CBO) says the national debt is on an up- ward path and will hit 122 percent of GDP in 2040. Explain why the national debt does not measure the federal government’s true indebtedness. How does the nation’s fiscal imbalance provide a more accurate account of government’s debt?


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