Compute equilibrium level of income and saving.

Economists use many types of data to measure the performance of an economy. Three macroeconomic variables are especially important: real gross domestic product (GDP), the inflation rate, and the unemployment rate. Real GDP measures the total income of everyone in the economy (adjusted for the level of prices). The inflation rate measures how fast prices are rising. The unemployment rate measures the fraction of the labor force that is out of work. Macroeconomists study how these variables are determined, why they change over time, and how they interact with one another.

The real GDP in the USA: – two aspects of real GDP are noteworthy. First, real GDP grows over time. Real GDP per person today is about eight times higher than it was in 1900. This growth in average income allows us to enjoy a much higher standard of living than our great grandparents did. Second, although real GDP rises in most years, this growth is not steady. There are repeated periods during which real GDP falls, the most dramatic instance being the early 1930s. Such periods are called recessions if they are mild and depressions if they are more severe. Not surprisingly, periods of declining income are associated with substantial economic hardship.

Inflation in the USA: – inflation varies substantially over time. In the first half of the twentieth century, the inflation rate averaged only slightly above zero. Periods of falling prices, called deflation, were almost as common as periods of rising prices. By contrast, inflation has been the norm during the past half-century. Inflation became most severe during the late 1970s when prices rose at a rate of almost 10 percent per year. In recent years, the inflation rate has been about 2 or 3 percent per year, indicating that prices have been fairly stable.

The U.S. unemployment rate: – there is always some unemployment in the economy. In addition, although the unemployment rate has no long-term trend, it varies substantially from year to year. Recessions and depressions are associated with unusually high unemployment. The highest rates of unemployment were reached during the Great Depression of the 1930s. The worst economic downturn since the Great Depression occurred in the aftermath of the financial crisis of 2008–2009 when unemployment rose substantially. These three pieces of evidence offer a glimpse at the history of the U.S. economy.

Questions:

a)    What is real GDP? How is it computed?

b)    What is an economic recession? Write its characteristics.

c)    Differentiate between inflation and deflation. Explain the role of the monetary authority to maintain price stability in the country.

d)    Define unemployment. What are the causes of unemployment?

e)    Overview of the US economy from 1900 AD to the date.