Problems

1. Calculating Growth Rates Data:

Year Real Per Capita GNP

1950 $11,745
1960 $13,951
1970 $18,561
1980 $22,784
1990 $28,598
1995 $30,525
1996 $31,396
1997 $32,520
1998 $33,544
1999 $34,367
2000 $35,265
2001 $35,165
2002 $35,368
2003 $35,895
2004 $36,939
2005 $37,773

(a) Actual Percentage Growth Rates, 19962005.

Year Real Per Capita GNP % Gr owth

1995 $30,525
1996 $31,396 2.85
1997 $32,520 3.58
1998 $33,544 3.15
1999 $34,367 2.45
2000 $35,265 2.61
2001 $35,165 0.28
2002 $35,368 0.58
2003 $35,895 1.49
2004 $36,939 2.91
2005 $37,773 2.26

(b) Approximate Percentage Growth Rates, 19962005.

Year Real Per Capita GNP % Gr owth

1995 $30,525
1996 $31,396 2.81
 1997 $32,520 3.52
1998 $33,544 3.10
1999 $34,367 2.42
2000 $35,265 2.58
2001 $35,165 0.28
2002 $35,368 0.58
2003 $35,895 1.48
2004 $36,939 2.87
2005 $37,773 2.23

The approximation is extremely close. The approximation works well for small
percentage changes.

(c) Actual Percentage Growth Rates for Decades, 19502000.

Year Real Per Capita GNP % Gr owth

1950 $11,745
1960 $13,951 18.78
1970 $18,561 33.04
1980 $22,784 22.75
1990 $28,598 25.52
2000 $35,265 23.31

Approximate Percentage Growth Rates.

Year Real Per Capita GNP % Gr owth

1950 $11,745
1960 $13,951 17.21
1970 $18,561 28.55
1980 $22,784 20.50
1990 $28,598 22.73
2000 $35,265 20.96

The approximation is still relatively close, but the approximation errors are larger
because the growth rates are larger. Note that the approximation formula actually
calculates the continuously compounded growth rate.

(d) Growth is fastest in the 1960s. Growth is slowest in the 1950s.

2. Some obvious possibilities include Federal Reserve open market purchases to keep the
money supply from shrinking, instituting bank reforms before the Depression started,
avoiding high tariff rates, etc.

3. Newtons model of falling bodies.

 Ignores air resistance.
Works well for most dense objects, doesnt work well for feathers.
Diagrams of plays in football and basketball.
Ignores the characteristics of individual players, and opponent reactions.
Works well for evenly matched teams.
Scale models of new aircraft designs.
Ignores working engines and interior contents.
Wind tunnel testing approximates aerodynamics of actual aircraft.

4. Income taxes are collected as a percentage of income. Sales taxes are collected as a
percentage of sales. Collections therefore fall if there is a reduction in the level of
economic activity.

5. Taxes as a percentage of GDP rose, and at the same time, spending as a percentage of
GDP fell.

6. In the early 1980s, inflation and money growth were moving in the opposite directions.
Also, since the mid-1980s, fluctuations in the money growth rate occur in the absence of
fluctuations in the rate of inflation. However, the relationship between money growth
and inflation is consistently confirmed over longer time spans. The period of time from
the late 1960s through the early 1980s was characterized by higher inflation and higher
money growth relative to the periods before and after.

7. As one possibility, fundamental changes in the supply and demand for lending may
explain changes in the real rate of interest. Alternatively, the mid-1970s was a period of
rising inflation. Borrowers willingness to pay interest depends on their expectations of
future inflation. If higher inflation was expected to be temporary, the low observed real
interest rates of the period would be consistent with somewhat higher expected real
interest rates.
8. Throughout the 1990s, imports rose dramatically. Although exports also increased,
exports grew less rapidly than imports.

9. At the end of the 1960s the work force was relatively old, and older workers are
generally unemployed less than younger workers. This period predates the entrance of
the baby boom generation. When a large number of young workers enter the labor force,
the average age of the workforce declines, and unemployment may be expected to rise.
The end of the 1960s also coincided with the peak years of the Vietnam War. Many
young men who might otherwise have been unemployed were drafted into the armed
forces.