1. a. True. b. True. c. True. d. Uncertain. It is true that the growth of output per worker increased in the mid-1990s, but economists disagree about the degree to which this increase in growth will persist. The growth of output per worker fluctuates a great deal from year to year, which makes it difficult to draw inferences from the data. e. True. f. False. The European “unemployment miracle” refers to the low rate of unemployment in Europe in the 1960s. g. False. The slump was triggered by the collapse of the Japanese stock market. h. False.
2. a. 1960-2000 1994-2000 2001-2004
US 3.2% 3.9% 2.45% EU 3.1% 2.3% 2.3% Japan 4.7% 1.4% 2.3%
Growth rates in all three regions are lower in the most recent period than over the period 1960-2004. However, compared to the period 1994-2000, U.S. growth is lower in the most recent period, Japanese growth is higher, and European growth is unchanged.
b. Answers will vary.
3. a. Low unemployment might lead to an increase in inflation.
b. Tax cuts may have been useful to stimulate the U.S. economy during the 2001 recession. However, the tax cuts were permanent. The recession is over and the deficit remains high.
c. Although labor market rigidities may be important, it is also important to consider that these rigidities may not be excessive, and that high unemployment may arise from flawed macroeconomic policies.
d. Although poor regulation of the financial system may be contributing to the length of Japan's slump, most economists believe that the collapse in Japanese asset prices triggered the economic downturn. Moreover, tightening regulation would likely involve more pain in the short run since some banks and firms would be forced to close.
e. Although the Euro will remove obstacles to free trade between European countries, each country will be forced to give up its own monetary policy.
4. This is a discussion question, so answers will vary. Based on the discussion in the text, there are clear similarities in the policy responses of the U.S. and Japanese governments. Central banks in both countries reduced interest rates, and governments in both countries tried to stimulate the economy with lower taxes. Government spending also increased in both countries; explicitly for economic stimulus in Japan, and as part of foreign and security policy in the United States. As for the differences, the text leaves the implication that Japanese banking system is less efficient than the U.S. banking system, which perhaps allows for easier recovery in the United States. There is also an allusion to the liquidity trap in Japan, since interest rates are zero. However, the mechanics of the liquidity trap are not discussed in detail until Chapter 22.
5. a. 10 years: (1.01)10≈1.10 or 10 % higher; 20 years: 22% higher; 50 years: 64% higher
b. 22%; 49%; 169% higher c. Take output per worker as a measure of the standard of living. 10 years: 1.22/1.1≈1.11, so the standard of living would be about 11% higher; 20 years: 22% higher; 50 years: 64% higher
d. No. Labor productivity growth fluctuates a lot from year to year. The last few years may represent good luck. Some economists believe there has been a lasting change in the U.S. economy that will lead to continued high productivity growth in the future, but we cannot be certain.
6. China overtakes the United States in 2044, or 41 years from 2003.. The problem asks students to find the answer by using a spreadsheet. Algebraically,
11(1.03)t=1.6(1.08)t 11/1.6 = (1.08/1.03)t t = ln(11/1.6)/ln(1.08/1.03) ≈ 40.7 yrs