APPLIED INTERNATIONAL MACROECONOMICS
Spring 2015
Practice Problems 1
Due Thursday January 17, at the beginning of class

1. Please attach some news item related to the economic situation in your country of origin.
Discuss briefly (10 sentences or less) the state of real economic growth, unemployment, and inflation in the country where you grew up. How is your own family faring? What has your government done recently to improve things?
Note: These questions are intended to make sure you are informed of current events and to get you thinking. You will be graded on whether you take the questions seriously and whether you have informed yourself.
2. Levels versus growth rates
Sometimes otherwise-educated people don’t recognize the distinction between the level of something and its growth rate. For example, they confuse something big or high with something that is rising. But these things often do not come together: Google in its first years was small but fast-growing. Yahoo is large but shrinking. Change = Growth

You can think of this in a 2-by-2: Level

a. The charts below show the unemployment rates for Greece since 1999 (calculated as unemployed people relative to people actively working or looking for work). For all 4 quadrants identify a period that fits.

b. The table below shows data for Austria’s prices since 1948. Columns 2 & 3 are based on the data in Column 1. ii. Why are Columns 2 & 3 empty in 1948? iii. Why is Column 4 empty in 1948 and 1952? iv. Explain how the price level can rise while inflation is falling.

Level
Change / Growth
Change in the Change

Austria’s Price Index
Change: “Austria’s prices …”
Average Annual Inflation
(% change in price level)
( Infl. > 0 means prices rose)
Change in Inflation: “Austria’s inflation …”
1948
8.4

1952
17.0
Rose
(17.0 > 8.4)
19.3%*

1953
16.7
Fell
(16.7 < 17.0)
-1.8%
Fell
(-1.8 < 19.3)
1980
50.9
Rose
(50.9 > 16.7)
4.2%
Rose
(4.2 < -1.8)
2011
113.1
Rose
(113.1 > 50.9)
2.6%
Fell
(2.6 < 4.2)
* Where does that number come from? Geometric average growth, which will be explained in a coming problem set: 169.0% = 1.69 = (17.0/8.4)^(1/4)-1.

c. In the table below, which already shows Japan’s deflation (falling prices) since 1998, you will construct an optimistic scenario for Japan’s prices going forward. Fill in the table by inventing some price index levels and the associated inflation rates consistent with a forecast that Japan’s inflation was 2% in 2012 and declines to 1% in 2015.

Level
Change / Growth
Change in the change

Japan’s Price Index
Change in price: “Japan’s prices (rose? fell?)”
Average annual inflation
(% change in price level)