Question 1

a)
GDP deflator
= Nominal GDP/Real GDP x 100
= ($500m / $500/) x 100
= 100

b)
Real GDP
= Nominal GDP/GDP deflator x 100
= ($550 / 110) x 100
= $500m

c)
Nominal GDP
= (Real GDP x GDP deflator) /100
= ($600m x 120) / 100
= $720m

Question 2
a)
- Higher oil prices will make raw materials and energy more expensive for
business, and can push up costs of production. Producers would then be tempted
to raise the prices for their goods so as to recoup the high production costs

- It can also push up consumer prices more directly by feeding through via higher
prices at the gas pump or petrol stations

- Both the above scenarios would lead to higher inflation

b)
Stagflation is a combination of low/stagnant economic growth accompanied by high
inflation

Usually, governments would fight inflation by targeting to reduce overall demand in

the economy (perhaps via higher interest rates), which would then lower real GDP
growth.

However, if there is stagflation, then targeting lower real GDP growth to control
inflation would just make the already low GDP growth even worst.
Question 3
Disagree.
- Economic recession lead to cyclical unemployment rather then structural
unemployment.
 i.e. it arises from fluctuations in the business cycle, rising during recessions
 it is cause by lack of aggregate demand for goods and services which lead to
companies closing production capacities and laying off workers
 Economy is considered to be in full employment when there is no cyclical
unemployment.

- Structural unemployment is due to

 Changes in technology or international competition which changes the skills
needed to perform jobs or change the location of jobs
 Exists even when they are unfilled job vacancies due to mismatch in skills of
the unemployed and those skills required by employers

Question 4
4.1) c
4.2) a
4.3) b
4.4) c
4.5) e
4.6) c
4.7) b