Measuring the Economy & Public Policy — Problem set, Grade 12
5 focused units, followed by an evidence workshop, chapter review, and chapter quiz.
Review the key ideas
GDP, Real Output & the Limits of Economic Measures
The expenditure approach organizes GDP as consumption, investment, government consumption and investment, and exports minus imports. Economic investment here includes produced capital and inventories, not every purchase of an existing financial asset. Imports are removed because some foreign production is already included in domestic spending categories; the subtraction is an accounting adjustment, not proof that imports automatically harm an economy.
Money, Bank Balance Sheets & the Federal Reserve
Banks have assets, liabilities, and equity. A deposit is a liability of the bank to the depositor; a loan is an asset of the bank and an obligation of the borrower. Lending can create a matching deposit, but banks face credit risk, capital, liquidity, profitability, demand, and governing constraints. They cannot create unlimited risk-free purchasing power simply by typing a balance.
Fiscal & Monetary Policy: Channels, Timing & Tradeoffs
A deficit is spending exceeding revenue over a defined period; debt is an accumulated stock of obligations at a time. A smaller deficit can coexist with increasing debt. Borrowing, repayment, interest, economic conditions, and accounting definitions matter. A household budget analogy can illustrate a distinction without making national institutions identical to a family.
Business Cycles, Employment & Inflation
The unemployment rate uses the labor force as its denominator. Official classification distinguishes employed people, unemployed people meeting the relevant work-availability and search conditions, and people outside the labor force. Receiving unemployment benefits is not the sole basis of the statistic. Participation and underemployment provide other information.
Work, Wages, Productivity & Economic Distribution
Labor productivity measures output relative to labor input, commonly hours in a defined measure. Total output can rise through more hours, greater productivity, or both. Technology, equipment, organization, skills, and other inputs can affect the rate. A productivity change does not automatically produce an identical pay change for every worker.
Problem 1
Answer and explanation
GDP is 180 units and per-person GDP is two units. Imports are removed to avoid including foreign production in domestic output. Neither the subtraction nor the average establishes household income, equal distribution, or overall well-being. The supplied model needs other indicators for those questions and does not identify an actual national economy.
Apply the expenditure identity.
Divide by population.
Distinguish accounting from welfare and distribution.
Response criteria
- Explain the relevant institution or economic concept accurately; show correct calculations where needed.
- Connect supplied evidence and stated assumptions to an explained conclusion.
- Compare feasible options and their effects on different people without stereotypes.
- Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.
Problem 2
Answer and explanation
Its contribution is already embodied in the final value. Adding it again double counts production. Count the final product or consistent value added along the chain under the specified accounting framework.
Problem 3
Answer and explanation
The bank holds a $1,000 loan asset and owes a $1,000 deposit liability. The borrower holds the deposit asset and owes the loan obligation. The entry illustrates creation of a deposit with credit, not $1,000 of free net wealth or proof of unlimited bank lending. Later payments, transfers, risk, capital, and liquidity conditions require additional entries and institutional context.
Record the bank’s loan asset and deposit liability.
Record the borrower’s deposit asset and debt.
Distinguish capacity from net wealth.
Response criteria
- Explain the relevant institution or economic concept accurately; show correct calculations where needed.
- Connect supplied evidence and stated assumptions to an explained conclusion.
- Compare feasible options and their effects on different people without stereotypes.
- Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.
Problem 4
Answer and explanation
Wealth includes relevant assets and liabilities at a time. A deposit is one asset to its holder, while debts and other holdings remain outside that balance. Income is another measure, a flow over a period.
Problem 5
Answer and explanation
Debt reaches 120 after the first year and 130 after the second. The deficit halves from 20 to 10, but debt still increases. The claim confuses a smaller positive flow with a falling stock. Real accounts can include interest and other adjustments; those are excluded here and should not be silently invented.
Add each positive deficit to the stock.
Distinguish the rate of addition from the level.
State model limits.
Response criteria
- Explain the relevant institution or economic concept accurately; show correct calculations where needed.
- Connect supplied evidence and stated assumptions to an explained conclusion.
- Compare feasible options and their effects on different people without stereotypes.
- Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.
Problem 6
Answer and explanation
They operate through different institutions and mechanisms. Public purchases directly finance activity under fiscal authority, while monetary tools influence financial conditions and decisions. Similar intended direction does not make the procedures or effects identical.
Problem 7
Answer and explanation
Unemployment is ten percent of the 100-person labor force. Inflation is five percent over the stated year. Neither measure uses the entire 140-person population as its denominator, and six index points are not six percent. The measures do not reveal every household’s work needs or exact purchase-price change; participation and distributional evidence would add context.
Use the 100-person labor force.
Divide index change by 120.
Keep classifications and household experience separate.
Response criteria
- Explain the relevant institution or economic concept accurately; show correct calculations where needed.
- Connect supplied evidence and stated assumptions to an explained conclusion.
- Compare feasible options and their effects on different people without stereotypes.
- Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.
Problem 8
Answer and explanation
The aggregate combines different sectors and places. Growth elsewhere or productivity changes can offset local losses. Use regional and distributional evidence instead of assigning the national direction to every household.
Problem 9
Answer and explanation
Mean income is 20 and median income is 10. The values show unequal incomes, while wealth cannot be determined without assets and liabilities at a defined time. The claim confuses an average flow with equal individual stocks. More definitions and records would be needed to compare purchasing power or household circumstances.
Sum and divide by five.
Identify the middle ordered value.
Separate income from wealth.
Response criteria
- Explain the relevant institution or economic concept accurately; show correct calculations where needed.
- Connect supplied evidence and stated assumptions to an explained conclusion.
- Compare feasible options and their effects on different people without stereotypes.
- Identify a limitation, tradeoff, uncertainty, or condition that qualifies the conclusion.
Problem 10
Answer and explanation
Hours can differ. Multiply the rate by the relevant hours and period, then compare other conditions. The supplied offers yield $200 and $300 respectively, so rate alone cannot rank total income.