University of Illinois at Urbana Champaign Economics Discussion

1. What is the simple equation that gives us a basic understanding of the long-
run potential of an economy? Briefly explain why each matters
2. What are the factors of production in a macro production function and what
role do these factors play in the long-run success of an economy?
3. Looking at the practical core of macroeconomics, what role does spending
play in the economy? Assume there is much fear of a new recession. In light
of this core idea about the short-run economy, what policy might the federal
government implement with regard to taxes and spending to help stop the
economy from falling into recession?
4. Assume that you are discussing macroeconomics with a member of your
family back in London and the issue of the Bank of England comes up. Your
relative thinks the central bank of the UK is unimportant to him because he
cannot bank there and it has no effect on his life over the next year. What
might you tell him to change his mind?
5. The country of Turkey, between 1988 and 2003 had inflation of about 60%
per year, peaking at 125% in the mid-1990s. What was its likely cause?
6. In a few sentences, tell me exactly what the economist’s concept of the
Classical Business Cycle measures and represents?
7. Deciding when the turning points occur in the business cycle could have
profound political effects even if the economic implications are minor.
Speculate in a few sentences on how setting the date of the beginning or end
of a recession could be used for political gain. To avoid this problem in the
US explain who it is that determines the dates of the turning points of the
Classical Business Cycle. What data does this organization use in addition to
GDP to determine these dates?
8. The Classical Cycle contains five different phases. What are those five
phases? Speculate on which of these phases are most important to firms and
policy makers and explain your position.
9. Why is a distinction made between the recovery and the expansion phases if
GDP is rising in both phases?
10. Now let’s consider the other model of the business cycle called the Growth
Cycle. What does the Growth Cycle measure and represent, and thus how is
different from the Classical Cycle? What would we expect to see in the
economy with regard to unemployment, inflationary pressures, and interest
rates if we spent four consecutive quarters in the Growth Recession phase of
the Growth Cycle?
11. Commentators love to take data and then draw conclusions from the data that
may or may not be warranted. Assume that potential GDP for the country of
Atlantis is 4.5%, and that you have only one data point: growth of actual GDP
= 6.5%. Can you make any inferences from this one data point? Why or why
not?

12. The level of potential GDP for the US in the Growth Cycle model was
assumed by most analysts to be 3.5% in the late 1990s and the early 2000s.
Now it is estimated that potential is only 1.8 – 2.0%. List and briefly describe
the possible reasons for decline in potential, and then speculate as to which
of these reasons is the most likely cause.