Question 1: First, a simple practice calculations in Real and Nominal Growth and the Inflation Rate since this kind calculation will appear on your midterm.

(a) What is the real GDP growth rate from 2005 to 2006?

(b) What is the Nominal GDP growth rate from 2005 to 2006?

(c) What is the inflation rate from 2005 to 2006? (It will be the difference between nominal growth and real growth.)

Question 2: Interpreting GDP growth

Recall that as you approach the peak of a business cycle, real growth is positive but slowing down.Prices do not fall (negative inflation rate) until the economy is into its downturn. Where does the peak of the cycle occur in this quarterly data? In other words, what is the last quarter before the inflation rate becomes negative?

Question 3: Interpreting Business Expectations

(a) Look at the Inventory/Sales picture, Graph Set #1, showing the I/S ratio from 2002 to 2011. If a build-up of inventories acquired at high marginal cost is a first sign of impending recession, when should our economy have sounded the alarm that trouble was coming? When do inventories start to climb relative to sales?

Question 4: Unemployment and Labor Force Participation

(a) Look at the Unemployment rate in 2005 and 2006 on Data Set #1. If rising unemployment is a first sign on impending recession, when should our economy have sounded the alarm that trouble was coming? When does the unemployment rate start to climb?

(b) Look at the growth rate in the Civilian Labor Force and the Labor Force Participation Rate from March 2007 to December 2009, Graph Set #1. Is there a 'discouraged worker' phenomenon? In other words, is there a drop in the unemployment rate even though other indicators such as growth are showing that we are still in a recession?

Question 5: Profiling the Business Cycle

According to Wesley Claire Mitchell's profile of the business cycle, events should occur in the following order:

1. Real GDP growth slows down but remains positive (it is lower than the previous quarter but not negative)

2. Real GDP growth becomes negative

3. Inventory/Sales ratio climbs due to falling sales against acquired inventory

4. Unemployment rises

5. Prices fall (deflation, i.e. a negative inflation rate)

6. Inventory/Sales ratio flattens out as inventories are eliminated

7. Prices flatten out (zero or low positive rate of inflation)

8. Real GDP growth flattens out (zero or low positive rate of growth)

From the information in Data Set #1, do you agree that the crisis evolved as Mitchell describes in his profile? In no more than one or two sentences, how did this real crisis differ from Mitchell's profile?