macro econ (quizzes ch 5-6)

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2010, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2015, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2015 on Planet Econ equals:

1.25 First, note that in the computation of the CPI, the basket of goods and services is fixed - so the quantities remain the same as in the base year. The market basket cost in 2010 was (10*$25) + (25* $2) = $300. The same market basket?scost in 2015 was (10*$30) + (25*$3) = $375, so the consumer price index is 1.25.

The CPI in 1974 equaled 0.49. The CPI in 1975 equaled 0.54. The rate of inflation between 1974 and 1975 was ______ percent.

10.2 The percentage change in CPI is calculated as: (current price index - historic prices) / historic price index. In this case:(0.54 - 0.49) / 0.49 = 0.102, or 10.2 percent.

The price level is:

a measure of overall prices at a particular point in time. The price level is a measure of overall prices at a particular point in time.

The nominal interest rate is the:

annual percentage increase in the dollar value of a financial asset. The nominal interest rate is the annual percentage increase in the dollar value of a financial asset.

The CPI is a measure of the:

average level of prices relative to prices in the base year. The consumer price index compares the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year.

If the Luddites had succeeded in ______ the introduction of labor-saving machinery, economic growth in Great Britain may have been ______.

blocking; slower Labor-saving machinery is a valuable economic innovation. Blocking it, as the Luddites wanted, would have slowed economic development.

The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the:

consumer price index. The consumer price index compares the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year.

An increase in unemployment insurance benefits will:

decrease job search efforts of unemployed workers. If unemployment insurance benefits go up, as they often do under political pressure, unemployed workers will be more selective in the job they accept. This decreases job search efforts.

Since the year2000, the share of the populationholding or actively looking forjobs have _______ in the United States:

decreased. Employment grew rapidly in the post-1970?s, but peaked in 2000. Since then the share of the population holding oractively looking for jobs have steadily decreased.

If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 1995 and 2005, real household income:

decreased. Household real income fell because real income was $35,000 ($35,000 / 1.00) in 1995 and only $24,242 ($40,000 / 1.65) in 2005.

If the price of TVs produced by XYZ-TV Company falls from $1,000 to $750 per TV set, then the:

demand for labor by the XYZ-TV Company decreases. When prices fall for the goods and services produced by workers, the demand for labor falls too.

Two groups of workers not counted as unemployed in the official unemployment statistics are ______ workers.

discouraged and involuntary part-time Official statistics count discouraged workers as being out-of-the labor force; involuntary part-time workers are counted as employed.

The real rate of return on holding cash ______ inflation is correctly anticipated.

does not depend on whether Because the nominal rate of return on holding cash is always zero regardless of the rate of inflation, the real rate of return does not depend on whether or not inflation is correctly anticipated. Only the actual inflation rate will impact the real rate of return on holding cash.

To obtain a given real rate of return, lenders must charge a ______ nominal interest rate in the face of increasing inflation.

higher This is the result of the "Fisher effect" which says that nominal interest rates in inflation rates move together.

In the twentieth century, average real wages have risen substantially:

in industrial countries including the United States. The United States and most industrial countries around the world have seen substantial increases in average real wages over the past 100 years.

Macroland produces dishes and glassware. Before trade, a set of dishes sells for $100 and a set of glasses sells for $50. When Macroland opens to trade, foreign demand for domestically produced china is strong, raising the price of a set of dishes to $125. But foreign competition reduces the demand for domestically produced glasses, so they now sell for $25 a set. Assuming workers cannot move between industries, the wages of workers producing dishes will ______ and the wages of workers producing glasses will ____.

increase; decrease Workers in the dishes industry see increasing wages because the strong demand for dishes increases the demand for workers. Conversely, the glasses industry sees decreasing wages due to reduced demand for glasses and therefore less demand for workers.

Holding other factors constant, if the education and skills of the typical worker in an economy increases, then the real wages of workers will ______ and employment of workers will _____.

increase; increase If worker quality increases, then more workers are desired because they are more productive. Demand for labor will shift right, increasing wages and employment.

As the real wage decreases, the quantity of labor demanded ______ and the quantity of labor supplied _______.

increases; decreases As real wages decrease, firms desire more employees. Conversely, as real wages decrease, fewer people find it worthwhile to work or workers desire fewer hours.

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:

indexed Indexing keeps wages and prices increasing at the same rate as inflation.

To prevent people paying a higher percentage of their income in taxes even when their real incomes have not changed, Congress:

indexed the income tax brackets to the CPI. Congress indexed income taxes in the 1980?s to prevent "bracket creep."

Two methods used to adjust nominal values for inflation are:

indexing and deflating. Indexing increases nominal amounts by the rate of inflation each year to maintain a certain real value, while deflating is the process of obtaining real values from nominal ones.

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

indexing. Indexing is the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.

A change in the average price level is called _____, while a change in the price of a specific good in comparison with other goods and services is called _______.

inflation; a change in a relative price These are the definitions of "inflation" and "changes in relative prices."

Firms will hire additional workers as long as the wage:

is less than the value of the marginal product of labor. This is an application of the marginal benefit-marginal cost rule.

Labor unions contribute to structural unemployment by:

keeping wages above the market-clearing level. Labor unions artificially restrict the supply of workers in an effort to keep wages above the market-clearing level.

A measurement in terms of current dollar value is called a(n) ______ quantity.

nominal A nominal value is measured in terms of current dollar value.

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ______ the rate of inflation.

overstate It?s hard to correctly factor in improvement to the quality of goods and services. To the extent that quality improvements are not fully accounted for, the CPI overstates the "true" inflation rate.

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ______ inflation as a result of ______ bias.

overstate; substitution When prices rise sharply for a product, consumers shift away from it. Since the CPI uses a fixed basket of goods and services, this switching between substitute products is often missed, resulting in "substitution bias" and overstatement of the CPI.

The nominal return on an inflation-protected bond equals a fixed real return:

plus the actual rate of inflation. The attractive feature of inflation-protected bonds is they add an inflation premium to a known real return.

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a:

price index. This is the definition of "price index."

Deflation is a situation in which the:

prices of most goods and services are falling over time. Deflation occurs when the average price level falls, and this is usually a situation where most goods and services see falling prices.

The nominal interest rate equals the:

real interest rate plus the inflation rate. The real interest rate = the nominal interest rate - the inflation rate. So the equation for nominal interest rate is: nominal interest rate = real interest rate + inflation rate.

The "true" costs of inflation are:

reduced economic growth and efficiency. The "true" costs of inflation include reduced efficiency of the market system as inflation makes it difficult to distinguish relative price changes from changes in the general level of prices.

When unemployment insurance benefits exceed the wages a worker could earn when employed, the worker will have an incentive to:

remain unemployed longer than otherwise. The more generous are unemployment benefits, the less hurried job seekers are. This lengthens periods of unemployment.

Technological change that affects the marginal products of high-skilled and low-skilled workers differently is called ______ technological change.

skill-biased Technological change that affects the marginal products of high-skilled and low-skilled workers differently is called skill-biased technological change.

The slowdown in the growth of real wages in the United States since 1973 is consistent with a concurrent:

slowdown in productivity gains. A slowdown in productivity gains will reduce (or even reverse) the growth in the demand for labor. Slower increases in the demand for labor will reduce the growth in real wages and a decrease in the demand for labor will reduce real wages as demand shifts left.

Larger increases in the demand for labor than in the supply of labor explain:

the substantial increase in real wages. When both labor supply and labor demand rise at the same time, it is certain that quantity will increase but uncertain whether wages will rise or fall. If wages rise, we know the demand shift was larger than the supply shift.

If the consumer price index increased from 1.52 to 1.65, then it must be the case that ______ relative to prices in the base year.

the weighted average level of prices rose It is typical for some prices to rise and some to fall in the same year, but the consumer price index measures the average price of the entire basket, weighted by the quantity of each item.

A person 16 years or older who does not work, but is actively looking for work, is officially classified as:

unemployed. This is the definition of "unemployed."

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?

11.02 To find the indexed wage in year two, the wage that would maintain the purchasing power from the first year, take the nominal wage in year one and multiply it by the CPI:, $10*1.07 = $10.70. Then, since the contract calls for an increase in the real wage by 3%, the indexed wage must be increased by 3 percent: $10.70*1.03 = $11.02.

The towns of Jekyll and Hyde each have a labor force of 2,000 people. In Jekyll, 500 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Hyde, every member of the labor force was unemployed for three months and was employed for nine months. The average duration of unemployment spells over the year was ______ months in Jekyll and ______ months in Hyde.

12; 3 An unemployment spell is the average duration of unemployment per worker. In Jekyll, workers were out of work for 12 months, on average, whereas in Hyde it averaged 3 months.

In a country with 200 million people aged 16 years and older, 120 million are in the labor force, and 114 million are employed, what is the participation rate?

60 percent To find the participation rate, divide the labor force by the number of people 16 and older, i.e., 120,000,000/200,000,000 = 0.60, or 60 percent.

Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the labor force in this economy?

800 million Since the participation rate is 80 percent, 20 percent are not participating in the labor market. So the 200 million people are not participating represent 20 percent of the working-age population, or (0.20*x) = 200,000,000, where x is the working-age population. Then x = 200,000,000/0.20 = 1,000,000,000, or 1 billion. With 200 million of these 1 billion people being outside the labor force, there must be 800 million are in the labor force.

Which of the following is an example of frictional unemployment?

Hector looked for a job for five weeks after finishing college. He turned down several jobs that didn't fit his skills, but now has a job that requires the expertise he gained in college. Hector faces frictional unemployment because it takes him a while to match his skills with those skills desired in the labor market.

Periods of unusually low production in an economy result in ______ unemployment.

cyclical Cyclical unemployment results from a dip in the business cycle.

Health and safety regulations in the labor market:

should be evaluated by comparing their costs to their benefits. There are trade-off when making the workplace safer, so both costs and benefits of new regulations should be considered.

The demand for labor depends on ______ and _______.

the marginal product of labor; the price of output produced When a business hires workers, the business is interested in both the productivity of the worker and the price of the output the worker produces.