Macro Exam #2

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college?

-Energy drinks became increasingly popular on college campuses between 2014 and 2016 due to significant improvements in flavor, but this quality change is hard to measure. -As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. -A new mobile device for personal computing became available for purchase.

Why might some firms voluntarily pay workers a wage above the market equilibrium, even in the presence of surplus labor?

-Paying higher wages enhances workers to adopt healthier lifestyles, enhancing their productivity. -Paying higher wages encourages workers to be more productive.

1. Automobile demand has fallen during a recent recession, and Neha has been laid off from her job on the assembly line. 2. Gilberto recently lost his job as a waiter at a local restaurant. A recent increase in the minimum wage keeps local employers from adding more of the low-skill positions for which he qualifies, so he has been unable to find work. He continues to look for a job, but he's considering going back to school for vocational training. 3. Juanita just graduated from college and is looking for a full-time position with an investment banking firm.

1. Cyclical - # of people who loose their jobs when economy isn't doing well 2. Structural -not enough jobs to go around 3. Frictional - Mismatch- due to time

Caveats of CPI:

1. a fixed basket of goods generates an upward bias in prices due to substitution bias 2. introduction of new goods 3. unmeasured changes in the quality of goods

reasons that price indexes such as the CSPI overstate inflation is that

1. they use a fixed basket of goods 2. assume the quality of a good doesn't change from year to year. 3. that they don't account for the benefits of new goods

Ex CSPI in 2015 =

100 X Cost of basket 2015/ Cost of basket in 2014

Labor Force Participation Rate

100 X Number in Labor Force/ Adult population

Computing inflation between 2014 and 2015

100 x CSPI in 2015-CSPI in 2014/ CSPI 2014

Percentage Change In Purchasing Power

100 x New quanity of ____ - Original quanity of __ / Original quanity of ___

Unemployment Rate =

100 x number of unemployed workers / labor force

which year did buyers of six-month Treasury bills receive the highest real return on their investment?

1972, The year with the lowest inflation rate

Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply.

A decrease in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers Answer: GDP deflator, An increase in the price of a Japanese-made car that is popular among U.S. consumers Answer: CPI

Employment ex: Automobile demand has fallen during a recent recession, and Neha has been laid off from her job on the assembly line.

Answer cyclical

Suppose a senator considers introducing a bill to legislate a minimum hourly wage of $7.50. Which of the following statements are true? Check all that apply. -In the absence of price controls, a shortage puts downward pressure on wages until they fall to the equilibrium. -If the minimum wage is set at $7.50, the market will still be able to reach equilibrium. -In this labor market, a minimum wage of $10.50 would be binding. -Binding minimum wages cause cyclical unemployment.

Answer: -If the minimum wage is set at $7.50, the market will still be able to reach equilibrium. -In this labor market, a minimum wage of $10.50 would be binding. Explanation: If the minimum wage is $7.50, employers will not be able to attract enough workers. This causes them to raise the wage until the quantity of labor supplied is equal to the quantity they demand (this occurs at $10). That is, the shortage puts upward pressure on wages and the market is able to reach equilibrium. If the minimum wage is instead set at $10.50, employers will attract more workers than they are willing to hire. Because the minimum wage prevents employers from lowering wages to the equilibrium rate, a minimum wage of $10.50 is considered binding.

Employment ex: Juanita just graduated from college and is looking for a full-time position with an investment banking firm.

Answer: Frictional

Suppose the government wants to reduce this type of unemployment. ( Frictional) Which of the following policies would help achieve this goal? -Improving a widely used job-search website so that it matches workers to job vacancies more effectively -Taxing the price of placing a resume or posting a job opening on a job-search website -Increasing the benefits offered to unemployed workers through the government's unemployment insurance program

Answer: Improving a widely used job-search website so that it matches workers to job vacancies more effectively

Employment ex: Gilberto recently lost his job as a waiter at a local restaurant. A recent increase in the minimum wage keeps local employers from adding more of the low-skill positions for which he qualifies, so he has been unable to find work. He continues to look for a job, but he's considering going back to school for vocational training.

Answer: Structual

Which of the following statements correctly describe discouraged workers? 1. They are employed workers who want to earn higher wages. 2. They have not looked for a job in 4 weeks (or longer), but they would like a job and are available for work. 3. They are full-time workers who would like to work only part-time. 4. They are counted as part of the labor force by the Bureau of Labor Statistics.

Answer: They have not looked for a job in 4 weeks (or longer), but they would like a job and are available for work.

he following graph shows the labor market in a state in the South. The legislature in this state passes strong "right-to-work" laws that make it very difficult for unions to organize workers, so the wage is always equal to the market-clearing value. Except for this difference in legislation, the two states are very similar. The initial position of the graph corresponds to the initial labor market condition in the southern state before the labor union negotiated the new, higher wage for workers in the northern state. -Suppose that after the wage goes up in the northern state, some workers in the northern state lose their jobs and decide to move to the southern state. Which of the following groups are better off as a result of the union action in the northern state? Check all that apply. -Workers who find new jobs in the southern state - Employers in the northern state - The original workers in the southern state -Workers in the northern state employed at the union wage

Answer: Workers in the northern state employed at the union wage

marginally attached workers def

Any jobless person who has not looked for work in the past 4 weeks is not in the labor force according to the Bureau of Labor Statistics (BLS). Some of these jobless people who are not in the labor force indicate that they'd like to have a job and are available for work.

Employed Def:

Anyone in the adult population who worked for pay in the last week, even if unsatisfied with his or her job, is considered employed.

Not in the labor force:

Because Andrew and Darnell are not actively seeking employment, they are not considered part of the labor force. Note that not being in the labor force is different from being unemployed. Once people leave the labor force, they are not counted when calculating the unemployment rate.

Not in the adult population:

Because Beth is under the age of 16, she is not considered part of the adult population

Included in GDP deflator not CPI

Capital goods (if produced domesticaly) GDP deflator uses basket of currently produced goods and services

Discouraged workers def

Discouraged workers are marginally attached workers who give a job-market-related reason for giving up on their job search. Typically, discouraged workers give up on their search because they feel that there are no current opportunities for them in the labor market.

Ex :Suppose the world price of cotton falls substantially. The demand for labor among cotton-producing firms in Texas will decrease Correct . The demand for labor among textile-producing firms in South Carolina, for which cotton is an input, will increase Correct . The temporary unemployment resulting from such sectoral shifts in the economy is best described as frictional Correct unemployment.

Frictional unemployment often results from changes in the demand for labor among firms. When the world price of cotton falls, cotton-producing firms will find it less profitable to produce cotton. As cotton-producing firms decrease production, the demand for labor with which to produce cotton decreases. Job opportunities in Texas contract. For textile-producing firms, the decrease in the world price of cotton decreases production costs. As textile-producing firms increase production, the demand for labor in South Carolina increases. Job opportunities in South Carolina expand. Workers laid off in one sector will take time to find new positions in an expanding sector. These types of sectoral shifts occur continuously in a dynamic economy, so there will always be some level of frictional unemployment.

The knowledge workers receive from training sessions on how to use and repair the printing presses

Human capital per worker Human capital- is the knowledge and skills that workers acquire through training, education, and experience. Human capital is distinct from

Included in CPI not in GDP deflator

Imported consumer goods CPI uses fixed basket

Purchasing power=

Initial Deposit/ Price

The trees that are used to create pulp for the production of paper

Natural Resources per worker Natural resources- are the inputs into the production of goods and services that are provided by nature, such as land, bodies of water, forests, and mineral deposits.

Winnings Adjusting for Inflation=

Nominal Winnings x Current year Index (CPI) / Original Year Index (CPI)

Physical Capital per worker

Physical capital (K)/ Quanity of labor (L)

The presses used to print documents

Physical capital per Worker Physical capital- is the stock of tools, machinery, equipment, and structures that are used to produce goods and services.

A way of organizing workers among the printing presses that speeds up the printing process

Technological Knowledge Technological knowledge- which is society's understanding of how the world works. Human capital measures the resources expended (years of training, education, or experience) transmitting society's technological knowledge to workers.

Unemployed def:

The BLS considers a person to be unemployed if he or she is in the adult population, did not work for pay in the previous week, and has actively looked for work during the preceding 4 weeks

Explanation for 1. A decrease in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers

The decrease in the price of the fishing equipment will show up in the GDP deflator because the deflator reflects the prices of all domestically produced products. The price change will not impact the consumer price index because commercial fishing equipment is not bought by a typical U.S. consumer.

Explanation for 2. An increase in the price of a Japanese-made car that is popular among U.S. consumers

The increase in the price of the Japanese-made car will show up in the U.S. CPI because it reflects the prices of products purchased by typical U.S. consumers. The price change will not affect the GDP deflator because the GDP deflator reflects the prices of domestically produced goods and services.

Real Interest rate =

The nominal interest rate - Inflation rate

Consider the economies of Hermes and Tralfamadore, both of which produce glops of gloop using only tools and workers. Suppose that, during the course of 50 years, the level of physical capital per worker rises by 4 tools per worker in each economy, but the size of each labor force remains the same.

To find the productivity of labor, we divide the total output by the number of workers in the labor force. Thus Productivity = Glops of Gloop / Labor Force.

Labor Productivity =

Total output / Total productive hours

U-4 Measure

U-4= 100 x Unemployed + Discouraged / Labor force + discouraged -adds discouraged workers to the ranks of the unemployed (and, thus, to the labor force):

CPI ( consumer price index)

a measure of the overall cost of the goods and services bought by a typical consumer

Structural unemployment def

arises from a mismatch between the jobs available in some labor markets and the skills of workers. -One cause of structural unemployment is institutional factors such as a minimum wage, which holds wages above the marginal productivity of less skilled workers, limiting their employment opportunities.

Labor force participation rate def

as the fraction of the adult population that is in the labor force—that is, those who are employed or else unemployed and actively searching for work.

Def Unemployment rate

as the fraction of the labor force that is unemployed.

CPI reflects only the prices of all goods and services

bought by consumers

The CPI for this year is calculated by

dividing the cost of a given market basket of goods and services , using this year's prices . by the cost of a given market basket of goods and services using the base year's prices and multiplying by 100.

If the Bureau of Labor Statistics were to include discouraged workers in the official unemployment rate, the reported unemployment rate would

increase

Suppose Rosa is an avid reader and buys only comic books. Rosa deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a comic book is priced at $15.00.

initially, the purchasing power of Rosa's $3,000 deposit is_comic books. Answer: 200 comic books

Price Index

is the cost of the market basket in the current year divided by the cost of the market basket in the base year, all multipled by 100

Cyclical unemployment def

is the form of unemployment associated with business cycles. This kind of unemployment rises during recessions and falls during expansions. Because Neha lost her job due to the recession, she would generally be considered to be cyclically unemployed.

Labor force

is the sum of employed and unemployed workers

Frictional unemployment def

occurs because job seekers and employers need time to find one another. Therefore, Juanita is considered to be frictionally unemployed. This kind of unemployment is usually brief.

Total unemployment is the sum

of frictional, structural, and cyclical unemployment. If there is no cyclical unemployment, the economy is at its natural rate of unemployment, equal to the sum of frictional and structural unemployment. In this case, because cyclical unemployment is 0.0%, the economy is at its natural rate of unemployment.

Foreign Direct Investment

refers to a capital investment that is owned and operated by a foreign entity.

Foreign Portfolio Investment

refers to an investment that is financed with foreign money but operated by domestic residents

When the rate of inflation is less than the interest rate on a deposit

the purchasing power of the deposit rises over time

A binding minimum wage will contribute

to a persistent surplus of labor in this market, generating structural unemployment

GDP deflator for this year is calculated by dividing the

value of all goods and services produced in the economy this year using this year's prices. by the value of all goods and services produced in the economy this year using the base year's prices and multiplying by 100.