Chapter 6: Employment & Unemployment
calculate real wages
nominal wages ------------------- x 100 CPI year of wages
Assume the market baskets contains 10X, 20Y, and 45Z. the current year prices are $1, $4 and $6 respectively. The base year prices are $1, $3, and $5. What is the CPI in the current year?
(Current year basket / base year basket) x 100 122.03
If the price of oranges has risen, does it follow that the price level has risen too? Explain your answer.
No. something could have occurred in the orange market, but that doesn't mean inflation has occurred.
calculate inflation rate
CPI year 2 - CPI year 1 --------------------------- x 100 CPI year 1
What is the relationship between your nominal income and the inflation rate if you are more than keeping up with inflation?
If you are more than keeping up with inflation, your nominal income is rising by a greater percentage than the inflation rate
If the CPI is 150 and nominal income is $100,000, what does real income equal?
Real income = (nominal income / CPI) x 100 66,666.67
what is the formula for calculating CPI?
base year basket (current price) ------------------------------------ x100 base year basket (base year price)
define price stability
easy to predict price changes
population: 200 million employed: 126 million unemployed: 8 million find employment rate
employment rate = employed / population 63%
what is stagflation?
high unemployment high inflation
calculate nominal interest rate
interest paid ---------------- x 100 borrowed money
frictional UE: 2% natural UE: 5% civilian labor force: 100m employed: 82m structural unemployment
natural UER - frictional UER 3%
calculate real interest rate
nominal interest rate % - inflation rate %
What criteria must be met for a person to be characterized as unemployed?
not in the military, not in prison, above the age of 16, willing and able to work, and has looked for work without success within the last 4 weeks.
How is a discouraged worker different from an unemployed worker?
A discouraged worker has not looked for a job in over 4 weeks. They are not calculated into the unemployment rate.
Jim earned an annual salary of $15,000 in 1965. What is this equivalent to in 2005 dollars?
Current dollars salary = salary (earlier year) x [CPI (current year)/CPI (earlier year)] x = 15000 x (195.3/31.5) = 93000
population: 200 million employed: 126 million unemployed: 8 million find labor force participation rate
participation rate = labor force/ population 67%
compute the percentage change in prices between _____ and ____
percentage change in prices = [(CPI later - CPI earlier)/CPI earlier] x 100
calculate labor force participation rate and what is it?
percentage of population currently looking to work labor force ------------- x 100 working age pop
Suppose 60 million people are employed, 10 million unemployed, and 30 million not in the labor force. What does the civilian noninstitutional population equal?
population = employed + unemployed + not in labor force 60 + 10 + 30 = 100 million
what is the formula for the inflation rate?
price index year 2 - price index year 1 ------------------------------------------- x100 price index year 1
Suppose 100 million people are in the civilian labor force and 90 million people are employed. How many people are unemployed? What is the unemployment rate?
unemployed = labor force - employed 10 million unemployment rate = unemployed / labor force 10%
frictional UE: 2% natural UE: 5% civilian labor force: 100m employed: 82m unemployment rate
unemployed/labor force: 82%
frictional UE: 2% natural UE: 5% civilian labor force: 100m employed: 82m cyclical unemployment
unemployment rate - natural unemployment 77%
What does it mean to say that the country is operating at full employment?
A country is operating at full employment if the natural unemployment = the true unemployment
A house cost $10,000 in 1976. What is this equivalent to in 2001 dollars?
Current dollars = 10,000 x (CPI 2001/CPI1976) =31124.78
Explain how the CPI is computed.
Current year market basket divided by base year market basket multiplied by 100
How does structural unemployment differ from frictional unemployment?
In structural, the cause is a lack of a skills match, while frictional unemployment is caused by normal labor market turnover and you just don't technically have a job yet.
population: 200 million employed: 126 million unemployed: 8 million find unemployment rate
UR = unemployed / labor force 6%
If the unemployment rate is 4%, it does not follow that the employment rate is 96%. Explain why.
Because the unemployment and employment rate percentages do not add up to be a full 100%. The unemployment rate's denominator is the labor force, while the employment rate's denominator is the civilian population.
What is "natural" about natural unemployment?
Natural unemployment means having a naturally occurring amount of frictional and structural employment, and no cyclical unemployment
What does the CPI in the base year equal? Explain your answer.
The CPI = 100 in the base year, because it is a benchmark that serves as a basis of comparison for prices in other years.
What is the difference between the employment rate and the labor force participation rate?
The employment rate is the percentage of the population that is employed, while the labor force participation rate is the percentage of the population that is in the labor force
how do you use a price index to calculate real dollars?
current year real $ = nominal $ x price index current/price index recent
