ECON 2101 Chapter 9
Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
$70,288
The unemployment rate is calculated as follows:
((Unemployment Rate = Number of Unemployed) / (Labor Force)) * 100
percentage change is equal to
((metric year 2 - metric year 1) / (metric year 1)) * 100
Even when inflation is perfectly anticipated, some individuals will experience a cost:
1. Some people's incomes will inevitably fall behind even an anticipated level of inflation. 2. Anyone holding paper money will find its purchasing power falling each year by the rate of inflation. This includes firms and consumers who have to hold at least some paper money to facilitate buying and selling. 3. Some firms experience menu costs. Menu costs are the costs to firms of changing prices on products, store shelves, or in printed catalogs.
Even perfectly anticipated inflation imposes costs. Why?
> Paper money loses its purchasing power by the rate of inflation > Menu costs > Some wages will fail to keep up with anticipated inflation
Which of the following causes changes in the CPI to overstate the true inflation rate?
> Substitution bias > Increase in quality bias > New product bias
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
> Underemployed people are considered employed. > It does not account for inaccurate responses to the Current Population Survey > Discouraged workers are not considered unemployed > It fails to account for illegal activities
The "normal" underlying level of unemployment in the economy is ___
> the full-employment rate of unemployment > the sum of structural unemployment and frictional unemployment > the natural rate of unemployment
Consumer price index (CPI)
An average of the prices of the goods and services purchased by the typical urban family of four > To obtain prices of a representative sample of goods and services, the BLS surveys 30,000 households to construct a market basket of 211 goods and services and visits 23,000 stores in 87 cities. One year is chosen as a "base year." For any given year, the CPI equals the ratio of the dollar amount necessary to purchase the market basket in the current year to the dollar amount required to purchase the same basket in the base year, multiplied by 100. As a result, the CPI equals 100 in the base year > (Cost of the market basket in the current year / Cost of the market basket in the base year) * 100
Producer price index (PPI)
An average of the prices received by producers of goods and services at all stages of the production process. > The PPI includes intermediate goods. It is often considered an early sign of inflation since increases in the prices of intermediate goods generally translate into higher prices to consumers.
The price index which is used to measure changes in the cost of living is the ___
Consumer Price Index (CPI)
Substitution bias
Consumers tend to purchase fewer of the items that increase in price
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
Cyclically unemployed
Briefly explain whether you agree or disagree with the following statement: "I don't believe the government price statistics. The CPI for 2016 was 212, but I know that the inflation rate couldn't have been as high as 112 percent in 2016."
Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
Frictionally unemployed
Which one of the following is not a measure of the price level?
Government Price Index: an average of the prices paid by the government for goods and services used only by different government agencies
Since 1948, which of the following best describes the trend in the labor force participation rate?
It is decreasing for men and increasing for women.
Increase in quality bias
Most products in the CPI increase in quality over time
New product bias
New products are constantly entering the market
Which one of the following accurately describes the relationship between frictional unemployment and job search?
People are said to be frictionally unemployed when they are between jobs and searching for new jobs
Which of the following can give an early warning of future increases in the price level?
Producer price index
Real Average Hourly Wage Equation:
Real Average Hourly Wage = (Nominal Average Hourly Wage / CPI) * 100
Real GDP Equation
Real GDP = (Nominal GDP / GDP price deflator) * 100
Frictional Unemployment
Short-term unemployment that arises from the process of matching workers with jobs. > Most workers spend time involved in job searches, just as most firms spend at least time searching for the best person for a job opening. Frictional unemployment is short-term unemployment that arises from the process of looking for a job. The process takes time, so there will always be some workers who are frictionally unemployed because they are between jobs and in the process of finding new ones.
Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new job, she discovers that the only available jobs are for economists and that there are no openings for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics degree, what is the best classification of her unemployment status?
Structurally unemployed
What is the difference between the consumer price index and the producer price index?
The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of four, whereas the producer price index is an average of the prices received by producers of goods and services at all stages of the production process
Outlet bias
The effect of consumer purchases from outlet and discount stores
Inflation rate
The percentage increase in the price level from one year to the next
In April 2017, the working-age population of the United States was 254.6 million. The working-age population is divided into those in the labor force (160.2 million) and those not in the labor force (94.4 million). The labor force is divided into the employed (153.2 million) and the unemployed (7.1 million). Those not in the labor force are divided into those not available for work (88.7 million) and those available for work (5.7 million). Finally, those available for work but not in the labor force are divided into discouraged workers (0.5 million) and those currently not working for other reasons (5.2 million). Use this data to help determine which one of the following statements is true:
The unemployment rate is (7.1 million / 160.2 million) * 100 = 4.4 % and The labor force participation rate is (160.2 million / 254.6 million) * 100 = 62.9 %
How would it affect the unemployment rate if the Bureau of Labor Statistics counted as unemployed both (1) discouraged workers and (2) people who work part-time but would prefer to work full-time?
The unemployment rate would increase
Which of the following is not one of the conditions someone needs to meet to be counted as unemployed?
They had worked only one hour per week during the previous four weeks.
Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
Structural Unemployment
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of available jobs. > For example, many people who were highly skilled at hand-drawn animation became unemployed as computer-generated, three-dimensional animation became the industry standard. To become employed again, these animators either learned the new animation methods or found employment in other industries after lengthy retraining periods. > Structural unemployment can last longer than frictional unemployment because workers need time to develop new skills.
Cyclical Unemployment
Unemployment caused by a business cycle recession. > When the economy moves into a recession, many firms find their sales falling and cut back on production. As a result, they often lay off workers. Workers who lose their jobs due to a recession are experiencing cyclical unemployment. > Often, as the economy recovers, firms will rehire the same workers who lost their jobs during the economic downturn. That is the nature of cyclical unemployment.
in x is equivalent to in y
Value in y dollars = Value in x dollars * (CPI in y / CPI in x)
Suppose that the inflation rate turns out to be much lower than most people expected. In that case ___
a borrower will lose from the situation while a lender will gain
Suppose that you are available to go to work but have not looked for a job for at least the last four weeks because you believe that there aren't any jobs available You would be counted as ___
a discouraged worker
Workers who lose their jobs because of a recession are experiencing ___
cyclical unemployment
When the economy is at full employment, which types of unemployment remain?
frictional and structural
The difference between a nominal variable and a real variable is that ___
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
All of the following are problems in measuring the unemployment rate except that ___
people on active military service are included as unemployed
The Internet has ___ the size of menu costs
reduced
The unemployment rate ___
shows the percentage of the labor force that is considered unemployed
Menu costs are ___
the costs to firms of changing prices
Why do economists believe that setting a goal of zero percent unemployment is not feasible or desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because ___
the economy needs some short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets
When the economy is at full employment, unemployment is equal to ___
the natural rate of unemployment
The natural rate of unemployment is ___
the sum of structural unemployment and frictional unemployment
If the actual cost is greater than the expected value ___
then the real price of a good or service would have increased by more than the general economy's inflation
When there are part minus time workers the official BLS measure of the unemployment rate ___ the true degree of unemployment
understates
If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50,000 income in 2009 have to earn in 2013 in order to keep her purchasing power constant?
$54,348
