Econ Study Guide #2: EXAM 2

Which type of price index theory uses base year's quantities?

Laspeyres

Which type of price index theory uses current year's quantities?

Paasche

suppose the Consumer Price Index is 143.6. What does that number mean?

Prices rose 43.6 percent over the reference base period, on average.

Discouraged workers ________ counted as officially unemployed because they ________.

are not; are not actively seeking work

Cyclical unemployment occurs when

a business cycle recession decreases employment.

Which of the following statements is INCORRECT?

The working age population includes everyone over the age of 16.

Structural unemployment is the result of

technological change, absolute job skills, or foreign competition.

Looking at inflation rates in the United States since the 1970s we see that

the 1970s experienced the highest inflation rates.

The employment-to-population ratio is defined as

total employment divided by the working-age population then multiplied by 100.

The ________ is calculated as the number of people ________ divided by the labor force multiplied by 100.

unemployment rate; unemployed

The Consumer Price Index is a measure of the average of the prices paid by ________ for a fixed basket of consumer goods and services.

urban consumers

The labor force is defined as

workers with jobs and unemployed workers.

In a country with a working-age population of 130 million, 90 million workers are employed and 10 million workers are unemployed. What is the unemployment rate?

10.0 percent

Suppose there are currently 100 people unemployed, 1500 people employed, and 2000 people in the working age population. The labor force participation rate equals 100 times

1600/2000.

If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals

225.

Year---- Nominal Income-- Price Index1990---- 9800-------- 991991---- 10000-------- 951992---- 15000------- 1001993---- 17000------- 1101994---- 23000------- 1151995---- 33000------- 123Calculate the change in inflation, nominal income, and real income from 1990 to 1995. I would recommend working out the entire problem as illustrated in class. Using a spreadsheet can be helpful as well.

24%, 237%, 171%

If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the unemployment rate is

9.1 percent

Which type of price index theory averages the base year and current year's quantities?

Fisher's Mean

Suppose the CPI last year is 121 and the CPI this year is 137. The correct method to calculate the inflation rate is

[(137 - 121)/121] × 100 = 13.2.

An example of "investment" in computing real GDP using the expenditure approach is the purchase of

a new set of tools by an auto mechanic, for use in repairing cars.

Deflation represents:

a reduction in the aggregate price level.

The consumer price index (CPI)

compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.

Unemployment caused by the fluctuation of the business cycle is called ________ unemployment.

cyclical

When a student finishes college and begins looking for work

frictional unemployment increases.

The three types of unemployment are

frictional, structural, and cyclical.

Because of a bank merger, Ms. Davis lost her position as Vice President and had to seek work with other banks. Ms. Davis has the skills necessary to find a new job, thus she is best considered as

frictionally unemployed.

As currently calculated, the CPI tends to overstate the true inflation rate because

it fails to correctly measure quality changes for some products.

The labor force participation rate is calculated as the

labor force divided by the working age population then multiplied by 100.

Because of the biases in calculating the CPI, actual inflation is

less than the measured inflation rate by about 1 percent per year.

The biases in the CPI include the

new goods, quality change, and substitution biases.

Frictional unemployment comes about because of

normal labor market turnover.

Marginally attached workers fall into which of the following population categories?

not in the labor force

During a recession, the ________.

number of marginally attached workers increases

Price indexes can overstate inflation because they

omit some quality improvements.

Full employment occurs

only if the unemployment rate is equal to the natural rate of unemployment.

The unemployment rate measures the percentage of

people in the labor force who can't find a job.

The currently used method for calculating the CPI

probably overstates inflation by about 1 percentage point.

Ms. Krupsky has shorthand and typing skills and still finds herself unemployed. In today's economy, Ms. Krupsky is an example of what type of unemployment?

structural unemployment

When the automobile replaced horse-drawn carriages as the principal means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing

structural unemployment.

Substitution bias in the CPI refers to the fact that the CPI

takes no account of the substitution of goods by consumers when relative prices change.