Econ002 Homework 3 Study Guide

Different types of unemployment

- Cyclical: due to fluctuation in economic activity low level spending = low demand = reduction in production = less workers required - Structural: mismatch between skills and job vacancies, improvements in technology - Frictional: short term and voluntary, person is between jobs, beneficial to the economy, better outcomes for firms and employees - Seasonal: unemployed during particular seasons, mainly due to climate (e.g. fruit pickers) - Hard core: been out of work for 12 months and struggle to find jobs, due to lack of education, skills, age or personal problems

Unit of account

Standardized means of measuring the prices of goods and services

What causes the supply curve to shift?

1.Economic outlook -Worse outlook means people save more -So, supply curve would shift right 2. Government deficits-Deficit means government issuing more bonds that individuals buy using savings so savings available drops -So, if deficits increase, supply curve would shift left 3. Money supply-If raise money supply, more money available to lend-So, supply would shift right Note: Supply (quantity) of money refers...... to the amount of money in circulation

What causes the demand curve to shift?

1.Tax incentives -When tax credits provided rises......return on investment rises...so more demand for loanable funds -So, demand would shift right 2.Business expectations - When business sentiment about economy ↑ ...firms will raise demand for loanable funds -So, demand would shift right

What is bartering? How is it different from Trade?

A direct exchange of goods and services...without money Trade is the exchange of goods and services...but the exchanges include money

Okun's Law

GDP lost = -2 x (Unemployment Rate - NRU) Potential GDP 100

Suppose NRU in 2012 = 5% Unemployment rate in 2012 = 8.1% Potential GDP in 2012 = $16 trillion How much GDP is lost?

GDP lost is the purpose of the formula Plug in to find this amount: GDP lost = [(-2*(8.1 - 5))/100] GDP lost = -0.062*16,000,000,000,000 = -$992,000,000,000

LFP & LFP rate

Labor Force Participation = (Total labor force / Civilian Non-institutional Population) x 100

Consider disability insurance in US: •Pays $14,000 a year (on average) •Provides health insurance •If claim, cannot get or look for work What is the effect on the LFP rate?

Number in the labor force drops Civilian Non-institutional population unchanged Effect: LFP rate falls

For Sharon in the previous problem, what is the real interest rate of the loan? a) -10% b) 0% c) 10% d) 100% e) Not enough information

a) -10%

Consider the country called William-stan. In this country, we have the following information: Number of people 16 and over: 1,300,000 Number of people in institutions like prison or mental health facilities: 20,000 Number of people in the military: 30,000 Number of people who are working (in any job): 945,000 Number of people who are unemployed: 55,000 What is the unemployment rate in this country? a) 5.5% b) 6.1% c) 8% d) 12.5% e) Not enough information

a) 5.5%

Reporting of unemployed... March 2021. April 2021 Employed 150,848,000 151,176,000 Unemployed 9,710,000 9,812,000 a) What is the change in the # of employed? b) What is the change in the unemployment rate?

a) Change in # of employed = Employed in April 2021 - Employed in March 2021 = 151,176,000 - 150,848,000 = 328,000 b) Change in unemployment rate= Unemp. rate in April 2021 - Unemp. rate in March 2021 = [(9,812,000/(151,176,000+9,812,000)) x 100] - [(9,710,000/(150,848,000+9,710,000) x 100] = 6.1 - 6.0 = 0.1%

Suppose there is a massive increase in the number of people retiring in the US due to our aging population and to avoid infection from the coronavirus. What is the likely effect of this rise in retirement on America's Labor Force Participation Rate? a) Decrease b) Increase c) Unchanged d) Unclear e) None of the above

a) Decrease The massive retirement means many people are no longer working and are no longer working for work. Recall the formula:Labor Force Participation Rate = (Labor Force / Civilian Non-Institutional Population) x 100Since this mass retirement would cause a decline in the number of people working and a decline in the number of people looking for work, there is a massive decline in the labor force. However, the Civilian Non-Institutional population is not affected because it is the number of people aged 16 and over who are neither in the military nor in institutions like prisons.So, in terms of the Labor Force Participation Rate, the numerator falls while the denominator stays the same. So, the mass retirement's effect on the Labor Force Participation Rate is that it will...Decrease.

Consider major retailer Macy's three employees: Sharon, Oralia, Emmett. Please classify the type of unemployment. a) Suppose Sharon quits her job to find a higher paying job elsewhere. b) Tastes and preferences move to online clothing. So, stores close Oralia is laid off as a result. c) Consider how the US economy has entered recession.Emmett is laid off as a result of the income fall.

a) Frictional b) Structural c) Cyclical

Consider unemployment insurance - a government program that financially compensates people when they become unemployed (such as California's $450 a week). Suppose a state in the US decides to increase unemployment insurance from 20 weeks to 30 weeks. What effect would this change have on the state's unemployment rate? a) Increase b) Decrease c) Unchanged d) Unclear e) None of the above

a) Increase

According to the lecture, "The Wizard of Oz" took what position with regard to the Free Silver Movement? a) It was supportive of the movement b) It was strongly against the movement c) It had no opinion of the movement d) It was for the movement in matters of banking but against the movement in matters of agriculture e) It advocated not for Free Silver but for Quantitative Easing (QE)

a) It was supportive of the movement As it states in the lecture slides, the main character Dorothy was not able to return home with just the gold road but needed the silver shoes as well (different from the ruby red of the movie). In other words, gold AND silver were needed to solve the problem (of returning home). As a result, the story was in favor of silver. So, the answer is the following: It was supportive of the Free Silver Movement.

One option for a country to tax its population is to print a lot of money. a) True b) False

a) True

Suppose President William C. from the country in the previous problem enacts a policy that forces 40,000 of the unemployed into institutions for mental health. This policy makes the unemployment rate fall. a) True b) False

a) True According to the definition and as stated above, a person must be looking for work to be considered unemployed. Since these people are forced into mental institutions, they are no longer able to get or look for a job and so would not be considered unemployed. As a result, the unemployment rate would fall. So, the answer is the following: True.

In July 2020... Employed = 150,031,000 Unemployed = 10,130,000 Civilian Non-institutional Pop. = 260,851,000 a) What is the unemployment rate? b) What is the labor force participation rate?

a) Unemployment rate = [(10,130,000)/(150,031,000+10,130,000)] x 100 = 6.3% b) Labor Force Participation Rate = (Total labor force / Civilian Non-institutional Population) x 100 = [(150,031,000+10,130,000) / (260,851,000)] x 100 = 61.4%

Numbers for US in 2012: Real GDP = $15 trillion Potential GDP = $16 trillion Inflation rate = 2.07% Actual i = 0% a) According to the rule, what nominal interest rate is set? b) How does rate from rule compare with actual interest rate observed?

a) i = 2 + inflation + 0.5 (Actual GDP - Potential GDP x 100) + 0.5 (inflation - 2)/Potential GDP = 2 + 2.07 + 0.5(15,000,000,000,000-16,000,000,000,000)x 100) + 0.5 (2.07 - 2)/16,000,000,000,000 = 0.98% b) Nominal interest rate predicted = 0.98%Nominal interest rate actual = 0.0%The prediction is off by 1%

The key word to describe money's evolution is tradeoffs. a) True b) False

b) False

Suppose a person named Sharon borrows $4,000 in 2020 which she needs to pay back to the "Bank of Rojas" in a year. The nominal interest rate is 25%, and the inflation rate is 35%. How much will she need to pay back to the bank in 2021? a) $2,500 b) $5,000 c) $7,000 d) $8,500 e) Not enough information

b) $5,000

Suppose a worker named Suzanna works as a receptionist and then voluntarily leaves her job to pursue her dream of starting her own business. After she quits but before she becomes self-employed, what type(s) of unemployment applies to her? a) Structural b) Frictional c) Cyclical d) Arman-al e) Frictional and Structural

b) Frictional

What is the difference between bartering and trade? a) Only bartering deals with an exchange of goods and services b) Only trade deals with money c) Bartering can occur between individuals while trade cannot d) Bartering requires the participants to drink two shots of Tequila while trade requires the participants to drink three shots e) There is no difference

b) Only trade deals with money

Consider the US in the year 2020. Suppose that due to estimates from the Federal Reserve Bank of St. Louis we have the following. The Natural Rate of Unemployment is 5.1% and the potential GDP for the year is $19.49 trillion. Suppose the unemployment rate on average for the year is 10%. According to Okun's Law, what is the output lost? a) $1 trillion b) $1.5 trillion c) $1.91 trillion d) $2.18 trillion e) Not enough information

c) $1.91 Trillion

Consider the loanable funds market. Suppose there is an increase in the business' expectations. What is the effect on this market? a) The real interest rate increases and the quantity of loanable funds decreases b) The real interest rate decreases and the quantity of loanable funds decreases c) The real interest rate increases and the quantity of loanable funds increases d) The real interest rate decreases and the quantity of loanable funds increases e) None of the above

c) The real interest rate increases and the quantity of loanable funds increases

Which of the following is FALSE concerning the future trends in money? a) Countries such as Sweden are in the process of going cashless b) People are increasingly using their cards and smart phones to buy things c) Going cashless is taking time for countries to do d) Going cashless is not benefiting a country's poor in any way at all e) Bitcoin is being used increasingly - particularly countries with poor economies like Venezuela

d) Going cashless is not benefiting a country's poor in any way at all Almost every answer choice is mentioned in section 11 of lecture 9. For example, the slides mention how Bitcoin is being used increasingly in countries like Venezuela. However, the one thing that is not mentioned is that going cashless is not benefiting the poor. Instead, a benefit to them is mentioned in the form of fostering borrowing opportunities for the poor. So, the answer is the following: Going cashless is not benefiting a country's poor.

Suppose a new iPhone game called "Avengers: Endgame" is developed focusing on the superheroes of Marvel. Suppose your classmate Yulia is running her own business - an auto body shop. But she becomes so interested in playing she decides to shut down her business and decides to dedicate herself completely to playing it for fun. Officially, she would now be classified as which of the following? a) Insane b) Unemployed c) Employed d) Not in the labor force e) Neither unemployed nor employed but still in the labor force

d) Not in the labor force Recall that in order for a person to be considered part of the labor force, they must be either employed or unemployed. The person is not employed because the person quit the job. Nor is the person unemployed because the person is not looking for a job. So, the answer is the following: Not in the labor force.

Consider the loanable funds market. Suppose people's economic outlook decreases. What is the effect on this market? a) The real interest rate increases and the quantity of loanable funds decreases b) The real interest rate decreases and the quantity of loanable funds decreases c) The real interest rate increases and the quantity of loanable funds increases d) The real interest rate decreases and the quantity of loanable funds increases e) None of the above

d) The real interest rate decreases and the quantity of loanable funds increases In the market for loanable funds, if people's economic outlook falls, they will save more money. So, if people's economic outlook decreases, the supply of loanable funds is higher at a given real interest rate. So, the supply curve shifts right.

From the previous question, what effect would this change have on the state's real GDP growth (assuming no major changes in migration patterns of people between states) in the long run? a) Increase b) Decrease c) No change d) Unclear e) None of the above

d) Unclear As most people figured out in problem 7, the extension of the unemployment insurance would tend to discourage people from finding a job as quickly. So, the unemployment rate would tend to be higher. Yes, a longer period of unemployment insurance means a higher unemployment rate which would tend to decrease GDP growth.But recall the unemployment insurance length and degree of benefits involves tradeoffs. Lengthier unemployment insurance would also mean people would spend more time finding a better job (more frictional unemployment which is voluntary) and which leads to people getting jobs that are a better match for their skills. As such, more such frictional unemployment means greater productivity which tends to cause higher GDP growth. So, the effect on the GDP growth from the higher unemployment is the opposite of the effect of the higher frictional unemployment. Since we do not know which effect is stronger, the effect on GDP growth is unclear. As a result, the answer is...Unclear.

According to the lecture slides, which of the following is NOT associated with a higher unemployment rate? (see lecture 8, slides 4 and 5). a) More suicides b) More homicides c) More children with psychological problems d) More people in prison e) All of the above are associated with higher levels of unemployment

e) All of the above are associated with higher levels of unemployment According to the lecture slides, it mentions suicides, homicides and incarcerations. Also, the slides mention family disintegration. It also and unfortunately leads to children with psychological problems. As a result, the answer is...All of the above are associated with higher levels of unemployment.

Suppose we notice from January to February that the unemployment rate has decreased. Which of the following can be concluded about the economy for this period? a) The labor market has worsened b) The amount of physical capital has increased in the economy c) The natural rate of unemployment has increased d) The CPI will increase over that year e) None of the above can be concluded

e) None of the above can be concluded Because the unemployment rate can decrease because more people are giving up looking for work (discouraged workers), a falling unemployment rate does not necessarily mean the labor market has improved. None of the other choices can be concluded from a lower unemployment rate either. As a result, the answer is...None of the above can be concluded.

Consider the country of Paulina-stan. Suppose the country's money is known as Haros. Further suppose the country suffers from very high inflation. Which of the following functions of money would be undermined? a) Unit of account b) Medium of exchange c) Store of value d) Unit of account and medium of exchange e) Unit of account, medium of exchange and store of value

e) Unit of account, medium of exchange and store of value If there is very high inflation (think here of around 50% or more), the purchasing power or value of the country's money (Haros) is plunging. As such, the money is less able to serve as a unit of account because the value of the currency is falling a lot. Money is also less able to function as a medium of exchange as people will be less willing to accept something whose value keeps decreasing so much. Finally, because the purchasing power of this money is falling so much, it is less able to function as a way of storing value from the present to the future. So, the answer as to which functions are undermined is...unit of account, medium of exchange and store of value.

Civilian Non-institutional Population

•People 16 and over •Not in an institution like prison or mental institution •Not in the military