ECON131 Chapter 6: Measuring Inflation and Unemployment

If the current year's consumer price index is 214 and last year's was 209, then the rate of inflation is . . .

2.5%

Consumer Price Index (CPI)

A measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services

Marginally Attached

The classification a person is given if he or she is available for work and has actively looked for work in the past year but not in the past four weeks

Unemployment Rate

The number of unemployed divided by the labor force; expressed as a percent (Total Labor Force / Unemployed) x 100

The GDP deflator is an index that includes prices of all but . . .

imports.

What would NOT lead to higher prices?

increases in the supply of food

If there are 1,500 in the population, 900 are employed, and 100 are unemployed, what is the unemployment rate?

10%

John has an escalator clause in his labor contract by which his salary increases automatically by the amount of the previous year's inflation rate. If John's salary is $100,000, this year's consumer price index is 105, and the previous year's CPI was 100, by what percent will John's salary be increased?

5%

Natural Rate of Unemployment

That level of unemployment at which price and wage decisions are consistent; a level at which the actual inflation rate is equal to people's inflationary expectations and where cyclical unemployment is zero

Price Level

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP)

Disinflation

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP) A reduction in the rate of inflation; an economy going through this will typically still be facing inflation but at a declining rate

Discouraged Workers

To continue to be counted as unemployed, those without work must actively seek work (apply for jobs, interview, register with employment services, etc.). These workers have given up actively looking for work and, as a result, are not counted as unemployed

Deflation

A decline in overall prices throughout the economy; the opposite of inflation

Hyperinflation

An extremely high rate of inflation; above 100% per year

Why is the consumer price index a conditional cost-of-goods index?

The CPI is a conditional cost-of-goods index because it measures only private goods and services.

Labor Force

The total number of those employed and unemployed

Structural Unemployment

Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed

What happened to the unemployment rate in the United States between 1940 and 2000?

It generally decreased.

Arlina got a 5% raise while the rate of inflation was 6%. Arlina's standard of living . . .

fell by about 1%.

In 2011 the Chinese price level increased by 6.5%. This is an example of . . .

inflation.

What would lead to higher prices?

strong consumer demand, higher gas prices, and an increase in the supply of money

For more than 10 years Kenneth has worked at a job fixing machinery used to produce textiles. As more and more clothing manufacturers moved overseas to lower labor costs, his services have been less and less in demand until ultimately he found himself out of a job. What type of unemployment does this contribute to?

structural unemployment

Cyclical unemployment is . . .

the difference between current unemployment and what the unemployment rate would be if the economy were at full employment.

Which of the following groups had the highest unemployment rate in 2012?

those with less than a high school diploma (11.7%)

Gordon was a manager at Countrywide Home Loans until it collapsed and was acquired by Bank of America in 2008. Unable to find a comparable position in the financial industry, Gordon works in the garden area at Home Depot. He is considered to be . . .

underemployed.

What is a person's classification if he or she is available for work and has actively looked for work in the past four weeks?

unemployed

People are counted as employed if they have done any work at all for pay or profit . . .

during the survey week.

Inflation was about 5.5% in the middle of 2008 but had fallen to near zero by the end of the year. This is an example of . . .

disinflation.

Full employment is reached when . . .

there is only frictional and structural unemployment.

Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% in the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2% . . .

creditors gain at debtors' expense.

What are problems for the producer price index (PPI) as a measure of inflation?

changes in product quality, products removed from the market, and manufacturers exiting their industries

If your salary was $50,000 last year and this year you receive a cost-of-living increase tied to the consumer price index (CPI), what will your salary be, assuming the CPI has risen from 110 to 114?

$51,818

Frictional Unemployment

Unemployment for any economy that includes workers who voluntarily quit their jobs to search for better positions, or are moving to new jobs but may still take several days or weeks before they can report to their new employers

The periodic fluctuations around the natural rate of unemployment are caused by . . .

cyclical unemployment

Cheryl lost her job six months ago and filled out her last job application about two months ago. The Bureau of Labor Statistics would classify her as . . .

marginally attached

One limitation of the unemployment rate as a measure of labor market health is that it does not include . . .

marginally attached workers.

If a set basket of goods costs $6,000 in the current year and $5,000 in the base year, what is the consumer price index?

120

Inflation

A measure of changes in the cost of living; a general rise in prices throughout the economy

Producer Price Index (PPI)

A measure of the average changes in the prices received by domestic producers for their output

GDP Deflator

An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA)

Full employment

Not the same as zero unemployment, since frictional and structural unemployment will always be present

Underemployment

Occurs when one who is forced to take a job that does not fully exploit his or her education, background, or skills

To determine the new salary . . .

The old salary must be multiplied by the current year's index divided by the previous year's index.

Cyclical Unemployment

Unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low inflationary, solid growth path

Efficiency Wages

Wages above market equilibrium that can reduce turnover, motivate workers to work harder, and remain with their present employer, but can also prevent employers from hiring new workers, thus contributing to unemployment

What is included in the producer price index (PPI)?

commodity price indexes

If the cost of a typical market basket in 2019 is 400 and the cost of a typical market basket in 2020 is 390, then during this period the economy is undergoing . . .

deflation.

Jessie has been out of work for more than a year and has given up trying to get a new job until the economy gets better. Jessie is considered to be a . . .

discouraged worker

David works as a software developer, but he recently took paternity leave after he and his wife had a child. During the time he is on leave and not at work, David is considered to be . . .

employed.

Monica is a social worker on vacation. While away, she is considered to be . . .

employed. (Monica has a job to return to once her vacation is over)

What is NOT a problem for the producer price index as a measure of inflation?

exclusion of changes in sales promotions

In the CPI, core inflation can be found by removing . . .

food and energy.

The twin perils of the modern macroeconomics are said to be . . .

inflation and unemployment.

If actual unemployment is at its natural rate . . .

inflation is very low.

A cost-of-living index requires . . .

information on how consumers will respond to changes in product prices and income.

Tiffany, who is going on interviews, hoping to get her first job would be considered . . .

unemployed.