Chapter 9 - ECO 202
measures of price level
- GDP deflator - Producer Price Index
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
- It fails to account for illegal activities. - Underemployed people are considered employed. - Discouraged workers are not considered unemployed. - It does not account for inaccurate responses to the Current Population Survey.
One drawback and one advantage of establishment survey
- It is based on unverifiable, self-reported survey responses. - It does not include information about self-employed people.
What causes changes in CPI to overstate the true inflation rate?
- New product bias - Increase in quality bias - Substitution bias
How does the U.S. economy create and destroy millions of jobs each year?
- Some businesses are expanding, while others are contracting. - In the market system, new firms are constantly entering and exiting various industries.
The "normal" underlying level of unemployment in the economy is...
- the full-employment rate of unemployment - the natural rate of unemployment - the sum of structural unemployment and frictional unemployment
If the inflation rate is 6 percent and the nominal interest rate is 4 percent, the real interest rate is...
-2 percent
CPI formula
Cost of market in current year/ Cost of market in base year x 100
Why the economy is in full employment, what types of unemployment remain?
Frictional and structural
If John is currently unemployed and searches for job openings that match his skills, abilities, and interests, and he says he is "in-between jobs" what is John's employment status?
Frictionally unemployed
Even perfectly anticipated inflation imposes costs. Why?
Menu costs Some wages will fail to keep up with anticipated inflation Paper money loses its purchasing power by the rate of inflation
What are problems of unanticipated inflation?
Redistribution of income from lenders to borrowers. Because nominal incomes generally increase with inflation.
What effect do labor unions have on the employment rate?
Since few non-government workers are unionized, there is no significant effect on the unemployment rate.
If Sally recently lost her job as an underwater welder, and she discovers there are no job openings for her trade because it is obsolete, she returns to school to earn an economics degree, what is her unemployment status?
Structurally unemployed
How do unemployment insurance payments in the United States and the social insurance programs in other countries increase the unemployment rate?
They decrease the opportunity cost of job search.
A wage rising slower than the rate of inflation is actually falling (T or F)
True: if wages are increasing slower than the average price of goods and services, purchases power falls.
Efficiency wage
an above-market wage paid by a firm to maximize worker productivity
Producer Price Index
an average of prices received by firms for goods and services at all stages of production
Consumer Price Index
an average of the prices of the goods and services purchased by the typical urban family of four
Structural unemployment is...
due to technology
An example of cyclical unemployment
during a recession, aircraft assemblers are laid off but expect to be recalled as the economy improves
At full employment,
employment = the natural rate of unemployment
The producer price index can...
give an early warning of future increases in the price level
Increases in the minimum wage will...
increase unemployment among teenagers
The chapter explains that it is impossible to know whether a particular nominal interest rate is "high" or "low" because
it all depend on the inflation rate
labor force participation rate
labor force/working age population x 100
The unemployment rate in the U.S. is usually ___ than in most other high-income countries, partly because U.S. has ___ requirements for the unemployed to receive government payments.
lower; more stringent
frictional + structural unemployment
natural rate of unemployment
real interest rate
nominal interest rate - inflation rate
Inflation can affect the distribution of income because...
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power
When the economy is at full employment...
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.
The unemployment rate...
shows the percentage of the labor force that is considered unemployed
unemployment rate
unemployed/labor force x 100
When a minimum wage is enacted or increased across a country, the unemployment rate...
will increase some but impacts will be much larger for some groups of workers
Eliminating all frictional unemployment...
will not be good for the economy since the presence of frictional unemployment increases economic efficiency
When Ségolène Royal was running unsuccessfully for president of France, she proposed that workers who lost their jobs would receive unemployment payments equal to 90 percent of their previous wages during their first year of unemployment. If this proposal were enacted, the unemployment rate in France...
would have gone up as the opportunity cost of job search would have decreased
