CH7#2: Macroeconomy: Unemployment, Inflation, and Deflations

There is consensus among economists that the current "full" employment rate for the U.S. economy is consistent with about ______ percent actual unemployment.

5

Contraction

A business fluctuation during which the pace of national economic activity is slowing down.

Expansion

A business fluctuation during which the pace of national economic activity is speeding up.

Recession

A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.

GDP deflator

A price index measuring the changes in prices of all new goods and services produced in the economy.

Flow

A quantity measured per unit of time; something that occurs over time, such as the income you make per week or per year or the number of individuals who are fired every month.

Consumer Price Index (CPI)

A statistical measure of a weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas.

Producer Price Index (PPI)

A statistical measure of a weighted average of prices of goods and services that firms produce and sell.

Personal Consumption Expenditures (PCE) Index

A statistical measure of average prices that uses annually updated weights based on surveys of consumer spending.

Deflation

A sustained decrease in the average of all prices of goods and services in an economy. Depression An extremely severe recession.

Inflation

A sustained increase in the average of all prices of goods and services in an economy. Job leaver An individual in the labor force who quits voluntarily.

Full employment

An arbitrary level of unemployment that corresponds to "normal" friction in the labor market. In 1986, a 6.5 percent rate of unemployment was considered full employment. Since the 1990s, it has been assumed to be around 5 percent.

Job loser

An individual in the labor force whose employment was involuntarily terminated.

New entrant

An individual who has never held a full-time job lasting two weeks or longer but is now seeking employment.

Reentrant

An individual who used to work full-time but left the labor force and has now reentered it looking for a job.

Cost-of-living adjustments (COLAs)

Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living.

______ unemployment varies with business fluctuations.

Cyclical

Leading indicators

Events that have been found to occur before changes in business activity.

Homemakers and students are officially counted as part of the labor force.

False

If the average duration of unemployment rises, other things being constant, the unemployment rate will fall.

False

Business fluctuations tend to be relatively constant in timing, magnitude, and duration, at least in the United States.

False All are highly variable.

The opportunity costs due to unemployment, in terms of foregone national output, are usually trivial.

False Costs could be in the hundreds of billions of dollars

During periods of correctly anticipated inflation, debtors gain at the expense of creditors.

False Neither group gains or benefits at the expense of the other because the nominal interest rate will reflect the anticipated inflation

People not working, who have looked for a job six months ago but are not looking now, are counted as discouraged workers, and therefore are officially unemployed.

False They are, officially, not in the labor force

Labor force

Individuals aged 16 years or older who either have jobs or who are looking and available for jobs; the number of employed plus the number of unemployed.

Discouraged workers

Individuals who have stopped looking for a job because they are convinced that they will not find a suitable one.

Unanticipated inflation

Inflation at a rate that comes as a surprise, either higher or lower than the rate anticipated.

Repricing, or menu, cost of inflation

The cost associated with recalculating prices and printing new price lists when there is inflation.

Price index

The cost of today's market basket of goods expressed as a percentage of the cost of the same market basket during a base year.

Anticipated inflation

The inflation rate that we believe will occur; when it does, we are in a situation of fully anticipated inflation.

Nominal rate of interest

The market rate of interest observed on contracts expressed in today's dollars.

Real rate of interest

The nominal rate of interest minus the anticipated rate of inflation.

Labor force participation rate

The percentage of noninstitutionalized working-age individuals who are employed or seeking employment.

Stock

The quantity of something, measured at a given point in time—for example, an inventory of goods or a bank account. Stocks are defined independently of time, although they are assessed at a point in time.

Natural rate of unemployment

The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy.

Unemployment

The total number of adults (aged 16 years and older) who are willing and able to work and who are actively looking for work but have not found a job.

Business fluctuations

The ups and downs in business activity throughout the economy.

Purchasing power

The value of money for buying goods and services. If your money income stays the same but the price of one good that you are buying goes up, your effective purchasing power falls, and vice versa.

Base year

The year that is chosen as the point of reference for comparison of prices in other years.

Anticipated inflation causes fewer economic problems than unanticipated inflation.

True

As inflation occurs, the purchasing power of a unit of money falls.

True

Because of imperfect information in the labor market, there will always be some frictional unemployment.

True

Income is a flow, inflation is a flow, and the number of people unemployed is a stock.

True

People who are not working and who last looked for a job within the past four weeks are officially unemployed.

True

Reentrants are considered to be unemployed.

True

The CPI measures the cost of an unchanging basket of goods and services.

True

The dating of recession and expansion phases is somewhat arbitrary.

True

The unemployment rate is higher in the contraction phase of a business cycle than in the expansionary phase.

True

Frictional unemployment

Unemployment due to the fact that workers must search for appropriate job offers. This activity takes time, and so they remain temporarily unemployed.

Structural unemployment

Unemployment resulting from a poor match of workers' abilities and skills with current requirements of employers.

Cyclical unemployment

Unemployment resulting from business recessions that occur when aggregate (total) demand is insufficient to create full employment.

Seasonal unemployment

Unemployment resulting from the seasonal pattern of work in specific industries. It is usually due to seasonal fluctuations in demand or to changing weather conditions, rendering work difficult, if not impossible, as in the agriculture, construction, and tourist industries.

Which one of the following statements is true? a. If there is zero anticipated inflation, the nominal interest rate equals the real interest rate. b. The real interest rate equals the nominal interest rate plus the anticipated inflation rate. c. The real interest rate equals the nominal interest rate divided by the anticipated inflation rate. d. Borrowers will not permit lenders to raise the nominal interest rate if all expect that the inflation rate will rise.

a. If there is zero anticipated inflation, the nominal interest rate equals the real interest rate.

Unemployment that results from search time required to find new employment after leaving a previous position is known as a. frictional unemployment. b. structural unemployment. c. seasonal unemployment. d. cyclical unemployment.

a. frictional unemployment.

Unanticipated deflation a. hurts net debtors. b. causes no economic problems. c. hurts people who hold cash. d. hurts fixed income groups.

a. hurts net debtors.

Which one of the following persons is not like the others? a. job finder b. job leaver c. new entrant d. reentrant

a. job finder

Business fluctuations are a. nonperiodic recurrent fluctuations in overall economic activities. b. of similar duration. c. of similar magnitude. d. All of the above.

a. nonperiodic recurrent fluctuations in overall economic activities.

The U.S. labor force includes a. the unemployed. b. people in mental institutions. c. children. d. None of the above.

a. the unemployed.

The CPI and the PPI measure the cost of (an unchanging, a changing) basket of goods through time.

an unchanging

If the inflation rate is anticipated, a. net creditors will be hurt. b. inflation may not be a major problem. c. net debtors will be hurt. d. people will hold more cash than they want to hold.

b. inflation may not be a major problem.

Which one of the following statements is not a stock concept? a. the number of people unemployed b. national income c. the number of job losers d. the number of job finders

b. national income

If the average duration of unemployment rises, other things being constant, a. the participation rate will rise. b. the unemployment rate will rise. c. total employment must fall. d. total unemployment must fall.

b. the unemployment rate will rise.

On average, economic expansions have (lasted about as long as; been shorter than; been longer than) those that predated World War II.

been longer than

On average, economic contractions have (lasted about as long as; been shorter than; been longer than) those that predated World War II.

been shorter than

Which one of the following is least like the others? a. frictional unemployment b. seasonal unemployment c. discouraged worker unemployment d. cyclical unemployment

c. discouraged worker unemployment

If inflation is anticipated, a. it is costless to society. b. debtors gain. c. it costs less to society than if unanticipated. d. creditors gain.

c. it costs less to society than if unanticipated.

Discouraged workers are officially a. unemployed. b. employed. c. not in the labor force. d. in the labor force.

c. not in the labor force.

Because there is always frictional unemployment, "full" employment is considered to exist if a. every man, woman, and child is working. b. everyone age 16 and over is working. c. the unemployment rate is relatively small. d. the unemployment rate is 12 percent

c. the unemployment rate is relatively small.

Which one of the following is a flow concept? a. national income b. inflation rate c. consumption d. All of the above

d. All of the above

If stay-at-home dads were counted in the labor force and considered employed, then a. the male labor force participation rate would rise. b. the overall official unemployment rate would fall. c. overall official employment would rise. d. All of the above.

d. All of the above.

The consumer price index a. measures the cost of an unchanging basket of goods and services. b. does not take into account relative price changes, and therefore is biased. c. does not completely account for quality changes, and therefore is biased. d. All of the above.

d. All of the above.

Which one of the following statements is false? a. It is possible for the total number of employed and the total number of unemployed to rise in the same period. b. It is possible for the total number of employed to rise and the unemployment rate to rise in the same period. c. If the average duration of unemployment falls, other things being constant, the unemployment rate will fall. d. The definitions of employment, unemployment, and labor force are not subject to disagreement among economists.

d. The definitions of employment, unemployment, and labor force are not subject to disagreement among economists.

Which one of the following persons is officially unemployed? a. a housewife b. a student c. a resident in an institution d. a nonworking individual who has looked for a job within the past week

d. a nonworking individual who has looked for a job within the past week

Which one of the following groups is most hurt by unanticipated inflation? a. workers with cost-of-living adjustment clauses in their labor contracts b. Social Security recipients c. workers who sign new work agreements every day d. wealthy people who hold much cash in their wall safes

d. wealthy people who hold much cash in their wall safes

When inflation is unexpected, (debtors, creditors) benefit at the expense of (debtors, creditors).

debtors creditors

If imperfect information exists within job markets, then some frictional unemployment is (desirable, undesirable), both from the individual's and society's points of view.

desirable

Business fluctuations can be caused by ______ shocks such as poor weather or large, unanticipated price rises in key resources such as oil.

external

A(n) ______ is measured per unit of time, while ______ is measured at a given moment in time.

flow stock

Unemployment has been categorized into four basic types: ______ , ______, ______, and ______.

frictional cyclical seasonal structural

Chapter 7 deals with unemployment and

inflation

If a person is able to work and last looked for a job five weeks ago, she (is, is not) in the labor force.

is not

The nominal interest rate equals the real interest rate (plus, minus) the anticipated inflation rate.

minus

Stay-at-home dads are officially considered as (unemployed, employed, not in the labor force).

not in the labor force

Discouraged workers who are not currently looking but have looked for a job are counted officially as (employed, unemployed, not in the labor force). Because of this official classification, some people believe that the measured unemployment rate (overstates, understates) true unemployment.

not in the labor force understates

To the extent that price indexes do not adjust for quality improvements, they (overstate, understate) the true rate of inflation.

overstate

The percentage of working-age individuals who are in the labor force is called the labor force ______.

participation rate.

Indexes of leading economic indicators include factors that have been demonstrated to be indicators of (past, future) recessions.

past

The personal consumption expenditure index is a price index based on annual surveys of consumer ______.

purchases

Many of the problems associated with inflation have occurred because the inflation rate was ______.

unanticipated

The unemployment rate is calculated by dividing the number of unemployed by the sum of the (a) employed plus the (b) ______.

unemployed

When unanticipated deflation occurs, debtors are economically (worse, better) off.

worse