Chapter 13:Unemployment and inflation

Suppose the consumer price index for one year was 120 and for the next year it was 132. What is the corresponding inflation rate?

10%

A country has a noninstitutionalized population of 243 million people. Of that number, 38 million are under the age of 16 70 million are full-time students and retirees 8 million are unemployed workers 127 million are employed full- or part-time What is the size of the labor force in millions of people? Round to the nearest whole number.

135 MILLION

Click or tap on the area of the graph below that represents when the United States had the highest level of cyclical unemployment.

1980-1985

Click or tap on the part of the timeline when a dramatic drop in the U.S. consumer price index (CPI) altered the type of inflation experienced in the economy.

2010

A country has a noninstitutionalized civilian adult population of 263 million. Of that number, 85 million are students, homemakers, retirees, etc. 11 million are marginally attached workers. 152 million are employed full- or part-time. 15 million are out of work and actively looking for work. What is the official unemployment rate? Round to one decimal place.

9.0%

Why might the prices of some products decrease whereas others increase?

Advances in technology typically cause the price of some goods to decrease over time.

Place the following hypothetical events, illustrating frictional unemployment, in chronological order.

Burger chain A introduces a new product, the MegaBurger. Customer demand for burger chain A's new burger is high. Burger chain A hires more workers as a result of increased demand for its products. At the same time, burger chain B begins to lose market share to burger chain A. Burger chain B lays off some of its workers. Unemployed burger chain workers are hired by burger chain A.

Which of the following can be causes of frictional unemployment? Which cannot?

CAUSES OF FRICTIONAL UNEMPLOYMENT lack of information unemployment benefits government regulation NOT CAUSES OF FRICTIONAL UNEMPLOYMENT recession industries shutting down due to long-term changes in consumer tastes

Match the situation to the factor that affects the accuracy of the CPI. Labels may be used more than once.

CHANGES IN QUALITY Video game consoles offer better graphics and gameplay than they did a decade ago. Newer cars have built-in GPS and Bluetooth capabilities. SUBSTITUTION The cost of bananas increases dramatically. Many people switch to oranges because they are cheaper. The cost of cable increases. People decide to switch to Netflix instead. NEW LOCATIONS New pop-up stores at airports sell clothing, personal electronics, and designer eyewear at low prices. NEW PRODUCTS A new smartphone app solves math problems simply by pointing the camera at the page.

The labels below describe either cyclical, structural, or frictional unemployment. Drag each label to the correct area on the figure. Keep in mind that not all labels will be used.

CYCLICAL unemployment that occurs as a result of a recession an unemployment level that is lower than the natural rate under healthy economic conditions STRUCTURAL unemployment that occurs as a result of changes in the industrial makeup of the economy unemployment as a result of seeking a new job in a shrinking industry FRICTIONAL unemployment between time of graduation and finding a first job in a stable industry unemployment as a result of seeking a new job in a stable industry

Match each form of unemployment with an example. Note that every item may not have a match.

CYCLICAL UNEMPLOYMENT- An unemployed banker seeking a job during a recession. The banker would be hired back once the economy began growing normally again. STRUCTURAL UNEMPLOYMENT- An unemployed paper mill worker currently looking for work. The local paper mill shut down due to lack of demand for paper products in a digital age.structural unemployment FRICTIONAL UNEMPLOYMENT- An unemployed cashier looking for employment. A small clothing store shut down due to its customers buying clothes from a new big-box retailer.

Fill in the blanks to complete the following sentence about labor force and unemployment, assuming country X has the following statistics: total population 16 years old or older = 50,000,000full-time students = 4,200,000not employed and not currently searching for jobs = 6,000,000not employed but currently searching for jobs = 2,336,000currently employed = 29,664,000

Country X has a labor force of 32,000,000 and an unemployment rate of 7.3%.

The following graph shows average inflation rates and the money supply growth rates across 138 nations from 1996-2016. Select the three countries that are most likely to have the highest devaluation of money.

DR CONGO ANGOLA BELARUS

Which of the following scenarios are examples of job separation (i.e., workers who quit or were laid off) as a result of creative destruction?

EXAMPLE In 1800, over 90% of U.S. workers had jobs in agriculture; by 2017, less than 5% did. Indeed.com provides an Internet-based job service; as a result, newspaper job offerings shrink and newspapers lay off workers. A company installs a new accounting system that does all the billing automatically, which subsequently shuts down the accounting department. Two major city newspapers cut staff due to declining readership. NOT AN EXAMPLE A regulation is passed that mandates paying workers for 45 days of labor for every year they are with a firm if they are fired or laid off. The day before the legislation goes into effect, three million workers with more than ten years of tenure each are fired. McDonalds starts selling a popular new product, the "Quadstack," which causes Burger King to lose customers. Burger King then lays off workers. In 2001, there was an economic downturn as a result of a reduction in the valuation of many tech stocks. As a result, companies laid off 1.7 million people.

In response to the coronavirus pandemic, the Federal Reserve dramatically increased the U.S. money supply. True or False: This will inevitably lead to inflation.

FALSE

True or False: All prices rise evenly during periods of inflation and deflation.

FALSE

The unemployment rate in economy X when it is growing normally (its "natural rate of unemployment") is 5%. When economy X is in a recession, the unemployment rate is 8%. Fill in the blanks to complete the statement correctly.

For economy X, the natural rate of unemployment is always 5%. This rate is not due to CYCLICAL factors. It applies AT ALL TIMES.

The following diagram illustrates the dilemma that firms face when they cannot tell which price changes are due to inflation. Place the following events onto the diagram to indicate whether they represent real increase in demand or inflation.

INCREASE OUTPUT growth in population 2% increase in income, which makes all goods and services more affordable DONT CHANGE OUTPUT rising housing prices with no change in housing consumption 3% increase in money supply, but no change in real GDP

Fill in the blanks to complete the explanation of how inflation and deflation affect consumers differently.

Inflation occurs when the overall prices of goods INCREASE. This means that consumers have LESS purchasing power. Deflation occurs when the overall prices of goods DECREASE. When this happens, consumers have MORE purchasing power.

Which of the following people would be officially considered unemployed?

Jenna, who just graduated college and is searching for a job that fits her graphic-design skills

Which of the following scenarios make it difficult to accurately measure the CPI?

MAKES CPI HARD TO MEASURE The price of a ticket to a baseball game increases after the stadium is rebuilt. A company releases a new product that many consumers adopt.DOES NOT MAKE CPI HARD TO MEASURE The typical basket of consumer goods does not change. Consumers need to purchase gas to get to work.

Match each term related to inflation-imposed costs on an economy to the appropriate example. Not all labels will be used.

MONEY ILLUSION Malika's wage increases by 12% and the prices at her favorite restaurant, along with all other prices, rise by the same percentage. She decides to no longer eat at her favorite restaurant because she feels it is now too expensive. PRICE CONFUSION Tarik is the manager of a car dealership selling hybrid vehicles. He notices the prices rising for the vehicles but is uncertain whether it is the greater demand for hybrid vehicles that is causing prices to rise. SHOE-LEATHER COSTS Caleb makes frequent trips to the bank to make withdrawals so as to avoid the "tax" of inflation.

Apply the correct label to each inflation-related problem. Labels may be used more than once.

MONEY ILLUSION Selena decides to move to a city with a very high cost of living, for a job with a slightly higher salary. The normal rate of inflation is about 3%. Hector notices the cost of a movie increases by 3% and decides not to go because he mistakenly concludes that movies have become more expensive. SHOE-LEATHER COSTS Because of extremely high inflation, David makes small weekly cash withdrawals instead of large monthly ones. MENU COSTS Inflation forces a car dealership to increase its prices and pay for frequent ads in the newspaper to announce the changes.

Marshall has recently lost his job and is currently receiving federal jobless benefits. Fill in the blanks to complete the following passage about Marshall.

Marshall benefits by receiving income so that he can continue to CONSUME goods and services while searching for a new job, which benefits society because it decreases the likelihood of an economic RECESSION. On the other hand, the benefits may also cause Marshall to become LESS incentivized to take a job and INCREASE the amount of time he spends unemployed.

Mary owns a seafood restaurant. What problems might Mary face due to steady inflation?

Mary's costs will rise, and for revenue to keep pace she will have to DEAL WITH MENU COSTS to keep her prices consistent with inflation. If Mary mistakenly believes the rising price of seafood is the result of increased DEMAND, she may misdirect restaurant resources. This would be an example of price CONFUSION.

Which of the following groups would not be counted as unemployed when calculating the unemployment rate?

NOT INCLUDED retired workers a 15-year-old student searching for his first job recently laid-off workers who are not searching for jobs INCLUDED recently laid-off workers who are searching for new jobs

Fill in the blanks to complete the passage about unemployment.

Not all unemployment is UNHEALTHY. Sometimes unemployment is due to CREATIVE DESTRUCTION, which is the introduction of new PRODUCTS and technologies that leads to the shutdown of other industries and jobs, as some jobs become OBSOLETE, causing structural unemployment.

Which of the following may be considered as part of the consumer price index?

PART OF THE CPI transportation food housing NOT PART OF THE CPI investments taxes

What are the three reasons why the CPI is hard to measure accurately?

REASON FOR DIFFICULTY OF MEASURING CPI consumers substituting one good for another because of price changes in the quality of the same good, over time new products to buy and new ways for consumers to buy them NOT A REASON FOR DIFFICULTY OF MEASURING CPI changes in the tax rate and therefore in take-home income the difference between nominal and real buying power

Which of the following scenarios are likely to lead to inflation, and which are not?

SCENARIO(S) LIKELY TO LEAD TO INFLATION The government prints $500 million in new currency to finance current infrastructure spending. The quantity of goods and services in the economy increases by 2% while the supply of money increases by 4%. SCENARIO NOT LIKELY TO LEAD TO INFLATION The supply of money decreases. The population of a nation decreases.

Match the job sectors to their workforce shares for the years 1800 to 2010.

SERVICES INDUSTRY AGRICULTURE

True or False: Some amount of unemployment will always exist, even in a healthy economy.

TRUE

True or False: Surprise inflation can help people who have borrowed money.

TRUE

The unemployment rate in economy X when it is growing normally (its "natural rate of unemployment") is 5%. When economy X is in a recession, the unemployment rate is 8%. Fill in the blanks to complete the statement about the unemployment rate.

The CYCLICAL unemployment rate while economy X is GROWING NORMALLY is 0%. The 5% normal unemployment rate is due to structural and FRICTIONAL factors.

Fill in the blanks to complete the passage about the rate of unemployment.

The rate of unemployment when the economy is not in recession is called THE NATURAL RATE OF unemployment (U*). If the rate of unemployment is below this, the economy is experiencing NEGATIVE cyclical unemployment.

Which of the following statements about unemployment is true?

To be officially unemployed, a person has to be in the labor force.

Fill in the blanks to complete the passage about inflation in Venezuela.

Venezuela initially prospered by exporting OIL. But it became too dependent on that one industry, and when the price plummeted, Venezuela's economy was in trouble. The government, in order to continue funding POPULAR PROGRAMS , began recklessly PRINTING money. This drove the inflation rate upward, until in 2018 it hit an annual rate of 1 MILLION percent. Inflation at that level is called HYPERINFLATION.

What could happen if the CPI is under-calculated and neither workers nor employers are aware of this?

Wages will be too low.

What best describes why inflation occurs?

an increase in the size of the money supply

Which of the following type(s) of unemployment are most associated with an economy that is experiencing dynamic growth and technological progress?

structural unemployment

Inflation occurs when the amount of money in an economy grows, relative to what?

the quantity of goods and services