Chapter 9
Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
$70,288
Consider the following table: What is the real average hourly wage in 2009? What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
$8.21 Both real and nominal average hourly earnings increased.
If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)?
0.8%
Part Two During which period did the country experience an increasing rate of inflation?
1990 to 2005 or 1990 to 1995
Part Three During which period did the country experience a slow down in inflation, although the inflation rate remained positive? (This situation is called "disinflation.")
1995 to 2000
When the economy was expanding in early 2007, fewer than _______ percent of the unemployed had been jobless for more than 6 months.
20%
Part One Suppose the consumer price index (CPI) of a country follows the path shown in the figure to the right. During which period did the country experience zero inflation?
2000 to 2005. NOTES: The inflation rate is the percentage increase in the CPI from one year to the next. If the CPI does not change, the change, and the percentage change, are zero. There is zero inflation.
Part Four During which period did the country experience deflation?
2005 to 2010
Which groups tend to have above-average unemployment rates, and which groups tend to have below-average unemployment rates? Consider the following choices. Which one is not accurate? A. Generally, teenagers as a group have higher unemployment rates than adults. B. Black teenagers as a group have lower unemployment rates than white teenagers. C. Black adults have above-average unemployment rates. D. White adults have below-average unemployment rates.
B. Black teenagers as a group have lower unemployment rates than white teenagers.
Even perfectly anticipated inflation imposes costs. Why? A. Paper money loses its purchasing power by the rate of inflation. B. Some wages will fail to keep up with anticipated inflation. C. Menu costs. D. All of the above. E. A and C only.
D. All of the above.
The "normal" underlying level of unemployment in the economy is A. the natural rate of unemployment. B. the full-employment rate of unemployment. C. the sum of structural unemployment and frictional unemployment. D. All of the above.
D. All of the above.
When the economy is at full employment, A. the unemployment rate is greater than zero. B. all remaining unemployment is either frictional or structural. C. the natural rate of unemployment prevails. D. All of the above.
D. All of the above.
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy? A. Discouraged workers are not considered unemployed. B. It fails to account for illegal activities. C. It does not account for inaccurate responses to the Current Population Survey. D. Underemployed people are considered employed. E. All of the above.
E. All of the above.
According to Costco's CEO, Jim Sinegal: "Paying good wages and keeping your people working for you is good business...Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you." Sources: Alan B. Goldberg and Bill Ritter, "Costco CEO Finds Pro-Worker Means Profitability," ABCnews.com, Aug. 2, 2006; Lori Montgomery, "Maverick CEO Joins Push to Increase Minimum Wage," Washington Post, Jan. 30, 2007. What is Costco's CEO referring to?
Efficiency wages
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
Frictionally unemployed
The BLS used the establishment survey to collect information on employment in the economy. Indicate one drawback of the establishment survey compared to the current population survey and indicate one advantage.
It does not include information about self-employed people. AND It is based on company payroll and not on unverifiable answers.
The BLS uses the establishment survey to collect information on employment in the economy. Indicate one drawback of the establishment survey compared to the current population survey and indicate one advantage.
It is based on company payroll and not on unverifiable answers. AND It does not include information about self-employed people.
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation?
Lenders lose from a lower real interest rate AND Borrowers gain from a lower real interest rate
Which of the following formulas does the Bureau of Labor Statistics use to calculate the unemployment rate?
Number of unemployed/Number in labor force * 100
Albanda is an agrarian economy located in South Asia. Shen Chou and her friend Wang Tao are discussing the efficacy of the Consumer Price Index. Shen, who works with a nonprofit organization, says that the Consumer Price Index does not reflect the realities of consumption patterns of the average consumer. Wang, a policy planner, says that it must be accurate because it was updated only a year ago. Which of the following, if true, would strengthen Shen's argument?
Pensioners whose benefit payments are directly linked to the changes in CPI reported a decreased purchasing power compared to the previous year.
Which of the following can give an early warning of future increases in the price level?
Producer price index
How does the U.S. economy create and destroy millions of jobs each year?
Some businesses are expanding, while others are contracting. AND In the market system, new firms are constantly entering and exiting various industries.
Bob Wesley believes that structural unemployment should be eliminated in order for an economy to be healthy. In making this argument, which of the following relevant issues is he ignoring?
Structural unemployment will exist in an economy that is innovative.
The president of a manufacturing firm that makes precision tools in California's Silicon Valley was quoted in an article in the Wall Street Journal as saying that "production workers...are scarce," and that "many applicants lack even the most rudimentary skills." He added that: "I would say in this valley, people looking for jobs are unemployed for a reason." Source: Jeffrey Sparshott, "Skilled Workers are Scarce in Tight Labor Market," Wall Street Journal, February 2, 2017. Are these applicants likely to be cyclically, frictionally, or structurally unemployed, and what would be the reason that most of them are unemployed? Briefly explain.
Structurally unemployed, because these applicants lack the skills required for the available jobs.
Albanda is an agrarian economy located in South Asia. Shen Chou and her friend Wang Tao are discussing the efficacy of the Consumer Price Index. Shen, who works with a nonprofit organization, says that the Consumer Price Index does not reflect the realities of consumption patterns of the average consumer. Wang, a policy planner, says that it must be accurate because it was updated only a year ago. Which of the following, if true, would weaken Wang's argument?
The CPI in Albanda is calculated based on consumption and spending patterns of urban consumers.
Which one of the following depicts an accurate description of the household survey and the establishment survey?
The household survey interviews households and collects data that is used to measure the unemployment rate whereas the establishment survey interviews businesses and measures total employment in the economy.
Real interest rate
The nominal interest rate minus the inflation rate.
Nominal interest rate
The stated interest rate on a loan.
In January 2021, the working-age population of the United States was 260.9 million. The working-age population is divided into those in the labor force (160.2 million) and those not in the labor force (100.7 million). The labor force is divided into the employed (150.0 million) and the unemployed (10.1 million). Those not in the labor force are divided into those not available for work (93.6 million) and those available for work (7.1 million). Finally, those available for work but not in the labor force are divided into discouraged workers (0.6 million) and those currently not working for other reasons (6.5 million). Use this data to help determine which one of the following statements is true:
The unemployment rate is 10.1 million/160.2 million * 100 = 6.3% AND The labor force participation rate is 160.2 million/260.9 million * 100 = 61.4%
How would it affect the unemployment rate if the Bureau of Labor Statistics counted as unemployed both (1) discouraged workers and (2) people who work part-time but would prefer to work full-time?
The unemployment rate would increase.
Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
What advice for finding a job would you give someone who lost his or her job because of machine learning?
You should tell the worker that he or she needs to learn new skills or move to another city to find a job.
The increase in labor turnover and the increases in entry-level wages being paid by large retailers are...
connected because higher wages can encourage workers to stay longer, thereby lowering turnover rates.
Workers who lose their jobs because of a recession are experiencing...
cyclical unemployment.
When an unemployed person drops out of the labor force, it...
does not affect the employment-population ratio.
When the economy is at full employment, which types of unemployment remain? A. frictional and cyclical B. cyclical and structural C. frictional and structural D. None of the above. Full employment means that there is no unemployment, so the unemployment rate would be zero.
frictional and structural
The unemployment rate declined from 3.8 percent in March 2019 to 3.6 percent in April. The labor force participation rate also declined from March to April, from 63.0 percent to 62.8 percent. Holding constant the number of people employed in April 2019, if the labor force participation rate had increased instead of decreased, the unemployment rate for April 2019 would be...
greater than 3.6 percent because adding the same number to both the numerator and the denominator of a fraction that is less than one increases the value of the fraction.
Unemployment rates are...
lower for college graduates than for people without a high school degree, and vary greatly among ethnic groups.
The employment-population ratio measures the...
percentage of the working age population that is employed.
When compared to the Great Depression, the typical length of unemployment in the modern (post-Great Depression-era) U.S. economy is...
relatively brief.
In 2015, an article on bloomberg.com noted that Walmart, Starbucks, TJ Maxx, IKEA, Gap, and several other big retailers had announced increases in the wages they were paying newly hired workers. The same article also noted that "[labor] turnover in the retail sector has been steadily rising and now stands at 5 percent a month." Source: Kyle Stock and Kim Bhasin, "Why Retailers Are Suddenly Desperate to Keep Their Least-Valuable Workers," bloomberg.com, March 6, 2015. The term "labor turnover" used in the article means the...
separation of an employee from an establishment.
According to the BLS, in what category of unemployment would that person belong? If someone lost his or her job because of machine learning, that person would be considered...
structurally unemployed.
Many economists prefer...
the establishment survey because it is determined by actual payroll records rather than unverified answers.
Many economists rely more on the number of employed persons from the Bureau of Labor Statistics' establishment survey than from its household survey because...
the establishment survey uses actual company payrolls rather than by unverified answers, as is the case with the household survey.
When the economy is at full employment, unemployment is equal to...
the natural rate of unemployment.
Computation of the CPI assumes that households buy the same market basket of products each month. For this reason, which one of the following factors is not relevant in calculating the CPI?
the quantities of the products households purchase in the current year
The natural rate of unemployment is...
the sum of structural unemployment and frictional unemployment.
When an unemployed person drops out of the labor force, the unemployment rate...
understates the true degree of joblessness in the economy.
An article in the Wall Street Journal asks the question, "How can inflation be low when everything is so expensive?" The article also notes that "the CPI shows that prices are the highest they've ever been." Source: Josh Zumbrun, "5 Things You Always Wanted to Know about Inflation Statistics," Wall Street Journal, May 15, 2014. Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"?
No, because the CPI and inflation measure only changes in the price level, not the absolute level of prices.
Of the eight categories in the CPI market basket, which three categories make up more than 75 percent of the basket?
housing, transportation, and food
