ECO 231

Based on the following data, compute (a) the unemployment rate, (b) the structural unemployment rate, and (c) the cyclical unemployment rate. The frictional unemployment = 2 percent, natural unemployment rate = 5 percent, civilian labor force = 100 million, and number of employed persons = 82 million.

(a) The unemployment rate = (100 million - 82 million) / 100 million = 18%. (b) The natural unemployment rate = frictional + structural = 2% + 3% = 5%. (c) Cyclical unemployment rate = the current unemployment rate - the natural unemployment rate = 18% - 5% = 13%.

If the price of, say, oranges has risen, does it follow that the price level has risen too? Explain your answer.

No, because the price level includes the price of all goods. Prices of other goods may have fallen, offsetting the effect of the higher price for oranges.

If the CPI is 150 and nominal income is $100,000, what does real income equal?

Real income = ($100,000 / 150) x 100 = $66,666.67

What is the relationship between your nominal income and the inflation rate if you are more than keeping up with inflation?

Your nominal income is rising faster than the inflation rate if you are more than keeping up with inflation.

How is a discouraged worker different from an unemployed worker?

A person who is unemployed is actively seeking work, while a discouraged worker has given up looking for a job, without finding one. The discouraged worker is not included in the unemployment rate, while the unemployed worker is.

Jim earned an annual salary of $15,000 in 1965. What is this equivalent to in 2005 dollars? (Use Exhibit 3 to find the CPI in the years mentioned.)

The CPI for 1965 = 31.5 The CPI for 2005 = 195.3 Jim's real income in 1965 = ($15,000/31.5) x 100 = $47,619.05. Set Jim's real income in 2005 equal to his real income in 1965 in the following equation and solve for his nominal income in 2005: (Jim's nominal income in 2005/195.3) x 100 = $47,619.05 Jim's nominal income in 2005 = $93,000.00 (this is the equivalent of $15,000 in 1965).

A house cost $10,000 in 1976. What is this equivalent to in 2001 dollars? (Use Exhibit 3 to find the CPI in the years mentioned.)

The CPI for 1976 = 56.9 The CPI for 2001 = 177.1 ($10,000 x 177.1/56.9) = $31,124.78

What does the CPI in the base year equal

The CPI in the base year always equals 100. This benchmark allows you to easily compare changes between the current year and the base year and to compare several different economic measurements that have the base year as their starting point.

Explain how the CPI is computed.

The CPI is computed by dividing the total dollar expenditure on a particular market basket of goods in the current year by the total dollar expenditure on that same market basket in the base year and then multiplying the result by 100.

Suppose, 60 million people are employed, 10 million unemployed, and 30 million not in the labor force. What does the civilian noninstitutional population equal?

The civilian noninstitutional population would be the sum of all three numbers, 60 + 10 + 30 = 100 million people.

What does it mean to say that the country is operating at full employment?

The country is operating at full employment when the current unemployment rate equals the natural unemployment rate and cyclical unemployment is zero.

Using the following data, compute (a) the unemployment rate, (b) the employment rate, and (c) the labor force participation rate. The civilian noninstitutional population = 200 million, number of employed persons = 126 million, and number of unemployed persons = 8 million.

The labor force = 126 + 8 = 134 million (a) The unemployment rate = 8 / 134 = 0.0597 = 5.87% (b) The employment rate = 126 / 200 = 0.63 = 63% (c) The labor force participation rate = 134 / 200 = 0.67 = 67%

What is the difference between the employment rate and the labor force participation rate?

The labor force participation rate includes both the number of employed persons and the number of unemployed persons in its numerator, while the employment rate only includes the number of employed persons.

How does structural unemployment differ from frictional unemployment?

The major difference between the two is that structurally unemployed individuals do not have transferable skills. Structural unemployment occurs when individuals are forced out of their jobs due to structural changes that eliminate those jobs. Frictional unemployment occurs because matching qualified workers with jobs takes time.

Using Exhibit 3, compute the percentage change in prices between (a) 1966 and 1969, (b) 1976 and 1986, and (c) 1990 and 1999.

1966 = 32.4 1969 = 36.7 Change = [(36.7-32.4) / 32.4] x 100 = 13.3% 1976 = 56.9 1986 = 109.6 Change = [(109.6-56.9) / 56.9] x 100 = 92.6% 1990 = 130.7 1999 = 166.6 Change = [(166.6-130.7) / 130.7] x 100 = 27.5%

What is "natural" about natural unemployment?

The natural rate of unemployment is the rate of unemployment that will exist under full employment conditions. It consists of frictional unemployment (voluntary job changers) and structural unemployment (people for whom there are no jobs for which they are qualified). It is, therefore, the rate toward which a growing economy moves naturally.

Change the current year prices in Exhibit 2 to $1 for pens, $28 for shirts, and $32 for a pair of shoes. What is the CPI for the current year based on these prices?

The new market basket value would be: 10 pens x $1 = $10, 5 shirts x $28 = $140, and 3 shoes x $32 = $96, total of $246. The CPI = ($246 / $67) x 100 = 367.16

Suppose 100 million people are in the civilian labor force and 90 million people are employed. How many people are unemployed? What is the unemployment rate?

The unemployed equal 10 million people (100 - 90), so that the unemployment rate is 10 million divided by 100 million, which equals 10 percent.

If the unemployment rate is 4 percent, it does not follow that the employment rate is 96 percent. Explain why.

The unemployment rate is calculated by dividing the number of unemployed persons by the civilian labor force, but the employment rate is calculated by dividing the number of employed persons by the civilian noninstitutional population. Since they have different denominators, the sum of the fractions would not normally equal one.

What criteria must be met in order for a person to be characterized as being unemployed?

To be characterized as unemployed, one must either (a) not have a job but made specific active efforts to find a job during the reference period and were available for work, or (b) is not working but is waiting to be called back to a job from which they had been temporarily laid off.

Assume the market basket contains 10X, 20Y, and 45Z. The current-year prices for goods X, Y, and Z are $1 $4, and $6, respectively. The base-year prices are $1, $3, and $5, respectively. What is the CPI in the current year?

Total dollar expenditures in base year were 10(1) + 20(3) + 45(5) = $295. Total dollar expenditures in the current year are 10(1) + 20(4) + 45(6) = $360. 360/295*100 =122.03