WEEK 5-6

David's pay last year was $100,000. His pay this year increased to $115,000. The consumer price index increased from 100 to 115 over the same time period. What has happened to David's real income from last year to this year?

David's real income is unchanged.

Why are certain policy decisions (like those undertaken by the Federal Reserve) best informed by using the core inflation index as opposed to the CPI?

Fluctuations in food and energy prices can be transitory.

Which scenario could you use as an example of frictional unemployment when explaining it to a friend?

Fred thinks he is being underpaid at his current job. He quits to find a better paying job, which takes eight months.

Which of the following individuals would be excluded from the unemployment rate?

George who is staying home to tend to his children while his partner works.

Cross-country comparisons of unemployment rates are difficult for all the following reasons except:

Higher government employment in developed countries.

How may low inflation actually assist labor markets adjust towards equilibrium?

It allows for the gradual downward adjustment of real wages.

Based on the following table comparing fictional international country unemployment rates, which country from the 1970s to 1985 had the best and healthiest economy? International Comparison of Unemployment RatesCountry1970197519801985Ulidia4%2.8%3.4%6.0%Agreriven7%6.0%5.7%4.5%Saede3%4.5%3.4%5.2%Galoiri5%7.0%5.5%2.5%

It can't be determined just by the information in the table.

In the last few decades the car manufacturing sector has found it difficult to compete with foreign car imports. High labor costs is one of the main reasons economists cite for the lack of competitiveness in the car manufacturing industry. How could a modest inflation help the car manufacturing industry in the United States compete with foreign car manufacturers?

It could allow real wages to downwardly adjust more easily.

Which of the following does NOT describe inflation?

It means that the price of every good and service is rising.

Among all high-income countries, which consistently has the lowest long-run unemployment rate in the past 30 years?

Japan

In 1985 inflation in Israel reached a record 500%. How did this period of high inflation affect market adjustments towards equilibrium price and quantity?

Markets adjusted to equilibrium more erratically and slowly.

Which of the following is NOT a shortcoming of using the CPI to measure changes in the cost of living.

Monetary policy

Henry accepted a new position at a ball bearing manufacturing plant after graduation from college. With his macroeconomic education, Henry has been asked to advise the best way to measure inflation for the company to be able to accurately adjust its prices. What would Henry advise the company use?

Producer Price Index

Which of the following is the name used to describe the price index that consists of raw materials and intermediate goods?

Producer Price Index

When the economy is at full employment, what is the relationship between real GDP and real potential GDP?

Real GDP is equal to real potential GDP.

What is excluded from the official calculation of the unemployment rate?

Students who are attending school full time and not working.

Which of the following is an example of structural unemployment?

Telephone operators replaced by computerized systems in the 1970s.

The mid-1990s saw a rise in the use of mobile phones in the general population. The technology continued to improve in the early 2000s and in the mid-2000s smartphones revolutionized the way people communicated. The technology has changed very rapidly and improved the lives of consumers. With these rapid changes, what would you suspect has happened to the CPI calculation?

The CPI has overstated the cost of living because of quality improvement bias.

If economists design a way to eliminate the substitution bias in CPI calculations, how is the CPI likely to change as a result?

The CPI will grow at a slower rate.

All else equal, increasing unemployment insurance will cause

The natural rate of unemployment to increase.

To determine the unemployment rate, you need to calculate

The number of unemployed workers divided by the labor force.

The unemployment rate measures:

The percentage of the labor force who do not have a job, but are looking for one.

Which of the following BEST fits the definition of inflation?

The price of most goods and services increases by 5% over a 2 year period.

The base year for the price index is

an arbitrary year from which to measure price changes.

The idea that only the most efficient workers will depart in response to a wage cut is called ________.

adverse selection of wage cuts.

A price index is NOT

an inflation rate.

Some critics of the unemployment rate say that it under-reports the actual unemployment problem by:

considering discouraged workers to be out of the labor force.

Fluctuations in the unemployment rates over the past 50 years can best be explained by

cycles of economic expansions and recessions.

Bill is a construction worker who was laid off because the market for new homes was adversely affected in the recession. Bill's unemployment experience is referred to as

cyclical unemployment.

Cyclical unemployment is caused by the ________ for labor ________ during a recession.

demand; shifting to the left

The consequences of unemployment are likely more serious in developing countries because...

developing countries are more likely to lack unemployment assistance programs.

This past year inflation in Snowdonia has increased to 150%. As an economic analyst, you are charged with identifying those sectors of the population worst affected by this inflation event. Which group of people is likely to be worst affected by inflation?

disabled veterans living on fixed (non-adjustable) government transfer payments

In the labor market diagram, the demand (downward-sloping) curve represents ________.

firm's demand for labor

Which types of unemployment exist at all times and determine the natural rate of unemployment?

frictional unemployment and structural unemployment

Tom graduated from college in June but was still looking for work in August. This is an example of ________.

frictional unemployment.

Which is the largest expenditure category in the U.S. CPI?

housing

Which of the following is included in the core inflation index calculation?

housing prices

Calculate the unemployment rate based on the following data for a country: Population: 200, Employed workers: 140, Labor Force: 160, Discouraged workers: 10.

12.5% (Unemployment rate = # unemployed / labor force = (160-140)/160 = 12.5%)

Which form of unemployment suggests workers need to seek education and training to update their skill sets?

structural

After the success of the Apollo space program, in the mid-1970s NASA budget cuts resulted in a decrease in the number of jobs for aerospace engineers. This was an example of ________.

structural unemployment.

If technological growth and innovation slows over a long period of time, which CPI bias problem is likely to persist?

substitution bias

Frictional unemployment occurs because in a world of imperfect information, it takes ________ for people to find jobs.

time

When the macroeconomy is experiencing a higher than natural rate of unemployment, it must be because

wages cannot adjust downward quickly and easily.

Which of the following BEST describes the effect inflation has on purchasing power in the United States over the past several decades?

$100 today has the same purchasing power as $15 in 1972.

In Fairwind Country, there are only 4 consumer goods or services: tourism, popcorn, carrots, and berries. Using the data in the following table, please calculate the CPI values for 2005 and 2015, using 1985 as a base year. The average family purchased the market basket indicated by the columns "Items" and "Quantity." ItemsQuantityYear: 1985Year: 2005Year: 2015PriceAmount SpentPriceAmount SpentPriceAmount SpentTourism2$125.00$150.00$200.00Popcorn25$4.00$5.00$7.00Carrots10$0.75$2.25$3.50Berries15$1.50$2.50$4.00Total2

2005: 128; 2015: 176

The following table indicates the CPI for the country of Praton over the last four years. Using the information in the table, calculate the annual inflation rates. Which time frame had the lowest annual inflation rate? YearCPI20131002014105201511020161222017127

2016-2017

In the table below there are three years of a basket of retail goods. From this information calculate the price index of 1990 if the base year in 1980? (Round your answer to the nearest whole number.) GoodAmount198019851990Tomatoes25$0.15$0.25$0.55Milk5$1.50$2.23$2.95Eggs1$1.00$1.25$1.50

245

While the U.S. unemployment rate fluctuates over time, it normally returns to a long-run average somewhere between

4% and 6%.

In the far off kingdom of Viracien there is a healthy sized population of citizens over 16 years old. The last census indicated a total adult population of 5 million people. This year a recession hit and 237 thousand people were let go from their jobs and are on the hunt to find new work. Because of the recession many took early retirement and there is now a population of 1.3 million who are not working or looking for various reasons. Because of the unrest, the military of Viracein has increased its ranks and is now grown to a total of 50 thousand citizens serving the country. What is the country's unemployment rate?

6.5% (Unemployment rate = # unemployed / labor force = (237,000)/(5,000,000-1,300,000-50,000) = 6.5%)

In 2008 the price index was calculated at 165.2 with 2005 as the base year. In 2009 the price index increased to 181.6. What was the inflation from 2008-2009?

9.9%

With a Consumer Price Index of 179.8 at the end of last year and 186.5 at the end of this year, the country experienced which of the following?

An inflation rate of 3.72 percent.

Why does Inflation increase uncertainty in the markets?

Because it is harder to stay aware of how one product cost compares to another.

You are an economist studying the small country of Mardodus. As you look at the data, you see Mardodus has experienced an influx of updated technology to its manufacturing plants, service industry and the medical field in the last three years. This change boosted the growth of the country's productivity by 75%, yet you see that wages have been very slow to respond to this growth. As you begin to analyze the natural unemployment rate for this time frame, what do you most likely discover?

Natural rate of unemployment will decrease because the productivity growth in the short term has surpassed wage growth.

During the 1990s worker productivity growth spiked as computers and the internet were introduced to many businesses for the first time but wage increases did not match gains in productivity. How did this affect the natural unemployment rate?

Natural unemployment decreased as productivity growth outstripped wage growth.

You have older parents who have been saving for retirement for decades. They are now getting close to retirement age and are looking at their options. One would like to leave everything in the pension fund and draw out a fixed, unchangeable amount over their retirement time. Your other parent wants to take out a chunk of retirement funds and purchase a business and use the profit from it to generate funds on which to live. You have noticed that inflation over the last few years is on a rapid rise. What would you advise your parents to do based on what you know of inflation and its redistribution of purchasing power?

You would advise them to invest their retirement funds and keep their money working for them in order to keep up with inflation.

Which of the following demographic has the highest unemployment rate according to U.S. Census Bureau data?

Young African-American men

With accelerated inflation In the 1980s middle-class Americans benefited primarily because

in real terms, their home mortgage debts decreased in value.

If the Consumer Price Index was 120 at the end of last year and 125 at the end of this year, Americans experienced which of the following?

inflation

Rapid technological change is likely to increase which problem MOST for CPI as an accurate measure of cost of living changes?

new goods bias

A year ago Parker reached his retirement and left the business to pursue other interests. He is now spending lots of time playing golf and visiting his grandchildren. For purposes of employment he is considered:

out of the labor force.

As more women entered the workforce in the late 20th century, the long-run US unemployment rate has

remained mostly unchanged.

Inflation makes certain things less valuable in real terms, including:

the dollar.

Using your understanding of economic history and inflation, which inflation target is most advisable?

1-2%

Given the table above, what is the price index for 2013, with 2012 as the base year having a price index of 100 (round your answer to the nearest whole number). ItemsQuantity in Basket2012 Price2013 PriceCake3$12.00$13.00Pie4$8.00$10.00Cupcake10$2.00$2.50

118

The number of people employed in one country is 230 million, with a total number of unemployed people at 40 million. The total population for the country is 500 million. What is the unemployment rate?

14.8% (Unemployment rate = # unemployed / labor force = (40)/(230+40) = 14.8%)

Which of the following inflation rates is most likely to affect consumer behavior?

15%

In the country of Cardonia, the natural rate of unemployment is 3.5% according to the Ministry of Economics. Last year there was an economic slow down where the actual rate of unemployment increased to 4.5%. Assuming that the unemployment percentages are accurate for Cardonia, what is the likely outcome for the economy of Cardonia?

Cardonia's economy will start growing again until real GDP is equal to potential real GDP and the unemployment rate equals 3.5%.

The GDP Deflator is

the ratio of nominal GDP to real GDP.

After a prolonged period of high inflation the government of Atlantia decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is best supported by the economic literature?

A 0% inflation target could lead to deflation.

Under ideal conditions inflation should not have any blurring effect on price signals. If wages and prices are rising at a constant 20% then individuals should be able to adjust their expectations accordingly. For example, if the price of bread increased by 20% and the price of the input flour also rose by 20%, the sellers should know that the real price of bread has not changed. The market equilibrium quantity and price has not changed. Why does inflation in the real world result in shortages and surpluses?

Price adjustments are not synchronized or smooth.

The Campus Collective company, which creates unique apps for colleges, has recently lost three large university clients that made up 40% of its total revenue. This has hit the company hard and management finds it necessary to reduce staff or wages. The economy also appears to be headed toward a recession and gaining more clients will most likely be harder to accomplish. Because it is a smaller company everyone knows each other and knows there are tough choices ahead. Management brings up the idea of an across the board wage reduction so that no one will be let go, but some employees don't believe that a wage cut will be equally applied to all. The employees are also not sure if other people working their same jobs in the economy are getting reduced wages. They start to argue against wage reduction and things get a bit heated. Which of the following theories best illustrate this wage stickiness scenario?

Relative wage coordination argument

The theory of frictional unemployment suggests that workers in which age group are least likely to be unemployed for a significant period of time?

workers aged 25-54