Chapter 6 Notes and Quizes

Suppose that the CPI in 2013 was 250 and the CPI in 2014 was 260. What is the rate of inflation in this economy?

4.0%

The natural rate of unemployment in the United States is between 4.5% and 5.5%. 5.5% and 6.5%. 3.5% and 4.5%. 2.5% and 3.5%.

4.5% and 5.5%.

Suppose that in Southlandia, frictional unemployment is 2%, structural unemployment is 3%, and cyclical unemployment is 4%. What is the natural rate of unemployment in Southlandia?

5%

Producer price index (PPI):

An index of the average change in prices received by producers for their output.

Which group is helped by inflation? restaurant owners who must reprint menus debtors senior citizens on a fixed income creditors

Debtor

If the cost of a typical market basket in 2019 is 400 and the cost of a typical market basket in 2020 is 390, then during this period the economy is undergoing deflation. hyperinflation. inflation. disinflation.

Defation

From 1999 to 2002, the Japanese inflation rate was, respectively, -0.3%, -0.6%, -0.7%, and -0.7%. During this time, the Japanese economy underwent inflation. deflation. a rise in its price level. hyperinflation.

Deflation

Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as the invisible unemployed. temporary workers. the disgruntled unemployed. discouraged workers.

Discouraged workers

If Chuck gets laid off from a high-paying job and temporarily works as an Uber driver, he is considered not in the labor force. employed. unemployed. a discouraged worker

Employed

New entrants into the labor force constitute the largest segment of the unemployed. False True

False

U.S. steelworkers who have lost their jobs to workers receiving lower wages overseas are part of _____ unemployment. frictional structural seasonal cyclical

Sturctural

GDP deflator:

The broadest index used to measure inflation; it includes the prices of all goods and services in the economy.

In 2008, the rate of inflation was 2%, which then rose to 3% in 2009 before falling back to 2% in 2010. Between 2008 and 2009, the economy experienced _____ and between 2009 and 2010, the economy experienced _____.

inflation; disinflation

Inflation

is a general rise in prices throughout the economy. Prices for individual goods can fluctuate up or down, but the price level captures the overall trend in the movement of prices.

Hyperinflation

is an extremely high rate of inflation, over 100% per year. It typically is caused by excess government spending over tax revenues (high deficits) and the printing of money to finance deficits.

labor force

is the total number of people employed or unemployed.

Wages that are higher than equilibrium can lead to a downward wage-price spiral. unemployment. overemployment. a labor shortage.

unemployment.

Consumer price index (CPI):

An index of the average change in prices of a market basket of consumer goods and services. CPI= (Cost in Current Period)/(Cost in Base Period) x 100

Which is NOT a reason unemployment rates differ so much within the United States? clustering of industries in certain geographic areas cultural differences tax differences between states differences in preferences for living in a certain geographic area

Cultural differences

Jonathan is currently enrolled in college full-time; however, he works part-time at a restaurant on weekends to earn some spending cash. Jonathan would be considered:

employed

Arlina got a 5% raise while the rate of inflation was 6%. Arlina's standard of living rose by 2%. rose by 1%. fell by 3%. fell by 1%.

fell by 1%

The official unemployment rate as commonly reported by the Department of Labor each month does not include people who have not searched for work in the past week. are underemployed or have not searched for work in the past week. are actively seeking work. are underemployed.

are underemployed

Deflation

occurs when the rate of inflation turns negative.

Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2% debtors gain at the expense of creditors. there is a redistribution of income from creditors to debtors. people on a fixed income see the purchasing power of their incomes rise. creditors gain at the expense of debtors.

creditors gain at the expense of debtors.

If the cost of a typical market basket is 400 in 2018, 410 in 2019, and 415 in 2020, then during this period the economy is undergoing deflation. disinflation. inflation. hyperinflation.

disinflation.

The costs of cyclical unemployment can be minimized by providing training for individuals who have lost their jobs and who want a new career. providing training for individuals who have a job. keeping the economy on a steady, low-inflationary growth path. providing training for new entrants into the labor force.

keeping the economy on a steady, low-inflationary growth path.

During periods of economic expansion, cyclical unemployment can become _____, causing the unemployment rate to become _____ than the natural rate of unemployment. negative; lower negative; higher positive; higher positive; lower

negative; lower

Full employment is an unemployment rate of zero. occurs if cyclical unemployment is zero. consists of frictional unemployment and cyclical unemployment. consists of structural unemployment and cyclical unemployment.

occurs if cyclical unemployment is zero.

Disinflation

occurs when the rate of inflation falls but is still positive.

Nominal GDP in 2006 was $13,458.2 billion. In 2006, the GDP deflator was 116.9. What was the real GDP for 2006 if the GDP deflator uses 2000 as the base year? $11,512.6 billion $15,732.6 billion $11,522.5 billion $15,746.1 billion

$11,512.6 billion

labor force participation rate

The percentage of the adult noninstitutionalized population that is in the labor force.

Suppose Robert has a wage contract subject to an escalator clause. He earned $22 per hour last year. In the same year, the consumer price index rose from 120 to 126. Based on the given information, what should his new wage be? $23.10 per hour $22.50 per hour $24 per hour $24.40 per hour

$23.10 per hour

If GDP was $10 trillion in 2001 and the GDP deflator was 100 in 2000 and 110 in 2001, what was real GDP? $11.1 trillion $9.09 trillion $10 trillion $110.0 trillion

$9.09 trillion

Which is NOT a reason unemployment rates differ so much within the United States? clustering of industries in certain geographic areas tax differences between states differences in preferences for living in a certain geographic area cultural differences

Cultural differences

When the economy is operating at the natural rate of unemployment _____ unemployment is zero. the sum of frictional unemployment and structural frictional cyclical structural

Cyclical

Which type of unemployment do economists attempt to resolve using economic policy? frictional structural frictional and cyclical cyclical

Cyclical

Who Are NOT Considered in the Labor Force?

Discouraged workers are the portion of marginally attached workers who have given up looking for work because they believe there are not enough good jobs. Marginally attached workers are those who have looked for work in the past 12 months but not in the last four weeks. Students who do not work are not counted in the labor force. Retired persons and children under 16 are not counted in the labor force. Institutionalized persons including persons in prison also are not counted in the labor force.

All of these types of wages can cause unemployment EXCEPT union. efficiency. minimum. equilibrium.

Equilibrium

A consumer price index of 107 means that prices rose by 7% from the previous year. False True

False

As a measure of inflation, the media gives more attention to the GDP deflator than the consumer price index. False True

False

Like the consumer price index, the personal consumption expenditures price index is based solely on household surveys. False True

False

Like the consumer price index, the personal consumption expenditures price index is based solely on household surveys. True False

False

The GDP deflator is the narrowest of the measures of inflation. False True

False

The consumer price index is a cost-of-living index. False True

False

The consumer price index measures the average change in prices received by domestic producers for their output. False True

False

The nominal value of wages explains how much a consumer can pay for goods and services. False True

False

The nominal value of wages explains how much a consumer can pay for goods and services. True False

False

The nonaccelerating inflation rate of unemployment does not change over time. True False

False

Assume that Bob reads an article for class concerning the U.S. labor market that reports an increase in entrepreneurial activity. To verify this information, he could refer to the payroll survey. weekly jobs report. current employment statistics survey. household survey.

Household survey

Frictional unemployment:

Includes workers who voluntarily quit their jobs in search of better positions or recent graduates seeking their first full-time job.

Suppose you took out $20,000 in student loans at a fixed interest rate of 5%. Assume that after you graduate, inflation rises significantly as you are paying back your loans. Does this rise in inflation benefit you in paying back your student loans? Who is hurt more from unexpected higher inflation—a borrower or a lender?

Inflation reduces the purchasing power of a dollar. Therefore, if you borrow money when inflation is low and pay back the loan when inflation is higher, the money you are paying back is worth less than what you received. You benefit by being able to pay back your loans with money that is valued at less than before. Thus, unexpected inflation hurts lenders because the money they are being paid back has less purchasing power than they planned. Alternatively, had the inflation rate unexpectedly fallen, lenders would gain, as the money being paid back would have more purchasing power than was expected.

Which statement about the weekly jobs report is NOT true? It is released by the Department of Labor. It contains an estimate of the total number of people receiving unemployment benefits. It is used as a way to estimate trends in hiring. It is used as a way to estimate trends in layoffs.

It contains an estimate of the total number of people receiving unemployment benefits.

Johnny is 17 and works in his father's bubble gum store 10 hours a week after school. His father pays him no money but buys video games for him. However, Johnny earns a spot on the high school football team and no longer works in his father's store. How is Johnny categorized in the unemployment figures? Johnny is not part of the labor force. Johnny is considered unemployed. Johnny is considered employed because he works hard at his football career. Johnny is considered underemployed.

Johnny is not part of the labor force.

Structural unemployment:

Longer-term unemployment that is caused by changes in consumer demands or technology and requires workers to use their skills in another industry or to retrain for a new career.

The main reason people were unemployed in the United States in 2018 was because they were reentrants into the labor force. were new entrants into the labor force. lost their job. left their job.

Lost their job

The financial industry experienced a rapid expansion in the mid-2000s as a result of the housing bubble, which created jobs for millions of workers in banks, mortgage companies, financial advising companies, and insurance companies. When the bubble burst, many of these workers became unemployed as the financial industry retrenched. For many, their skills were so specialized that they were unable to find new jobs at their old salaries. Were these people frictionally, structurally, or cyclically unemployed? Explain.

Many workers became structurally unemployed because the skills they acquired for the financial industry (and, in many cases, specific to the housing industry) were not as useful in other industries. Therefore, as the financial industry became smaller after the housing bubble burst, many workers needed to find work in other industries, which often meant acquiring a new skills set.

The Main Causes of Inflation

Strong consumer demand: Consumers spend more money, demand increases, and prices rise. Supply shocks on key inputs: When prices for goods with inelastic demand (such as food or oil) rise, the higher prices are passed on to other industries and to consumers. Government printing money: When a government prints money to finance its borrowing, more money is chasing a relatively fixed amount of goods and services, and therefore prices rise.

U.S. steelworkers who have lost their jobs to workers receiving lower wages overseas are part of _____ unemployment. structural cyclical seasonal frictional

Structural

Price level

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).

The natural rate of unemployment or nonaccelerating inflation rate of unemployment (NAIRU)

The natural rate of unemployment or nonaccelerating inflation rate of unemployment (NAIRU) is the rate of unemployment that exists when prices and wages are equal to people's expectations. At the natural rate of unemployment, the economy is at "full employment." Natural rate of unemployment = frictional + structural unemployment The natural rate of unemployment in the United States has trended downward over the past few decades and is stable between 4.5% and 5.5%.

In 2009, a market basket of goods and services cost $100 in Merryland while the same basket cost $200 in Berryland. In 2010, the cost in Merryland was $150 and in Berryland, the cost was $225. Based on the given information, which statement is TRUE? Berryland has more inflation than Merryland. The rate of inflation is four times as large in Merryland as in Berryland. The countries have the same rate of inflation. Neither country underwent inflation.

The rate of inflation is four times as large in Merryland as in Berryland.

Does it seem reasonable to require that to be counted as unemployed, a person must be actively seeking work? Why not just count those who do not have a job but indicate they would like to work?

The reason for the requirement that a person actively seek work is to differentiate empirically those who profess to want a job (at possibly a higher wage than they can earn in the market) from those who are actively trying to obtain work.

Cyclical unemployment can be mitigated by keeping the economy on a steady, low-inflationary, solid growth path. False True

True

Frictional unemployment refers primarily to workers between jobs. False True

True

In the United States, people are counted as employed if they have a job but are having child-care problems. False True

True

The personal consumption expenditures price index does a better job in approximating the cost of living than does the consumer price index. False True

True

Cyclical unemployment:

Unemployment that results from the business cycle—when a recession hits, firms lay off workers until the economy recovers.

The current consumer price index is calculated by dividing the market basket's cost in the base period by its cost in the current period. based on a changing bundle of goods and services from one period to the next. a cost-of-goods index. a true cost-of-living measure.

a cost-of-goods index.

Which person would NOT be considered employed? a unionized worker on strike a full-time worker on vacation an unpaid family employee working 10 hours a week a person working 10 hours a week for pay

an unpaid family employee working 10 hours a week

Retirees and creditors benefit from inflation because interest rates rise. are hurt by inflation because their purchasing power is reduced. are hurt by inflation because taxes decrease. benefit from inflation because they are paid in cheaper dollars.

are hurt by inflation because their purchasing power is reduced.

Employed persons

are individuals age 16 and over who work for pay, whether full-time, part-time, or even temporary.

Unemployed persons

are those without jobs but actively seeking work.

The official unemployment rate as commonly reported by the Department of Labor each month does not include people who have not searched for work in the past week. are actively seeking work. are underemployed or have not searched for work in the past week. are underemployed.

are underemployed.