Econ Test 2

Inflation Rate

= % rate of change of a price index. Inflation does not relate to the level of prices, but to their percentage change. The inflation rate in recent years has been around 2%.

Labor Force participation Rate

= (labor force / population 16 years and older) x 100

Unemployment rates for different groups

Adults have substantially lower unemployment rates than teenagers. Minorities have high unemployment rates. African American teenagers have extremely high unemployment rates.

Hyperinflation

An inflation rate exceeding 50% per month.

Cost-of-Living Adjustments (COLAs)

Automatic increases in wages or other payments that are tied to the CPI

Seasonal Unemployment

Component of unemployment attributed to seasonal factors

Shoe-leather costs

Costs of inflation that arise from trying to reduce holdings of cash. Costs can be large, as much as 1% of GDP

Types of Unemployment

Cyclical. Frictional. Structural

Anticipated Inflation

Inflation that is expected. Despite being expected, this type of inflation still has its costs. Ex: menu costs, shoe-leather costs, costs of indexation.

Unanticipated Inflation

Inflation that is not expected. Can be good for some and bad for others. Ex: If you negotiate a new salary with your employer, either you or your employer is going to win or lose.

Problems in measuring changes in prices

Many economists believe that all the indexes overstate actual changes in prices. They believe we overstate the inflation rate by 0.5 and 1.5 percent each year.

Consumer Price Index (CPI)

Measure to track the cost of living over time. Measures the prices of a fixed basket of goods chosen to represent the consumption patter of a typical consumer.

Deflation

Negative inflation or falling prices of goods and services. Deflation is a bad thing. Wages decrease. Bad for debtors.

Marginally attached Workers

Not counted in the labor force -Discouraged workers -Workers who are not looking for jobs because of other reasons

Unemployment Insurance

Payments unemployed people receive from the gov't upon becoming unemployed. Usually only temporary. Usually leads to a longer period of unemployment for the person bc they have a cushion.

Components of the CPI (basket of goods)

Rent and food and beverages make up 44% of the CPI basket. Rent makes up the most of it.

Menu Costs

The costs associated with changing prices and having to print new price lists when inflation/deflation occurs. Ex: Reprinting billboards, restaurant menus, etc. Relatively small cost for an economy

The natural rate of unemployment

The level of employment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment

Full Employment

The level of unemployment that occurs when the unemployment rate is at the natural rate.

Labor Force

Total Number of Workers. Comprised of the employed and the unemployed. Labor Force = employed + Unemployed Military personnel and prisoners are not included in the labor force.

Unemployment Rate

Unemployment Rate = (unemployed / labor force) x 100

Cyclical unemployment

Unemployment that occurs during fluctuations of real GDP

Structural Unemployment

Unemployment that occurs when there is a mismatch of skills and jobs. Occurs when the economy evolves.

Frictional Unemployment

Unemployment that occurs with the normal workings of an economy. Examples include workers taking time to search for suitable jobs and firms taking time to search for qualified employees. Some frictional unemployment is good for an economy.

Discouraged Workers

Workers who left the labor force bc they could not find jobs