macro test 3

How is inflation rate calculated?

Inflation rate = (price level this year - price level last year) / price level last year x100

how do you convert a nominal variable to a real variable

apply the inflation adjustment formula

Outlet substitution bias

as the structure of retailing changes, people switch to buying from cheaper sources, but the CPI, as measured, does not take account of this outlet substitution Ex. switching from Publix to Walmart

what is a major challenge with CPI?

can overstate true inflation

What is fiat money?

inconvertible paper money made legal tender by a government decree.

what type of market is the labor market

input market

what is indexation

is automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation

Quality change bias

quality improvements occur every year part of the rise in the price is payment for improved quality and is not inflation. CPI counts all price rises as inflation

what is the interest rate in terms of changes in your purchasing power

real interest rate

what is nominal wage rigidity

reluctance to cut nominal wages

what do efficiency wages cause

Structural unemployment

Unemployment rate formula

Unemployed / labor force x 100

what is cyclical unemployment?

Unemployment that is due to a temporary downturn in the economy

an estimate made in 1996 says what about CPI

says that the CPI overstates inflation by 1.1% points each year

what is the labor force participation rate

share of the working age population that is either employed or unemployed

two costs of expected inflation

shoe-leather cost menu cost

what is underemployment

someone who has some work but wants more hours or whose job isn't adequate using their skills

what is marginally attached

someone who wants a job, and who has looked for a job within the past year, but who isn't counted as unemployed because they aren't currently searching for a job.

what is involuntarily part-time?

someone who wants full time work but is working part-time because they haven't found a full time job.

what is equilibrium in the labor market

where the supply of labor equals the demand fro labor

Labor Force

working age population that either has a job or would like a job

Long term unemployment is associated with...

worse life expectancy, morbidity, clinical depression

what two things did people use before fiat money?

- barter - commodity money

3 issues brought by money illusion

- distorted prices - mispricing - nominal wage rigidity

what causes frictional unemployment?

- job search resources - skills/geographical mismatch - unemployment insurance

what are the two ways to measure changes in business prices?

- producer price index - GDP deflator

inflation adjustment formula

Today's Dollars = Another times dollars X Price level today/ Price level over time

when should you focus on real monetary variable? (3)

- to analyze when you are becoming better paid - to assess whether your stocks have become more valuable - to evaluate whether your sales staff are performing better

what causes structural unemployment?

- when wages are unable to fall to the market clearing wage - job protection regulation makes it hard to find workers - minimum wage laws

CPI construction steps

1) find out what people typically buy 2) collect prices from the stores where people do their shopping 3) tally up the price of the basket of goods and services 4) calculate the inflation rate

what are the three causes of unemployment?

1) frictional unemployment 2) structural unemployment 3) cyclical unemployment

3 reasons for inflation

1) general increase in demand, aggregate demand, as opposed to individual good demand 2) an increase in the price of widely used inputs 3) an increase in money supply

four challenges brought by CPI

1) new goods bias 2) quality change bias 3) commodity substitution bias 4) outlet substitution bias

six ways to protect yourself from unemployment

1)Don't postpone job search 2)Build up a nest egg 3)Build new skills 4)Look for new opportunities while you remain unemployed 5)Use your network 6)Avoid long-term unemployment

what are the three alternative measures of unemployment?

1)Underemployment 2)marginally attached 3)involuntarily part-time

labor force =

= employed + unemployed

what is CPI in the base year?

100

real interest rate =

= nominal interest rate - inflation rate

which measure of inflation do we use for estimating the price of all output/real GDP

GDP deflator

labor force participation rate formula

Labor force / working age population x 100

What is barter?

Trading/exchanging of goods and services without the use of money

Equilibrium unemployment rate

The long-run unemployment rate to which the economy tends to return

who is counted in labor market statistics?

Those age 16 or older who are not in the military or institutionalized are considered the working age population.

what can inflation result in

a decline in the purchasing power of money

GDP deflator

a price index that tracks the price of all goods and services produced domestically -(nominal GDP / real GDP) x 100

producer price index (PPI)

a price index that tracks the price of inputs into the production process

nominal variable

a variable measured in dollars (whose value may fluctuate over time)

real variable

a variable that has been adjusted to account for inflation

What are efficiency wages?

above-equilibrium wages paid by firms to increase worker productivity

what does personal consumption expenditure adjust for and why is this possible

adjusts for substitution bias, can do this because it is not based on a fixed basket of goods

hyperinflation

an extremely high rate of inflation Makes most aspects of life harder and erodes all the functions of money

consumer price index (CPI)

an index that tracks the average price consumers pay over time for a representative "basket" of goods and services

which measure of inflation do we use for cost of living

consumer price index (CPI)

Which inflation measure is used by forecasters?

core inflation - core CPI or core PCE

which measure of inflation do we use for forecasting underlying inflation trends

core inflation (excludes food and energy)

what principle does the new goods bias contradict

cost benefit principle

what type of money is money in the U.S.

fiat money

what type of price increase is inflation

general price increase

what does a high unemployment rate mean for the government

means they receive lower taxes but spend more

consumer price index (CPI)

measure of inflation most relevant to our lives as a consumer. Tracks the average price consumers pay overtime for a representative "basket" of goods and services

What is commodity money?

money that has intrinsic value in addition to being money - gold coins

what is the natural unemployment rate

natural unemployment rate = frictional unemployment + structural unemployment

new goods bias

new goods that were not available in the base year appear, and, is they are more expensive than the goods they replace they put an upward bias into the CPI

what issue does money illusion create

nominal wage rigidity

working age population

noninstitutionalized civilians over 16 years old

what is hysteresis

occurs when a period of high unemployment leads to a high equilibrium unemployment rate

Shoe-leather cost

on the consumer side, the resources wasted when inflation encourages people to reduce their money holdings. the cost of time and effort that people spend trying to counteract the effects of inflation.

menu cost

on the producer side, the cost of changing prices

Which inflation measure is used for monetary policy?

personal consumption expenditure

what do the feds use to set their inflation target

personal consumption expenditure

which measure of inflation do we use for monetary policies

personal consumption expenditure deflator (PCE deflator)

what is relative price increase

price increase not due to inlflation

which measure of inflation do we use for looking at cost of inputs

producer price index

children whose parents experience unemployment tend to...

suffer worse academically, mentally, and future economic outcomes

money illusion

the (mistaken) tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts

Commodity substitution bias

the market basket of goods used in calculating the CPI is fixed and does not take into account consumers' substitutions away from goods whose relative prices increase

what is frictional unemployment?

unemployment due to the time it takes for employers to search for workers and for workers to search for jobs

what is structural unemployment?

unemployment that occurs because wages don't fall to bring labor demand and supply into equilibrium