Macroeconomic Measures: Unemployment and Inflation
The chart below displays the total spending for a typical consumer on a fixed (unchanging) basket of goods during a four year period. If 1995 is the base year, what is the price index and inflation rate in 1998? Year_CPI 1995_$15,052 1996_$15,500 1997_$16,500 1998_$19,000
1.26, 15.2%
Below is a list of annual CPI values for the years 2000-2003. Using these values please calculate the average annual rate of inflation over this period. Year_CPI 2000_200.2 2001_205.6 2002_208.2 2003_209.1
1.46%
Based on what you know about how the price index is constructed, which of the following price increases will lead to the largest increase in the price index?
A housing shortage causes rent prices to increase by 10% in a single year
The country of Oceania possesses a highly developed industrial economy with a labor force participation rate of 80% and an unemployment rate of 4.2%. Eastasia meanwhile is classified as a developing economy and its economic ministry reports a labor force participation rate of 60% and an unemployment rate of 6%. Why might the fraction of Eastasia's working-age population engaged in economic activity still be higher than that of Oceania?
A significant fraction of Eastasia's working-age population is engaged in the informal economy including subsistence activities, barter, and short-term work.
The President is concerned that a recent financial crisis will increase the natural rate of unemployment. After three full quarters of negative economic growth the unemployment rate now stands at 10%, and she fears it will persist at this level indefinitely. As the President's economic advisor, which possible reply to the President's concerns most agrees with natural unemployment rate theory?
All else being equal, the cyclical unemployment brought about by the recession will not affect the natural unemployment rate.
Which of the following is an example of frictional unemployment as defined in the text?
An auto worker has received a job offer two states away, and must take off one month between jobs in order to relocate.
Why does Inflation increase uncertainty in the markets?
Because it is harder to stay aware of how one product cost compares to another
The base year for the price index is
an arbitrary year from which to measure price changes
Inflation makes certain things less valuable in real terms, including:
the dollar
natural rate of unemployment
the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time; the sum of frictional plus structural unemployment
When the macroeconomy is experiencing a higher than natural rate of unemployment, it must be because
wages cannot adjust downward quickly and easily.
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
Which group of people is harmed by the redistribution of purchasing power due to unexpected inflation?
lenders
Entering January 2000, the price index for a basket of consumer goods was standardized at 100. This price index increased to 103.4 in January 2001, 106.2 in 2002, 108.5 in 2003, and 110.2 in 2004. Calculate the inflation rates in 2000, 2001, 2002, and 2003.
2000: 3.4%, 2001: 2.7%, 2002: 2.2%, 2003: 1.6%
While the U.S. unemployment rate fluctuates over time, it normally returns to a long-run average somewhere between
4% and 6%
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
In the early 1980s, a new technology was introduced to banks where customers could withdraw their money without having to enter the bank or keep baking hours. As the first ATMs began to be introduced to more and more banks, it began to have an effect on bank personnel. Thinking about the bank environment, identify who would most likely be impacted by this technology change and suffer long term structural unemployment?
A bank teller with 4 years of relevant work experience and a high school diploma.
As the economic adviser to the President you are tasked with devising a set of policy recommendations to reduce the level of frictional unemployment and improving efficiency in the labor market. Which of the following policy options is a good candidate for your list of recommendations?
A federal subsidy to help job searchers relocate to new job opportunities.
To determine the unemployment rate, you need to calculate
the number of unemployed workers divided by the labor force.
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
Improved Quality/New Goods Bias:
As the quality of goods improves over time, and as new goods become invented, the prices of those goods naturally increase reflecting their increased value; the result is that the CPI overstates the cost of living since some of the price increases it measures represent increases in value, not cost
As a government economist you are tasked with estimating the impact of consumer electronics on the CPI. Which of the following is not an example of how consumer electronics cause the CPI to overstate the true cost of living?
Consumer electronics represent a relatively small share of consumer expenditure compared to rent, healthcare and education.
Jane is an unemployed construction worker desperate to find employment so she can cover her mortgage and basic living expenses. She is willing to work for any wage, yet is unable to find any paid work given the poor state of the economy. She continues her search despite the lack of opportunities. Which of the following economic terms best describes Jane's current predicament?
Cyclical Unemployment
In the early 1990s the introduction of computers to Indian banks caused significant unrest among bank tellers afraid the new technology would result in structural unemployment. If technology is a common cause of structural unemployment, how can the Indian (or any) government justify allowing technological improvements which cause workers to lose their jobs? The question has been evaluated.
In the long run new technology can create demand for high skilled workers which can offset the loss of low-skill jobs.
You work as an economic analyst at a small manufacturing firm producing umbrellas. Your CEO is overjoyed that revenues doubled over the past month as prices increased 200%. She interprets the higher prices and strong sales as a signal there is a shortage in umbrellas, and orders production increased. How would you assess her interpretation of events?
Inflation is a possible explanation for the price and revenue increases, so analyzing input prices is advisable before increasing production.
efficiency wage theory
the theory that the productivity of workers, either individually or as a group, will increase if they are paid more
A key takeaway from analyzing trends in the U.S. unemployment rate over the past 50 years is how persistent these trends have been. For example, the long-run unemployment rate has remained constant at 4-6% despite major technological and social changes during this period. Caucasians continue to have the lowest unemployment rate of any ethnic group. Which long-term trend has persisted to the present day?
Older workers (aged 55+) have the lowest unemployment rate among all age demographics.
Over the past year inflation in Tropico has increased to over 40%. As an economist, you are tasked with identifying those most vulnerable to the ravages of high inflation so that the government knows whom to help first. Which of the following types of people is most likely to be harmed by high inflation?
Pensioners living on a fixed income.
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.
Over the past ten years the cost of subscription cable service has substantially increased while the cost of internet services has fallen. At the same time new TV streaming services have been introduced which allow consumers to watch premium cable channels over the internet. How will this cause the CPI to overstate the cost of living?
Substitution bias - Consumers are likely to switch from cables services to internet streaming
In compiling the CPI for the fictional country of Doggerland the fresh fruit component of CPI is calculated assuming the average consumer buys 4 apples, 5 pears, and 2 peaches each week. Over the course of the survey the price of apples has doubled while the price of pears and peaches has remained mostly unchanged. This is likely to cause WHICH shortcoming in the CPI? In which direction will this bias the CPI as a measure of the cost of living?
Substitution bias, which will overstate the true cost of living
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.
Which of the following is a commonly cited reason for a decrease in the unemployment rate between the 1980s and today?
The baby boomer population reaching middle age
This past year inflation in the fictional country of Zeelandia reached an astonishing 150%. A fellow economist at the Ministry of Economics claims this will have little effect on price signaling, as producers can simply take the 150% inflation as a given and interpret any deviations as a true price signal. For example, if the cost of oranges increases by 155% while inflation is 150% then demand has increased and producers should produce more oranges. Do you agree with your colleague's assessment? Why or why not?
This is a poor assessment, as short term inflation and price changes are not so predictable
The President for Life of the small country of Yucatania is celebrating the 40th anniversary of their 'election' to office. In order to highlight how living standards have improved during their time in power they commission a series of propaganda posters showing how wages have increased by 1000% over the past 40 years. As an economist, what would you want to say to the President about this statistic (hopefully from a safe exile)?
Wage growth is a poor indicator of living standards without into account increases in consumer prices over the same period.
The developing country of Azania is debating a new labor law that will finally allow women to enter the workforce in greater numbers. Until now, Azanian women have required the permission of a male guardian to seek employment, and can only work a maximum of 20 hours per week. Conservatives oppose the new law arguing that such a large expansion of the labor force will increase the unemployment rate in the long-run. What does the U.S. experience tell us about the likelihood of this coming to pass?
Women entering the workforce has had little to no effect on the U.S. unemployment rate.
401(k):
a defined contribution retirement program to which the employee and often the employer contribute
Inflation
a general and ongoing rise in the level of prices in an economy
index number:
a unit-free measure of an economic indicators; index numbers are based on a value of 100, which makes it easy to measure percent changes
implicit contract
an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong
base year:
arbitrary year whose value as an index number is defined as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—i.e., 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year
employed
currently working for pay
Joseph is an unemployed yard landscaping worker who is trying to find employment as he last had work seven months ago. He is now at a point where he will take any wage even if low to get money to pay the bills. He talks to businesses and landscaping companies on a daily basis but none are hiring due to an ongoing recession. How would you describe his experience with the correct economic term?
cyclical unemployment
Cyclical unemployment is caused by the ________ for labor ________ during a recession.
demand; shifting to the left
price indices:
essentially the weighted average of prices of a certain type of good or service; price indices are created to calculate the inflation rate, i.e. the percent change in prices over time
Employment Cost Index:
estimate of the average cost of labor compensation to employers, including wages, salaries and fringe benefits
After a long period of high inflation the minister of finance pledges "never again" and sets the inflation target at 0%. Why might such a low inflation target be a poor policy?
it could result in deflation
Which form of unemployment suggests workers need to seek education and training to update their skill sets?
structural
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%
Examine a basket of retail goods with the corresponding prices below. What is the price index in year 4 if year 1 is the base year? What is the price index in year 4 if year 3 is the base year? Good_Amount_Year 1 Price_Year 2 Price_Year 3 Price_Year 4 Price Tuna_30_$2.50_$2.70_$2.95_$3.20 Onions_6_$0.70_$0.80_$0.92_$1.05 Sugar_1_$12_$14.50_$16.70_$19
133 and 109.56
Below is a list of annual CPI values for the fictional country of Zeuslandia. During which year did this country experience the lowest annual inflation rate? Year_CPI 1985_100 1986_105 1987_110 1988_115
1987-1988
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
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.) Good_Amount_1980_1985_1990 Tomatoes25$0.15$0.25$0.55 Milk5$1.50$2.23$2.95 Eggs1$1.00$1.25$1.50
245 $30/$12.25 = 245
The small coastal town of Innsmouth in Essex County, MA has a total population of five thousand, of whom four thousand are aged sixteen and above. The nearby Miskatonic University is currently studying the town's labor force after recent allegations of unusual work patterns by the town's inhabitants. The university's labor economists find that only one thousand of the town's inhabitants are currently employed, mostly at a small gold refinery running of the leanest kind of part-time. A further 100 townspeople are classified as unemployed---not working but currently searching for new employment. Based on these finding, what is Innsmouth's current labor force participation rate and percentage out of the labor force?
27.5% and 72.5%
The country of Snowdonia has a total adult population of 10 million, and of these 210 thousand are currently out of work and actively searching for new employment. A further 2.9 million are not working because they are retired, institutionalized, or simply choose not to work (i.e. homemakers and full-time students). Finally a total of 100 thousand citizens are currently enlisted with the Snowdonian military. Assuming the Snowdonian ministry of statistics uses the same unemployment formula as the U.S. Bureau of the Census, what is Snowdonia's current unemployment rate?
3%
The small country of Vinlandia has a total adult population of 5 million. Of these 3.5 million are currently employed while 500 thousand are out of work and currently searching for new employment opportunities. The Ministry of Statistics estimates there are 300 thousand retirees and 150 thousand who are out of work and not actively searching for new employment opportunities. To these can be added 300 thousand homemakers, 200 thousand full-time adult students, and 50 thousand active duty military personnel. If the Vinlandia Ministry of Statistics follows the labor force criteria used by the U.S. Bureau of the Census, what is the size of Vinlandia's labor force?
4 million
Economists have calculated that the natural rate of unemployment for the small Kingdom of Illyria is 4%. During an unprecedented economic boom the actual rate of unemployment has decreased to a mere 3%. Assuming the economists' calculations are accurate, which of the following is a likely outcome for the Illyrian economy?
Economic growth will slow in future quarters until real GDP is equal to potential real GDP and the unemployment rate equals 4%.
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 of the following individuals would be excluded from the unemployment rate?
George who is staying home to tend to his children hile his partner works.
Recently the steel industry has struggled to compete with foreign imports. Economists cite high labor costs as a main impediment to the competitiveness of the domestic steel industry. How might modest inflation help the domestic steel industry compete?
It allows real wages to adjust downwards more easily.
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
See the table below for international comparison of unemployment rates for four fictional countries. Based on this table, which country possesses the healthiest economy over the 1960-1980 period? International Comparison of Unemployment Rates Country_1960_1965_1970_1975_1980 Moria_5%_4.50%_4%_6.20%_7% Andalus_3%_2.50%_2.80%_3.40%_4% Euskadi_4.50%_5.20%_6%_5.60%_6% Xanadu_4%_4.50%_5%_5.50%_5.70%
It is impossible to determine with the information given.
Advances in automation have caused significant disruption among all employees, both workers and management, in one small construction company. Review the biographies of three employees listed below and select the one most in danger of long term structural unemployment.
Jacob installs drywall and has never received a high school diploma. He has two years of work experience in the industry.
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.
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.
Substitution Bias:
One one good or service becomes more expensive relative to others, consumers tend to substitute away from the more expensive item towards the cheaper item; this means that the weights used to calculate the CPI are no longer accurate, causing the CPI to overstate the cost of living
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.
Which of the following is an example of structural unemployment?
Telephone operators replaced by computerized systems in the 1970s.
As an economic analyst working for a major manufacturer, you are tasked with tracking the rising costs of inputs over the past several years. Which price index will provide the most accurate and relevant inflation measure for your employer?
The Producer Price Index
Two analysts at the Bureau of Labor statistics are having an argument about the accurate measure of inflation over the past year. The first economist recalculated this year's GDP in the past year's prices and then took the ratio of nominal and real GDP. Using this method they calculated an inflation rate of 2.5%. The second economist used a survey of household goods to estimate an inflation rate of 2.3%. You are asked to adjudicate their dispute. Which is correct?
The first economist using the GDP deflator.
All else equal, increasing unemployment insurance will cause
The natural rate of unemployment to increase.
In recent years worker productivity growth in the small country of Xanadu has nearly doubled as new technologies have revolutionized many manufacturing and service sectors. As an economist analyzing the phenomenon you are surprised to find that wage growth has remained stagnant despite these productivity gains. Based on these findings, what do you expect to find when you review the natural unemployment rate during this period?
The natural unemployment rate will decrease due to productivity growth outpacing wage growth.
Inflation rate:
The percentage change in some price index
Periods of high inflation generate winners as well as losers. Those living on fixed incomes suffer as their income fails to keep pace with cost of living increases, while those holding loans on fixed interest rates see their debt burden diminish. If the public can gain as well as lose from inflation, why is inflation generally unpopular with the public at large?
The redistribution of purchasing power from inflation is seen as arbitrary and unfair.
Core Inflation Index:
Version of the CPI excluding volatile economic components like energy and food prices
pension:
a defined benefit retirement payment
relative wage coordination argument
across-the-board wage cuts are hard for an economy to implement, and workers fight against them
Hyperinflation
an extremely high rate of inflation, in the 100s or 1000s percent per year
Accounting for quality improvements is one of the major challenges to using the CPI as a measure of the cost of living. Quality changes in which of the following goods is likely to give economists the most trouble?
automobiles
As an economic analyst in the developing country of Lakto you are tasked with compiling a measure of inflation over the last several decades. Due to limited resources you can only choose the price of one good to serve as the estimate of inflation over this period. Which of the consumer goods listed below will serve as the BEST estimator?
bread
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.
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
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
The idea that firms will get the most for their money when they pay wages higher than the equilibrium wage is called:
efficiency-wage theory
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
Which of the following is a commonly cited explanation for the relatively high level of natural unemployment in European countries compared to the United States?
generous unemployment benefits
Which of the following is included in the core inflation index calculation?
housing prices
market basket:
hypothetical collection of goods and services (or more precisely, the quantities of each good or service) consumers typically buy
adverse selection of wage cuts argument
if employers reduce wages for all workers, the best workers will leave
With accelerated inflation In the 1980s middle-class Americans benefited primarily because
in real terms, their home mortgage debts decreased in value
underemployed:
individuals who are employed in a job that is below their skills
out of the labor force
out of paid workforce and/or not actively looking for a job
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
Until six months ago Jane worked as an agricultural engineer until her employer filed for bankruptcy. For the first four months she actively searched for new employment opportunities, yet the past couple months she has become discouraged in her job search. She is no longer actively looking for work and spends her time on hobbies such as pottery and painting. According to the U.S. Bureau of the Census criteria, Jane would now be considered ________ .
out of the labor force
unemployed
out of work and actively looking for a job
Producer Price Index:
price index based on prices paid for supplies and inputs by producers of goods and services
GDP Deflator:
price index which measures the average price of all goods and services included in GDP; used to convert nominal into real GDP
Which of the following is the name used to describe the price index that consists of raw materials and intermediate goods?
producer price index
In the base year in a small island macroeconomy, nominal GDP was $400m. In a later year when the general level of all prices was twice as high, nominal GDP reached $1000m. Between the base year and the later year:
real GDP was unchanged
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
nominal interest rate:
the actual interest rate charged on a loan
price level:
the average level of prices
Consumer Price Index:
the average price of the goods and services typically purchased by urban consumers
real interest rate:
the interest rate after inflation is taken into account; the nominal interest rate minus the rate of inflation
labor force
the number of employed plus the unemployed
GDP deflator is
the ratio of nominal GDP to real GDP
natural rate of unemployment:
the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time; the sum of frictional plus structural unemployment
insider-outsider model
those already working for the firm are "insiders" who know the procedures; the other workers are "outsiders" who are recent or prospective hires
out of the labor force:
those who are not working and not looking for work—whether they want employment or not; also termed "not in the labor force"
discouraged workers:
those who have stopped looking for employment due to the lack of suitable positions available
Frictional unemployment occurs because in a world of imperfect information, it takes ________ for people to find jobs.
time
cyclical unemployment
unemployment closely tied to the business cycle, like higher unemployment during a recession
frictional unemployment
unemployment that occurs as workers move between jobs
frictional unemployment:
unemployment that occurs as workers move between jobs
structural unemployment
unemployment that occurs because individuals lack skills valued by employers
structural unemployment:
unemployment that occurs because individuals lack skills valued by employers
