Chapter 14B Inflation and Unemployment

Question 1

Consumer Price Index

Answer 1

(Current cost of base period / base period of base period) (x 100)

Question 2

Inflation

Answer 2

percentage change in CPI

Question 3

Biases in CPI

Answer 3

typical urban family of 4
cannot completely adjust for introduction of new goods
cannot completely adjust for changes in quality of goods
ignores “outlet substitution”
ignores changes in “optimal” level of consumption

Question 4

GDP deflator equation

Answer 4

measures the average change in prices of goods and services that make up GDP
(Nominal GDP / Real GDP) x 100

Question 5

Unemployment Rate

Answer 5

(# unemployed / # labor force) x 100

Question 6

Labor force participation rate

Answer 6

(# labor force / # working age population) x 100

Question 7

Employment to population ratio

Answer 7

(# employed / # in working age population) x 100

Question 8

Cyclical, frictional and structural unemployment

Answer 8

Cyclical: result of fluctuations in economy
Frictional: unemployment reflecting changes in jobs due to quits, fires, and entry of new workers into labor force
Structural: changes in the composition or structure of goods (new tech, etc)

Question 9

Natural rate of unemployment

Answer 9

Frictional + structural