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Flashcards in ECON CH 7 Deck (44):
1

inflation

an increase in the overall price level

2

deflation

is a decrease in the overall price level

3

price indexes

used to measure overall price level

4

GDP deflator

is the price index that measure the overall price of all goods and services produced in the economy

5

consumer price index (CPI)

is the price index that measure the overall price of a "market basket" purchased monthly by a typical consumer (is computed each month by the bureau of labor stats)

6

the CPI market basket shows

it shows how a typical consumer divides his or her money among various goods and services. most of a consumers money goes toward housing, transportation, food, and beverages.

7

five steps to calculate CPI and inflation rate

1. fix the "basket" (determine the quantities in the basket)
2. find the prices
3. compute the baskets cost
4. choose the base year and compute the CPI in any year
5. calculate the inflation rate

8

CPI in a year equation

cost of basket in that year divided by cost of basket in base year x100

9

the three main PPI categories

1. finished goods
2. intermediate materials
3. crude materials

10

how can inflation change purchasing power

-if income rise by the same percentage as price rise, then the purchasing power stays constant and people are not hurt by inflation
-but, people living on fixed incomes (not incomes or incomes adjusted for inflation) are hurt by inflation
-if incomes of some groups of people rise by less than prices rise, then the purchasing power declines and those people are hurt by inflation

11

the costs of inflation

-inflation creates administration costs and inefficiencies
-during inflation, people need more cash
-misallocation of resources
-creates instability in the business environment

12

the economic costs of inflation: increased business risk and slower economic growth

unanticipated inflation increases the risk and cost associated with investments in the economy. this discourages firms from investing and reduces the long-run rate of growth in the economy

13

unemployment

the most frequent discussed symptom of recessions

14

social costs of unemployment

-suicides
-homicides
-more people going to mental institutions
-more going to prisons
-more deaths
-increases in domestic violence and homelessness

15

BLS divides the AP into 3 groups

1. employed
2. unemployed
3. not in the labor force

16

unemployment rate

the ratio of the number of people unemployed to the number of people in the labor force

17

u-rate equation

unemployed divided by labor force x100

18

labor force participation rate

the ratio go the labor force to the total adult population

19

LF-rate equation

LF divided by AP x100

20

an employed person is any adult person who either (3)

1. works for pay
2. works without pay
3. has a job

21

an unemployed person is any adult person who (2)

1. does not have a job
2. has been looking for work in the last four weeks

22

unemployment rate is

an aggregate (an average)

23

discouraged worker

people who would like to work but have given up looking for jobs
-classified NLF
-lowers the U rate by about 1%

24

not in the labor force (NLF)

an adult person who is not looking for work, b/c they either do not want a job or has given up looking for a job

25

sue lost her job, and begins looking for a new one

-u-rate rises
-the labor market is worsening
-the u-rate is telling the truth

26

jon has been out of work since last year, becomes discouraged, stops looking for work

-u-rate falls
-labor market worse
-u-rate not accurate

27

sam lost 80,000 job, and takes part-time job at mcdonalds until he finds a better job

-u-rate unchanged
-labor market worse
-u-rate not accurate

28

three types of unemployment

1. frictional
2. structural
3. cyclical

29

frictional unemployment (GOOD)

is the portion of unemployment that is due to the normal working of the labor market
-short-term job/skill matching problems

30

structural unemployment (GOOD)

is the portion of unemployment due to structural changes in the economy that result in a significant movement of jobs from industries to others
-long-term job/skill adjusting problems

31

cyclical unemployment (BAD)

is in an increase in unemployment that occurs during recessions and depressions
-short-term job/skill

32

natural rate of unemployment

is the unemployment that occurs as a normal part of the functioning of the economy
-the sum of frictional and structural

33

economic costs of unemployment

the loss of goods and services not being produced

34

social costs of unemployment

-large number of people living in poverty
-personal and social ills: anxiety, depression, deterioration of psych and physical health, suicide, etc

35

recession

production goes down and unemployment goes up

36

business cycle

is the cycle of short-run ups and downs in an economy or deviations of output and employment away from the long-run trend

37

ideal economy (3)

1. stable and rapid output growth 3%
2. low unemployment 5%
3. decent rate of inflation 2%

38

NBER convention

a recession is a period in which real GDP declines for at least two consecutive quarters

39

3 symptoms of a recession

1. falling output (decline in real GDP)
2. rising unemployment
3. low capacity utilization rate

40

labor productivity equation

total output divided by total number of worker hours

41

five ways to increase output in long-run output and productivity growth

1. add more workers (labor=L)
2. add more machines (capital=K)
3. increase the length of the work week
4. increase the quality of the physical capital (tech advances thru R&D)
5. increase the quality of human capital (increase workers education, mental and physical skills)

42

the upward trend in productivity can be explained by (2)

1. an increase in the amount of capital per worker
2. a continuous increase in quality of labor and capital

43

population=

labor force+not in the labor force

44

natural rate=

frictional+ structural=5.5%