ECON CH 7

Question 1

inflation

Answer 1

an increase in the overall price level

Question 2

deflation

Answer 2

is a decrease in the overall price level

Question 3

price indexes

Answer 3

used to measure overall price level

Question 4

GDP deflator

Answer 4

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

Question 5

consumer price index (CPI)

Answer 5

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)

Question 6

the CPI market basket shows

Answer 6

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.

Question 7

five steps to calculate CPI and inflation rate

Answer 7

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

Question 8

CPI in a year equation

Answer 8

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

Question 9

the three main PPI categories

Answer 9

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

Question 10

how can inflation change purchasing power

Answer 10

• 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

Question 11

the costs of inflation

Answer 11

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

Question 12

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

Answer 12

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

Question 13

unemployment

Answer 13

the most frequent discussed symptom of recessions

Question 14

social costs of unemployment

Answer 14

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

Question 15

BLS divides the AP into 3 groups

Answer 15

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

Question 16

unemployment rate

Answer 16

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

Question 17

u-rate equation

Answer 17

unemployed divided by labor force x100

Question 18

labor force participation rate

Answer 18

the ratio go the labor force to the total adult population

Question 19

LF-rate equation

Answer 19

LF divided by AP x100

Question 20

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

Answer 20

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

Question 21

an unemployed person is any adult person who (2)

Answer 21

1. does not have a job

2. has been looking for work in the last four weeks

Question 22

unemployment rate is

Answer 22

an aggregate (an average)

Question 23

discouraged worker

Answer 23

people who would like to work but have given up looking for jobs

• classified NLF
• lowers the U rate by about 1%

Question 24

not in the labor force (NLF)

Answer 24

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

Question 25

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

Answer 25

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

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

three types of unemployment

Answer 28

1. frictional 2. structural 3. cyclical

Question 29

frictional unemployment (GOOD)

Answer 29

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

Question 30

structural unemployment (GOOD)

Answer 30

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

Question 31

cyclical unemployment (BAD)

Answer 31

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

Question 32

natural rate of unemployment

Answer 32

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

Question 33

economic costs of unemployment

Answer 33

the loss of goods and services not being produced

Question 34

social costs of unemployment

Answer 34

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

Question 35

recession

Answer 35

production goes down and unemployment goes up

Question 36

business cycle

Answer 36

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

Question 37

ideal economy (3)

Answer 37

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

Question 38

NBER convention

Answer 38

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

Question 39

3 symptoms of a recession

Answer 39

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

Question 40

labor productivity equation

Answer 40

total output divided by total number of worker hours

Question 41

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

Answer 41

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)

Question 42

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

Answer 42

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

Question 43

population=

Answer 43

labor force+not in the labor force

Question 44

natural rate=

Answer 44

frictional+ structural=5.5%