Chapter 5: Unemployment and Inflation

Question 1

Misery Index

Answer 1

Adds the inflation rate and the unemployment rate together to give a rough measure of the state of the economy

Question 2

Unemplyment Rate

Answer 2

The percentage of the labor force that is unemployed
= unemployed over labor force x 100%

Question 3

Labor Force Survey

Answer 3

Interviews households to gain info on peoples labor market activities as well as demographic makeup of the people living in the household
- Focuses on the working-age population 15 and older who are legally entitled to work in Canada

Question 4

Employed

Answer 4

• Anyone who did paid work, unpaid work for a family business or worded for themselves
• Anyone who would normally have worked by did not due to illness, disability, family crisis, vacation or labor dispute

Question 5

Unemployed

Answer 5

People who don’t have a job but are willing and able to work and have looked for work in the last four weeks

Question 6

Not in the labor force

Answer 6

People who were unable or unwilling to do paid work

Question 7

Labor Force

Answer 7

All the people who are working or actively looking for work
Employed + unemployed

Question 8

Participation Rate

Answer 8

= Labor force over working-age population x 100%

Question 9

Employment-population ratio

Answer 9

The portion of the population engaged in paid work
= Employed over working-age x100%

Question 10

Problems with measuring unemployment rate

Answer 10

• people who are having a hard time finding a job will stop looking
• Individuals with part-time work may be looking for full-time but are still considered employed (Understates problems in labor market)
• People may be employed in illegal activity or concealing a legitimate job to avoid taxes
• People claim to be looking for work but aren’t actually

Question 11

Why is labor force participation rate important

Answer 11

• determines the amount of labor that will be available to the economy form a given population
• more labor = higher GDP

Question 12

Frictional Unemployment

Answer 12

Short-term unemployment that arises from the process of matching workings with jobs
- necessary time to ensure a good match between the at worker and job

Question 13

Structured Unemployment

Answer 13

Arises from a persistent mismatch between skills or attributes of workers and the requirements of jobs
- Can last long period of time because workers need to learn new skills

Question 14

Cyclical Unemployment

Answer 14

Workers who lose their jobs due to a recession

Question 15

Seasonal Unemployment

Answer 15

Unemployment that is due to seasonal factors, such as weather or the fluctuation in demand for some products during different times of the year

Question 16

Full employment

Answer 16

When the only remaining unemployment is structural and frictional unemployment

Question 17

Natural Rate of unemployment

Answer 17

The sum of frictional and structural unemployment
- Theoretical concept that represents the portion of the labor force that would be unemployed if everything in the economy was going well and only structural and frictional unemployment occur

Question 18

Government policies influence on unemployment rate

Answer 18

• Reduce level of frictional unemployment by pursuing policies that speed up the process of matching employees with employers
• Reduce structural unemployment by implementing policies that air worker retraining
• Can increase unemployment rate by providing disincentives for firms to hire worker, increasing the time workers devote to searching for jobs, keeping wages above the market clearing wage

Question 19

Employment Insurance

Answer 19

With EI payments spend more time searching for a job because there is a lower opportunity cost
- increase unemployment rate
- but less of a decrease in spending decreasing effect on recession and personal hardship
- helps find good matches

Question 20

Minimum Wage Laws

Answer 20

If the minimum wage is set above the market clearing wage, the quantity of labor supplied will be greater than the quantity of labor demanded - higher unemployment rate

Question 21

Labor Unions

Answer 21

Organizations of workers that bargain with employers for higher wages and better working conditions for their members
- harder to find a job in unionized industries

Question 22

Efficiency wage

Answer 22

A higher-than-market wage that a firm pays to motivate workers to be more productive
- Firm raises cost to workers of losing their jobs because many other available jobs pay less
- Increase in productivity that results from paying a higher wage can more than offset the extra cost of the wage
- leads to unemployment because more people willing to work for that price

Question 23

Inflation

Answer 23

A general increase in the prices of goods and services over time

Question 24

Price Level

Answer 24

A measure of the average prices of goods and services in the economy

Question 25

Inflation Rate

Answer 25

The percentage increase in the price level from one year to the next

Question 26

Consumer Price Index

Answer 26

An average of the prices of the goods and services purchased by a typical household
- Measures changes in the price faced by the average household
- Equal to the ratio of the dollar amount necessary to buy the basket of goods and services in that year to the dollar amount required to purchase the same basket of goods and services in the base year X100

Question 27

Substitution Bias

Answer 27

• Households will buy less of a product when its prices increase relative to other goods
• Prices of the basket households actually buy will rise less than the prices of the basket stats can uses to compute the CPI

Question 28

Increase in quality bias

Answer 28

• Most products included in the CPI improve in quality
• Increases in the prices of these products partly reflect their improved quality and partly are pure inflation

Question 29

New Product Bias

Answer 29

The CPI list isn’t updated every time a new product comes out
- Applies to all new products that become popular quickly

Question 30

Outlet Bias

Answer 30

CPI basket is not updated to reflect changes in where people buy things, the CPI will overstate inflation
- people change to discount stores or internet

Question 31

What biases will alter the accuracy of CPI

Answer 31

• Substitution bias
• Increase in quality bias
• New product bias
• Outlet Bias

Question 32

Producer Price Index

Answer 32

An average of the prices received by producers of goods and services at all stages of production
- Increase in prices of goods means it costs the firms more to produce final goods and services which many lead to future increases in the prices of goods
- Can give early warning to future movements of CPI

Question 33

Interest Rate

Answer 33

The cost of borrowing money expressed as a percentage of the amount borrowed

Question 34

Nominal Interest Rate

Answer 34

The stated interest rate on a loan

Question 35

Real Interest Rate

Answer 35

The nominal interest rate minus the inflation rate

Question 36

Prime Rate

Answer 36

The rate at which the most credit-worthy businesses can borrow

Question 37

Conventional Mortgage rate

Answer 37

The rate at which the most credit-worthy individuals can borrow to purchase a house

Question 38

Overnight rate

Answer 38

The rate at which banks can borrow form other banks for a period of 24 hours

Question 39

Bank Rate

Answer 39

The rate at which the bank of Canada will lend to commercial banks

Question 40

The Problem with Anticipated Inflation

Answer 40

• Redistribution of income
• Purchasing power decreases of paper money that is held by firms and consumers
• Menu costs: cost of firms of changing the prices they charge for their products
• raises taxes paid by investors and raises the cost of capital for business investments