Chapter 7

Question 1

Define “unemployment.”

Answer 1

The number of adults who currently don’t have a job but are looking for one.

Question 2

What is the “labor force participation rate?”

Answer 2

The percentage of non-institutionalized working-age individuals who are employed or seeing employment.

Question 3

Define “frictional unemployment.”

Answer 3

Unemployment is due to the fact that workers must search for appropriate job offers. This can take time, and so they remain temporarily unemployed.

Question 4

Define “structural unemployment.”

Answer 4

Unemployment for long periods of time due to an individual not having the required skills to contribute to the present economy.

Example: Switchboard operators, travel agents, gas station attendants, etc.

Question 5

True or False

Structural unemployment is NOT due to the movement of workers from low to high paying jobs.

Answer 5

True

Question 6

True or False

Structural unemployment is NOT caused by general business fluctuations, although business fluctuations can affect it.

Answer 6

True

Question 7

What is “cyclical unemployment?”

Answer 7

Unemployment that results from business recessions that occur when total demand is insufficient to create full employment.

Question 8

Define “full employment.”

Answer 8

An arbitrary level of unemployment that corresponds to “normal” friction in the labor market.

Question 9

Define the “natural rate of unemployment.”

Answer 9

The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy.

Question 10

True or False

the natural unemployment rate should include only frictional and structural unemployment.

Answer 10

True

Question 11

Define inflation.

Answer 11

A sustained increase in the average of all prices of goods and services in an economy.

Question 12

Define deflation.

Answer 12

A sustained decrease in the average of all prices of goods and services in an economy.

Question 13

True or False

the value of the dollar will always remain constant during a period of rapid inflation.

Answer 13

False

Question 14

Define purchasing power.

Answer 14

The value of money for buying goods and services. If your money income stays the same but the price of one good that you are buying goes up your effective purchasing power falls, and vice versa.

Question 15

True or False

another way of looking at inflation is that the purchasing power of money decreases.

Answer 15

True.

Question 16

True or False

The faster the rate of inflation the lower the rate of decline and the purchasing power of money.

Answer 16

False. The faster the rate of inflation the greater the rate of decline and the purchasing power of money.

Question 17

Define nominal value.

Answer 17

The nominal value of anything is simply its price expressed in today’s dollars.

Question 18

Give a general definition of “real value.”

Answer 18

The real value of anything is its value expressed in purchasing power. This is highly dependent upon inflation.

Question 19

What is a price index?

Answer 19

The cost of today’s Market Basket of goods expressed as a percentage of the cost of the same Market Basket during a base year.

Price index = (Price of market basket today) / (cost of market basket in base year)

Question 20

What is a base here?

Answer 20

The year that is chosen as the point of reference for comparison of prices and other years.

Question 21

In the base here, the price index will always be____.

Answer 21

100

Question 22

What is the consumer price index measure?

Answer 22

The CPI attempts to measure changes only in the level of prices of goods and services purchased by consumers.

Question 23

What does the producer price index try and measure?

Answer 23

The PPI attempts to show what has happened to the average price of goods and services produced and sold by a typical firm.

Question 24

Why is the GDP deflator a good indication of inflation?

Answer 24

Because it measures changes in the level of prices of all new goods and services produced in the economy as a whole.

Question 25

What are some problems with the CPI?

Answer 25

1. Doesn’t account for consumer substitute habits.
2. Doesn’t account for the change in the quality of products (computers in 1970 vs 2022).
3. Ignores new products until long after they’ve been introduced.

Question 26

The CPI tends to be biased_____.

Answer 26

Upward

Question 27

True or false

PPIs can be considered general-purpose indexes for non-retail markets.

Answer 27

True

Question 28

True or False
Most often the PPIs increase before the CPI because it takes time for producer price increases to show up in the prices that consumers pay for final products.

Answer 28

Tru e

Question 29

The broadest price index reported in the United States is the ______.

Answer 29

GDP deflator

Question 30

True or False

the GDP deflator is not based on a fixed Market Basket of goods and services.

Answer 30

True.

Question 31

Define anticipated inflation.

Answer 31

The inflation rate that we believe will occur. When it does occur, we are in a situation of fully anticipated inflation.

Question 32

Define unanticipated inflation.

Answer 32

Inflation at a rate that comes as a surprise, either higher or lower than the rate anticipated.

Question 33

What is a nominal rate of interest?

Answer 33

The market rate of interest observed in contracts expressed in today’s dollars. Also, the market rate of interest expressed in today’s dollars.

Question 34

What is the definition of “real rate of interest?”

Answer 34

The nominal rate of interest minus the anticipated rate of inflation.

Question 35

For unanticipated inflation, who gains and who loses?

Answer 35

Creditors lose and debtors gain.

Question 36

What are cost of living adjustments?

Answer 36

Clauses in contracts that allow for increases and specified nominal values to take into account changes in the cost of living.

Question 37

When business fluctuations are positive they are called ______.

Answer 37

Expansions

Question 38

What is an economic contraction?

Answer 38

A business fluctuation during which the pace of national economic activity is slowing down.

Question 39

What is a recession?

Answer 39

A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.

Question 40

What is an economic depression?

Answer 40

An extremely severe recession.