Chapter 7 Flashcards
Define “unemployment.”
The number of adults who currently don’t have a job but are looking for one.
What is the “labor force participation rate?”
The percentage of non-institutionalized working-age individuals who are employed or seeing employment.
Define “frictional unemployment.”
Unemployment is due to the fact that workers must search for appropriate job offers. This can take time, and so they remain temporarily unemployed.
Define “structural unemployment.”
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.
True or False
Structural unemployment is NOT due to the movement of workers from low to high paying jobs.
True
True or False
Structural unemployment is NOT caused by general business fluctuations, although business fluctuations can affect it.
True
What is “cyclical unemployment?”
Unemployment that results from business recessions that occur when total demand is insufficient to create full employment.
Define “full employment.”
An arbitrary level of unemployment that corresponds to “normal” friction in the labor market.
Define the “natural rate of unemployment.”
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.
True or False
the natural unemployment rate should include only frictional and structural unemployment.
True
Define inflation.
A sustained increase in the average of all prices of goods and services in an economy.
Define deflation.
A sustained decrease in the average of all prices of goods and services in an economy.
True or False
the value of the dollar will always remain constant during a period of rapid inflation.
False
Define purchasing power.
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.
True or False
another way of looking at inflation is that the purchasing power of money decreases.
True.
True or False
The faster the rate of inflation the lower the rate of decline and the purchasing power of money.
False. The faster the rate of inflation the greater the rate of decline and the purchasing power of money.
Define nominal value.
The nominal value of anything is simply its price expressed in today’s dollars.
Give a general definition of “real value.”
The real value of anything is its value expressed in purchasing power. This is highly dependent upon inflation.
What is a price index?
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)
What is a base here?
The year that is chosen as the point of reference for comparison of prices and other years.
In the base here, the price index will always be____.
100
What is the consumer price index measure?
The CPI attempts to measure changes only in the level of prices of goods and services purchased by consumers.
What does the producer price index try and measure?
The PPI attempts to show what has happened to the average price of goods and services produced and sold by a typical firm.
Why is the GDP deflator a good indication of inflation?
Because it measures changes in the level of prices of all new goods and services produced in the economy as a whole.
What are some problems with the CPI?
- Doesn’t account for consumer substitute habits.
- Doesn’t account for the change in the quality of products (computers in 1970 vs 2022).
- Ignores new products until long after they’ve been introduced.
The CPI tends to be biased_____.
Upward
True or false
PPIs can be considered general-purpose indexes for non-retail markets.
True
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.
Tru e
The broadest price index reported in the United States is the ______.
GDP deflator
True or False
the GDP deflator is not based on a fixed Market Basket of goods and services.
True.
Define anticipated inflation.
The inflation rate that we believe will occur. When it does occur, we are in a situation of fully anticipated inflation.
Define unanticipated inflation.
Inflation at a rate that comes as a surprise, either higher or lower than the rate anticipated.
What is a nominal rate of interest?
The market rate of interest observed in contracts expressed in today’s dollars. Also, the market rate of interest expressed in today’s dollars.
What is the definition of “real rate of interest?”
The nominal rate of interest minus the anticipated rate of inflation.
For unanticipated inflation, who gains and who loses?
Creditors lose and debtors gain.
What are cost of living adjustments?
Clauses in contracts that allow for increases and specified nominal values to take into account changes in the cost of living.
When business fluctuations are positive they are called ______.
Expansions
What is an economic contraction?
A business fluctuation during which the pace of national economic activity is slowing down.
What is a recession?
A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.
What is an economic depression?
An extremely severe recession.
