chapter 8

Question 1

inflation and unemployment

Answer 1

inversed relationship –> the highest inflation the lowest unemployement and vice versa
but both are not good

Question 2

nominal and real interest rate

Answer 2

nominal is the interest rate at current prices (with inflation) real is nominal interest rate - inflation rate
normally a borrower will benefit from high inflation unless lenders predict it and compensate for it

Question 3

interest rate

Answer 3

price calculated as a percentage of the amount borrowed that lenders charge borrowers

Question 4

unemployment rate

Answer 4

percentage of only those looking for a job and that cannot find it
expected to be < 5%
labour force - employed

Question 5

labour force

Answer 5

the sum of unemployed and employed
participation rate: percentage of those older than 16/18 in the labour force

Question 6

3 types of unemployed

Answer 6

discouraged workers: given up hope
marginally attached workers: looked for job in the recent past but not now
underemployed: those who could be placed higher ranks and are wasted for their job

Question 7

GDP and change in unemployment

Answer 7

negative relationship between growth rate and the change in unemployment

Question 8

why can’t unemployment fall to zero?

Answer 8

natural unemployment is a cipphre that you can’t change. sum of frictional unemployment (time to search the job) and structural unempl.

Question 9

structural unemployment

Answer 9

when the prevailing wage rate is above the equilibrium wage rate. there will be more supply of workers that demand

Question 10

actual unemployment rate

Answer 10

natural rate + cyclical unemployment

Question 11

inflation and wages

Answer 11

prices tend to inflate before the wages, real wages is the nominal wage divided by the price level (RATE OF CHANGE OF THE PRICE LEVEL)

Question 12

how to calculate inflation?

Answer 12

price index2 - price index1 divided per 100 (keep it .05 it’s improper to say 5%)

Question 13

inflation in the graph

Answer 13

bigger the inflation rate, the steeper the slope of the line of the price level

Question 14

inflation abroad and purchasing power

Answer 14

inflation is dangerous because abroad your purchasing power will be reduced even if in your country there is no problem, imports become even more expensive

Question 15

domestic costs of inflation

Answer 15

shoe-leather costs
menu costs
unit-of-account costs

Question 16

shoe-leather costs

Answer 16

high rates of inflation is people storing their money in goods that hold their value (real estate, gold), and this takes a lot of time

Question 17

menu costs

Answer 17

physically changing the prices in a supermarket costs money to the suppliers

Question 18

unit-of-account costs

Answer 18

if you are not sure about what the value will be you have to make a guess on how many goods and factors to buy –> inefficiency

Question 19

deflation vs. disinflation

Answer 19

deflation is when price levels drop
disinflation is the process of bringing the inflation rate down
high disinflation = high unemployment