Chapter 8: Unemployment and Inflation

Question 1

Employment

Answer 1

of people employed in economy, full or part time

Question 2

Unemployment

Answer 2

of people actively looking for work, not employed

Question 3

Labor force

Answer 3

= employment + unemployment

Question 4

Labor force participation rate (%)

Answer 4

Labor force/population > or = 16 yrs x 100

% of pop aged 16 or older that in in the labor force

Question 5

Unemployment rate (%)

Answer 5

# of unemployed workers/Labor force x 100
%of total # of people in labor force who are unemployed)

Question 6

Costs of unemployment

Answer 6

1. Lost output (billions of $)

2. Personal psychological impact

Question 7

Discouraged workers

Answer 7

Non working people, capable of working, who have given up looking for a job due to the state of the job market.

Question 8

Marginally attached workers

Answer 8

People who would like to be employed, have looked for a job in past, but are not currently looking

Question 9

Underemployment

Answer 9

of people who work part time because cannot find full time

Question 10

Frictional unemployment (due to time workers spend in job search)

Answer 10

results from fact that workers must search for job offers, which takes time, so they remain unemployed temporarily

Question 11

Structural unemployment (> people looking than jobs available)

Answer 11

1. results from a poor match of workers’ abilities/skills with current reqs of employers
2. considerable evidence shows that govt labor force policies influence how many jobs businesses wish to create, which affects structural unemployment (ie minimum wage)

Question 12

Unions

Answer 12

By collective bargaining, unions can win higher wages from employers than if workers bargained individually

Question 13

Efficiency wages

Answer 13

wages employers set above the equilibrium wage rate as an incentive for better performance

Question 14

Side effects of govt policies designed to help workers who lose jobs

Answer 14

Can lead to structural unemployment unintentionally

Question 15

Natural rate of unemployment (NRE)

Answer 15

1. normal unemployment rate around which the actual unemployment rate fluctuates
   (frictional + structural unemployment)
2. should not reflect cyclical unemployment
3. when seasonally adjusted, NRE should include only frictional + structural unemployment

Question 16

cyclical unemployment

Answer 16

deviation in the actual rate of unemployment from the natural rate.
2. Results from business recessions that occur when aggregate (total) demand is insufficient to create full employment

Question 17

Seasonal unemployment

Answer 17

1. results from seasonal pattern of work in specific industries.
2. Due to seasonal fluctuations in demand or changing weather conditions that affect agriculture, construction, tourism industries, etc.

Question 18

Inflation

Answer 18

a sustained increase in the average of all prices of goods/services in an economy

Question 19

deflation

Answer 19

a sustained decrease in the average of all prices of goods/services in an economy

Question 20

Purchasing power

Answer 20

1. the value of $ for buying goods/services
2. varies with prices and income e.g. if your $ income stays the same but the price of a good goes up, your effective purchasing power falls.

Question 21

Nominal value

Answer 21

price expressed in today’s $s

Question 22

Real value

Answer 22

value expressed in purchasing power, adjusted for inflation

Question 23

Real wage

Answer 23

wage rate/price level

Question 24

Real income

Answer 24

income/price level

Question 25

market basket

Answer 25

representative bundle of goods/services

Question 26

base year

Answer 26

point of reference for comparison of prices in other years

Question 27

Price index (%)

Answer 27

cost of market basket today/cost of same market basket during base year X 100

Question 28

Costs of high inflation

Answer 28

1. Shoe leather costs: increased costs of transactions caused by inflation
2. Menu cost: real cost of changing a listed price
3. Unit-of-account costs: arise from way inflation makes $ a less reliable unit of measurement

Question 29

Anticipated inflation

Answer 29

rate we believe will occur

Question 30

Unanticipated inflation

Answer 30

rate that comes as a surprise

Question 31

Nominal rate of interest

Answer 31

market rate of interest expressed in today’s $

Question 32

Real rate of interest

Answer 32

nominal rate of interest – anticipated rate of inflation
Example:
Nominal rate: 5%
Expected (anticipated) inflation rate: 3%
Real rate: 5% – 3% = 2%

Question 33

Consumer price index (CPI)

Answer 33

1. statistical measure of a weighted average of prices of a specified set of goods/services purchased by wage earners in urban areas
2. market basket of goods/services of typical consumer

Question 34

Producer price index (PPI)

Answer 34

1. statistical measure of a weighted average of prices of goods/services that firms produce and sell
2. used as a short-run leading indicator (before CPI)
3. Producer price indexes for:
   foodstuffs, intermediate goods, finished goods

Question 35

GDP deflator

Answer 35

1. price index measuring the changes of all new goods/services produced in economy
2. Broadest measure of prices, reflects both price changes and the public’s market responses to those price changes

Question 36

Personal Consumption Expenditure (PCE) Index

Answer 36

1. statistical measure of average price using annually updated weights based on consumer spending
2. primary inflation indicator used by the Federal Reserve

Question 37

Cost-of-Living Adjustments (COLAs)

Answer 37

1. protection against inflation
2. clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living

Question 38

Repricing or Menu cost of inflation

Answer 38

1. resource cost of inflation

2. cost associated with recalculating prices and printing new price lists when there is inflation