Chapter 9: Inflation and Unemployment Flashcards
What is inflation
A general increase in the price of goods and services in a economy
Consumer price index
Used to measure the overall changes in prices, represents a “shopping basket” of consumer products
In a consumer price index, there are 30 milkshakes, 50 hamburgers, and 70 french fries. What is the item weight of all items?
20% Milkshakes, 33% Hamburgers, 47% French Fries
Suppose in a CPI at 100, the sum of all prices rises from $65 to $73, what is the inflation rate? How much has the consumer price index moved by
12.3%, 100->112
What is nominal and real income?
Nominal Is income at current dollars, Real is income adjusted for inflation
If a workers income raises from $1000 to $1200, and the CPI also raises from 100 to 130, what is the workers real income?
$923
Relationship between CPI and purchasing power
Higher the CPI, lower the purchasing power
Limitations of CPI
Doesn’t account for consumer differences in spending, spending patterns, or quality changes
GDP Deflator
measures price change for all goods and services produced in an economy and weights them in terms of the economies total output
How is GDP Deflator Calculated?
Divide the output in dollars in the year(Ex.2023( with the output in dollars of the reference year(Ex.2021). Multiply by 100
Real GDP vs Nominal GDP
Real GDP is GDP expressed in constant dollars, Nominal GDP is GDP expressed in current dollars
When are lenders worse off or better off when giving loans
when the rate of inflation is more than expected, lenders are worse off, if less than expected lenders are better off
Interest premium
The percentage built into nominal interest rate to account for rise in inflation
Who is included in the labour force population
All Canadians above 15 years of age except for first nations on reserves, military, or those in institutions like jail or medical
Who is included in labour force
Those in the labour force population who are employed or looking for jobs
Participation rate
Labour force/labour force population
What are some drawbacks of Official unemployment rate
Cant account for underemployment; misuse of skills, discouraged workers, and dishonesty in statistsics
What are the types of unemployment
Frictional, cyclical, seasonal, and structural
What is Frictional Unemployment?
Workers who are in-between jobs who first time workers looking for their first job
What is cyclical unemployment?
unemployment due to economies fluctuations in output; hard times means less jobs
What is Structural unemployment?
unemployment due to mismatch between jobs and people
What is Seasonal Unemployment
Unemployment due to the seasonal nature of certain jobs
Define Full employment?
The highest reasonable expectation of employment for the economy as a whole, incorporates a natural unemployment rate
What is Okun’s Law
For every 1% that the unemployment rate exceeds the natural unemployment rate, the gap between potential output and actual output increases by 2.5%
What is the real output associated with full employment?
potential output
