Module 15.2: Inflation and Indicators Flashcards
What is frictional unemployement?
results from the time lag necessary to match employees who seek work with employers needing their skills.
What is structural unemployment?
caused by long run changes in the economy that eliminate some jobs while generating others.
What is cyclical unemployment?
driven by changes in the general level of economic activity. Driven by business cycles.
When is a person considered unemployed?
A person is unemployed if he is actively searching for work.
Does the labor force include only people who are unemployed?
No, can include both employed and unemployed.
What is the participation ratio? When does it expand and decrease?
is the percentage of the working-age population who are either employed or actively seeking employment. Tends to increase when economy expands and decrease during recessions.
What causes the unemployment rate to be a lagging indicator?
the number of discouraged workers who re-enter the labor force is greater than the number who are hired immediately.
What is inflation? hyperinflation?
persistent increase in price level over time.
Hyperinflation is when inflation is out of control and can ruin a monetary system.
What is the inflation rate? What is disinflation? What is deflation?
pecentage increase in the price level, typically compared to prior year.
Disinflation refers to an inflation rate that is decreasing over time but remains greater than 0.
A deflation is commonly associated with deep recessions. When prices are deflating, consumers delay purchases b/c prices will be cheaper in the future.
What is a price index? CPI? how is it used to calculate inflation?
Price index is a proxy for the price level.
CPI or consumer price index is the best known indicator in the U.S.
What is the formula for CPI?
[cost of basket at current price / cost of basket at base period prices] * 100
What is headline inflations vs. core inflation?
headline inflation - refers to price indexes for all goods
core inflation - refers to price indexes that exclude food and energy.
What is a laspeyres index? what are the three factors that cause laspeyres index to be biased upward?
Laspeyres index is an index that uses a constant basket of goods and services.
Three factors that cause it to be biased:
1) New Goods - new goods will reduce weight of goods in the index.
2) Quality changes - if price increases because increase in quality, could overstate inflation.
3) Substitution - prices of substitutes could lead to more purchases of the cheaper good.
What is hedonic pricing?
Used to adjust a price index for product quality
What is a fisher index (also known as chained index)? what does it solve?
it is the geometric mean of a laspeyres index and a paasche index.
Helps solve the bias from substitution.
