Unit 2

Question 1

You are officially unemployed when:

Answer 1

1. Without work but has made specific efforts to find a job
   within the previous four weeks, or
2. Waiting to be called back to a job from which he or she
   has been laid off, or
3. Waiting to start a new job within four weeks
   Discouraged searchers: Individuals who would like to work
   but have given up looking for a job.

Question 2

Aggregate hours

Answer 2

are the total number of hours worked by
all workers during a year.

Question 3

Real wage rate

Answer 3

The real wage rate is the
quantity of goods and
services that an hour’s work
will buy.
Real wage = W/P
Productivity

Question 4

Types of unemployment

Answer 4

▪ Frictional
•Search, new entrants
▪ Structural
•Technology, foreign competition
▪ Seasonal
F+S+S = NATURAL
▪ Cyclical
Full Employment: Cyclical = 0

Question 5

Potential GDP

Answer 5

Is the quantity of real GDP produced at full employment

It corresponds to the capacity of the economy to produce output on a
sustained basis.

Question 6

What does actual GDP fluctuate around

Answer 6

Potential GDP with the business cycle

Question 7

Why unemployment is a problem

Answer 7

• lost incomes
• lost human capital
• social probelms
  Q

Question 8

The consumer price index

Answer 8

The average level of the prices of goods and services
consumed by an urban family.

Question 9

Core inflation rate

Answer 9

Inflation rate excluding the
volatile elements (food and
fuel).

The core inflation rate
attempts to reveal the
underlying inflation trend.

Question 10

Why is inflation a problem

Answer 10

• Redistribution of income
  Diverting resources from production
  Lowers GDP and raises unemployment
• Hyperinflation
  Germany in WWII, Zimbabwe, Venezuela
• Inflation Targeting Policy by Bank of Canada
  Indexation

Question 11

The biased CPI - why would the CPI overstate true inflation

Answer 11

The CPI may overstate the true inflation for four reasons
▪ New goods bias
▪ Quality change bias
▪ Commodity substitution bias
▪ Outlet substitution bias.

Question 12

The biased CPI

Answer 12

• distorts private contracts
• increases government outlays (close to a third of government outlays
  are linked to the CPI)
• biases estimate of real earnings

Question 13

To reduce the bias in the CPI

Answer 13

• more frequent consumer expenditure surveys
• revise CPI
• other adjustments to minimize the bias

Question 14

The GDP deflator

Answer 14

• reflects the current level of prices relative to the level of
prices in the base year.
• is monitored by economists to gauge how quickly
prices are rising
• is calculated as follows:

Question 15

Why does nominal GDP increase

Answer 15

Because both production and prices rise