Deck 7: Unemployment, Inflation, and Long-Run Growth

Question 1

Table 7.2

Using Table 7.2 calculate the unemployment rate and show your work.

Answer 1

Unemployment rate = Unemployed / (Employed + Unemployed) = 5000/(45000 + 5000) x 100% = 10%

Question 2

What is meant by the phrase "not in the labor force?" Give examples of why people might be in this state.

Answer 2

It means people over the age of fifteen who are not looking for work, either because they do not want a job or because they have given up looking. It might include retirees, full-time students, stay-at-home parents, individuals in institutions like prisons or mental hospitals or elderly parents.

Question 3

Suppose there are 10 million unemployed out of a labor force of 100 million. This means an unemployment rate of 10/100 = .10, or 10 percent. Recalcuate the unemployment rate if 1 million previously discouraged workers re-enter the workforce and start looking for work but don't immediately find employment.

Answer 3

Now the labor force is 101 million workers and there are 11 million unemployed workers. The unemployment rate is now 10.89%.

Question 4

With a population of 100 million, a labor force of 90 million and the unemployed measured at 9 million what is the rate of unemployment?

Question 5

In September there are 10,000 people unemployed and the labor force is 250,000. If the only thing that changed between September and October is that 2500 people stop looking for work what can we say is true about the unemployment rate in September and the unemployment rate in October?

Question 6

Explain how the unemployment rate can drop even if the total number of people with and without jobs remains constant.

Question 7

How might the official employment statistics of the BLS be a a misleading picture of the overall health of the economy?

Question 8

What is the official definition of an unemployed person?

Question 9

Assume a population of 3,000,000 people, 500,000 people employed and 1,500,000 in the labor force. Calculate the unemployment rate.

Question 10

How does the Bureau of Labor Statistics officially characterize an employed person?

Question 11

Suppose there are 10 million unemployed out of a labor force of 100 million. This means an unemployment rate of 10/100 = .10, or 10 percent. Recalculate the unemployment rate if 1 million of these 10 million unemployed workers stop looking for work.

Question 12

Some countries use claims for unemployment compensation as the method for calculating the unemployment rate. This of course is not the case in the United States. Can you think of any reason why this method might not be an accurate portrayal of the true unemployment rate?

Question 13

Explain how it might be possible for the unemployment rate to decline even though the number of unemployed is growing.

Question 14

Figure 22.1
Using Figure 22.1 calcuulate the unemployment rate in each of the years between 1950 and 2009.

Question 15

Explain how it might be possible for the unemployment rate to drop inspite of a severe recession.

Question 16

Table 7.2

Using the Table 7.2 calculate the labor-force participation rate.

Question 17

Assume the number of people employed is 100,000 and the labor force is 500,000. Calculate the unemployment rate based on this information.

Question 18

Explain how and why the unemployment rate may actually rise during an economic recovery.

Question 19

Table 7-1
Using Table 7.1 above, calculate the unemployment rate.

Question 20

What might happen to the official unemployment rate if unemployment compensation were eliminated? Explain your answer.

Question 21

Why might a certain amout of frictional unemployment improve the efficiency of labor markets?

Question 22

You are an employee of the Bureau of Labor Statistics involved in the monthly survey of households used to estimate the unemployment rate. In each of the following cases, classify the individual as employed, unemployed, or not in the labor force. Explain your classification.
(a) During the entire week containing the 12th of the month, Rosie the Riveter misses work simply because she didn't feel like going in to work.
(b) Jenny Wren is a volunteer 20 hours a week on a Rape Crisis telephone hotline. She feels she makes an important contribution to society and would not accept a paid job if one were offered to her.
(c) Cauley McCulkin is a hugely successful film star, age 12, who has earned over $5,000,000 each year for the past five years. Currently, Cauley is filming a new movie on location in Tenerife.
(d) Maxwell Edison, a full-time Ph.D. student, is involved in ground-breaking research in fiber optics. His dissertation advisor has already claimed that Maxwell's work will revolutionize telecommunications.
(e) Maggie Madd, 84, works 10 hours a week doing cleaning services for her son, Norman Neurotic. He pays her minimum wage.

Question 23

Explain the major differences in the unemployment rate by demographic group.

Question 24

Explain what is meant by the discouraged-worker effect?

Question 25

What are the economic costs of unemployment?

Question 26

Why is unemployment bad for society? Why is it bad for the individual or household?

Question 27

You are an employee of the Bureau of Labor Statistics involved in the monthly survey of households used to estimate the unemployment rate. In each of the following cases, classify the individual as frictionally, structurally, or cyclically unemployed. Explain your classification.
(a) There has been a general economic slow down. Because of weak demand, Andy Capp has lost his portering job at the docks.
(b) Phil McCafferty, a newly qualified dental school graduate, is looking for a place to set up practice.
(c) Coal miner Ned Ludd is thrown out of work by the introduction of a more mechanized production process.
(d) Latosha Hogan, a computer programmer with a large bank, quit her job two months ago in search of a better-paid programming position. She is still looking.

Question 28

For each of the following, indicate if the person would be classified as employed, unemployed, or not in the labor force (a) a 70-year-old man who left his job to help his daughter in her business for 10 hours a week, (b) a 20-year-old college student who is out of school for the summer and is looking for a job, (c) a 30-year-old woman with a Ph.D. in history who has not been able to find a teaching position and is driving a cab 30 hours a week, and (d) a 40-year-old steel worker who isn't working and has given up searching for a job.

Question 29

If the national unemployment rate is 7%, does every region in the country have a 7% unemployment rate? Explain.

Question 30

Discuss what is meant by the discouraged-worker effect. Explain whether the existence of the discouraged-worker effect causes the official unemployment rate to understate or overstate the "true" level of unemployment.

Question 31

What changes might take place to reduce the number of discouraged workers?

Question 32

During a press conference, the Secretary of Employment notes that the unemployment rate is 7.0%. As a political opponent, how might you criticize this figure as an underestimate? In rebuttal, how might the Secretary argue that the reported rate is an overestimate of unemployment?

Question 33

Explain why it might be a fruitless endeavor for the government to attempt to reduce frictional unemployment.

Question 34

Compare and contrast cyclical unemployment and natural unemployment

Question 35

Explain the differences between the unemployment rate and the labor-force participation rate.

Question 36

Explain what structural unemployment is and give some examples.

Question 37

List and explain the three major types of unemployment.

Question 38

What is the natural rate of unemployment and the current consensus estimate of economists?

Question 39

Identify the following events as either increasing or decreasing the natural rate of unemployment.

Question 40

How do the costs of unemployment differ in an economy with a large underground sector relative to one with a small underground sector?

Question 41

Explain the three different types of unemployment. Give an example of each type. Given what you have learned about the different types of unemployment, suggest three policies that could be used to reduce unemployment, one for each type of unemployment.

Question 42

Explain the costs of unemployment. Be sure to include both the economic and noneconomic costs.

Question 43

If gasoline prices rise and the CPI goes up as a consequence why might there be reason to believe that the true cost of living has not risen by the full amount of the increase in gasoline prices?

Question 44

Critically evaluate the following statement. "As consumers increase their demand for hybrid vehicles in response to high gasoline prices this is leading to higher prices for these sames cars. This inevitably would lead to inflation."

Question 45

What is the PPI or producer price index?

Question 46

Suppose you want to earn a 7% rate of return on a one-year loan you are about to make and the expected inflation rate for the duration of the loan is 5%. How much interest should be charged? Secondly, suppose that your forecasts are 2% below the actual level. What would happen to your real rate of return? What if you overestimated inflation by 2%.

Question 47

Assume that the CPI for year 3 is 120 and the CPI for year 4 is 130. Compute the inflation rate for year 4.

Question 48

What are the chief costs of inflation?

Question 49

Provide an explanation for why the Consumer Price Index may somewhat overstate changes in the cost of living.

Question 50

Identify the following individuals as either "better off", "worse off" or "no different" from unanticipated inflation.

Question 51

Is the CPI the best measure of inflation?

Question 52

Explain why some economists argue that counting discouraged workers as unemployed gives a better picture of the unemployment situation. How would the magnitude of the unemployment rate change if discouraged workers were counted as unemployed?

Question 53

The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance? What reason would the BLS have for not counting these items?

Question 54

Many people like to reminisce about the good old days when movies were a quarter and the price of gasoline was twenty cents and bristle at $8 movie tickets and $4.00 gasoline. Why do economists argue that the increases in these prices today don't really mean anything in real terms?

Question 55

Define inflation.

Question 56

"If inflation is fully anticipated by all parties, the redistributional effects would be minimal. It's the fact that inflation surprises us that causes there to be winners and losers." Comment. Which costs still occur even with fully anticipated inflation?

Question 57

Explain why some unemployment is inevitable. How can unemployment actually benefit the economy?

Question 58

Below are different groups of people in society. Explain how each one of them would fair under unanticipated inflation.
Social Security recipient
Welfare beneficiary
Union worker
Landlord
Savers

Question 59

What is the CPI or consumer price index?

Question 60

Suppose state employees complain bitterly that they are not receiving substantial enough raises. In addition, lawmakers respond by saying they have nothing to complain about since they have been receiving 8% pay raises the past three years. What could account for the apparent disagreement?

Question 61

For the United States, explain why the amount of output that each worker can produce per hour has risen in the last half century.

Question 62

Explain how labor productivity is measured.

Question 63

Why is anticipated inflation less of a problem than unanticipated inflation?

Question 64

What are the administrative costs and inefficiencies associated with inflation?

Question 65

Explain the costs associated with unanticipated inflation and the costs associated with anticipated inflation.

Question 66

If year 1 is the base year and the price index for year 2 is 105 and the price index for year 3 is 103, what is the inflation rate in years 2 and 3? Explain what has happened between years 1 and 2, years 2 and 3, and years 1 and 3 to the cost of living.

Question 67

Lenders and borrowers expect the inflation rate to equal the actual inflation rate. The consumer price index is 110 in year 1 and 126.5 in year 2. If the interest rate charged by Richie Rich in year 2 is 40%, what is Rich's real interest rate?

Question 68

Explain how low or nonexistent inflation can actually have a positive impact on the ability of people to adequately plan for retirement.

Question 69

Explain why persisten inflation can have a detrimental impact on the planned investment of firms.

Question 70

Why would the number of fixed rate mortgages offered to the public by banks decline in the face of inflation while the offering of adjustable rate mortgages rises?

Question 71

Explain how inflation might actually provide an incentive for the government to spend more and take on more debt?

Question 72

How can inflation and recession both reduce future output?

Question 73

Explain how an unanticipated increase in inflation would affect creditors and debtors.

Question 74

Explain some of the costs associated with inflation.

Question 75

Why might retired persons argue that their cost of living is much higher than what is reported by the CPI? What is going on here that might support this claim?

Question 76

The inflation rate measured by changes in the consumer price index is 5%. Does this mean that every individual's cost of living has increased by 5%? Explain.

Question 77

Define what is meant by capital and discuss the various types of capital.

Question 78

Discuss how inflation can redistribute income.

Question 79

An "ideal" economy would be represented by what type of situation?

Question 80

Suppose that you take out a loan at the bank for $1000 and are required to pay it back with interest of $100 at the end of the year. Suppose that there was no inflation at all when you took out the loan. By the end of the year the price level has increased 7%. Calculate both the nominal interest rate and the real interest rate on this simple loan arrangement.