Answers to review quizzes marcroeconomics 12e parkin chapter 5

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W H AT I S E C O N O M I C S ? 69 MONITORING JOBS AND INFLATION** Answers to the Review Quizzes Page 150 (page 558 in Economics) What determines if a person is in the labor force? Workers who have a job and workers who are unemployed are in the labor force To be “officially” counted as unemployed, and thus in the labor force, means that the person does not have a job but is available and willing to work and has made some effort to find work within the past four weeks, or waiting to be called back to a job from which he or she has been laid off, or waiting to start a new job within 30 days What distinguishes an unemployed person from one who is not in the labor force? A general definition of unemployment is a person who wants to work but does not have a job A person who is not in the labor force does not have a job and does not want one More specifically to be considered as unemployed, and thus in the labor force, the person must not have a job but must be available and willing to work The person must also have made some effort to find work within the past four weeks, or be waiting to be called back to a job from which he or she has been laid off, or be waiting to start a new job within 30 days Describe the trends and fluctuations in the U.S unemployment rate from 1980 to 2014 The unemployment rate has had several significant fluctuations around its average of 6.5 percent It started by soaring to a high that exceeded 10 percent during the 1982 recession Then there was a gradual downward trend particularly insofar as the peaks during the recessions in 1990-1991 and 2001 were much lower than in 1982 But that situation reversed itself with the severe and prolonged recession of 2008-2009 when the unemployment once more jumped (slightly) above 10 percent Since that peak the unemployment rate has fallen to around percent 69 70 Describe the trends and fluctuations in the U.S employment-to-population ratio and labor force participation rate from 1980 to 2014 The labor force participation rate and the employment-to-population ratio had an upward trend from 1980 until about 2000 after which they turned downward Both show fluctuations around these trends, especially the employment-to-population ratio which rises during expansions and falls during recessions but its fall between 2008 and 2010 was particularly severe The labor force participation rate also fell between 2008 and 2010 but the fall was not as dramatic Recently the labor force participation rate has been near 63 percent and the employment-to-population ratio has been near 59 percent 70 Describe the alternative measures of unemployment The Bureau of Labor Statistics keeps track of alternative measures of unemployment:  U-1 measures long-term unemployment It counts as unemployed only workers who have been unemployed for 15 or more weeks  U-2 measures job losers; that is, only workers who lost their jobs (as opposed to quitting or reentering the labor market) are counted as unemployed  U-3 is the conventional measure of unemployment  U-4 adds discouraged workers to the conventional measure of unemployment  U-5 adds all marginally attached workers to the U-4 measure of unemployment  U-6 adds part-time workers who would like a full-time job (economic parttime workers) to the U-5 measure of unemployment Page 153 (page 561 in Economics) Why does unemployment arise and what makes some unemployment unavoidable? In a dynamic economy some unemployment is unavoidable For instance, growth means that some workers will always be entering the labor force without a job and therefore be unemployed Consumers changing their demand for one good over another means workers in the newly less-favored industry will lose their jobs and also be unemployed Moreover some workers will always be leaving their current job to search for a better job and these workers, too, will be unemployed So some unemployment is unavoidable as the economy churns and reacts to changes Define frictional unemployment, structural unemployment, and cyclical unemployment Give examples of each type of unemployment Frictional unemployment is the unemployment that arises from the normal labor turnover from people entering and leaving the labor force and from the ongoing creation and destruction of jobs For instance, newly graduated students entering the labor market looking for work are frictionally unemployed Structural unemployment represents the unemployment created by changes in technology or international competition that change the skills needed to perform jobs or change the locations of jobs in the economy For instance, workers are structurally unemployed if they lose their jobs because of changes in the amount of foreign competition and if they have different skills from those required by new jobs or if they live in a different region of the country from where new jobs are being created Finally, cyclical unemployment is the unemployment created by business cycle fluctuations in economic activity Specifically the higher than normal unemployment at a business cycle trough and the lower than normal unemployment at a business cycle peak is called cyclical unemployment For instance, a worker laid off in 2009 because of the recession is cyclically employed What is the natural unemployment rate? The natural unemployment rate is the unemployment rate when no cyclical unemployment exists That is, when all unemployment is frictional or structural then the unemployment rate equals the natural unemployment rate Full employment occurs when there is no cyclical unemployment and the unemployment rate equals the natural unemployment rate 66 CHAPTER How does the natural unemployment rate change and what factors might make it change? Changes in the natural unemployment rate arise because of changes in frictional and structural unemployment Any factor that changes frictional unemployment or structural unemployment changes the natural unemployment rate For instance, a change in the age distribution of the population, a change in the scale of structural changes that are occurring, a change in the minimum wage rate or efficiency wages, or a change in unemployment benefits all change the natural unemployment rate Why is the unemployment rate never zero, even at full employment? The unemployment rate is never zero because there is always churning going on the economy There are always new workers entering the labor market and searching for work, there are always workers leaving one job to search for another, better job, and there are always firms laying off workers All these cases lead to unemployment as the workers search for a job What is the output gap? How does it change when the economy goes into recession? The output gap equals the difference between real GDP and potential GDP When the economy goes into a recession, the output gap becomes negative How does the unemployment rate fluctuate over the business cycle? During a recession the unemployment rate is generally rising During an expansion the unemployment rate is generally falling Page 159 (page 567 in Economics) What is the price level? The price level is the average level of prices What is the CPI and how is it calculated? The CPI is the Consumer Price Index The CPI equals (Cost of CPI basket at current prices ÷ Cost of CPI basket at base-period prices) ×100 How we calculate the inflation rate and what is its relationship with the CPI? The inflation rate is the percentage change in a price index from one year to the next The rate of change of the CPI is often used as a measure of inflation as faced by consumers What are the four main ways in which the CPI is an upward-biased measure of the price level? The CPI is biased upward because of the new goods bias; the quality change bias; commodity substitution bias; and outlet substitution bias The new goods bias reflects the point that new goods, such as DVDs are generally more expensive than the old goods they replace, VHS tapes The quality change bias points out that part of the reason goods and services rise in price is because their quality is improved Commodity substitution bias occurs because consumers substitute away from goods and services that have risen in the price more than other goods and services Outlet substitution bias occurs because consumers will use discount stores more frequently when goods and services rise in price What problems arise from the CPI bias? The upward bias in the CPI distorts private contracts and government outlays that include formulas based on CPI change as a measure of inflation If the intent is to M O N I T O R I N G J O B S A N D I N F L AT I O N maintain the real value of a payment, indexing payments to the CPI will in fact increase the real value of payments over time if the CPI has an upward bias In one year, the effect of the bias may not be much, but it will accumulate over time Close to one third of federal government outlays are indexed to the CPI What are the alternative measures of the price level and how they address the problem of bias in the CPI? The first of three alternative price level is the chained CPI The chained CPI is calculated in a similar manner as chained-dollar real GDP The chained CPI overcomes the commodity substitution and new goods bias because it uses current as well as previous period quantities The second alternative price level is the personal consumption expenditure deflator or PCE deflator The PCE deflator is calculated from real and nominal consumption expenditure The PCE deflator uses a broader basket of goods and services than the CPI and, similar to the chained CPI, is also calculated using a chained method The third alternative is the GDP deflator The GDP deflator is similar to the PCE deflator except the GDP deflator uses the prices from all the goods and services included in GDP 67 68 CHAPTER Answers to the Study Plan Problems and Applications The BLS reported the following data for 2010: Labor force: 153.7 million Employment: 139.1 million Working-age population: 237.9 million Calculate the a Unemployment rate The unemployment rate is 9.5 percent The unemployment rate is the percentage of the labor force that is unemployed The labor force is the sum of the people unemployed and the people employed So the number of people who are unemployed is 153.7 million minus 139.1 million, which is 14.6 million The unemployment rate equals (the number of people unemployed divided by the labor force) multiplied by 100 That is, (14.6 million/153.7 million)  100, which is 9.5 percent b Labor force participation rate The labor force participation rate is 64.6 percent The labor force participation rate is the percentage of the working-age population that is in the labor force The working-age population is 237.9 million and the labor force is 153.7 million, so the labor force participation rate is (153.7 million/237.9 million) 100, which equals 64.6 percent c Employment-to-population ratio The employment-to-population ratio is 58.4 percent The employment-topopulation ratio is the percentage of the people of working age who have jobs The employment-to-population ratio is equal to the number of people employed divided by the working-age population then multiplied by 100 The employment-topopulation ratio is (139.1 million/237.9 million)  100, which is 58.4 percent In July 2014, in the economy of Sandy Island, 10,000 people were employed, 1,000 were unemployed, and 5,000 were not in the labor force During August 2014, 80 people lost their jobs and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed people were hired, 50 people quit the labor force, and 40 people entered the labor force to look for work Calculate for July 2014 a The unemployment rate The unemployment rate in July is 9.1 percent The unemployment rate is the number unemployed as a percentage of the labor force The number of unemployed workers is 1,000 The labor force is the number employed plus the number unemployed so in July it is 11,000 The unemployment rate equals (1,000/11,000)  100, which is 9.1 percent b The employment-to-population ratio The employment-to-population ratio is 62.5 percent The employment-topopulation ratio is the number employed as a percentage of the working-age population The number of employed people is 10,000 The working-age population is the sum of the labor force and the number of people who are not in the labor force, which is 16,000 The employment-to-population ratio is (10,000/16,000)  100, which is 62.5 percent And calculate for the end of August 2014 c The number of people unemployed The number of people who are unemployed at the end of August is 840 The number of people who are unemployed at the end of August equals the number M O N I T O R I N G J O B S A N D I N F L AT I O N unemployed in July plus the number of people who lost their job and who stayed in the labor market plus the number of people entering the labor market minus the number of people who were hired minus the number of people who left the labor market So the number of people unemployed equals 1,000 + 40  150  50, which is 840 d The number of people employed The number of people who are employed at the end of August is 10,050 The number of people who are employed at the end of August equals the number employed in July minus the people whom lost their jobs plus the number of people who gained jobs e The unemployment rate The unemployment rate at the end of August is 7.7 percent The unemployment rate equals the number unemployed expressed as a percentage of the labor force The number of people who are unemployed is 840 The labor force equals the number employed plus the number unemployed and at the end of August it is 10,890 The unemployment rate at the end of August equals (840/10,890)  100, which is 7.7 percent Use the following information to work Problems and In October 2009, the U.S unemployment rate was 10.0 percent In October 2011, the unemployment rate was 8.9 percent Predict what happened to: Unemployment between October 2009 and October 2011, if the labor force was constant If the labor force is constant, the only way the unemployment rate can decrease is if the number of unemployed workers decreases The labor force between October 2009 and October 2011, if unemployment was constant If unemployment is constant, the only way the unemployment rate can decrease is if the labor force increases Shrinking U.S Labor Force Keeps Unemployment Rate From Rising An exodus of discouraged workers from the job market kept the unemployment rate from climbing above 10 percent Had the labor force not decreased by 661,000, the unemployment rate would have been 10.4 percent The number of discouraged workers rose to 929,000 last month Source: Bloomberg, January 9, 2010 What is a discouraged worker? Explain how an increase in discouraged workers influences the official unemployment rate and U–4 A discouraged worker is a person, who currently is not working, would like a job, has looked for one in the recent past, but has stopped looking for work because of repeated failures in finding a job If a worker who had been looking for work quits looking, the official unemployment rate, U-3, falls U-4 includes discouraged workers among the ranks of the unemployed so when the worker stops looking for work and becomes a discouraged worker, the U-4 unemployment rate does not change 69 70 CHAPTER Use the following news clip to work Problems and Some Firms Struggle to Hire Despite High Unemployment Matching people with available jobs is always difficult after a recession as the economy remakes itself but the disconnect is particularly acute this time Since the recovery began in mid-2009, the number of job openings has risen more than twice as fast as actual hires If the job market were working normally, openings would be getting filled as they appear Some five million more would be employed and the unemployment rate would be 6.8%, instead of 9.5% Source: The Wall Street Journal, August 9, 2010 If the labor market is working properly, why would there be any unemployment at all? Unemployment will always exist in the labor market because of normal labor market frictions People newly entering the labor market, workers quitting a job to look for a better job, firms laying-off workers because consumers no longer want to buy the goods produced by the firms will always be part of the labor market All of these events create unemployment, so even when the labor market is operating at peak efficiency, unemployment will always be present Are the million workers who cannot find jobs because of mismatching in the labor market counted as part of the economy’s structural unemployment or part of its cyclical unemployment? Even though these workers are unemployed during a recessionary period, their unemployment is the result of a mismatch between their skills and the skills required for the available jobs So while they might be counted as part of cyclical unemployment because they lost their jobs because of the recession, the mismatch means that these workers might also be counted as part of the economy’s structural unemployment Use the following information to work Problems and The people on Coral Island buy only juice and cloth The CPI basket contains the quantities bought in 2013 The average household spent $60 on juice and $30 on cloth in 2013 when the price of juice was $2 a bottle and the price of cloth was $5 a yard In 2014, juice is $4 a bottle and cloth is $6 a yard Calculate the CPI basket and the percentage of the household’s budget spent on juice in 2013 The CPI basket is 30 bottles of juice and yards of cloth The total amount spent on the CPI basket in 2012 was $90 and of that $60 was spent on juice The percentage of the household’s budget spent on juice was ($60/$90) × 100, which is 66.7 percent Calculate the CPI and the inflation rate in 2014 The CPI in 2014 is 173.3 To calculate the CPI, divide the value of the CPI basket in 2014 prices by the base-year value of the CPI basket and then multiply the resulting number by100 The value of the CPI basket in 2014 prices is: ($4  30) + ($6  6) = $156 The value in base-year prices is $60 + $30 (provided in the question), which equals $90 So the CPI is ($156/$90)  100 = 173.3 The inflation rate in the 2014 is 73.3 percent The inflation rate equals the CPI in 2014 year minus the CPI in the base year expressed as a percentage of the baseyear CPI Because the base-year CPI is 100, the inflation rate is [(173.3 – 100)/ 100] × 100 = 73.3 percent M O N I T O R I N G J O B S A N D I N F L AT I O N Use the following data to work Problems 10 to 11 The BLS reported the following CPI data: June 2008 217.3 June 2009 214.6 June 2010 216.9 10 Calculate the inflation rates for the years ended June 2009 and June 2010 How did the inflation rate change in 2010? The inflation rate for the year ended June 2009 is −1.2 percent; the inflation rate for the year ended June 2010 is 1.1 percent The inflation rate is the percentage change in the price level It is equal to [(Pthis year – Plast year)/ Plast year]  100 For the year ended in June 2009 the inflation rate is [(214.6 – 217.3)/217.3]  100, which is −1.2 percent For the year ended in June 2010 the inflation rate is [(216.9 – 214.6)/214.6]  100, which is 1.1 percent The inflation rate increased in 2010 11 Why might these CPI numbers be biased? How can alternative price indexes avoid this bias? The CPI numbers might be biased because of the new goods bias, the quality change bias, the commodity substitution bias, and the outlet substitution bias The new goods bias is that new goods are often more expensive than the older goods that they replace The quality change bias is that increases in the quality of a good are often accompanied by increases in the good’s price The commodity substitution bias reflects the point that consumers will buy less of a good whose price increased and more of a good whose price has not changed Finally the outlet substitution bias points out that when prices rise, consumers shop more frequently at stores with cheaper prices Each of the alternative price indexes attempts to overcome some of the bias in the CPI numbers The chained CPI uses prices and quantities from the previous period and the current period The chaining process overcomes the commodity substitution process And because it contains current period quantities, it also does not suffer from the new goods bias The personal consumption expenditure deflator contains goods and services omitted from the CPI It is calculated from the nominal and real consumption expenditure data and so it, too, is computed using a chaining procedure Because the personal consumption expenditure deflator is calculated using a chaining procedure, it does not suffer from the commodity substitution bias or the new goods bias The GDP deflator is calculated from nominal and real GDP data It is broader than the personal consumption expenditure deflator because it contains goods and services in consumption expenditure, investment, government expenditure, and net exports The GDP deflator is calculated using a chaining procedure and so it also avoids the commodity substitution bias and new goods bias 71 72 CHAPTER Answers to Additional Problems and Applications 12 What is the unemployment rate supposed to measure and why is it an imperfect measure? Ideally the unemployment rate would measure the underutilization of labor resources But it is an imperfect measure for two reasons First the unemployment rate does not include some underutilized labor In particular the unemployment rate completely omits marginally attached workers, such as discouraged workers These workers are not included in the unemployment rate Second the unemployment rate counts as fully employed workers who are working part time but who want full-time jobs These workers are underutilized because they would like to work for more hours than is presently the case 13 According to FRED, in the fourth quarter of 2014, the labor force was 2,394,000, employment equaled 2,254,500, and working-age population was 2,984,600 in New Zealand Calculate the a Labor force participation rate The labor force participation rate equals the labor force divided by the workingage population then multiplied by 100 Using this formula with the data given in the problem shows that the labor force participation rate equals (2,394,000/2,984,600) × 100 = 80.21 percent b Employment-to-population ratio The employment-to-population ratio equals employment divided by the workingage population then multiplied by 100 Using this formula with the data given in the problem shows that the employment-to-population ratio equals (2,254,500/2,984,600) × 100 = 75.53 percent c Unemployment rate The unemployment rate equals the number of people unemployed (labor force employment) divided by the labor force, then multiplied by 100 Using this formula shows that the unemployment rate equals [(2,394,000 - 2,254,500)/2,394,000] × 100 = 5.8 percent 14 Jobs Report: Hiring Up, Unemployment Down The Labor Department reported that hiring accelerated in November, and the unemployment rate fell to 8.6 percent from percent in October Two reasons for the fall are that more Americans got jobs, but even more people gave up on their job searches altogether Source: CNNMoney, December 2, 2011 a If the only change was that all the newly hired people had been unemployed in October, explain how the labor force and unemployment would have changed The labor force would not have changed The number of people unemployed would have decreased so the unemployment rate would have fallen b If the only change was that people gave up on their job searches, explain how the labor force and unemployment would have changed The number of people unemployed would have fallen, so the labor force and the unemployment rate would have decreased M O N I T O R I N G J O B S A N D I N F L AT I O N 15 The BLS reported that in July 2012, employment decreased by 195,000 to 142,220,000 and the unemployment rate increased from 8.2 percent to 8.3 percent About 3.4 million people were marginally attached workers and 0.9 million of them were discouraged a Calculate the change in unemployment in July 2012 At the start of July employment was 142,220,000 + 195,000 = 142,415,000 The unemployment rate, which was 8.2 percent, equals (Unemployment/ [Unemployment + Employment]) × 100 Using the data for the start of July gives the result that 0.082 = (Unemployment/[Unemployment + 142,415,000]) Solving for the amount of unemployment shows that unemployment at the start of July was 12,721,166 workers Similar calculations show that at the end of July the amount of unemployment was 12,872,694 workers Unemployment increased in July by 151,528 workers in July b With 3.4 million marginally attached workers and 0.9 million of them discouraged workers, what are the characteristics of the other 2.5 million marginally attached workers? The other 2.5 million marginally attached workers would like a job but have stopped looking for work Because they are not discouraged workers, these 2.5 million workers have stopped looking for reasons other than their inability to find a job For example, a stay-at-home spouse might prefer working in the job market but have quit looking to undertake some home repairs 16 A high unemployment rate tells us that a large percentage of the labor force is unemployed but not why the unemployment rate is high What unemployment measure tells us if (i) people are searching longer than usual to find a job, (ii) more people are economic part-time workers, or (iii) more unemployed people are job losers? U-1 measures long-term unemployment of 15 weeks or more If U-1 exceeds its normal value, then people are taking longer than usual to find a job U-6 equals U5 plus part-time workers who want full-time jobs as unemployed, so the difference between U-6 and U-5 is the result of part-time workers who want a full-time job If this difference is unusually large, then more workers than normal are working at part-time jobs U-2 measures unemployment resulting from people losing their jobs If U-2 is larger than normal, then more unemployment than normal results from people losing their jobs 17 Some Firms Struggle to Hire Despite High Unemployment With about 15 million Americans looking for work, some employers are swamped with job applicants, but many employers can’t hire enough workers The U.S jobs market has changed During the recession, millions of middleskill, middle-wage jobs disappeared Now with the recovery, these people can’t find the skilled jobs that they seek and have a hard time adjusting to lower-skilled work with less pay Source: The Wall Street Journal, August 9, 2010 If the government extends the period over which it pays unemployment benefits to 99 weeks, how will the cost of being unemployed change? Extending unemployment benefits to 99 weeks decreases the cost of being unemployed and thereby increases the unemployment rate as some people search for a new job for a longer period of time 73 74 18 CHAPTER Why might the unemployment rate underestimate the underutilization of labor resources? The official unemployment rate underestimates the underutilization of labor resources for two reasons First the official unemployment rate completely omits some underutilized labor In particular the official unemployment rate omits marginally attached workers, such as discouraged workers These workers are not included in the unemployment rate because they are not searching for a job, though if the labor market was better and jobs more plentiful they would reenter the labor market Marginally attached workers are not a major source of mismeasurement because they are a small subset of people Second the unemployment rate counts as fully employed workers who are working part time but who want full time jobs These workers are underutilized because they would like to work for more hours than is presently the case These workers are a significantly more substantial source of error because they account for a much larger part of the labor force Use the following data to work Problems 19 to 21 The IMF World Economic Outlook reports the unemployment rates in the table 19 What these numbers tell you about the phase of the business cycle in the three regions in 2011? Region United States Euro area Japan 2010 9.6 10.1 5.1 2011 9.0 10.9 4.5 The unemployment rates fell in the United States and Japan, so it might well be the case that the United States and Japan were entering an expansionary period The unemployment rate in the Euro area rose, so it might be the case that the Euro area was in a recession 20 What these numbers tell us about the relative size of their natural unemployment rates? These numbers cover only two years, so making inferences about the relative size of the natural unemployment rates is potentially dangerous To the extent that these data are representative, the natural unemployment rate is likely the highest in the Euro area and the lowest in Japan 21 Do these numbers tell us anything about the relative size of the labor force participation rates and employment-to-population ratios? The numbers tell us nothing about the relative sizes of the labor force participation rates or the employment-to-population ratios in these three regions 22 A Half-Year of Job Losses For the first six months of 2008, the U.S economy lost 438,000 jobs The job losses in June were concentrated in manufacturing and construction, two sectors that have been badly battered in the recession Source: CNN, July 3, 2008 a Based on the news clip, what might be the main source of increased unemployment? The main source of increased unemployment likely is in the form of job losses in manufacturing and construction as opposed to people entering or reentering the labor market or people leaving their jobs The news clip makes clear that the first six months of the year had been dismal for the economy, so these job losses are likely cyclical unemployment in nature though with a mixture of structural unemployment included because the job losses were concentrated in specific areas M O N I T O R I N G J O B S A N D I N F L AT I O N b Based on the news clip, what might be the main type of increased unemployment? While the job losses were “concentrated” in manufacturing and construction, the news clip mentioned as the reason for the unemployment the point that the two sectors were “badly battered in the recession.” These job losses represented cyclical unemployment because there were the result of the “battering” that took place during the recession 23 Youth and Unemployment in Lebanon The overall unemployment rate in Lebanon stands at 24 percent, and youth unemployment exceeds 35 percent In the face of job crisis, Lebanon should introduce reforms in the education system to adapt to future labor market needs At the same time, it is crucial to develop a viable information and communications technology sector and to speed up the process of finalizing the oil and gas exploration and production projects Also essential to job creation are small- and medium-size enterprises Source: The Daily Star, December 24, 2014 a On the basis of the news clip, what is the main type of unemployment that Lebanon should use policies to control? Explain On the basis of the news clip, Lebanon should attempt to decrease both frictional unemployment and some structural unemployment The introduction of reforms in the education system in order to adapt to future labor needs is an attempt to decrease the frictional unemployment in newly graduated students who are looking for a job If the students graduate with the skills that firms want to hire for, the students will quickly find suitable jobs, thereby decreasing the country’s frictional unemployment The proposal to develop a viable information and communications technology sector, to speed up the process of finalizing the oil and gas exploration and production projects, and to encourage small- and medium-size enterprises (SMEs) are attempts to reduce structural unemployment Information and communications technology sector, oil/natural gas industry and SMEs can create sizeable employment opportunities b How might these policies impact Lebanon’s natural unemployment rate? Explain Natural unemployment is comprised of frictional and structural unemployment If these policies succeed, they will decrease the natural unemployment rate in Lebanon 24 A typical family on Sandy Island consumes only juice and cloth Last year, which was the base year, the family spent $40 on juice and $25 on cloth In the base year, juice was $4 a bottle and cloth was $5 a length This year, juice is $4 a bottle and cloth is $6 a length Calculate a The CPI basket The CPI basket is 10 bottles of juice and lengths of cloth b The CPI in the current year The CPI in the current year is 107.7 To calculate the CPI, divide the value of the CPI basket in current year prices by the base-year value of the CPI basket and then multiply the resulting number by100 The value of the CPI basket in current year prices is: ($4  10) + ($6  5) = $70 The value in base-year prices is $40 + $25 (provided in the question), which equals $65 So the CPI is ($70/$65)  100 = 107.7 75 76 CHAPTER c The inflation rate in the current year The inflation rate in the current year is 7.7 percent The inflation rate equals the CPI in the current year minus the CPI in the base year expressed as a percentage of the base-year CPI Because the base-year CPI is 100, the inflation rate is [(107.7 – 100)/ 100] × 100 = 7.7 percent 25 Amazon.com agreed to pay its workers $20 an hour in 1999 and $22 an hour in 2001 The price level for these years was 166 in 1999 and 180 in 2001 Calculate the real wage rate in each year Did these workers really get a pay raise between 1999 and 2001? The real wage rate equals the nominal wage rate divided by the price level In 1999 the real wage rate was $20/166 × 100, for a real wage rate of $12.05 In 2001 the real wage rate was $22/180 × 100, for a real wage rate of $12.22 The workers really got a pay raise between 1999 and 2001 but it was less than the raise in their nominal wage rate 26 News release According to BEA, in the U.S., real personal consumption expenditure (PCE) was $10,811.4 billion and nominal PCE was $11,653.3 billion in the fourth quarter of 2013 The PCE deflator was 108.9 and real PCE was $11,119.6 billion in the fourth quarter of 2014 Calculate the PCE deflator in 2013and the percentage change in real PCE and nominal PCE Personal consumption expenditure = (real personal consumption expenditure) ì (PCE deflator) ữ 100, so in May 2012 personal consumption expenditure equaled $9,588 billion × 115.4 ÷ 100 = $11,064 billion The PCE deflator is given by (nominal consumption/real consumption) x 100 This is equal to (11,653.3/10,811.4) x 100 = 107.78 The percentage change in real PCE and nominal PCE is [(11,119.6 – 10,811.4)/10,811.4] x 100 = 2.8 percent Nominal PCE for the fourth quarter of 2014 is equal to the (PCE deflator x real PCE)/100, which is (108.9 x 11,119.6)/100 = 12,109.24 Percentage change in nominal PCE is [(12,109.24 – 11,653.3)/11,653.3] x 100 = 3.91 percent 27 The Truth on Pay – Far More People Are Now Enjoying Real Wage Rises The average weekly earnings (AWE) series shows that wages rose percent over the past five years in cash terms, while real wages were down by percent Source: The Telegraph, February 9, 2015 By what percentage did the CPI increase over these years? The percentage change in the CPI is the percentage change in nominal wage minus the percentage change in real wage Thus, the percentage change in the CPI is – (–7) = 15% Thus the CPI increased by 15% 28 After you have studied Economics in the News on pp 160–161 (568–569 in Economics), answer the following questions a How many jobs must be created each month to keep pace with a growing population? About 200,000 jobs per month must be created M O N I T O R I N G J O B S A N D I N F L AT I O N b What normally happens to the unemployment rate when the pace of job creation exceeds the increase in population? When the pace of job creation exceeds the increase in population, normally the unemployment rate falls c Why might the unemployment rate sometimes increase, when the pace of job creation exceeds the increase in population? The unemployment rate might increase because the relatively rapid pace of job creation brings more discouraged workers back into the labor force Unless they immediately find jobs, these workers are counted as unemployed, which can increase the unemployment rate d How would you expect the labor force participation rate to respond to job creation in excess of population growth? One would expect the labor force participation rate to increase But from July 013 to July 2014, there actually was a small decrease in the labor force participation rate e How would you expect an increase in the growth rate of real GDP (see last paragraph of news article) to affect jobs and unemployment? An increase in the growth rate of real GDP increases the number of jobs and decreases unemployment 29 Greece’s Older Men May Never Work Again The unemployment rate among older Greek males is about twice the Eurozone average These men were often families’ sole bread winners Now, strained by the financial woes, their wives have to take jobs outside the home In Greece, with its macho, traditional culture, this could mean shame and depression for men They have mortgage arrears, children to put through college and bills to pay But for a few days’ work at a factory, they have to sometimes travel across the country Source: The Wall Street Journal, August 8, 2014 a What type of unemployment might older workers be more prone to experience than younger workers? Older workers are more likely to experience structural unemployment b Explain how the unemployment rate of older workers could be influenced by the business cycle Older workers might be more likely to be fired when the economy enters a recession because the business would rather train its younger workers to prepare for the future If this takes place, then the unemployment rate of older workers will rise more than that of other groups when the economy enters a recession c Why might older unemployed workers become marginally attached or discouraged workers during a recession? The news clip explains that older unemployed workers have a significantly difficult time finding a new job Often they are families’ sole breadwinners, and in Greece, with its macho, traditional culture, unemployed men are at risk of depression They have been forced to search, wait and travel extensively for a few days’ work at a factory In the face of financial struggle and family strain, it would be easy for some older workers to become discouraged about their job prospects and either quit looking entirely, thereby becoming marginally attached or discouraged workers 77 78 CHAPTER ... is the GDP deflator The GDP deflator is similar to the PCE deflator except the GDP deflator uses the prices from all the goods and services included in GDP 67 68 CHAPTER Answers to the Study Plan... prices is: ($4  10) + ($6  5) = $70 The value in base-year prices is $40 + $ 25 (provided in the question), which equals $ 65 So the CPI is ($70/$ 65)  100 = 107.7 75 76 CHAPTER c The inflation rate... 153 .7 million, so the labor force participation rate is ( 153 .7 million/237.9 million) 100, which equals 64.6 percent c Employment -to- population ratio The employment -to- population ratio is 58 .4
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