QUESTIONS AND PROBLEMS

Check Your Understanding

Question 17.1

1. Describe the three common indices used to measure inflation and the focus of each one.

Question 17.2

2. Who loses from unanticipated inflation? Who benefits?

Question 17.3

3. Describe the possible losses to our society and the economy when people are unemployed.

Question 17.4

4. What is required for a person to be considered unemployed? How is the unemployment rate computed?

Question 17.5

5. Why do teenagers and young people have high unemployment rates?

Question 17.6

6. Describe the three types of unemployment. What types of government programs would be most effective in combating each type of unemployment?

Apply the Concepts

Question 17.7

7. You have several student loans that have interest rates that change every year. After graduation, you can consolidate these loans into a fixed-rate single loan. You can consolidate now or one year from now. How do your expectations of the inflation rate during the next year affect your decision regarding when to consolidate?

Question 17.8

8. Suppose you work hard at a job after graduation and after your first year, your effort is rewarded with a 3% raise when the average wage increase in your company is 2%. Then, the government releases its inflation report which states inflation is running at 5%. Given this information, did your standard of living improve? Why or why not?

Question 17.9

9. Since 1987, the U.S. population has grown 32%, while employment has increased by 39%. Further, the number of people unemployed has risen by 3%. Are all of these indicators a sign of a strong or weak labor market over the past two decades?

Question 17.10

10. Assume you just lost your job and have decided to take a month-long break to travel to Europe before looking for a new position. Just as you return home from your trip, you are interviewed by the Department of Labor about your employment status. How would you be classified (employed, unemployed, or not in the labor force)? Explain why.

Question 17.11

11. The Bureau of Labor Statistics categorizes unemployed people into several groups, including job leavers, job losers, and discouraged workers. During a mild recession, which group would tend to increase the most? During a deep recession? During a boom?

Question 17.12

12. In the beginning of a recovery after a recession, employment begins to rise and the news media report these data on job growth. Would such a report have an impact on the labor force? Would it affect the unemployment rate?

In The News

Question 17.13

13. A debate that regularly occurs in Congress concerns raising the debt ceiling, allowing the U.S. government to continue paying its obligations. A few years ago, one politician proposed that instead of raising the debt ceiling, the U.S. Treasury should just mint a trillion dollar coin and use it to “pay off” the federal deficit. If such a coin were to be minted, what would be its potential effects on inflation? Is this a risk-free way of paying off a fiscal deficit? Why or why not?

475

Question 17.14

14. Federal unemployment benefits were extended in 2013, allowing unemployed workers to receive up to 73 weeks of benefits depending on the unemployment rate in each state. This is an extension of a program that at its peak during the last recession offered up to a maximum of 99 weeks of unemployment benefits. How does extending the federal unemployment benefit program influence the unemployment rate?

Solving Problems

WORK IT OUT | interactive activity

Question 17.15

15. Suppose the country of Snowland uses the following market basket of goods to determine its consumer price index, with Year 1 being the base year with a CPI of 100. Nominal GDP is also provided.

Market basket items Year 1 Year 2 Year 3 Year 4
Loaf of bread $2.50 $2.80 $3.00 $3.10
Movie ticket $8.00 $8.80 $9.20 $9.50
Gallon of gasoline $3.50 $4.20 $4.00 $3.60
Scented candle $12.00 $13.20 $14.00 $14.30
Nominal GDP $5 billion $5.6 billion $6.1 billion $6.5 billion
  1. Calculate the CPI in Snowland for each year, using Year 1 as the base year with CPI = 100.

  2. Calculate the rate of inflation (based on CPI) in Year 2, Year 3, and Year 4.

  3. Using the CPI, calculate the real GDP in each of the four years.

  4. Between Year 1 and Year 4, what proportion of the total increase in nominal GDP was due to inflation?

Question 17.16

16. The town of Villageton has 500 residents, of which 300 are employed, 30 are not working but actively seeking work, 80 are children in school, 40 are retirees, 30 are full-time college students, and 20 are institutionalized.

  1. Calculate the unemployment rate in Villageton.

  2. Suppose that 10 of the 30 college students graduate and enter the labor force actively seeking work, but only 5 find a job. How does this change the unemployment rate in Villageton?

USING THE NUMBERS

Question 17.17

17. Using By the Numbers, describe the change in the average price of public college tuition and private college tuition relative to the overall change in prices based on CPI. Has a college education become more or less affordable in real terms?

Question 17.18

18. By approximately what percentage did average housing prices increase from 2001 to the peak in 2006? By what percentage did average housing prices fall from the peak in 2006 to the bottom point in 2012?