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Macro Chapter 9

In sequential order, the four phases of the business cycle are
peak, recession, trough, and expansion
The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing nondurables because capital goods and durable good
last and these purchases can be postponed.
A financial crisis can lead to a recession because it can cause
wealth and income to fall, reducing spending and ultimately reducing employment
A major new invention can lead to an expansion if there are
increases in investment, consumption, output, and employment
How is the labor force defined and who measures it?
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work
The unemployment rate is the
number of unemployed persons divided by the labor force.
If the unemployment rate increases, the size of the labor force
could increase or decrease.
A positive unemployment rate—one more than zero percent—is fully compatible with full employment because at full employment,
unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs.
In general, unemployment rates are higher for
African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers
The average length of time people are unemployed rises during a recession because
businesses continue to lay-off workers as a result of the decrease in demand
A difficult aspect of measuring the unemployment rate is
determining who is eligible and available to work.
Unemployment is an economic problem because
a unit of labor resource that could be engaged in production is sitting idle
The noneconomic effects of unemployment include
a sense of failure created in parents and in their children
The United States has an unemployment compensation program that provides income for those out of work.
still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs
The Consumer Price Index (CPI) is constructed by
comparing the value of a “market basket” of goods that consumers typically purchase to the value of the basket in a base year.
The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by
subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4.
reduces the purchasing power of the dollar
The nominal interest rate
minus the inflation rate is the real interest rate.
T/F Deflation means that the price level is falling, whereas with inflation, overall prices are rising.
Demand-pull inflation occurs when
prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
A negative GDP gap is associated with
cost-push inflation
A positive GDP gap is associated with
demand-pull inflation.
An increase in your nominal income and a decrease in your real income can occur simultaneously if your
nominal income increases less than the cost of living increases.
The losers from inflation are those with
fixed incomes in nominal terms
Those who lose the most from unemployment are
minority groups and those with the least skill
Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate.
Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation.
Hyperinflation might lead to a severe decline in total output if
everyone starts speculating and searching for ways to avoid inflation
Place the phases of the business cycle in order.
Peak, Recession. Trough, Expansion
Tim just graduated and is looking for a job:
Frictional Unemployment
A recession causes a local factory to lay off 30 workers
Cyclical Unemployment
Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant: .
Structural unemployment
Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India: .
Structural unemployment
The unemployment rate that is consistent with full employment is known as
The natural rate of unemployment.
A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy’s negative GDP gap?
Cost-push inflation occurs when there is
Rising per-unit production costs.
Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be – 2 percent next year. By approximately how much will Jimmer’s real income change next year?
Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?
True or False: Lenders are helped by unanticipated inflation
Economists agree that ________________ inflation reduces real output.
Under 16/ jailed=120
Not in labor force=100
Part time looking for full time=10
Labor force (500-120-100)=280
Unemployment rate (28/280)*100=10%
Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 11 percent.
Use Okun’s law (2(unemployment rate-natural unemployment) to determine the size of the GDP gap in percentage-point terms. 2(11-6)=10%
Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 11 percent
If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? 500(from above equation)*10%=50
Suppose the CPI was 110 last year and is 132 this year.
Suppose the CPI was 110 last year and is 132 this year.
(132-110/110*100) do individually on calculator as:
suppose that the CPI was 110 last year and is 106 this year. What is this year’s rate of inflation?
0.36363*100=-3.6363 …
-3.64 (answer)
What term do economists use to describe this second outcome?
How long would it take for the price level to double if inflation persisted at the following percentages?
(Use the rule of 70)
7 percent per year: 70/7=10
14 percent per year: 70/14=5
2.5 percent per year: 70/2.5=28
Suppose your nominal income rose by 5.3 percent and the price level rose by 3.3 percent in some year. By what percentage would your real income (approximately) increase?
Suppose your nominal income rose by 2.8 percent and the price level rose by 1.2 percent in some year.
Suppose that the nominal rate of interest is 5 percent and the inflation premium is 2 percent. What is the real interest rate?
Nominal interest rate + real interest rate = inflation premium.
5=x(interest rate)+2
Interest rate =3%
Assume that the real interest rate is 5 percent and the nominal interest rate is 6 percent. What is the inflation premium?
Nominal interest rate + real interest rate = inflation premium.
6=5+x(inflation premium)
Inflation premium=1%

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