Deck 6: Business Cycles, Unemployment, and Inflation

Question 1

Because the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?

Answer 1

Although has an unemployment compensation program we should still worry about unemployment because it has economic and non-economic consequences.
Economic consequences includes negative GDP gap, which causes sacrifice of output and decreases living standards. The unemployment compensation is not as high as a normal wage when the economy is fully employed.
Non-economic consequences include loss of skills, loss of self-respect, plummeting morale, family disintegration and sociopolitical unrest. Widespread unemployment increases poverty, heightens racial and ethnic tensions and reduces hope for material advancement. These are less likely to be offset by the unemployment compensation.

Question 2

How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?

Answer 2

Inflation is the constant upsurge in an economy's price level.
According to rule of seventy , the number of years for CPI to double is equal to 70 divided by the rate of inflation. The rule of seventy is used as follows: a.
The rule of seventy will be used in order to calculate the time for price level to double. When inflation rate is 2% per year, the number of years for price level to double are calculated as follows: Therefore, it takes for the price level to double if the inflation rate is 2% per annum.
b.
When inflation rate is 5% per year, the number of years for price level to double are calculated as follows: Therefore, it takes for the price level to double if the inflation rate is 5% per annum.
c.
When inflation rate is 10% per year, the number of years for price level to double are calculated as follows: Therefore, it takes for the price level to double if the inflation rate is 10% per annum.

Question 3

What are the three types of unemployment? Unemployment is seen by some as undesirable. Are all three types of unemployment undesirable? Explain.

Answer 3

The three types of unemployment are frictional, structural and cyclical. Although unemployment may be seen as undesirable, frictional unemployment is desirable because the search process allows workers to move into higher-paying, higher-productive jobs. This provides greater income for workers, a better allocation of labor resources, and an increase in the production of goods and services for the economy.

Question 4

If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation?

Question 5

What is the Consumer Price Index (CPI), and how is it determined each month? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation?

Question 6

Suppose that the nominal rate of inflation is 4 percent and the inflation premium is 2 percent. What is the real interest rate? Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium?

Question 7

Briefly distinguish between demand-pull inflation and cost-push inflation.

Question 8

How does unanticipated inflation hurt creditors and help borrowers? How can anticipating the inflation make these effects less severe?

Question 9

Explain how hyperinflation might lead to a severe decline in total output.

Question 10

Suppose that a country's annual growth rates were 5, 3, 4, -1, -2, 2, 3, 4, 6, and 3 in yearly sequence over a 10-year period. What was the country's trend rate of growth over this period? Which set of years most clearly demonstrates an expansionary phase of the business cycle? Which set of years best illustrates a recessionary phase of the business cycle?

Question 11

What are the two primary phases of the business cycle? What tends to happen to real GDP, unemployment, and inflation during these phases?

Question 12

Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the official unemployment rate?

Question 13

How many recessions has the U.S. experienced since 1950? Which ones were the longest in duration? Which ones were the most severe in terms of declines in real output?

Question 14

If the CPI was 110 last year and is 121 this year, what is this year's rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year's rate of inflation? What term do economists use to describe this second outcome?