Economics Today The Macro View Roger LeRoy Miller Seventeenth Edition

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1 Economics Today The Macro View Roger LeRoy Miller Seventeenth Edition

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3 The Macroeconomy: Unemployment, Inflation, and Deflation WHAT YOU SHOULD KNOW Key Features of Business Fluctuations Business fluctuations are increases and decreases in business activity. A positive fluctuation is an expansion, which is an upward movement in business activity from a trough, or low point, to a peak, or high point. A negative fluctuation is a contraction, which is a drop in the pace of business activity from a previous peak to a new trough. MyEconLab continued business fluctuations expansion contraction recession depression leading indicators Key Figure Figure 6 WHERE TO GO TO PRACTICE MyEconLab Study Plan 7.6 Animated Figure 6 Log in to MyEconLab, take a chapter test, and get a personalized Study Plan that tells you which concepts you understand and which ones you need to review. From there, MyEconLab will give you further practice, tutorials, animations, videos, and guided solutions. For more information, visit PROBLEMS All problems are assignable in MyEconLab; exercises that update with real-time data are marked with. Answers to odd-numbered problems appear at the end of the chapter. 1. Suppose that you are given the following information: Total population Adult, noninstitutionalized, nonmilitary population Unemployment million million 7.5 million a. If the labor force participation rate is 70 percent, what is the labor force? b. How many workers are employed? c. What is the unemployment rate? 2. Suppose that you are given the following information: Labor force Adults in the military Nonadult population Employed adults Institutionalized adults Nonmilitary, noninstitutionalized adults not in labor force million 1.5 million 48.0 million million 3.5 million 40.8 million a. What is the total population? b. How many people are unemployed, and what is the unemployment rate? c. What is the labor force participation rate? 3. Suppose that the U.S. nonmilitary, noninstitutionalized adult population is 224 million, the number employed is 156 million, and the number unemployed is 8 million. a. What is the unemployment rate? b. Suppose that there is a difference of 60 million between the adult population and the combined total of people who are employed and unemployed. How do we classify these 60 million people? Based on these figures, what is the U.S. labor force participation rate? 4. During the course of a year, the labor force consists of the same 1,000 people. Employers have chosen not to hire 20 of these people in the face of government regulations making it too costly to employ them. Hence, they remain unemployed throughout the year. At the same time, every month during the year, 30 different people become unemployed, and 30 other different people who were unemployed find jobs. There is no seasonal employment. a. What is the frictional unemployment rate? b. What is the unemployment rate? c. Suppose that a system of unemployment compensation is established. Each month, 30 new people (not including the 20 that employers have chosen not to employ) continue to become unemployed, but each monthly group of newly unemployed now takes two months to find a job. After this change, what is the frictional unemployment rate?

4 The Macroeconomy: Unemployment, Inflation, and Deflation d. After the change discussed in part (c), what is the unemployment rate? 5. Suppose that a nation has a labor force of 100 people. In January, Amy, Barbara, Carine, and Denise are unemployed. In February, those four find jobs, but Evan, Francesco, George, and Horatio become unemployed. Suppose further that every month, the previous four who were unemployed find jobs and four different people become unemployed. Throughout the year, however, three people Ito, Jack, and Kelley continually remain unemployed because firms facing government regulations view them as too costly to employ. a. What is this nation s frictional unemployment rate? b. What is its structural unemployment rate? c. What is its unemployment rate? 6. In a country with a labor force of 200, a different group of 10 people becomes unemployed each month, but becomes employed once again a month later. No others outside these groups are unemployed. a. What is this country s unemployment rate? b. What is the average duration of unemployment? c. Suppose that establishment of a system of unemployment compensation increases to two months the interval that it takes each group of job losers to become employed each month. Nevertheless, a different group of 10 people still becomes unemployed each month. Now what is the average duration of unemployment? d. Following the change discussed in part (c), what is the country s unemployment rate? 7. A nation s frictional unemployment rate is 1 percent. Seasonal unemployment does not exist in this country. Its cyclical rate of unemployment is 3 percent, and its structural unemployment rate is 4 percent. What is this nation s overall rate of unemployment? 8. In 2012, the cost of a market basket of goods was $2,000. In 2014, the cost of the same market basket of goods was $2,100. Use the price index formula to calculate the price index for 2014 if 2012 is the base year. 9. Suppose that in 2013, a typical U.S. student attending a state-supported college bought 10 textbooks at a price of $100 per book and enrolled in 25 credit hours of coursework at a price of $360 per credit hour. In 2014, the typical student continued to purchase 10 textbooks and enroll in 25 credit hours, but the price of a textbook rose to $110 per book, and the tuition price increased to $400 per credit hour. The base year for computing a student price index using this information is What is the value of the student price index in 2013? In 2014? Show your work. 10. Between 2013 and 2014 in a particular nation, the value of the consumer price index for which the base year is 2010 rose by percent, to a value of 120 in What was the value of the price index in 2013? 11. Consider the following price indexes: 90 in 2013, 100 in 2014, 110 in 2015, 121 in 2016, and 150 in Answer the following questions. a. Which year is likely the base year? b. What is the inflation rate from 2014 to 2015? c. What is the inflation rate from 2015 to 2016? d. If the cost of a market basket in 2014 is $2,000, what is the cost of the same basket of goods and services in 2013? In 2017? 12. The real interest rate is 4 percent, and the nominal interest rate is 6 percent. What is the anticipated rate of inflation? 13. Currently, the price index used to calculate the inflation rate is equal to 90. The general expectation throughout the economy is that next year its value will be 99. The current nominal interest rate is 12 percent. What is the real interest rate? 14. At present, the nominal interest rate is 7 percent, and the expected inflation rate is 5 percent. The current year is the base year for the price index used to calculate inflation. a. What is the real interest rate? b. What is the anticipated value of the price index next year? 15. Suppose that in 2017 there is a sudden, unanticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses? a. A homeowner whose wages will keep pace with inflation in 2017 but whose monthly mortgage payments to a savings bank will remain fixed b. An apartment landlord who has guaranteed to his tenants that their monthly rent payments during 2017 will be the same as they were during 2016 c. A banker who made an auto loan that the auto buyer will repay at a fixed rate of interest during 2017 d. A retired individual who earns a pension with fixed monthly payments from her past employer during 2017

5 The Macroeconomy: Unemployment, Inflation, and Deflation 16. Consider the diagram at the right. The line represents the economy s growth trend, and the curve represents the economy s actual course of business fluctuations. For each part below, provide the letter label from the portion of the curve that corresponds to the associated term. a. Contraction b. Peak c. Trough d. Expansion Level of National Business Activity S U Growth trend Time V X ECONOMICS ON THE NET Looking at the Unemployment and Inflation Data This chapter reviewed key concepts relating to unemployment and inflation. In this application, you get a chance to examine U.S. unemployment and inflation data on your own. Title: Bureau of Labor Statistics: Employment and Unemployment Navigation: Use the link at to visit the Employment page of the Bureau of Labor Statistics (BLS). Click on Top Picks next to Labor Force Statistics (Current Population Survey CPS). Application Perform the indicated operations, and answer the following questions. 1. Retrieve data for Civilian Labor Force Level, Employment Level, and Unemployment Level. Can you identify periods of sharp cyclical swings? Do they show up in data for the labor force, employment, or unemployment? 2. Are cyclical factors important? For Group Study and Analysis Divide the class into groups, and assign a price index to each group. Ask each group to take a look at the index for All Years at the link to the BLS statistics on inflation at /chap07. Have each group identify periods during which their index accelerated or decelerated (or even fell). Do the indexes ever provide opposing implications about inflation and deflation?

6 Answers to Odd-Numbered Problems 1. a. Multiplying the fraction of people who participate in the labor force, 0.7, times the adult, noninstitutionalized, nonmilitary population of million yields a labor force of million. b. Subtracting the 7.5 million unemployed from the labor force of million yields million people who are employed. c. Dividing the 7.5 million unemployed by the million in the labor force and multiplying by 100 yields an unemployment rate of about 5.36 percent. 3. a. The labor force equals the number employed plus the number unemployed, or 156 million + 8 million = 164 million. In percentage terms, therefore, the unemployment rate is 100 times 8 million>164 million, or 4.9 percent. b. These 60 million people are not in the labor force. The labor force participation rate is, in percentage terms, 100 times 164 million>224 million, or 73.2 percent. 5. a. Four of the 100 people are always continuously unemployed because they are between jobs, so the frictional unemployment rate is (4>100) * 100 = 4 percent. b. Three of the 100 people are always unemployed as a result of government regulations, so the structural unemployment rate is (3>100) * 100 = 3 percent. c. The unemployment rate is the sum of the frictional and structural rates of unemployment, or 7 percent. 7. The overall unemployment rate is 8 percent, and the natural rate of unemployment is 5 percent. 9. In 2013, the value of the price index is $10,000> $10,000 * 100 = 100. In 2014, the value of the price index is $11,100>$10,000 * 100 = a b. 10 percent c. 10 percent d. $1,800 in 2013; $3,000 in The expected rate of inflation is equal to 100 * [(99-90)>90] = 10 percent. Hence, the real interest rate equals the difference between the 12 percent nominal interest rate and the 10 percent anticipated inflation rate, or 2 percent. 15. a. The homeowner gains; the savings bank loses. b. The tenants gain; the landlord loses. c. The auto buyer gains; the bank loses. d. The employer gains; the pensioner loses. ANSWERS TO QUICK QUIZZES Quick Quiz 1: (i) Unemployed... labor force; (ii) job losers... reentrants... job leavers... new entrants; (iii) increase; (iv) female Quick Quiz 2: (i) Frictional; (ii) Structural; (iii) natural Quick Quiz 3: (i) base; (ii) Consumer Price; (iii) GDP deflator; (iv) Personal Consumption Expenditure Quick Quiz 4: (i) greater... less; (ii) purchasing power; (iii) resource Quick Quiz 5: (i) business fluctuations; (ii) trough... peak; (iii) recession; (iv) external shocks

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