INTRODUCTION TO MACROECONOMICS

TUTORIAL # 2
UNIT II
ECONOMIC FLUCTUATIONS, UNEMPLOYMENT & INFLATION

1. What is the technical definition of a recession?

2. Assume an economy with deteriorating employment and incomes, collapsing home prices,
and business retrenchment. Is this enough information to officially declare a recession? What
informal assessment of the economy would you make?

3. How might the official employment statistics of the STATIN be a misleading picture of the
overall health of the economy?

4. What is meant by the phrase "not in the labour force?" Give examples of why people might be
in this state.

5. What is the official definition of an unemployed person?

6. Classify the types of unemployment (Frictional, Structural, Cyclical and Seasonal) faced by
each person:
a. Tashna used to work at Windalco Kirkvine Alumina Plant, but lost her job due to the
global economic crisis.
b. John just finished his law degree and is seeking a Job with a law firm.
c. Mary used to work in a factory, but mechanization of the factory led to her job
becoming redundant.
d. Annie lost her job when the coffee picking season ended.

7. Identify the following as either associated or not associated with recessions.

Event Associated with recessions

(Yes or No)
decreased real output
worsening of the nation's balance of
payments
loss of future output
slow down the rate of inflation

8. You are an employee of the STATIN involved in the monthly survey of households used to
estimate the unemployment rate. In each of the following cases, classify the individual as
employed, unemployed, or not in the labour force. Explain your classification.

(a) During the entire week containing the 12th of the month, Rosie the Riveter misses
work simply because she didn't feel like going in to work.
(b) Jenny Wren is a volunteer 20 hours a week on a Rape Crisis telephone hotline. She
feels she makes an important contribution to society and would not accept a paid job if
 one were offered to her.
(c) Cauley McCulkin is a hugely successful film star, age 12, who has earned over
$5,000,000 each year for the past five years. Currently, Cauley is filming a new movie on
location in Tenerife.
(d) Maxwell Edison, a full-time Ph.D. student, is involved in ground-breaking research
in fiber optics. His dissertation advisor has already claimed that Maxwell's work will
revolutionize telecommunications.
(e) Maggie Madd, 84, works 10 hours a week doing cleaning services for her son,
Norman Neurotic. He pays her minimum wage.

9. What is the CPI or consumer price index?

10. What is the PPI or producer price index?

11. Identify the following individuals as either "better off", "worse off" or "no different" from
unanticipated inflation.

Creditors who make variable interest rate

mortgages that are tied to the Consumer
Price Index

Creditors who make fixed interest rate loans

Homeowners who pay fixed interest rate
mortgages
Landlords who receive rent in multi-year
contracts

12. Define cost-push inflation. Using an AS/AD diagram, illustrate how cost-push inflation
affects the level of aggregate output and the price level in the economy. Suppose that the
government uses expansionary fiscal policy to counter the effects of the cost-push inflation.
Indicate on the diagram the impact of this policy on the price level and level of aggregate output.

13. Define the Phillips Curve. Graphically illustrate the relationship between the inflation rate
and the unemployment rate.

14. Explain Okun's Law.

15. List and explain the possible factors that cause business cycles.

16. Evaluate the effects of anticipated and unanticipated inflation.

17. Suppose that to calculate the CPI we use three goods: coffee, tea, and diet cola. A typical consumer
buys 2 pounds of coffee, 3 boxes of tea, and 1 can of diet cola. Prices of these goods are given in the
table below for each of three years:
 YEAR PRICE OF PRICE OF PRICE OF VALUE CPI CPI/INFLATION
COFFEE TEA DIET OF RATE
COLA MARKET
BASKET
1 $ 3.25 $ 2.00 $ 1.10
2 $ 3.75 $ 2.22 $ 1.20
3 $ 4.05 $ 2.50 $ 1.25

Assume year 1 is the base year. Calculate the value of the market basket for each year.
Remember the basket of goods is the same from year to year.
a. Calculate the CPI and the CPI inflation rate.

b. How would your answer differ if year 3 were the base year? (Remember, as with the CPI, use
the same market basket of goods for each time period.)

YEAR PRICE OF PRICE OF PRICE OF VALUE CPI CPI/INFLATION

COFFEE TEA DIET OF $ RATE
COLA MARKET $
BASKET $
1 $ 3.25 $ 2.00 $ 1.10
2 $ 3.75 $ 2.22 $ 1.20
3 $ 4.05 $ 2.50 $ 1.25

18. Joe borrowed $300 from his friend Mike to buy a $300 bike. Joe agreed to pay Mike a 5% interest
rate to compensate him for not having use of his $300 for that year and to adjust for the 2% inflation in
the past. That nominal interest rate would imply a 3% real interest rate on the loan. Suppose that over
the year the inflation rate was 3%, rather than the 2% rate Joe and Mike had expected. Who gains and
who loses? How would your answer differ if the actual inflation rate over the year was 1%?

19. Refer the table given below and answer the questions following it:
DESCRIPTION NUMBER
Population (over 16 years) 130,000
Frictionally unemployed 12,000
Structurally unemployed 8,000
Cyclical unemployed 15,000
Seasonal unemployed 2,000
Under-employed 25,000
Discouraged workers 8,000
Employed 50,000

Calculate the following:

a. Labour force.
b. Official Unemployment rate.
c. True/Actual unemployment rate.
d. Natural unemployment rate.
e. Employment/population ratio.
f. Labour force participation rate.
20. Define the following economic terms:

Business cycles
Labour Markets Natural rate of employment
Cost- Push Inflation Demand – Pull Inflation
Phillip’s Curve

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