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Ans 2

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You are on page 1/ 11

Let's go through each question systematically, addressing each with

a detailed response.

---

1. Suppose 60 million people are employed, 10 million are


unemployed, and 30 million are not in the labor force. What does
the civilian noninstitutional population equal?

Explanation: The civilian noninstitutional population includes


individuals who are either employed, unemployed, or not
participating in the labor force.

Calculation:

\text{Civilian noninstitutional population} = \text{Employed} +


\text{Unemployed} + \text{Not in labor force}

= 60 \text{ million} + 10 \text{ million} + 30 \text{ million} = 100


\text{ million} ]

Conclusion: The civilian noninstitutional population is 100 million.

---

2. Suppose 100 million people are in the civilian labor force, and 90
million people are employed. How many people are unemployed?
What is the unemployment rate?

Unemployed Calculation:
\text{Unemployed} = \text{Labor force} - \text{Employed}

= 100 \text{ million} - 90 \text{ million} = 10 \text{ million} ]

Unemployment Rate Calculation:

\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor


force}} \times 100

= \frac{10 \text{ million}}{100 \text{ million}} \times 100 = 10% ]

Conclusion: The unemployment rate is 10%.

---

3. Change the current-year prices in Exhibit 1 to $1 for pens, $28 for


shirts, and $32 for a pair of shoes. Based on these prices, what is the
CPI for the current year?

CPI Formula:

\text{CPI} = \frac{\text{Cost of current-year basket}}{\text{Cost of


base-year basket}} \times 100

Assume the basket includes 10 pens, 5 shirts, and 2 pairs of shoes.


Base Year Cost: Assume base prices are $1 for pens, $25 for shirts,
and $30 for shoes.

(10 \times 1) + (5 \times 25) + (2 \times 30) = 10 + 125 + 60 = 195

(10 \times 1) + (5 \times 28) + (2 \times 32) = 10 + 140 + 64 = 214

\text{CPI} = \frac{214}{195} \times 100 = 109.7

---

4. Jim earned an annual salary of $15,000 in 1965. What is this salary


equivalent to in 2005 dollars?

Exhibit 2 Data:

CPI in 1965: 32.0

CPI in 2005: 195.3

Salary Adjustment Formula:

\text{Equivalent Salary} = \text{Old Salary} \times \frac{\text{CPI in


2005}}{\text{CPI in 1965}}

= 15,000 \times \frac{195.3}{32.0} = 91,406.25 ]


Conclusion: Jim’s salary in 1965 is equivalent to about $91,406 in
2005 dollars.

---

5. A house cost $10,000 in 1976. What is this price equivalent to in


2001 dollars?

Exhibit 2 Data:

CPI in 1976: 56.9

CPI in 2001: 177.1

Price Adjustment Formula:

\text{Equivalent Price} = \text{Old Price} \times \frac{\text{CPI in


2001}}{\text{CPI in 1976}}

= 10,000 \times \frac{177.1}{56.9} = 31,117.75 ]

Conclusion: The equivalent house price in 2001 dollars is


approximately $31,118.

---
6. Using the following data, compute (a) the unemployment rate, (b)
the employment rate, and (c) the labor force participation rate.

Given Data:

Civilian noninstitutional population: 200 million

Employed: 126 million

Unemployed: 8 million

Labor Force:

\text{Labor force} = \text{Employed} + \text{Unemployed} = 126 + 8


= 134 \text{ million}

Unemployment Rate:

\frac{\text{Unemployed}}{\text{Labor Force}} \times 100 =


\frac{8}{134} \times 100 \approx 5.97\%

Employment Rate:

\frac{\text{Employed}}{\text{Labor Force}} \times 100 =


\frac{126}{200} \times 100 = 63\%

Labor Force Participation Rate:


\frac{\text{Labor Force}}{\text{Noninstitutional Population}} \times
100 = \frac{134}{200} \times 100 = 67\%

---

7. Based on the following data, compute (a) the unemployment rate,


(b) the structural unemployment rate, and (c) the cyclical
unemployment rate.

Given Data:

Frictional unemployment rate: 2%

Natural unemployment rate: 5%

Civilian labor force: 100 million

Employed: 82 million

1. Unemployment Rate:

\text{Unemployment Rate} = \frac{\text{Labor Force} -


\text{Employed}}{\text{Labor Force}} \times 100

= \frac{100 - 82}{100} \times 100 = 18% ]

2. Structural Unemployment Rate:


\text{Natural Unemployment Rate} = \text{Frictional} +
\text{Structural}

\text{Structural Unemployment Rate} = \text{Natural


Unemployment Rate} - \text{Frictional Unemployment Rate} = 5% -
2% = 3% ]

3. Cyclical Unemployment Rate:

\text{Cyclical Unemployment} = \text{Unemployment Rate} -


\text{Natural Unemployment Rate} = 18\% - 5\% = 13\%

---

8. Using Exhibit 2, compute the percentage change in prices


between:

(a) 1966 and 1969:

CPI in 1966 = 32.9

CPI in 1969 = 36.7

\frac{36.7 - 32.9}{32.9} \times 100 = 11.55\%

(b) 1976 and 1986:


CPI in 1976 = 56.9

CPI in 1986 = 109.6

\frac{109.6 - 56.9}{56.9} \times 100 = 92.61\%

(c) 1990 and 1999:

CPI in 1990 = 130.7

CPI in 1999 = 166.6

\frac{166.6 - 130.7}{130.7} \times 100 = 27.47\%

---

frac{360}{295} \timesLet's break down each question with detailed


calculations.

---

9. Assume that the market basket contains 10 units of good X, 20


units of good Y, and 45 units of good Z. The current-year prices for
goods X, Y, and Z are $1, $4, and $6, respectively. The base-year
prices are $1, $3, and $5, respectively. What is the CPI in the current
year?
Solution: The Consumer Price Index (CPI) is calculated by comparing
the total cost of a fixed basket of goods in the current year to the
cost of the same basket in the base year, then multiplying by 100.

1. Calculate the Cost of the Market Basket in the Base Year:

Cost of X in the base year:

Cost of Y in the base year:

Cost of Z in the base year:

Total Base-Year Cost:

2. Calculate the Cost of the Market Basket in the Current Year:

Cost of X in the current year:

Cost of Y in the current year:

Cost of Z in the current year:

Total Current-Year Cost:

3. Calculate the CPI:


\text{CPI} = \frac{\text{Total Cost in Current Year}}{\text{Total Cost
in Base Year}} \times 100

= \frac{360}{295} \times 100 \approx 122.03 ]

Conclusion: The CPI for the current year is approximately 122.03,


indicating that prices have risen by about 22.03% since the base
year.

---

10. If the CPI is 150 and nominal income is $100,000, what does real
income equal?

Solution: Real income adjusts nominal income to account for


changes in price levels, measured by the CPI. Real income
represents the purchasing power of nominal income in terms of
base-year prices. It is calculated as follows:

1. Real Income Formula:

\text{Real Income} = \frac{\text{Nominal Income}}{\text{CPI}} \times


100

2. Substitute the Given Values:

Nominal income = $100,000

CPI = 150
\text{Real Income} = \frac{100,000}{150} \times 100

= \frac{100,000 \times 100}{150} = 66,666.67 ]

Conclusion: With a CPI of 150, a nominal income of $100,000 is


equivalent to a real income of approximately $66,667. This means
that, in base-year terms, the purchasing power of $100,000 today is
about $66,667, reflecting a decrease in real income due to inflation.

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