Chapter 22 Problem Set

22.1 UNEMPLOYMENT

1.1 In late 2010 economists were debating whether the U.S. economy was in a
recession. GDP seemed to be rising, yet the unemployment rate was stuck at close
to 10 percent. In thinking about the economic distress experienced during a
recession, which is the most important: high unemployment or falling GDP? Defend
your answer.

1.2 When an inefficient firm or a firm producing a product that people no longer want
goes out of business, people are unemployed, but that is part of the normal process
of economic growth and development. The unemployment is part of the natural rate
and need not concern policymakers. Discuss that statement and its relevance to
the economy today.

1.3 What is the unemployment rate in your country? Compare national GDP to global
GDP during the global financial crisis. Was unemployment in your country
significantly affected by the 2008 global financial crisis? Could you tell why?

1.4 From the following events, which ones would positively affect youth employment?
a. The minimum legal working age is lowered.
b. There is an increase in educational attainment among young people
aged 15 to 24.
c. Apprenticeship becomes widespread.
d. Overall unemployment increases.
e. There is an increase in early retirement.

1.5 The United Kingdom has gone through a severe recession in the past eight years. In
particular, according to the United Kingdom's Office of National Statistics, the
country’s GDP decreased from the last quarter of 2008 until the third quarter of
2010. From then on (that is, until the second quarter of 2015), the United Kingdom’s
GDP growth has been positive. Looking at unemployment data from the same
source (www.ons.gov.uk), how would you say the recession has affected
unemployment in that country? Did recovery from the crisis in the second half of
2010 immediately translate into a drop in the unemployment rate? Why (not)?

1.6 According to data you can access from the World Bank's website
(http://data.worldbank.org/), what is the female labor force participation rate in your
country? How does it compare to the male labor force participation and female
labor force participation rates in the world?
1.7 Consider the following statements:
a. Fewer people are employed in Freedonia now than at any time in the
past 75 years.
b. The unemployment rate in Freedonia is lower now than it has been in
75years.
Can both of those statements be true at the same time? Explain.

1.8 Suppose the number of employed people in an economy is 312,545,372. The

unemployment rate in this economy is 7.4 percent, or 0.074, and the labor force
participation rate is 80 percent, or 0.80.
a. What is the size of the labor force?
b. How many people are unemployed?
c. What is the size of the working-age population?

1.9 On average, nations in Europe pay higher unemployment benefits for longer periods
of time than does the United States. How do you suppose this would impact the
unemployment rates in these nations? Explain which type of unemployment you
think is most directly affected by the size and duration of unemployment benefits.

1.10 Which of the following situations correspond to cyclical unemployment, structural

unemployment, frictional unemployment, and exit from the labor force, and why?
a. Some of your friends just graduated from college and have been
looking for jobs for the past five weeks.
b. Christine lost her job as a biologist at a bio-tech company when the
whole industry went into recession.
c. Gerhard, who used to be a taxi driver, stopped looking for a job three
months after he lost his job.
d. Dirk has been working as a craftsman making cotton dolls. Now all
kids want plastic dolls, and your neighbor has been out of a job for the
past two years.
e. Aditi, a high-tech engineer, just decided to quit her job in a start-up in
Bangalore; she’s being interviewed for a better-paid job in a
multinational company.
f. A man just lost his job as a public reader as education levels have
increased in his village.

22.2 INFLATION AND DEFLATION

2.1 Suppose all wages, salaries, welfare benefits, and sources of income were indexed
to inflation. Would inflation still be considered a problem? Why or why not?

2.2 What do the CPI and PPIs measure? Why do we need both of these types of price
indexes? (Think about what purpose you would use each one for.)
2.3 The CPI is a fixed-weight index. It compares the price of a fixed bundle of goods in
one year with the price of the same bundle of goods in some base year. Calculate
the price of a bundle containing 50 units of good X, 125 units of good Y, and 100
units of good Z in 2013, 2014, and 2015. Convert the results into an index by dividing
each bundle price figure by the bundle price in 2013 and multiplying by 100.
Calculate the percentage change in your index between 2013 and 2014 and again
between 2014 and 2015. Was there inflation between 2014 and 2015?

Good Quantity Consumed 2013 Prices 2014 Prices 2015 Prices

X 50 $2.00 $1.50 $2.00
Y 125 $3.00 $3.00 $2.50
Z 100 $0.75 $1.25 $1.50

2.4 In his 2015 State of the Union speech, President Barack Obama urged Congress to
raise the federal minimum wage from $7.25 to $10.10 per hour, and stated that
future minimum wage increases should be tied to the cost of living. Explain how
tying the minimum wage to an index like the CPI could impact the economy? Do you
suppose the impact would be different if the minimum wage was tied to the chain-
linked CPI as opposed to the fixed-weight CPI? Explain.

2.5 Consider the following five situations. In which situation would a borrower be best
off and in which situation would a lender be best off?
a. The nominal interest rate is 6 percent and the inflation rate is 3
percent.
b. The nominal interest rate is 13 percent and the inflation rate is 11
percent.
c. The nominal interest rate is 3 percent and the inflation rate is −1
percent.
d. The real interest rate is 8 percent and the inflation rate is 7 percent.
e. The real interest rate is 5 percent and the inflation rate is 9 percent.

2.6 The CPI is 120 in year 1 and 150 in year 2. All inflation is anticipated. If the Gringotts
Bank charges an interest rate of 30 percent in year 2, what is the bank’s real interest
rate?

22.3 LONG-RUN GROWTH

3.1 Policy makers talk about the “capacity” of the economy to grow. What specifically is
meant by the “capacity” of the economy? How might capacity be measured? In
what ways is capacity limited by labor constraints and by capital constraints? What
 are the consequences if demand in the economy exceeds capacity? What signs
would you look for?

3.2 What was the rate of growth in real GDP during the most recent quarter? You can
find the answer in publications such as the Survey of Current Business, The
Economist, and Business Week. Has growth been increasing or decreasing? What
policies might you suggest for increasing the economy's potential long-run rate of
growth?

3.3 An article in the Gotham Times states that the stock of capital and the workforce in
Gotham are both increasing at an annual rate of 7 percent. The same article states
that real output is growing by 11 percent. Explain if this is possible in the short run
and in the long run.