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Exam 9: Part A: Business Cycles, Unemployment, and Inflation

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Question 1

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Describe and explain what is meant by downward sticky wages and unemployment.

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Labour markets have an important quirk t...

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Question 2

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Explain the difference between nominal and real interest rates.

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Nominal interest rates are the stated rates of interest.The real rates are the nominal rates corrected for the effects of inflation on the interest payments.The real rate represents the increase in purchasing power that the lender receives from the borrower and can be approximated by subtracting the rate of inflation from the nominal rate of interest.

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"Inflation is a harsh and arbitrary form of taxation." Do you agree? If so, who pays this tax?

In the table below are statistics showing the labour force and total employment during year 1 and year 5.Make the computations necessary to complete the table. (a) How is it possible that both employment and unemployment increased? (b) Would you say that year 5 was a year of full employment? (c) Why is the task of maintaining full employment over the years more than just a problem of finding jobs for those who happen to be unemployed at any given time?

Calculate the rate of inflation between Year 1 and Year 2.The price index in Year 1 was 124.0.It was 130.7 in Year 2.

Which types of industries are hit hardest by a recession? Explain.

What are the economic and non-economic costs of unemployment?

Why might the unemployment rate increase when the economy moves into its recovery phase?

What is Okun's law? Give an example of how it works.

Describe and explain what is meant by clipping coins, from an economic perspective.

If the population is 26.7 million, the labour force is 13.6 million, and the number measured as unemployed is 0.68 million, what is the rate of unemployment?

"The economic cost of unemployment is measured by the GDP gap." Explain this statement.

Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.

Describe cost-push inflation and its major source.

What is hyperinflation and what are its effects?

Explain the difference between real and nominal income.How can you get an approximation of the percentage change in real income from one-time period to another?

What are two criticisms of the unemployment rate? How do these criticisms relate to the overstating or understating of the unemployment rate?

What is "demand-pull" inflation?

Assume that nominal income is $35,000 and the price index is 1.20 in year 1.In year 2, nominal income rises to $38,000 and the price index rises to 1.25.What was the percentage change in real income from year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the percentage change in real income and the absolute change in real income using the approximation formula and using the more precise method with index numbers.

Explain how policy makers Core Inflation data to assess whether any deliberate changes are in polices aimed at achieving acceptable levels of Inflation.