chapter 7

Question 1

Unemployed

Answer 1

not employed and actively seeking work

Question 2

Employed

Answer 2

working full-time or part-time at a paid job

Question 3

Work force

Answer 3

employed + unemployed

Question 4

Unemployment rate formula

Answer 4

(unemployed/labor force) x 100

Question 5

Labor force participation rate

Answer 5

percentage of working-age population in the labor force (employed or unemployed)

Question 6

Labor force participation rate formula

Answer 6

(labor force/working-age population) x 100

Question 7

Involuntary part-time workers

Answer 7

• some workers who are employed part-time would rather have a full-time job, but can’t find one
• they don’t show up on official unemployment rate

Question 8

Discouraged workers

Answer 8

• those who want to work, but have given up actively searching for jobs
• The number of discouraged workers tends to increase in recessions and decrease in expansions

Question 9

Unemployment rate and discouraged workers

Answer 9

As the economy beings expanding, the unemployment rate often increases even as the economy is creating more jobs, because previously discouraged workers get encouraged and re-enter the labor force actively seeking work again

Question 10

Regional differences

Answer 10

the unemployment rate average hides regional differences in unemployment rates across Canada

Question 11

Types of unemployment

Answer 11

1. Frictional Unemployment
2. Structural Unemployment
3. Seasonal Unemployment
4. Cyclical Unemployment

Question 12

Healthy unemployment types

Answer 12

1. Frictional Unemployment
2. Structural Unemployment
3. Seasonal Unemployment

Question 13

Frictional Unemployment

Answer 13

• due to normal labor turnover and job search; healthy part of a changing economy
• Caused by workers between or searching jobs

Question 14

Structural Unemployment

Answer 14

• due to technological change or international competition that makes workers’ skills obsolete
• there is a mismatch between the skills workers have and the skills new jobs require
• Workers who are structurally unemployed need to retrain to find new and different jobs

Question 15

Seasonal Unemployment

Answer 15

• due to seasonal changes in weather
• Not a problem needing a policy solution

Question 16

Cyclical Unemployment

Answer 16

• due to fluctuations in economic activity over the business cycle
• Workers who lose their jobs because of contraction in economic activity
• Needs fixing from the government, either monetary or fiscal policy

Question 17

Natural rate of unemployment (full employment)

Answer 17

unemployment rate at full employment, when there is only frictional, structural and seasonal unemployment (all the healthy types of unemployment)

zero percent cyclical employment

Question 18

If the economy is at full employment (with no cyclical unemployment) real GDP =

Answer 18

potential GDP

Question 19

Recessionary Gap

Answer 19

• when the economy contracts and real GDP falls below potential GDP
• There are unemployed inputs, so real GDP is less than potential GDP

Question 20

Inflationary Gap

Answer 20

• when the economy expands and real GDP temporarily rises above potential GDP
• Inputs are fully employed and the economy is working overtime
• Unemployment rate decreases below the natural rate and more workers are employed, so levels of healthy unemployment drop below normal levels

Question 21

Inflation

Answer 21

a persistent rise in the average price level and a fall in the value of money

Question 22

Consumer Price Index

Answer 22

measures the monthly change in prices paid by consumers.

Question 23

Inflation rate

Answer 23

annual percentage change in the Consumer Price Index

Question 24

Inflation Rate Formula

Answer 24

((CPI for current year - CPI for previous year)/CPI for previous year) x 100

Question 25

Core Inflation Rate

Answer 25

inflation rate excluding unpredictable categories

Question 26

Why is inflation important

Answer 26

1. inflation reduces purchasing power of unchanged dollar incomes 2. inflation affects the purchasing power of a loan and interest received or paid 3. Unpredictable prices discourage planning and investment

Question 27

Nominal interest rate

Answer 27

observed interest rate; equal to the number of dollars received per year in interest as a percentage of the number of dollars saved

Question 28

Real interest rate

Answer 28

nominal interest rate adjusted for effects of inflation, calculates the purchasing power you have gained or lost at the end of a loan → more important for making smart saving and investing decisions

Question 29

Acceptable inflation

Answer 29

Low inflation rate, between 1-3%

Question 30

Deflation

Answer 30

persistent fall in average prices and a rise in the value of money

Question 31

Deflation impact on savers

Answer 31

deflation increases the purchasing power of any money you have in the bank, which benefits savers

Question 32

Deflation impact on borrowers

Answer 32

hurts borrowers because when they pay back loans, they are paying back more valuable dollars (in purchasing power) than the dollars they borrowed

Question 33

During deflation, asset values

Answer 33

fall

Question 34

What does inflation rate miss?

Answer 34

1. Standard of living vs Cost of living 2. Switching to cheaper substitutes 3. New and better products

Question 35

Money (M)

Answer 35

consumers use money income earned in input markets to buy the products and services they want

Question 36

Velocity of Money

Answer 36

number of times unit of money changes hands during a year

Question 37

P x Q

Answer 37

nominal GDP, which also equals aggregate income

Question 38

Quantity theory of money formula

Answer 38

M x V (fixed) = P x Q (fixed)

Question 39

Quantity theory of money

Answer 39

increase in the quantity of money causes an equal percentage increase in the inflation rate

Question 40

Relationship between money and inflation

Answer 40

There cannot be inflation in the economy as a whole unless there is an accompanying increase in the quantity of money

Question 41

Phillips Curve

Answer 41

graph showing an inverse relation between unemployment and inflation * When the unemployment rate was lower, the inflation rate was higher * When the unemployment rate was higher, the inflation rate was lower

Question 42

Demand-pull inflation

Answer 42

rising average prices caused by increases in demand

Question 43

Downward demand-pull deflation

Answer 43

* Decrease in demand pull prices down * Decreased demand causes surpluses of unsold products and services, leading businesses to cut prices

Question 44

Supply shocks

Answer 44

events directly affecting businesses’ costs, prices and supply

Question 46

Cost-Push Inflation

Answer 46

* rising average prices caused by decreases in supply * A decrease in supply caused by increasing costs is the key force pushing output prices * There is also an accompanying increase in the quantity of money

Question 47

Stagflation

Answer 47

combination of recession (higher unemployment) and inflation (higher average prices)

Question 48

Two factors that complicate the original (short-run) Phillips Curve

Answer 48

1. changes in the natural rate of unemployment 2. changes in inflation expectations