Econ 104 1st Edition Outline of Current Lecture 1 Review Questions Current Lecture ECON 104 REVIEW QUESTIONS SECOND EXAM The following are some questions for review CHAPTER 9 Unemployment Labor Force Participation Rates Inflation and Interest Rates text pages 264 287 packet pages 59 76 1 When the economy is at potential Y is unemployment zero No even with full PPF unemployment is not at zero 2 What is a discouraged worker A discouraged worker is someone who is available for work but has not looked for it in the past month This underestimates the unemployment rate 3 How do we calculate Labor Force Unemployment Rate Labor Force Participation Rate Labor Force Unemployed Employed Unemployed 16 years old or more and are looking for work Unemployment Rate Number Unemployed Labor Force X100 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Labor Force Participation Rate Labor Force Working age non institutionalized population 4 Why did policy makers come up with U6 This number counts discouraged workers and workers who are working less than their preferred amount in the unemployed number 5 A price level is a measure of the average level of prices Two price levels CPI GDP deflator How do these differ Packet page 66 a GDP deflator P NGDP RGDP X100 includes only domestic goods while CPI includes anything bought by consumers including foreign goods The GDP deflator is a measure of the prices of all goods and services while CPI is a measure of only goods bought by consumers 6 The CPI stands for Consumer PRICE INDEX How do we calculate the CPI Which component of the consumption basket in the CPI has the greatest weight CPI Cost of Basket in Current Year Cost of Basket in Base Year X 100 The greatest weight comes from the price of the goods in that year 7 What is the CPI equal to in the base year Base year CPI is always 100 8 Suppose the CPI 120 This says prices have risen by 20 since the base year 9 If the CPI 100 has the real purchasing power of the dollar i e amount of goods and services that a dollar can buy increased or decreased since the base year Real Purchasing power has decreased 10 If the CPI 100 has the real purchasing power of the dollar increased or decreased since the base year Real purchasing power has increased 11 Babe Ruth s salary in 1932 was 80 000 What is his salary in 2014 dollars if the CPI 1932 12 9 and CPI 2014 236 7 Answer 1 467 907 Real IncomeyearX New CPI Old CPI X Nominal Income 236 7 12 9 X 80 000 1 467 907 12 How do we calculate inflation New CPI Old CPI Old CPI X 100 Inflation Rate 13 How do we calculate real income How is real income different from nominal income 14 Real IncomeyearX New CPI Old CPI X Nominal Income Real income accounts for the change in price level 15 What is the simplified way of calculating expected real income growth when you have the growth in nominal income salary increase and expected inflation e Real Income Nominal IncomeYearX CPI YearX 100 change Real income change Nominal Income change CPI Change New Old Old X 100 16 What is the impact of inflation on income If your nominal wage or income grows at a rate that is greater than or equal to the inflation rate are you better off i r inflation i nominal interest rate r real interest rate r 0 You are more likely to spend Borrowers win When inflation is rising r 0 You are more likely to save lenders and savers both lose Interest earnings do not keep up with inflation i nominal wage growth rate So if your nominal wage growth rate was greater than the inflation rate then r 0 and lenders and savers both lose inflation is the expected inflation rate 17 What is the formula for calculating the real interest rate r the nominal interest rate i i r inflation 17 If Merrill bank says they will give you an education loan with an interest rate of 10 are they quoting the nominal interest rate or the real interest rate They are quoting the nominal interest rate 18 How does inflation affect savers How does inflation affect a borrower A lender Inflation causes your money to decrease in purchasing power People who borrow will have to pay back the same amount nominally but it will be worth less in real terms People who save will hold on to the money and when they decide to spend it will be worth less A lender will give away money and receive the same back nominally but it will be less in real terms 19 Inflation hurts mainly when it is anticipated or unanticipated Inflation hurts the most when it is unanticipated because people did not account for the decrease in purchasing power 20 Why do you think banks lenders came up with adjustable rate mortgages ARMs Banks came up with ARMs so that if there is unexpected inflation they do not lose money CHAPTER 10 beginning with page 316 322 The Business Cycle packet pages 78 93 186 189 and 196 208 21 What is a business cycle What are the four phases of a business cycle Alternating periods of economic growth and contraction which can be measured in changes in real GDP Has four cycles Expansion 1 Production employment and income are increasing Spending by firms and households increases Peak 1 the expansion ends Recession 1 Production employment and income are decreasing Spending by firms and households decreases Trough 1 The recession ends 22 When was the last recession in the U S Dec 07 Jun 09 23 Who decides when a business cycle begins and ends NBER National Bureau of Economic Research 24 What are the challenges confronting forecasters businesses and policymakers with respect to the business cycle What do we mean by economic indicators Why do we look at the other economic indicators besides real GDP a Takes time to gather and analyze economic date Always wish you had more time or another model to compare it with b Economists try and get ahead of the curve to see if there is going to be a recession If they see it coming there is a very slim close to 0 that they will stop it but they are able to lessen the decline or try and create more output Challenges confronting policy makers and businesses in forecasting the business cycle c No two business cycles are alike the vary in length and depth d Real GDP comes out only quarterly at the end of the first month after the quarter ends Business Cycle Indicators e Policymakers and businesses rely on business cycle indicators Are released more frequently than real GDP daily or monthly Lead lag or are coincident indicators of the