Chapter 7: Business Cycles, Unemployment and Inflation

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Chapter 7: Business Cycles, Unemployment and Inflation
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2012-04-07 22:00:21
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Business Cycles Unemployment Inflation
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Chapter 7: Business Cycles, Unemployment and Inflation
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  1. What are the four types of unemployment?
    • 1. Frictional Unemployment
    • Unemployed workers in-between jobs
    • Searching for jobs or waiting to take new jobs

    • 2. Structural Unemployment
    • Right people in the wrong place
    • Changes in consumer demand and technology

    • 3. Cyclical Unemployment
    • Unemployed because of business cycle
    • Insufficient demand for goods and services

    • 4. Seasonal Unemployment
    • Unemployment caused by seasonal factors
  2. How do you measure the unemployment rate?
    unemployed/labour force x 100
  3. What is the Definition of ‘Full’ Employment?
    • NOT zero unemployment
    • Occurs when there is no cyclical unemployment
  4. What is the GDP gap?
    The amount by which actual GDP falls short of potential GDP
  5. What is OKUN's LAW?
    • For every 1% unemployment exceeds the natural rate.…
    • A GDP Gap of about 2% occurs
  6. What is the Consumer Price Index?
    How is it calculated?
    A measure of the overall cost of the goods and services bought by a typical consumer.

  7. How do you calculate the inflation rate?
    The inflation rate is calculated after the CPI is calculated.

  8. Problems with CPI (3)
    1. Substitution Bias
    1.Substitution bias



    Over time, some prices rise faster than others.

    Consumers substitute toward goods that become relatively cheaper.

    The CPI misses this substitution because it uses a fixed basket of goods.

    Thus, the CPI overstates increases in the cost of living.
  9. Problems with CPI
    2. Introduction of New Goods
    •When new goods become available, variety increases, allowing consumers to find products that more closely meet their needs.

    •This has the effect of making each dollar more valuable.

    •The CPI misses this effect because it uses a fixed basket of goods.

    •Thus, the CPI overstates increases in the cost of living.
  10. Problems with CPI
    3. Unmeasured Quality Change
    •Improvements in the quality of goods in the basket increase the value of each dollar.

    •Statistics Canada tries to account for quality changes,but probably misses some quality improvements, as quality is hard to measure.

    •Thus, the CPI overstates increases in the cost of living.
  11. What is the GDP Deflator?
    §The GDP deflator
    reflects the current level of prices relative to the level of prices in the base year.
    •reflects the current level of prices relative to the level of prices in the base year.

  12. Contrasting the CPI and GDP Deflator




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