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Macroeconomics: Unemployment and Inflation

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  • What is the labor force?
    The labor force is the sum of employed and unemployed workers in the economy.
  • How is the unemployment rate defined?
    The unemployment rate is the percentage of the labor force that is unemployed.
  • What is the labor force participation rate?
    The labor force participation rate is the percentage of the working-age population that is in the labor force.
  • What does the employment-population ratio measure?
    The employment-population ratio is the percentage of the working-age population that is employed.
  • Who are discouraged workers?
    Discouraged workers are people available for work but have not looked for a job in the past four weeks because they believe no jobs are available.
  • What are the three types of unemployment?
    The three types are frictional unemployment, structural unemployment, and cyclical unemployment.
  • Define frictional unemployment.
    Short-term unemployment arising from the process of matching workers with jobs, including job search and seasonal unemployment.
  • Define structural unemployment.
    Unemployment caused by a persistent mismatch between workers' skills and job requirements, often requiring retraining.
  • What is cyclical unemployment?
    Unemployment caused by business cycle recessions, rising during downturns and falling during recoveries.
  • What is the natural rate of unemployment?
    The normal rate of unemployment consisting of frictional and structural unemployment, typically between 4% and 5% in the U.S.
  • How can unemployment insurance affect unemployment?
    Unemployment insurance may increase unemployment by encouraging workers to search longer for better jobs.
  • What effect do minimum wage laws have on unemployment?
    Minimum wage increases can reduce teenage employment slightly, but overall unemployment effects are small at current levels.
  • What are efficiency wages?
    Above-market wages paid by firms to increase worker productivity and reduce turnover, potentially causing unemployment.
  • What is the consumer price index (CPI)?
    A measure of the average prices urban consumers pay for a fixed basket of goods and services.
  • How is the CPI calculated?
    CPI = (Cost of basket in current year / Cost of basket in base year) × 100.
  • What is inflation rate based on CPI?
    The percentage change in the CPI from one year to the next.
  • What are common biases in the CPI?
    Substitution bias, quality change bias, new product bias, and outlet bias can cause CPI to overstate inflation.
  • What is the producer price index (PPI)?
    An average of prices received by producers for goods and services at all production stages.
  • How do nominal and real variables differ?
    Nominal variables are measured in current dollars; real variables are adjusted for inflation using price indexes.
  • How is the real interest rate calculated?
    Real interest rate ≈ nominal interest rate minus the inflation rate.
  • What problems does inflation cause?
    Inflation redistributes income, increases costs of holding cash, causes menu costs, and can distort taxes on nominal returns.
  • Why is unanticipated inflation problematic?
    It makes borrowing and lending risky because it is hard to predict real returns.
  • How does inflation affect people with fixed incomes?
    Inflation reduces the purchasing power of fixed incomes, making it harder for retirees and others to maintain living standards.