Part II

1. What does the CPI in the base year equal

The CPI in the base year is equal to 100. The formula for CPI is total dollar expenditure on
market basket in current year divided by the total dollar expenditure on market basket in base
year. Since the expenditure for current year is the base year, the numerator and denominator
are the same. Hence, the ratio would be 1 and multiplying it with 100 gives us 100 as the
CPI.
2. Show that, if the percentage rise in prices equal to the percentage rise in nominal income
then one’s real income does not change.
Person A’s nominal income in year 1 is 20,000 and 22,000 in year 2. The CPI in year 1 is 100
and 110 in year 2.
20,000
The real income for year 1 = × 100 = 20,000
100
22,000
The real income for year 2 = × 100 = 20,000
110
Despite the increase on the nominal income, the real income for both years are the same due
to the inflation.
3. When is the total dollar expenditure on the market basket in the base year the same as in
the current year?
If the inflation rate is zero, there would be no changes in the prices in the current year. As a
result, the total expenditure on the market basket in the base year and current year will be equal.
4. How does structural unemployment differ from frictional unemployment?
In frictional unemployment, the unemployed person has readily transferable skills, while the
structurally unemployed person does not.
5. What does it mean to say that the country is operating at full employment?
When we say that a country is operating at full employment, this means that the unemployment
rate is equal to the natural unemployment rate
6. What is “natural” about natural unemployment?
The word natural refers to the unemployment that is a result of real or voluntary economic forces.
Basically, unemployment is caused by natural economic occurrences.
7. What is the difference between the employment rate and the labor force participation
rate?
These two have the same denominator but differs in the numerator. Employment rate has
number of employed persons as the numerator, while the labor force participation rate has the
civilian labor force as the numerator. This means that the employment rate indicates the
percentage of the population that is working. On the other hand, the labor force participation rate
gives the percentage of the population that is willing to work
8. If the unemployment rate is 4%, it does not follow that the employment rate is 96%.
Explain why.
The formula for the unemployment rate and employment rate do not have the same denominator.
While the unemployment rate is a percentage of the civilian labor force, the employment rate is
a percentage of the civilian noninstitutionalized population.
9. What criteria must be met in order for a person to be characterized as being unemployed.
In order for a person to be recognized as unemployed, they should have no job as of the moment,
they should be making active efforts to find a job during the prior four weeks, they should be
available for work, and another criterion is if they are waiting to be called back to a job from
which they have been temporarily laid off.
10. What is the difference between a job leaver and a reentrant.
The difference is the effort in reentering the labor force. A job leaver was previously employed
but quitted their job. On the other hand, a reentrant was previously employed, hasn’t worked for
some time, but is now reentering the labor force by looking for jobs.
11. How is a discouraged worker different from an unemployed worker?
A discouraged worker is making no efforts in looking for a job while an unemployed worker is
making efforts to land a job.
12. If the price of, say, oranges has risen, does it follow that the price level has risen too?
No, because the price level includes the price of all goods. Prices of other goods may have
fallen, offsetting the effect of the higher price for oranges.
13. What is the relationship between your nominal income and the inflation rate if you are
more than keeping up with inflation?
If you are more than keeping up with inflation, the increase in the nominal income should be
greater than the inflation rate.
 14. Explain how the CPI is computed
The CPI is calculated as follows:
1. First the market basket is defined
2. Next, determine how much it would cost to purchase the market basket in the current year
and in the base year;
3. Then, divide the dollar cost of purchasing the market basket in the current year by the dollar
cost of purchasing the market basket in the base year;
4. Lastly, multiply the quotient by 100.
15. Using the following data, compute (a) the unemployment rate, (b) the employment rate,
and (c) the labor force participation rate. The civilian noninstitutional population = 200 million,
number of employed persons = 126 million, and number of unemployed persons = 8 million
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 8 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
a. 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = × 100 = × 100 = 5.97%
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 126+8 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
# 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 126 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
b. 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = × 100 = × 100 = 63%
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 200 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 126+8 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
c. 𝐿𝐹𝑃𝑅 = × 100 = × 100 = 67%
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 200 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
16. Based on the following data, compute (a) the unemployment rate, (b) the structural
unemployment rate, and (c) the cyclical unemployment rate. The frictional unemployment =
2%, Natural unemployment rate = 5%, civilian labor force = 100 million, and number of
employed persons = 82 million
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 100−82 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
a. 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = × 100 = × 100 = 18%
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 100 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
b. Structural Unemployment Rate
= Natural – Frictional
= 5% - 2%
= 3%
Extra:
What does a positive cyclical unemployment rate imply?
It implies that the (actual, measured) unemployment rate in the economy is greater than the natural
unemployment rate. For example, if the unemployment rate is 8 percent and the natural unemployment
rate is 6 percent, the cyclical unemployment rate is 2 percent.