ECON 162B – 90, 91 Kenny Christianson

Fall 2007

ANSWER KEY – PROBLEM SET NUMBER SIX

1. The following people would be included in the labor force:

Alice, Bert, Charlotte, Ethel, Hank, Irene, Jim, Karen, Larry and Nick,
so the size of the labor force is 10. Of those ten people, three are actively seeking work
but not working (Alice, Irene, and Nick), so the unemployment rate is 3/10 = 30%.

2. First, we must calculate the cost of each market basket in each year:

GOOD 1990 PRICES Q P x Q 2000 PRICES Q PxQ

pens $.25 20 5.00 $1.00 20 20.00

notebooks 1.00 6 6.00 3.00 6 18.00
textbooks (average price) 25.00 8 200.00 60.00 8 480.00
pizza 4.00 25 100.00 10.00 25 250.00
compact disks 7.50 10 75.00 20.00 10 200.00
16 ounce bottle of soda .40 10 4.00 1.00 10 10.00
390.00 978.00

Cost of market basket in 1990 = $390

Cost of market basket in 2000 = $978

Student Price Index = Cost of market basket in current year x 100

Cost of market basket in base year

For 1990 = (390/390) x 100 = 100

For 2000 = (978/390) x 100 = 250.77

So student prices have increased by 150.7% from 1990 to 2000:

% change in student price index = SPI (2000) – SP1 (1990) x 100

SPI (1990)

= 250.77 – 100 x 100 = 150.7

100
Note that for a price index, quantity is held constant while the price varies.

3. a. Alice is facing frictional unemployment.

b. Barney is facing structural unemployment.
c. Charlie is facing cyclical unemployment.
d. David is facing seasonal unemployment.
e. Ellen is facing frictional unemployment.
Econ 162B-90, 91 Fall 2007 Answer Key Six 2

4. There are two ways to answer this question:

a. Who earns the highest real interest ( r )?

real interest rate = nominal interest rate – inflation

Fred: earns 10 – 15 = -5% real interest

Gerry: earns 8 – 4 = 4% real interest
Henrietta: earns 6 – 1 = 5% real interest

So Henrietta is better off, since she earns the highest real interest.

b. Who has the most purchasing power at the end of year?

Each individual starts with $100. After earning interest for a year, each individual will
have $100(1 + i). The value today (purchasing power) of that payment will be

$100(1 + i)/(1 + Π)

So the value today (PV) of a payment in one year for each individual would be:

Fred: PV = 100(1 + .1)/(1 + .15) = $95.65

Gerry: PV = 100(1 + .08)/(1 + .04) = $103.85
Henrietta: PV = 100(1 + .06)/(1 + .01) = $104.95

So once again, Henrietta is better off because the purchasing power of her future
payments is the greatest.

5 a. For September 2007, the rate of unemployment was 4.7%. It has been slowly
increasing from 4.5% in April 2007. The CPI increased by 0.3% in September 2007.
The inflation rate has been volatile in the recent past, ranging from an increase of 0.7% in
May 2007 to a decrease of 0.1% in August 2007.

b. In 1913, the CPI = 9.9.

In July 1983, the CPI = 99.9.
In 2000, the CPI = 172.2.
In September 2007, the CPI = 208.49.
So prices have increased by 108.49% from 1982-84 to September 2007.