Solution Manual for Macroeconomics 12th Edition

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Answers to the Review Quizzes

Page 112 (page 520 in Economics)
1. What determines if a person is in the labor force?
Workers who have a job and workers who are unemployed are in the labor force. To be “officially”
counted as unemployed, and thus in the labor force, means that the person does not have a job but is
available and willing to work and has made some effort to find work within the past four weeks, or
waiting to be called back to a job from which he or she has been laid off, or waiting to start a new job
within 30 days.
2. What distinguishes an unemployed person from one who is not in the labor force?
A general definition of unemployment is a person who wants to work but does not have a job. A
person who is not in the labor force does not have a job and does not want one. More specifically to be
considered as unemployed, and thus in the labor force, the person must not have a job but must be
available and willing to work. The person must also have made some effort to find work within the past
four weeks, or be waiting to be called back to a job from which he or she has been laid off, or be
waiting to start a new job within 30 days.
3. Describe the trends and fluctuations in the U.S. unemployment rate from 1980 to 2014.
The unemployment rate has had several significant fluctuations around its average of 6.5 percent. It
started by soaring to a high that exceeded 10 percent during the 1982 recession. Then there was a
gradual downward trend particularly insofar as the peaks during the recessions in 1990-1991 and 2001
were much lower than in 1982. But that situation reversed itself with the severe and prolonged
recession of 2008-2009 when the unemployment once more jumped (slightly) above 10 percent. Since
that peak the unemployment rate has fallen to around 6 percent.
4. Describe the trends and fluctuations in the U.S. employment-to-population ratio and labor force
participation rate from 1980 to 2014.
The labor force participation rate and the employment-to-population ratio had an upward trend from
1980 until about 2000 after which they turned downward. Both show fluctuations around these trends,
especially the employment-to-population ratio which rises during expansions and falls during recessions
but its fall between 2008 and 2010 was particularly severe. The labor force participation rate also fell
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between 2008 and 2010 but the fall was not as dramatic. Recently the labor force participation rate has
been near 63 percent and the employment-to-population ratio has been near 59 percent.

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5. Describe the alternative measures of unemployment.

The Bureau of Labor Statistics keeps track of 6 alternative measures of unemployment:
• U-1 measures long-term unemployment. It counts as unemployed only workers who have
been unemployed for 15 or more weeks.
• U-2 measures job losers; that is, only workers who lost their jobs (as opposed to quitting or
reentering the labor market) are counted as unemployed.
• U-3 is the conventional measure of unemployment.
• U-4 adds discouraged workers to the conventional measure of unemployment.
• U-5 adds all marginally attached workers to the U-4 measure of unemployment.
• U-6 adds part-time workers who would like a full-time job (economic part-time workers) to
the U-5 measure of unemployment.

Page 115 (page 523 in Economics)

1. Why does unemployment arise and what makes some unemployment unavoidable?
In a dynamic economy some unemployment is unavoidable. For instance, growth means that some
workers will always be entering the labor force without a job and therefore be unemployed.
Consumers changing their demand for one good over another means workers in the newly less-favored
industry will lose their jobs and also be unemployed. Moreover some workers will always be leaving
their current job to search for a better job and these workers, too, will be unemployed. So some
unemployment is unavoidable as the economy churns and reacts to changes.
2. Define frictional unemployment, structural unemployment, and cyclical unemployment. Give
examples of each type of unemployment.
Frictional unemployment is the unemployment that arises from the normal labor turnover from people
entering and leaving the labor force and from the ongoing creation and destruction of jobs. For
instance, newly graduated students entering the labor market looking for work are frictionally
unemployed. Structural unemployment represents the unemployment created by changes in technology
or international competition that change the skills needed to perform jobs or change the locations of
jobs in the economy. For instance, workers are structurally unemployed if they lose their jobs because
of changes in the amount of foreign competition and if they have different skills from those required by
new jobs or if they live in a different region of the country from where new jobs are being created.
Finally, cyclical unemployment is the unemployment created by business cycle fluctuations in economic
activity. Specifically the higher than normal unemployment at a business cycle trough and the lower than
normal unemployment at a business cycle peak is called cyclical unemployment. For instance, a worker
laid off in 2009 because of the recession is cyclically employed.
3. What is the natural unemployment rate?
The natural unemployment rate is the unemployment rate when no cyclical unemployment exists. That
is, when all unemployment is frictional or structural then the unemployment rate equals the natural
unemployment rate. Full employment occurs when there is no cyclical unemployment and the
unemployment rate equals the natural unemployment rate.
4. How does the natural unemployment rate change and what factors might make it change?
Changes in the natural unemployment rate arise because of changes in frictional and structural
unemployment. Any factor that changes frictional unemployment or structural unemployment changes
the natural unemployment rate. For instance, a change in the age distribution of the population, a
change in the scale of structural changes that are occurring, a change in the minimum wage rate or
efficiency wages, or a change in unemployment benefits all change the natural unemployment rate.
5. Why is the unemployment rate never zero, even at full employment?
The unemployment rate is never zero because there is always churning going on the economy. There
are always new workers entering the labor market and searching for work, there are always workers
leaving one job to search for another, better job, and there are always firms laying off workers. All
these cases lead to unemployment as the workers search for a job.

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6. What is the output gap? How does it change when the economy goes into recession?
The output gap equals the difference between real GDP and potential GDP. When the economy goes
into a recession, the output gap becomes negative.
7. How does the unemployment rate fluctuate over the business cycle?
During a recession the unemployment rate is generally rising. During an expansion the unemployment
rate is generally falling.

Page 121 (page 529 in Economics)

1. What is the price level?
The price level is the average level of prices.
2. What is the CPI and how is it calculated?
The CPI is the Consumer Price Index. The CPI equals (Cost of CPI basket at current prices ÷ Cost of
CPI basket at base-period prices) ×100.
3. How do we calculate the inflation rate and what is its relationship with the CPI?
The inflation rate is the percentage change in a price index from one year to the next. The rate of
change of the CPI is often used as a measure of inflation as faced by consumers.
4. What are the four main ways in which the CPI is an upward-biased measure of the price level?
The CPI is biased upward because of the new goods bias; the quality change bias; commodity
substitution bias; and outlet substitution bias. The new goods bias reflects the point that new goods,
such as DVDs are generally more expensive than the old goods they replace, VHS tapes. The quality
change bias points out that part of the reason goods and services rise in price is because their quality is
improved. Commodity substitution bias occurs because consumers substitute away from goods and
services that have risen in the price more than other goods and services. Outlet substitution bias
occurs because consumers will use discount stores more frequently when goods and services rise in
price.
5. What problems arise from the CPI bias?
The upward bias in the CPI distorts private contracts and government outlays that include formulas
based on CPI change as a measure of inflation. If the intent is to maintain the real value of a payment,
indexing payments to the CPI will in fact increase the real value of payments over time if the CPI has an
upward bias. In one year, the effect of the bias may not be much, but it will accumulate over time. Close
to one third of federal government outlays are indexed to the CPI.
6. What are the alternative measures of the price level and how do they address the problem of bias
in the CPI?
The first of three alternative price level is the chained CPI. The chained CPI is calculated in a similar
manner as chained-dollar real GDP. The chained CPI overcomes the commodity substitution and new
goods bias because it uses current as well as previous period quantities. The second alternative price
level is the personal consumption expenditure deflator or PCE deflator. The PCE deflator is calculated from
real and nominal consumption expenditure. The PCE deflator uses a broader basket of goods and
services than the CPI and, similar to the chained CPI, is also calculated using a chained method. The
third alternative is the GDP deflator. The GDP deflator is similar to the PCE deflator except the GDP
deflator uses the prices from all the goods and services included in GDP.

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Answers to the Study Plan Problems and Applications

1. The BLS reported the following data for 2010:
Labor force: 153.7 million
Employment: 139.1 million
Working-age population: 237.9 million
Calculate the
a. Unemployment rate.
The unemployment rate is 9.5 percent. The unemployment rate is the percentage of the labor force
that is unemployed. The labor force is the sum of the people unemployed and the people employed. So
the number of people who are unemployed is 153.7 million minus 139.1 million, which is 14.6 million.
The unemployment rate equals (the number of people unemployed divided by the labor force)
multiplied by 100. That is, (14.6 million/153.7 million) 100, which is 9.5 percent.
b. Labor force participation rate.
The labor force participation rate is 64.6 percent. The labor force participation rate is the percentage
of the working-age population that is in the labor force. The working-age population is 237.9 million and
the labor force is 153.7 million, so the labor force participation rate is (153.7 million/237.9 million)
100, which equals 64.6 percent.
c. Employment-to-population ratio.
The employment-to-population ratio is 58.4 percent. The employment-to-population ratio is the
percentage of the people of working age who have jobs. The employment-to-population ratio is equal
to the number of people employed divided by the working-age population then multiplied by 100. The
employment-to-population ratio is (139.1 million/237.9 million) 100, which is 58.4 percent.
2. In July 2014, in the economy of Sandy Island, 10,000 people were employed, 1,000 were
unemployed, and 5,000 were not in the labor force. During August 2014, 80 people lost their jobs
and didn’t look for new ones, 20 people quit their jobs and retired, 150 unemployed people were
hired, 50 people quit the labor force, and 40 people entered the labor force to look for work.
Calculate for July 2014
a. The unemployment rate.
The unemployment rate in July is 9.1 percent. The unemployment rate is the number unemployed as a
percentage of the labor force. The number of unemployed workers is 1,000. The labor force is the
number employed plus the number unemployed so in July it is 11,000. The unemployment rate equals
(1,000/11,000)  100, which is 9.1 percent.
b. The employment-to-population ratio.
The employment-to-population ratio is 62.5 percent. The employment-to-population ratio is the
number employed as a percentage of the working-age population. The number of employed people is
10,000. The working-age population is the sum of the labor force and the number of people who are
not in the labor force, which is 16,000. The employment-to-population ratio is (10,000/16,000)  100,
which is 62.5 percent.
And calculate for the end of August 2014
c. The number of people unemployed.
The number of people who are unemployed at the end of August is 840. The number of people who
are unemployed at the end of August equals the number unemployed in July plus the number of people
who lost their job and who stayed in the labor market plus the number of people entering the labor
market minus the number of people who were hired minus the number of people who left the labor
market. So the number of people unemployed equals 1,000 + 40 − 150 − 50, which is 840.
d. The number of people employed.
The number of people who are employed at the end of August is 10,050. The number of people who
are employed at the end of August equals the number employed in July minus the people whom lost
their jobs plus the number of people who gained jobs.

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e. The unemployment rate.

The unemployment rate at the end of August is 7.7 percent. The unemployment rate equals the
number unemployed expressed as a percentage of the labor force. The number of people who are
unemployed is 840. The labor force equals the number employed plus the number unemployed and at
the end of August it is 10,890. The unemployment rate at the end of August equals (840/10,890)  100,
which is 7.7 percent.
Use the following information to work Problems 3 and 4.
In October 2009, the U.S. unemployment rate was 10.0 percent. In October 2011, the unemployment
rate was 8.9 percent. Predict what happened to:
3. Unemployment between October 2009 and October 2011, if the labor force was constant.
If the labor force is constant, the only way the unemployment rate can decrease is if the number of
unemployed workers decreases.
4. The labor force between October 2009 and October 2011, if unemployment was constant.
If unemployment is constant, the only way the unemployment rate can decrease is if the labor force
increases.
5. Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising
An exodus of discouraged workers from the job market kept the unemployment rate from
climbing above 10 percent. Had the labor force not decreased by 661,000, the unemployment
rate would have been 10.4 percent. The number of discouraged workers rose to 929,000 last
month.
Source: Bloomberg, January 9, 2010
What is a discouraged worker? Explain how an increase in discouraged workers influences the
official unemployment rate and U–4.
A discouraged worker is a person, who currently is not working, would like a job, has looked for one in
the recent past, but has stopped looking for work because of repeated failures in finding a job. If a
worker who had been looking for work quits looking, the official unemployment rate, U-3, falls. U-4
includes discouraged workers among the ranks of the unemployed so when the worker stops looking
for work and becomes a discouraged worker, the U-4 unemployment rate does not change.
Use the following news clip to work Problems 6 and 7.
Some Firms Struggle to Hire Despite High Unemployment
Matching people with available jobs is always difficult after a recession as the economy remakes itself but
the disconnect is particularly acute this time. Since the recovery began in mid-2009, the number of job
openings has risen more than twice as fast as actual hires. If the job market were working normally,
openings would be getting filled as they appear. Some five million more would be employed and the
unemployment rate would be 6.8%, instead of 9.5%.
Source: The Wall Street Journal, August 9, 2010
6. If the labor market is working properly, why would there be any unemployment at all?
Unemployment will always exist in the labor market because of normal labor market frictions. People
newly entering the labor market, workers quitting a job to look for a better job, firms laying-off
workers because consumers no longer want to buy the goods produced by the firms will always be part
of the labor market. All of these events create unemployment, so even when the labor market is
operating at peak efficiency, unemployment will always be present.
7. Are the 5 million workers who cannot find jobs because of mismatching in the labor market
counted as part of the economy’s structural unemployment or part of its cyclical unemployment?
Even though these workers are unemployed during a recessionary period, their unemployment is the
result of a mismatch between their skills and the skills required for the available jobs. So while they
might be counted as part of cyclical unemployment because they lost their jobs because of the
recession, the mismatch means that these workers might also be counted as part of the economy’s
structural unemployment.

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Use the following information to work Problems 8 and 9.

The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought in
2013. The average household spent $60 on juice and $30 on cloth in 2013 when the price of juice was
$2 a bottle and the price of cloth was $5 a yard. In 2014, juice is $4 a bottle and cloth is $6 a yard.
8. Calculate the CPI basket and the percentage of the household’s budget spent on juice in 2013.
The CPI basket is 30 bottles of juice and 6 yards of cloth. The total amount spent on the CPI basket in
2012 was $90 and of that $60 was spent on juice. The percentage of the household’s budget spent on
juice was ($60/$90) × 100, which is 66.7 percent.
9. Calculate the CPI and the inflation rate in 2014.
The CPI in 2014 is 173.3. To calculate the CPI, divide the value of the CPI basket in 2014 prices by the
base-year value of the CPI basket and then multiply the resulting number by100. The value of the CPI
basket in 2014 prices is: ($4  30) + ($6  6) = $156. The value in base-year prices is $60 + $30
(provided in the question), which equals $90. So the CPI is ($156/$90)  100 = 173.3.
The inflation rate in the 2014 is 73.3 percent. The inflation rate equals the CPI in 2014 year minus the
CPI in the base year expressed as a percentage of the base-year CPI. Because the base-year CPI is 100,
the inflation rate is [(173.3 – 100)/ 100] × 100 = 73.3 percent.
Use the following data to work Problems 10 to 11.
The BLS reported the following CPI data:
June 2008 217.3
June 2009 214.6
June 2010 216.9
10. Calculate the inflation rates for the years ended June 2009 and June 2010. How did the inflation
rate change in 2010?
The inflation rate for the year ended June 2009 is −1.2 percent; the inflation rate for the year ended
June 2010 is 1.1 percent.
The inflation rate is the percentage change in the price level. It is equal to [(Pthis year – Plast year)/ Plast year]
 100. For the year ended in June 2009 the inflation rate is [(214.6 – 217.3)/217.3]  100, which is −1.2
percent. For the year ended in June 2010 the inflation rate is [(216.9 – 214.6)/214.6]  100, which is 1.1
percent. The inflation rate increased in 2010.
11. Why might these CPI numbers be biased? How can alternative price indexes avoid this bias?
The CPI numbers might be biased because of the new goods bias, the quality change bias, the
commodity substitution bias, and the outlet substitution bias. The new goods bias is that new goods are
often more expensive than the older goods that they replace. The quality change bias is that increases
in the quality of a good are often accompanied by increases in the good’s price. The commodity
substitution bias reflects the point that consumers will buy less of a good whose price increased and
more of a good whose price has not changed. Finally the outlet substitution bias points out that when
prices rise, consumers shop more frequently at stores with cheaper prices.
Each of the alternative price indexes attempts to overcome some of the bias in the CPI numbers. The
chained CPI uses prices and quantities from the previous period and the current period. The chaining
process overcomes the commodity substitution process. And because it contains current period
quantities, it also does not suffer from the new goods bias. The personal consumption expenditure
deflator contains goods and services omitted from the CPI. It is calculated from the nominal and real
consumption expenditure data and so it, too, is computed using a chaining procedure. Because the
personal consumption expenditure deflator is calculated using a chaining procedure, it does not suffer
from the commodity substitution bias or the new goods bias. The GDP deflator is calculated from
nominal and real GDP data. It is broader than the personal consumption expenditure deflator because
it contains goods and services in consumption expenditure, investment, government expenditure, and
net exports. The GDP deflator is calculated using a chaining procedure and so it also avoids the
commodity substitution bias and new goods bias.

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Answers to Additional Problems and Applications

12. What is the unemployment rate supposed to measure and why is it an imperfect measure?
Ideally the unemployment rate would measure the underutilization of labor resources. But it is an
imperfect measure for two reasons. First the unemployment rate does not include some underutilized
labor. In particular the unemployment rate completely omits marginally attached workers, such as
discouraged workers. These workers are not included in the unemployment rate. Second the unemployment
rate counts as fully employed workers who are working part time but who want full-time jobs. These
workers are underutilized because they would like to work for more hours than is presently the case.
13. The BLS reported the following data for July 2012:
Labor force participation rate: 63.7 percent
Working-age population: 243.4 million
Employment-to-population ratio: 58.4
Calculate the
a. Labor force.
The labor force participation rate equals the labor force divided by the working-age population then
multiplied by 100. Rearranging this formula shows that the labor force equals the working-age
population multiplied by the labor force participation rate then divided by 100. Using this last formula
and the data given in the problem shows that the labor force equals 243.4 million × 63.7/100, which is
155.0 million.
b. Employment.
The employment-to-population ratio equals employment divided by the working-age population then
multiplied by 100. Rearranging this formula shows that employment equals the working-age population
multiplied by the employment-to-population ratio then divided by 100. Using this last formula and the
data given in the problem shows that employment equals 243.4 million × 58.4/100, or 142.1 million.
c. Unemployment rate.
The unemployment rate equals the number of people unemployed divided by the labor force. The labor
force, from part (a), is 155.0 million. The labor force equals the number of people employed plus the
number of people unemployed. Employment, from part (b), is 142.1 million so the number of people
unemployed is 12.9 million. The unemployment rate equals the number of people unemployed divided
by the labor force, then multiplied by 100. Using this last formula shows that the unemployment rate
equals (12.9 million/155.0 million) × 100, which is 8.3 percent.
14. Jobs Report: Hiring Up, Unemployment Down
The Labor Department reported that hiring accelerated in November, and the unemployment
rate fell to 8.6 percent from 9 percent in October. Two reasons for the fall are that more
Americans got jobs, but even more people gave up on their job searches altogether.
Source: CNNMoney, December 2, 2011
a. If the only change was that all the newly hired people had been unemployed in October, explain
how the labor force and unemployment would have changed.
The labor force would not have changed. The number of people unemployed would have decreased so
the unemployment rate would have fallen.
b. If the only change was that people gave up on their job searches, explain how the labor force
and unemployment would have changed.
The number of people unemployed would have fallen, so the labor force and the unemployment rate
would have decreased.
15. The BLS reported that in July 2012, employment decreased by 195,000 to 142,220,000 and the
unemployment rate increased from 8.2 percent to 8.3 percent. About 3.4 million people were

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marginally attached workers and 0.9 million of them were discouraged.

a. Calculate the change in unemployment in July 2012.
At the start of July employment was 142,220,000 + 195,000 = 142,415,000. The unemployment rate,
which was 8.2 percent, equals (Unemployment/[Unemployment + Employment]) × 100. Using the data
for the start of July gives the result that 0.082 = (Unemployment/[Unemployment + 142,415,000]).
Solving for the amount of unemployment shows that unemployment at the start of July was 12,721,166
workers. Similar calculations show that at the end of July the amount of unemployment was 12,872,694
workers. Unemployment increased in July by 151,528 workers in July.
b. With 3.4 million marginally attached workers and 0.9 million of them discouraged workers, what
are the characteristics of the other 2.5 million marginally attached workers?
The other 2.5 million marginally attached workers would like a job but have stopped looking for work.
Because they are not discouraged workers, these 2.5 million workers have stopped looking for reasons
other than their inability to find a job. For example, a stay-at-home spouse might prefer working in the
job market but have quit looking to undertake some home repairs.
16. A high unemployment rate tells us that a large percentage of the labor force is unemployed but
not why the unemployment rate is high. What unemployment measure tells us if (i) people are
searching longer than usual to find a job, (ii) more people are economic part-time workers, or (iii)
more unemployed people are job losers?
U-1 measures long-term unemployment of 15 weeks or more. If U-1 exceeds its normal value, then
people are taking longer than usual to find a job. U-6 equals U-5 plus part-time workers who want full-
time jobs as unemployed, so the difference between U-6 and U-5 is the result of part-time workers
who want a full-time job. If this difference is unusually large, then more workers than normal are
working at part-time jobs. U-2 measures unemployment resulting from people losing their jobs. If U-2 is
larger than normal, then more unemployment than normal results from people losing their jobs.
17. Some Firms Struggle to Hire Despite High Unemployment
With about 15 million Americans looking for work, some employers are swamped with job
applicants, but many employers can’t hire enough workers. The U.S. jobs market has changed.
During the recession, millions of middle-skill, middle-wage jobs disappeared. Now with the
recovery, these people can’t find the skilled jobs that they seek and have a hard time adjusting to
lower-skilled work with less pay.
Source: The Wall Street Journal, August 9, 2010
If the government extends the period over which it pays unemployment benefits to 99 weeks,
how will the cost of being unemployed change?
Extending unemployment benefits to 99 weeks decreases the cost of being unemployed and thereby
increases the unemployment rate as some people search for a new job for a longer period of time.
18. Why might the unemployment rate underestimate the underutilization of labor resources?
The official unemployment rate underestimates the underutilization of labor resources for two reasons.
First the official unemployment rate completely omits some underutilized labor. In particular the official
unemployment rate omits marginally attached workers, such as discouraged workers. These workers
are not included in the unemployment rate because they are not searching for a job, though if the labor
market was better and jobs more plentiful they would reenter the labor market. Marginally attached
workers are not a major source of mismeasurement because they are a small subset of people. Second
the unemployment rate counts as fully employed workers who are working part time but who want full
time jobs. These workers are underutilized because they would like to work for more hours than is
presently the case. These workers are a significantly more substantial source of error because they
account for a much larger part of the labor force.
Use the following data to work Problems 19 to 21.

Region 2010 2011

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The IMF World Economic Outlook reports the United States 9.6 9.0
unemployment rates in the table. Euro area 10.1 10.9
19. What do these numbers tell you about the phase Japan 5.1 4.5
of the business cycle in the three regions in 2011?
The unemployment rates fell in the United States and Japan, so it might well be the case that the United
States and Japan were entering an expansionary period. The unemployment rate in the Euro area rose,
so it might be the case that the Euro area was in a recession.
20. What do these numbers tell us about the relative size of their natural unemployment rates?
These numbers cover only two years, so making inferences about the relative size of the natural
unemployment rates is potentially dangerous. To the extent that these data are representative, the
natural unemployment rate is likely the highest in the Euro area and the lowest in Japan.
21. Do these numbers tell us anything about the relative size of the labor force participation rates and
employment-to-population ratios?
The numbers tell us nothing about the relative sizes of the labor force participation rates or the
employment-to-population ratios in these three regions.
22. A Half-Year of Job Losses
For the first six months of 2008, the U.S. economy lost 438,000 jobs. The job losses in June were
concentrated in manufacturing and construction, two sectors that have been badly battered in the
recession.
Source: CNN, July 3, 2008
a. Based on the news clip, what might be the main source of increased unemployment?
The main source of increased unemployment likely is in the form of job losses in manufacturing and
construction as opposed to people entering or reentering the labor market or people leaving their jobs.
The news clip makes clear that the first six months of the year had been dismal for the economy, so
these job losses are likely cyclical unemployment in nature though with a mixture of structural
unemployment included because the job losses were concentrated in specific areas..
b. Based on the news clip, what might be the main type of increased unemployment?
While the job losses were “concentrated” in manufacturing and construction, the news clip mentioned
as the reason for the unemployment the point that the two sectors were “badly battered in the
recession.” These job losses represented cyclical unemployment because there were the result of the
“battering” that took place during the recession.
23. Governor Plans to Boost Economy with Ecofriendly Jobs
Oregon’s 5.6 percent unemployment rate hovers close to the national average of 5.5 percent. A
few years ago, Oregon had one of the highest unemployment rates in the nation. To avoid rising
unemployment, Oregon Governor Kulongoski introduced a plan that provides public schools and
universities with enough state funds to meet growing demand for skilled workers. Also
Kulongoski wants to use state and federal money for bridges, roads, and buildings to stimulate
more construction jobs.
Source: The Oregonian, July 8, 2008
a. What is the main type of unemployment that Governor Kulongoski is using policies to avoid?
Explain.
Governor Kulongoski is attempting to decrease both frictional and some structural unemployment. The
educational policies of attempting to train students for jobs with growing demand is an attempt to
decrease the frictional unemployment of newly graduated students looking for a job. If the students
graduate with the skills that firms want to hire, the students quickly will find suitable jobs, thereby
decreasing the state’s frictional unemployment. The proposed policy of building more bridges, roads,
and buildings to provide more construction jobs is attempting to overcome some structural
unemployment in the construction industry. Apparently the number of unemployed workers in the
construction sector is large enough and persistent enough that the governor wants to implement

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policies to decrease it. Because this unemployment is persistent in nature, it is structural

unemployment.
b. How might these policies impact Oregon’s natural unemployment rate? Explain.
If these policies succeed, they will decrease the natural unemployment rate in Oregon. Natural
unemployment is comprised of frictional and structural unemployment. By decreasing these types of
unemployment, Governor Kulongoski’s policies are decreasing the natural unemployment rate.
24. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the base year,
the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a bottle and cloth
was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length. Calculate
a. The CPI basket.
The CPI basket is 10 bottles of juice and 5 lengths of cloth.
b. The CPI in the current year.
The CPI in the current year is 107.7. To calculate the CPI, divide the value of the CPI basket in current
year prices by the base-year value of the CPI basket and then multiply the resulting number by100. The
value of the CPI basket in current year prices is: ($4  10) + ($6  5) = $70. The value in base-year
prices is $40 + $25 (provided in the question), which equals $65. So the CPI is ($70/$65)  100 =
107.7.
c. The inflation rate in the current year.
The inflation rate in the current year is 7.7 percent. The inflation rate equals the CPI in the current year
minus the CPI in the base year expressed as a percentage of the base-year CPI. Because the base-year
CPI is 100, the inflation rate is [(107.7 – 100)/ 100] × 100 = 7.7 percent.
25. Amazon.com agreed to pay its workers $20 an hour in 1999 and $22 an hour in 2001. The price
level for these years was 166 in 1999 and 180 in 2001. Calculate the real wage rate in each year.
Did these workers really get a pay raise between 1999 and 2001?
The real wage rate equals the nominal wage rate divided by the price level. In 1999 the real wage rate
was $20/166 × 100, for a real wage rate of $12.05. In 2001 the real wage rate was $22/180 × 100, for a
real wage rate of $12.22. The workers really got a pay raise between 1999 and 2001 but it was less
than the raise in their nominal wage rate.
26. News release
In May 2012, real personal consumption expenditure (PCE) was $9,588 billion and the PCE
deflator was 115.4. In June 2012, real personal consumption expenditure was $9,576 billion and
personal consumption expenditure was $11,062 billion.
Source: BEA, July 30, 2012
Calculate personal consumption expenditure in May 2012 and the PCE deflator in June 2012. Was
the percentage increase in real personal consumption expenditure greater or smaller than that in
personal consumption expenditure?
Personal consumption expenditure = (real personal consumption expenditure) × (PCE deflator) ÷ 100,
so in May 2012 personal consumption expenditure equaled $9,588 billion × 115.4 ÷ 100 = $11,064
billion.
PCE deflator = ([personal consumption expenditure] ÷ [real personal consumption expenditure) × 100,
so in June 2012 the PCE deflator = ($11,062 billion ÷ $9,576 billion) × 100 = 115.5.
The percentage increase in real personal consumption expenditure was smaller than the percentage
increase in personal consumption expenditure. Personal consumption expenditure grows because real
personal consumption expenditure grows and/or because the PCE deflator grows. During this period,
both real personal consumption expenditure grew and because the PCE deflator grew so the percentage
increase in (nominal) personal consumption exceeded the percentage increase in real personal
consumption expenditure.
27. Hardworking Americans Should Not Be Living in Poverty
The federal minimum wage has remained frozen for the past three years at $7.25 an hour, while
the prices of gas and milk have risen steadily. Over this three-year period, the real value of the

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minimum wage has fallen to $6.77 per hour.

Source: CNN, July 25, 2012
By what percentage did the CPI increase over these three years?
The real minimum wage is equal to (minimum wage)/(price level). In real terms, the minimum wage has
fallen by a percentage equal to [($7.25 − $6.77)/(7$7.25)] × 100, which is a decrease of 6.6 percent.
The nominal minimum wage rate has not changed, so the only factor that has caused the change in the
real minimum wage is a change in the price level. Because the real minimum wage has fallen by 6.6
percent, the price level, that is, the CPI, must have risen by 6.6 percent.
28. After you have studied Economics in the News on pp. 122–123 (530–531 in Economics), answer the
following questions.
a. How many jobs must be created each month to keep pace with a growing population?
About 200,000 jobs per month must be created.
b. What normally happens to the unemployment rate when the pace of job creation exceeds the
increase in population?
When the pace of job creation exceeds the increase in population, normally the unemployment rate
falls.
c. Why might the unemployment rate sometimes increase, when the pace of job creation exceeds
the increase in population?
The unemployment rate might increase because the relatively rapid pace of job creation brings more
discouraged workers back into the labor force. Unless they immediately find jobs, these workers are
counted as unemployed, which can increase the unemployment rate.
d. How would you expect the labor force participation rate to respond to job creation in excess
of population growth?
One would expect the labor force participation rate to increase. But from July 013 to July 2014, there
actually was a small decrease in the labor force participation rate.
e. How would you expect an increase in the growth rate of real GDP (see last paragraph of news
article) to affect jobs and unemployment?
An increase in the growth rate of real GDP increases the number of jobs and decreases unemployment.
29. Out of a Job and Out of Luck at 54
Too young to retire, too old to get a new job. That’s how many older workers feel after getting
the pink slip and spending time on the unemployment line. Many lack the skills to craft resumes
and search online, experts say. Older workers took an average of 21.1 weeks to land a new job in
2007, about 5 weeks longer than younger people. “Older workers will be more adversely affected
because of the time it takes to transition into another job,” said Deborah Russell, AARP’s
director of workforce issues.
Source: CNN, May 21, 2008
a. What type of unemployment might older workers be more prone to experience?
Older workers are more likely to experience structural unemployment.
b. Explain how the unemployment rate of older workers is influenced by the business cycle.
Older workers might be more likely to be fired when the economy enters a recession because the
business would rather train its younger workers to prepare for the future. If this takes place, then the
unemployment rate of older workers will rise more than that of other groups when the economy
enters a recession.
c. Why might older unemployed workers become marginally attached or discouraged workers
during a recession?
The news clip explains that older unemployed workers have a significantly more difficult time finding a
new job than do younger unemployed workers. Older workers must search an average of 5 weeks
longer to find a new job than younger workers. It would be easy for some older workers to become
discouraged about their job prospects and either quit looking entirely, thereby becoming marginally
attached or discouraged workers.

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