Macroeconomics 6th Edition Hubbard Solutions Manual

Macroeconomics 6th Edition Hubbard
Solutions Manual
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CHAPTER 9 | Unemployment and Inflation
Brief Chapter Summary and Learning Objectives

9.1 Measuring the Unemployment Rate, the Labor Force Participation Rate,
and the Employment-Population Ratio (pages 658–667)
Define the unemployment rate, the labor force participation rate, and the employment-
population ratio and understand how they are computed.
 The U.S. Bureau of Labor Statistics uses a monthly household survey to calculate the
unemployment rate, the labor force participation rate, and the employment-population
ratio. An establishment survey, or payroll survey, is used to measure total employment.
9.2 Types of Unemployment (pages 667–670)

Identify the three types of unemployment.
 The three types of unemployment are: frictional, structural, and cyclical.
9.3 Explaining Unemployment (pages 670–672)

Explain what factors determine the unemployment rate.
 Government policies can reduce the level of frictional and structural unemployment by
aiding job search and worker retraining.
 Government policies can add to the level of frictional and structural unemployment by
increasing the time workers devote to searching for jobs, providing disincentives for
firms to hire workers, or by keeping wages above their market level.
9.4 Measuring Inflation (pages 672–676)

Define the price level and the inflation rate and understand how they are computed.
 The price level measures the average prices of goods and services in the economy. The
inflation rate is the percentage increase in the price level from one year to the next.
9.5 Using Price Indexes to Adjust for the Effects of Inflation (pages 676–678)
Use price indexes to adjust for the effects of inflation.
 To correct for the effects of inflation, we divide a nominal variable by a price index and
multiply by 100 to obtain a real variable.
9.6 Nominal Interest Rates versus Real Interest Rates (pages 678–680)
Distinguish between the nominal interest rate and the real interest rate.
 The real interest rate is the nominal interest rate minus the inflation rate.
9.7 Does Inflation Impose Costs on the Economy? (pages 680–683)

Discuss the problems that inflation causes.
 When the inflation rate is different from the expected inflation rate some people gain and
some people lose.
Copyright © 2017 Pearson Education, Inc.

196 CHAPTER 9 | Unemployment and Inflation
Key Terms
Consumer price index (CPI), p. 673. A Menu costs, p. 681. The costs to firms of
measure of the average change over time in the changing prices.
prices a typical urban family of four pays for the
goods and services they purchase. Natural rate of unemployment, p. 669. The
normal rate of unemployment, consisting of
Cyclical unemployment, p. 669. Unemployment frictional unemployment and structural
caused by a business cycle recession. unemployment.
Deflation, p. 680. A decline in the price level. Nominal interest rate, p. 678. The stated
interest rate on a loan.
Discouraged workers, p. 659. People who are
available for work but have not looked for a job Price level, p. 673. A measure of the average
during the previous four weeks because they prices of goods and services in the economy.
believe no jobs are available for them.
Producer price index (PPI), p. 676. An average
Efficiency wage, p. 672. An above-market wage of the prices received by producers of goods and
that a firm pays to increase workers' services at all stages of the production process.
productivity.
Real interest rate, p. 678. The nominal interest
Employed, p. 658. In government statistics, rate minus the inflation rate.
someone who currently has a job or who is
temporarily away from his or her job. Structural unemployment, p. 669.
Unemployment that arises from a persistent
Frictional unemployment, p. 668. Short-term mismatch between the skills or attributes of
unemployment that arises from the process of workers and the requirements of jobs.
matching workers with jobs.
Unemployed, p. 658. In government statistics,
Inflation rate, p. 673. The percentage increase someone who is not currently at work but who is
in the price level from one year to the next. available for work and who has actively looked
for work during the previous month.
Labor force, p. 658. The sum of employed and
unemployed workers in the economy. Unemployment rate, p. 658. The percentage of
the labor force that is unemployed.
Labor force participation rate, p. 660. The
percentage of the working-age population in the
labor force.
Chapter Outline
Why Is JPMorgan Chase Laying Off Workers?
Many workers lost their jobs during the 2007–2009 recession and the banking industry was hit especially
hard. JPMorgan Chase, the largest bank in the United States, saw its profit decline by two-thirds from 2007
to 2009. By 2015, the U.S. economy and JPMorgan were well into a recovery, but banks were still
struggling for three key reasons: Interest rates remained at low levels, increased regulation caused some
banks to stop certain activities—such as making student loans—and technological change resulted in more
activity taking place online. In May 2015, JPMorgan announced it would lay off 5,000 workers. Three other
banks—Bank of America, Citigroup, and Wells Fargo—also laid off workers for similar reasons.

CHAPTER 9 | Unemployment and Inflation 197
Measuring the Unemployment Rate, the Labor Force Participation Rate,

9.1 and the Employment-Population Ratio (pages 658–667)
Learning Objective: Define the unemployment rate, the labor force participation rate,
and the employment-population ratio and understand how they are computed.
A. The Household Survey

Each month the U.S. Bureau of the Census conducts the Current Population Survey to collect data needed
to compute the monthly unemployment rate. The Department of Labor’s Bureau of Labor Statistics (BLS)
uses these data to calculate the unemployment rate. In government statistics, an employed person is
someone who currently has a job or is temporarily away from his or her job. In government statistics an
unemployed person is someone who is not currently at work but who is available for work and who has
actively looked for work during the previous month.
The labor force is the sum of employed and unemployed workers in the economy. The unemployment
rate is the percentage of the labor force that is unemployed. Discouraged workers are people who are
available for work but have not looked for a job during the previous four weeks because they believe no
jobs are available for them. The labor force participation rate is the percentage of the working-age
population in the labor force. The employment-population ratio measures the percentage of the working
age population that is employed.
B. Problems with Measuring the Unemployment Rate

The unemployment rate is not a perfect measure of the current state of joblessness. During a recession, an
increase in the number of discouraged workers occurs, but these workers are not counted as unemployed.
The BLS counts people as employed if they hold part-time jobs even though they would prefer to hold
full-time jobs. There are other problems that cause the measured unemployment rate to overstate the
extent of joblessness. The survey that is used to measure the unemployment rate does not verify the
responses of people included in the survey. A person might claim to be actively looking for a job to
remain eligible for government programs. Other people might be employed but engaged in illegal activity
or might want to conceal a legitimate job to avoid paying taxes.
C. Trends in Labor Force Participation

The labor force participation rate determines the amount of labor that will be available to the economy
from a given population. The higher the labor force participation rate, the more labor will be available and
the higher a country’s level of GDP. The labor force participation rate of adult men has declined gradually
since 1948, but the labor force participation rate of adult women has increased sharply. The overall labor
force participation rate rose from 59 percent in 1948 to 63 percent in 2014.
D. Unemployment Rates for Different Groups

Different groups in the population can have very different unemployment rates. For example, in August
2015, Asians had a lower unemployment rate, and African Americans had a higher unemployment rate,
than the overall rate.
E. How Long Are People Typically Unemployed?

In the modern U.S. economy, the typical unemployed person stays unemployed for a relatively brief
period of time, although that time lengthens significantly during a recession.
F. The Establishment Survey: Another Measure of Employment

The BLS uses the establishment survey, sometimes called the payroll survey, to measure total
employment in the economy. This monthly survey samples about 300,000 business establishments to
provide information on the total number of persons who are employed and on a company payroll. Despite

some drawbacks, the establishment survey has the advantage of being determined by actual payrolls. In
recent years, some economists have come to rely more on establishment survey data than on household
survey data in analyzing current labor market conditions.
G. Revisions in the Establishment Survey Employment Data: How Bad Was the
2007–2009 Recession?
To avoid long waits in supplying data, such as the employment data from the establishment survey, to
policymakers and the general public, government agencies typically issue preliminary estimates that they
revise as additional information becomes available.
H. Job Creation and Job Destruction over Time

The U.S. economy creates and destroys millions of jobs every year. The creation and destruction of jobs
results from changes in consumer tastes, technological progress, and the successes and failures of
entrepreneurs in responding to the opportunities and challenges of shifting consumer tastes and
technological change. When the BLS announces each month the increases or decreases in the number of
people employed and unemployed, these are net figures.
Teaching Tips
The end of the chapter in the main text includes a special category of exercises titled Real-Time Data
Exercises. These exercises help students become familiar with a key data source, learn how to locate data,
and develop skills in interpreting data. Those exercises marked with a red circle allow students and
instructors to use the very latest data from the web site of the Federal Reserve Bank of St. Louis (FRED).
Many RTD exercises require more elaborate calculations than other problems and the use of Excel
spreadsheets.
Extra Making
How Unusual Was the Unemployment Situation Following the
the
2007–2009 Recession?
Connection
The Great Depression of the 1930s left its mark on nearly everyone who lived through it. The Depression
began in August 1929, became worse after the stock market crash in October 1929, and reached its lowest
point in 1933, following the collapse of the banking system. Real GDP fell by more than 25 percent
between 1929 and 1933—the largest decline ever recorded. The unemployment rate in 1933 was above 20
percent—the highest rate ever recorded. The unemployment rate did not return to its 1929 level until
1942, the year after the United States entered World War II. With the unemployment rate so high for so
long, many people were out of work for years. As one historian put it: “What was distinctive about the
Great Depression, in fact, was . . . the extraordinary lengths of time that most jobless men and women
remained out of work.”
By the 2000s, many people in the United States, including most economists and policymakers, believed
that prolonged periods of unemployment such as the U.S. economy had suffered from during the 1930s
were very unlikely to happen again. Although the 1981–1982 recession had been severe and the
unemployment rate had risen above 10 percent for the first time since the 1930s, the recovery was strong,
and many unemployed workers found new jobs relatively quickly. So, following the 2007–2009
recession, most economists and policymakers were unprepared for how slowly the unemployment rate
declined and for how much the average period of unemployment rose. During the 1981–1982 recession,
the unemployment rate peaked at 10.8 percent in December 1982, but 18 months later, in June 1984, it

had already declined to 7.2 percent. In contrast, after the recession of 2007–2009, the unemployment rate
peaked at 10.0 percent in October 2009, while 18 months later it had declined by only 1 percentage point
to 9.0 percent. The following figure shows that the average period of unemployment was twice as high
following the 2007–2009 recession as following any other recession since the end of World War II.
Unemployment was so persistent and widespread that a survey taken by the Pew Research Center in the
spring of 2011 found that more than half of all households had experienced at least one member losing his
or her job during the previous year. Another Pew survey taken in June 2011 found that more than half of
people with jobs expected to receive a pay cut or to lose their job during the next year. As we have seen,
one drawback to the unemployment data is that workers who drop out of the labor market are no longer
counted by the BLS as unemployed. As a result, some economists focus on the employment–population
ratio because it measures the fraction of the population that has jobs. The following figure shows the
employment–population ratio for the period from 1948 through mid-2013. The overall upward trend of
the ratio reflects the increased labor force participation rate of women. In each recession, the
employment–population ratio falls as some workers lose their jobs. The fall of the employment–
population ratio was particularly dramatic during the recession of 2007–2009, and the ratio was actually
even lower four years after the end of the recession. The fall of the employment–population ratio may be
the best indication of how weak the U.S. labor market was during and after the 2007–2009 recession.
As we will see in later chapters, explaining the weakness of the U.S. labor market during these years had
become a top priority of economists and policymakers.
Sources: Alexander Keyssar, Out of Work: The First Century of Unemployment in Massachusetts, New York: Cambridge University
Press, 1986, p. 290; Federal Reserve Bank of St. Louis; U.S. Bureau of Labor Statistics; Pew Research Center, “The Recession,
Economic Stress, and Optimism,” May 4, 2011; and Pew Research Center, “Views of Personal Finances,” June 23, 2011.

Question
An article published in the New York Times in July 2011 argued: “For the second straight year, the
recovery in the job market has essentially stalled. This chart, showing the share of adults with jobs, offers
the best summary you’ll find.” The “share of adults with jobs” is known more formally as the
employment–population ratio. Why might the employment–population ratio provide the “best summary”
of the state of the job market rather than the unemployment rate?
Source: David Leonhardt, “Overly Optimistic, Once Again,” New York Times, July 8, 2011.
Answer
A weakness of the unemployment rate is that it does not count as unemployed those workers who drop
out of the labor force. As a result, some economists focus on the employment-population ratio because it
measures the fraction of the working-age population that has jobs.
Types of Unemployment (pages 667–670)

9.2 Learning Objective: Identify the three types of unemployment.
A. Frictional Unemployment and Job Search

Most workers spend time engaging in a job search, and most firms spend time searching for people to fill
job openings. Frictional unemployment is short-term unemployment that arises from the process of
matching workers with jobs. There will always be some workers who are frictionally unemployed
because they are between jobs and in the process of searching for new ones. Some unemployment is due
to seasonal factors, such as weather or fluctuations in demand during different times of the year. Seasonal
unemployment refers to unemployment due to factors such as weather, variations in tourism, and other
calendar-related events.
B. Structural Unemployment
Structural unemployment is unemployment that arises from a persistent mismatch between the skills or
attributes of workers and the requirements of jobs. This type of unemployment can last for longer periods
than frictional unemployment because workers need time to learn new skills.
C. Cyclical Unemployment
When the economy moves into recession, many firms find their sales falling and cut back on production.
As production falls, firms lay off workers. Cyclical unemployment is unemployment caused by a
business cycle recession.
D. Full Employment
The natural rate of unemployment is the normal rate of unemployment, consisting of frictional
unemployment and structural unemployment. The natural rate of unemployment is also called the full-
employment rate of unemployment.
Teaching Tips
Though categorizing unemployment as frictional, structural, or cyclical is useful in understanding the
sources of unemployment, the Bureau of Labor Statistics provides estimates of total unemployment. It
does not classify unemployment as frictional, structural, or cyclical.

Extra Solved Problem 9.2

Reasons for Unemployment
Some of the data the Bureau of Labor Statistics collects regarding the reasons people are unemployed
appear in the following table (numbers are in thousands, not seasonally adjusted).
Unemployment Reason for Unemployment

Job Losers
Rate On Job New
Year (%) Number Total Layoff Other Leavers Reentrants Entrants
2008 5.8 8,924 4,789 1,176 3,614 896 2,472 766
2009 9.3 14,265 9,160 1,630 7,530 882 3,187 1,035
2010 9.6 14,825 9,250 1,431 7,819 889 3,466 1,220
2011 8.9 13,747 8,106 1,230 6,876 956 3,401 1,284
2012 8.1 12,506 6,877 1,183 5,694 967 3,345 1,316
2013 7.4 11,460 6,073 1,136 4,937 932 3,207 1,247
2014 6.2 9,617 4,878 1,007 3,831 824 2,829 1,086
Source: U.S. Department of Labor, Bureau of Labor Statistics. www.bls.gov.
a. Calculate the percentage of the unemployed who lost their jobs (Job Losers) and the percentage
that left their jobs (Job Leavers) from 2008 to 2014.
b. Calculate the percentage of the unemployed who were unemployed as the result of entering the
labor force, either for the first time or as reentrants, from 2008 to 2014.
Solving the Problem

Step 1: Review the chapter material.
This problem is about the sources of unemployment, so you may want to review the section
“Types of Unemployment,” which begins on page 667 in the textbook.
Step 2: Calculate the percentage of the unemployed who lost their jobs and the percentage
that left their jobs from 2008 to 2014.
The percentage of “job losers,” for example in 2008, can be calculated as: (4,789/8,924) 
100 = 53.7 percent. The percentages for each year are in the second column (Job Losers) of
the following table. The percentage of “job leavers” can be calculated for 2008 as:
(896/8,924)  100 = 10.0 percent. The percentages for each year are in the third column (Job
Leavers) of the following table.
Percentage of The Unemployed

Reentrants and
Year Job Losers Job Leavers New Entrants
2008 53.7 10.0 36.3
2009 64.2 6.2 29.6
2010 62.4 6.0 31.6
2011 60.2 7.1 34.8
2012 55.0 7.7 37.3
2013 53.0 8.1 38.9
2014 50.7 8.6 40.7

Step 3: Calculate the percentage of the unemployed who were unemployed as the result
of entering the labor force from 2008 to 2014.
The percentage of reentrants and new entrants for 2008 is: [(2,472 + 766)/8,924]  100 =
36.3 percent. The percentages for each year are included final column in the above table. The
main source of unemployment is job losers, followed by reentrants and new entrants. There
were more reentrants—people who lost or quit jobs in the past, dropped out of the labor force
and are now looking for new jobs—than new entrants to the labor force.
Explaining Unemployment (pages 670–672)

9.3 Learning Objective: Explain what factors determine the unemployment rate.
A. Government Policies and the Unemployment Rate

Governments can reduce the level of frictional unemployment with policies that speed up the process of
matching unemployed workers with unfilled jobs. Governments can help reduce structural unemployment
with policies that aid worker retraining. Some government policies, however, can add to the level of
frictional and structural unemployment. In the United States and most industrial countries, the
unemployed are eligible for unemployment insurance payments. The unemployed spend more time
searching for jobs because they receive these payments. Unemployment insurance helps the unemployed
maintain their income and spending, which lessens the personal hardship of being unemployed. In the
United States, unemployed workers are typically eligible to receive unemployment insurance payments
equal to about half of their previous wage for six months, although this period is often extended during
recessions. In many other countries workers are eligible to receive unemployment payments for a year or
more, and payments may equal 70 percent of their previous wage.
In 1938, the federal government enacted a minimum-wage law. If the minimum wage is set above the
market wage, the quantity supplied of labor will be greater than the quantity of labor demanded. As a result,
the unemployment rate will be higher than it would be without the minimum wage. Studies estimate that a
10 percent increase in the minimum wage reduces teenage unemployment by about 2 percent.
B. Labor Unions
Labor unions are organizations of workers that bargain with employers for higher wages and better
working conditions for their members. In unionized industries, the wage is usually above what otherwise
would be the market wage, but most economists believe that this does not result in an increase in the
overall unemployment rate because only about 9 percent of workers outside the government sector are
unionized.
C. Efficiency Wages
An efficiency wage is an above-market wage that a firm pays to increase workers’ productivity.
Efficiency wages are another reason economies experience some unemployment even when cyclical
unemployment is zero.

The Graying of the Unemployment Rate
The unemployment rate changes not only as the number of unemployed workers changes (the numerator
of the unemployment rate formula), but also as the size of the labor force changes (the denominator of the
unemployment rate formula). As the textbook notes, there has been a dramatic increase in the number of
women in the labor force since the late 1940s. The participation rate among adult women increased from

33 percent in 1948 to 58 percent in 2012. In the early part of the twenty-first century, the labor force will
be affected by the aging of the “baby boomers”—Americans born between 1946 and 1964. According to
the U.S. Census Bureau by 2050 the number of Americans aged 65 and older is expected to rise to 83.7
million from about 43.1 million in 2012. Despite improvements in health care and the increased life
expectancy of Americans, many older workers are leaving the labor force. In 1960, 78 percent of men
between the ages 60 and 64 and 31 percent of men 65 years and older were in the labor force. Today these
figures are about 55 percent and 17 percent, respectively. The average age of retirement today is 62,
compared to an average age of 65 in 1965.
There are several reasons why many workers today retire earlier than in years past. First, many boomers
have greater disposable incomes than people in other age groups and choose to use this income to
consume more leisure. Second, career advancement becomes more difficult after age 40. Third, over
60 percent of U.S. corporations offer older workers early retirement plans, while only about 5 percent
offer incentives to delay retirement. If these trends continue, the disappearance of baby boomers from the
labor force will have a significant impact on the size of the labor force.
a. What effect will the retirement of the baby boomers have on the unemployment rate?
b. Can the size of the labor force increase despite of the retirement of older workers?
Solving the Problem

This problem is about factors that determine the unemployment rate, so you may want to
review the section “Explaining Unemployment,” which begins on page 670 in the textbook.
Step 2: What effect will the retirement of baby boomers will have on the unemployment
rate?
Holding other factors that affect the labor force constant, as baby boomers retire, the
unemployment rate will rise because the numerator of the unemployment rate formula would
not change much (relatively few baby boomers are unemployed), while the denominator
becomes smaller as the labor force declines.
Step 3: Explain whether the size of the labor force can increase despite the retirement of
older workers.
It is possible, but unlikely, that the labor force will increase due to the retirement of older
workers, because the birth rate in the 1980s and 1990s was less than in the 1950s and 1960s.
To offset the decline in the labor force due to the retirement of the baby boomers, there would
have to be new job seekers—either immigrants or current U.S. residents who had not been in
the labor force.
Measuring Inflation (pages 672–676)

9.4 Learning Objective: Define the price level and the inflation rate and understand how
they are computed.
The price level is a measure of the average prices of goods and services in the economy. The inflation
rate is the percentage increase in the price level from one year to the next. The GDP deflator is the
broadest measure of the price level, but to know the impact of inflation on the typical household, the
deflator can be misleading. Changes in the consumer price index come closest to measuring changes in
the cost of living as experienced by the typical household.

A. The Consumer Price Index

To obtain prices of a representative group of goods and services, the BLS surveys 30,000 households on
their spending habits. The survey is used to construct a market basket of 211 types of goods and services
used by the typical urban family of four. The consumer price index (CPI) is measure of the average
change over time in the prices a typical urban family of four pays for the goods and services they
purchase. One year is chosen as the base year, and the value of the CPI is set equal to 100 for that year. In
any other year the CPI equals the ratio of the dollar amount necessary to buy the market basket in that
year divided by the dollar amount necessary to buy the market basket in the base year, multiplied by 100.
The CPI is sometimes called the cost-of-living index.
B. Is the CPI Accurate?

The CPI is the most widely used measure of inflation. It is important that the CPI be as accurate as
possible, but there are four biases that cause the CPI to overstate the true inflation rate: substitution bias,
increase in quality bias, new product bias, and outlet bias. The BLS take steps to reduce the size of the
bias.
C. The Producer Price Index

In addition to the GDP deflator and the CPI, the government also computes the producer price index
(PPI), which is an average of the prices received by producers of goods and services at all stages of the
production process. Changes in the PPI can give an early warning of future movements in the CPI.

Calculating the CPI
The consumer price index (CPI) compares the cost of a market basket of goods in a given year with the
cost of the same market basket in the base year. Suppose that a market basket includes (1) admission for
two to a local theatre for a weekend movie, (2) a large box of popcorn at the theatre, (3) a large pepperoni
pizza (carry-out from a local pizzeria), and (4) a two-liter bottle of diet Coke.
Theatre
Admission
for One Diet
Year Person Popcorn Pizza Coke
1 $5.00 $2.00 $12.00 $1.25
2 6.00 2.50 12.50 1.40
3 6.50 3.00 13.00 1.50
Assume that Year 1 is the base year. Calculate the value of the CPI for each year and the rate of inflation
for Years 2 and 3.
Solving the Problem

This problem is about using the CPI to calculate the inflation rate, so you may want to review
the section “Measuring Inflation,” which begins on page 672 in the textbook.

Step 2: Determine the value of the market basket.

The value of the market basket is the sum of the quantity of each good included in the basket
multiplied by its price. The market basket in this example has a quantity of two for theater
admissions, and a quantity of one for each of the other goods. The value of the market basket
in Year 1, the base year, is (2  $5.00) + $2.00 + $12.00 + $1.25 = $25.25. The table in Step
3 lists the value of the market basket for all three years.
Step 3: Calculate the value of the CPI and the inflation rates for Years 2 and 3.
The CPI is the ratio of the value of the market basket in a given year to the value of the
market basket in the base year, multiplied by 100. We can use the CPI to calculate the
inflation rate, which is the percentage change in the CPI from Year 1 to Year 2 and from Year
2 to Year 3. These values are in the following table:
Value of the
Market Rate of
Year Basket CPI Inflation
1 $25.25 100.0 —
2 28.40 112.5 12.5%
3 30.50 120.8 7.4%
Extra Making
Explaining How the CPI Measures the Price Level and Rate of
the
Inflation
Connection
There are many misconceptions about how the consumer price index (CPI) is constructed and exactly
what it measures. Economists John Greenlees and Robert McCelland addressed these misconceptions in
an article published in the Monthly Labor Review. They explain that “…when prices change, the goal of
the CPI is to measure the percentage by which consumers would have to increase their spending to be as
well off with the new prices as they were with the old prices…” The following information regarding the
CPI and its construction are taken from the Greenlees and McCelland article.
Since 1978, the Bureau of Labor Statistics (BLS) has published the CPI for all urban consumers (CPI-U)
and the CPI for urban wage earners and clerical workers (CPI-W). Though the items and prices included
in both indexes are the same, the weights given to some of the index components differ. The U.S. Census
Bureau administers a Telephone Point-of-Purchase Survey in which consumers are asked where they
recently purchased goods and services. The BLS uses these data to select a sample of grocery stores,
service stations, doctors’ offices and other locations at which to collect prices. Representative samples of
items from these locations are selected and prices of the items are collected regularly by BLS employees.
Individual item-area indexes are constructed and the indexes are averaged together using weights based
on the Consumer Expenditure Survey, which is conducted for the BLS by the Census Bureau.
The all-items CPI-U is the CPI that is reported most widely, but the CPI-U and the CPI-W are both used
to make cost-of-living adjustments. The CPI-W is the index used to make annual Social Security and
federal retirement cost-of-living adjustments and is often used for periodic wage adjustments in collective
bargaining agreements. The CPI-U is used for indexation of tax brackets and personal exemption amounts
in the federal tax system. CPI data are also used in the construction of the National Income and Products
Accounts (NIPA). For example, CPI component indexes are inputs into the NIPA Personal Consumption
Expenditures (PCE) price index and are used in the calculation of real GDP.

In 2002, the BLS began publishing the chained Consumer Price Index for urban consumers (C-CPI-U).
This more closely approximates a cost-of-living index by reflecting consumer substitution among item
categories. Over time, some goods and services consumers commonly bought are replaced by new goods
and services. Adjustments to the CPI must be made to avoid having a shrinking market basket that is
unrepresentative of what consumers are buying. For many food items, the substitution is facilitated
because the BLS measures prices on a per-ounce or per-pound basis, rather than a per-item, basis.
Greenlees and McCelland use a simple example of a maker of a candy bar that replaces a 1-ounce bar
with a 1.5-ounce bar that sells for the same 75 cent price. The BLS would record a 50 percent increase in
price rather than recording that the price of the bar had not changed. More complicated adjustments are
required when an item, such as a standard-definition television set, is replaced in a store by a high-
definition set that has a much higher price, but also higher quality. The BLS uses sophisticated techniques
to estimate how much of the price difference is due to the higher quality of the set, rather than an increase
in price for a given quality.
Source: John S. Greenlees and Robert B. McCelland, “Addressing misconceptions about the Consumer Price Index,” Monthly
Labor Review, August 2008, pp. 3–19.
Using Price Indexes to Adjust for the Effects of Inflation (pages 676–678)
9.5 Learning Objective: Use price indexes to adjust for the effects of inflation.
Price indexes give us a way of adjusting for the effects of inflation so that we can compare dollar values
from different years. To correct for the effects of inflation, we can divide a nominal variable by a price
index and multiply by 100 to obtain a real variable. Economic variables that are calculated in current-
year prices are referred to as nominal variables.

Calculating Real Wages at Caterpillar
In 2013, Caterpillar and the United Steelworkers Union signed a labor contract that froze the wages of
caterpillar workers for six years. In 2013, the average wage at Caterpillar was about $27 per hour and the
CPI was 233. Suppose the CPI rises to 260 in 2018, the last year of the contract. Calculate the percentage
change between 2013 and 2018 in the real wage earned by an average Caterpillar worker. Be sure to
explain what the values you calculate for the real wage represent.
Solving the Problem

This problem is about using price indexes to correct for the effects of inflation, so you may
want to review the section “Using Price Indexes to Adjust for the Effects of Inflation” that
begins on page 676 in the textbook.
Step 2: Begin by defining the real wage in 2013 and 2018, and explaining what the
values of the real wage represent.
The number of dollars a worker receives is the worker’s nominal wage. To calculate the
worker’s real wage, we have to divide the nominal wage by the CPI for that year and multiply
by 100. We can make the following calculations for the two years:

For 2013:
 $27 
   100  $11.59
 233 
For 2018:
 $27 
   100  $10.38
 260 
The base year for the CPI is the average of prices during the period 1982–1984. So, the
values for the real wage we calculated are in 1982–1984 dollars. In other words, these values
for the real wage tell us that in 2013, $27 would buy what $11.59 would have bought in
1982–1984, and that in 2018, $27 would buy what $10.38 would have bought in 1982–1984.
Step 3: Complete the answer by calculating the percentage change in the real wage
Caterpillar workers will receive.
This percentage change equals:
 $10.38  $11.59 
   100  10.4%.
 $11.59 
We can conclude that if the estimate of the CPI in 2018 is correct, an average Caterpillar worker
will experience about a 10 percent decline in his or her real wage between 2013 and 2018.
Extra Credit: The values we computed for the real wages Caterpillar workers earn are measured in
1982–1984 dollars. Because this period is more than 30 years ago, the values are somewhat difficult to
interpret. We can convert the earnings to 2013 or 2018 dollars by using the method we used earlier to
calculate your mother’s salary. But notice that, for purposes of calculating the change in the value of real
average hourly earnings over time, the base year of the price index doesn’t matter. The change from 2013
to 2018 would still be −10.4 percent, no matter what the base year of the price index was. If you don’t see
that this is true, test it by using the mother’s salary method to calculate the real wage for 2013 and 2018 in
2013 dollars. Then calculate the percentage change. Unless you make an arithmetic error, you should find
that the answer is still −10.4 percent.
Question
In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled
“How to Live on $36,000 a Year,” in which he wondered how he and his wife had managed to spend all
of that very high income without saving any of it. The CPI in 1924 was 17, and the CPI in 2012 was 230.
What income would you have needed in 2012 to have had the same purchasing power that Fitzgerald’s
$36,000 had in 1924? Be sure to show your calculation.
Source: F. Scott Fitzgerald, “How to Live on $36,000 a Year,” Saturday Evening Post, April 5, 1924.
Answer
We can convert Fitzgerald’s 1924 nominal income of $36,000 to an equivalent income in 2012 by
multiplying the 1924 nominal income by the ratio of the CPI for 2012 to the CPI for 1924: $36,000 ×
(230/17) = $487,059. So, you would have needed an income of $487,059 in 2012 to have the same
purchasing power that Fitzgerald’s $36,000 had in 1924.
Question
Use the information in the table in the next column to determine the percentage changes in the U.S. and
French real minimum wages between 1957 and 2012. Does it matter for your answer that you have not
been told the base year for the U.S. CPI or the French CPI? Was the percentage increase in the price level
greater in the United States or in France during these years?

Sources: John M. Abowd, Francis Kramarz, Thomas Lemieux, and David N. Margolis, “Minimum Wages and Youth
Employment in France and the United States,” in D. Blanchflower and R. Freeman, eds., Youth Employment and Joblessness in
Advanced Countries, Chicago: University of Chicago Press, 1999, pp. 427–472 (the value for the minimum wage is given in
francs; it was converted to euros at a conversion rate of 1 euro = 6.55957 francs); Insee online data bank, www.insee.fr; U.S.
Department of Labor; and U.S. Bureau of Labor Statistics.
Answer
In the United States, the real minimum wage in 1957 was $3.70: [($1.00/27) × 100], and in 2012 it was
$3.15: [($7.25/230)  100]. In France, the real minimum wage in 1957 was €1.9: [(€0.19/10) × 100], and in
2012 it was €7.09: [(9.43/133) × 100]. Therefore, between 1957 and 2012, there was a 14.9 percent decrease
in the real minimum wage in the United States: [($3.15 – $3.70)/$3.70] × 100. And, there was a 273.2
percent increase in the real minimum wage in France: [(€7.09 – €1.9)/€1.9] × 100. It does not matter
whether we have information about the base year as long as we have the CPI data. Whatever the base year
is, we would get the same percentage increase in prices. The percentage increase in the price level was less
in the United States {[(230 – 27)/27 × 100] = 752%} than in France {[(133 – 10)/10 × 100] = 1,230%}.
Nominal Interest Rates versus Real Interest Rates (pages 678–680)

9.6 Learning Objective: Distinguish between the nominal interest rate and the real interest
rate.
The difference between nominal and real values is important when money is being borrowed and lent.
Because it is corrected for the effects of inflation, the real interest rate provides a better measure of the
true cost of borrowing and the true return to lending than does the nominal interest rate. The nominal
interest rate is the stated interest rate on a loan. The real interest rate is the nominal interest rate minus
the inflation rate. For the economy as a whole, we can measure the nominal interest rate as the interest
rate on three-month U.S. Treasury bills. The nominal interest rate will be less than the real interest rate
when the inflation rate is negative. Deflation is a decline in the price level.

Computing the Real Rate of Interest
The real interest rate is defined as the nominal interest rate minus the inflation rate. The textbook uses the
three-month interest rate on U.S. Treasury bills (short-term loans investors make to the federal
government) as a measure of the nominal interest rate. The table below contains the average annual
interest rate on three-month Treasury bills (T-bills) and the percentage change in the consumer price
index (CPI-U) for 1980, 1981, 1984, and 1985 (years of relatively high nominal interest rates) and 2011
and 2012 (years of relatively low nominal interest rates).
1980 1981 1984 1985 2011 2012 2013 2014 2015

Interest rate on three-month T-bills 11.39 14.04 9.54 7.47 0.05 0.09 0.06 0.03 0.05
Percentage change in the CPI-U 13.50 10.38 4.37 3.53 3.14 2.08 1.46 1.61 0.12
Source: Federal Reserve Statistical Release H.15. http://www.federalreserve.gov/releases/h15/data.htm and Bureau of Labor
Statistics. http://www.bls.gov.

a. What was the real interest rate in the years 1980, 1981, 1984, 1985, 2011, and 2012?
b. In which of these years was the real interest highest? In which years was the real interest rate
negative?
Solving the Problem

This problem refers to real and nominal interest rates, so you may want to review the section
“Nominal Interest Rates versus Real Interest Rates,” which begins on page 678 of the
textbook.
Step 2: Calculate the real interest rate for the years 1980, 1981, 1984, 1985, and 2011
through 2015.
Real interest rates for the given years are:
1980 1981 1984 1985 2011 2012 2013 2014 2015

2.11 3.66 5.17 3.94 3.09 1.99 1.40 1.58 0.07
Step 3: In which of these years was the real interest rate highest? In which years was the
real interest rate negative?
The real interest rate was highest, 5.17 percent, in 1984 and was negative in 1980 and 2011
through 2015. A negative real interest rate means that lenders are receiving a negative real
return on funds they have loaned. When the real interest rate was negative in 1980, it rose the
following year. Eventually, nominal interest rates will rise in order to make the real interest rate
positive. Although this did not happen between 2011 and 2015, at some point investors will
demand a positive interest rate in order to convince them to keep buying Treasury securities.
Extra Making
Low Real Interest Rates on Treasury Debt Force Investors to
the
Consider Alternatives
Connection
The federal government’s deficit declined from $1.4 trillion in fiscal year (October 1–September 30) 2009
to $439 billion in fiscal year 2015. Although the size of deficit fell, the total national debt climbed to over
$19 trillion in 2016. The U.S. Treasury has to sell hundreds of billions of dollars in securities annually to
pay interest on this debt. Holding the demand constant, an increase in supply of Treasury securities will
lead to lower prices and higher interest rates. But because the demand for Treasury securities also
increased, interest rates remained low throughout 2015. Low real interest rates encourage firms and
consumers to borrow to fund construction of new buildings, equipment and purchases of automobiles and
other durable goods. But bondholders and retirees who seek steady income view low real interest rates on
Treasury securities differently. William Gross, co-founder of PIMCO, the world’s largest bond fund
advised bondholders to “. . . find something else that’s attractive.” While Princeton economist Burton
Malkiel agreed that U.S. Treasury securities are currently poor choices for investors, he endorsed two
other types of bonds: (1) Tax-exempt municipal bonds, issued by state and local governments, that offer
yields higher than those on Treasury debt, some of which are tied to reliable sources of revenue (for
example, bridge and tunnel fees) and are free of state and local taxes; (2) bonds issued by foreign
countries that are in better fiscal condition than the United States. Australia, for example, has a low debt-
to-GDP ratio and abundant natural resources that can be used to fuel economic growth. Malkiel suggests
that another strategy for savers: buy a portfolio of blue-chip common stocks that offer dividends.

Sources: Matt Phillips, “Real Interest Rates: 1919–The Present,” Wall Street Journal, October 13, 2011; Burton G. Malkiel, “The
Bond Buyer's Dilemma,” Wall Street Journal, December 7, 2011; Matt Cover, “At Current Rate of Federal Borrowing,
Government on Track to Hit Legal Limit on National Debt on March 14,” cnsnews.com, February 24, 2011; and "U.S. deficit
falls to $680 billion," CNNMoney, October 30, 2013.
Does Inflation Impose Costs on the Economy? (pages 680–683)

9.7 Learning Objective: Discuss the problems that inflation causes.
A. Inflation Affects the Distribution of Income

Although inflation does not reduce the affordability of goods and services to the average consumer, it still
imposes costs on the economy. Inflation affects the distribution of income. Some people will find their
incomes rising faster than the rate of inflation, and so their purchasing power will rise. Other people will
find their incomes rising slower than the rate of inflation, and so their purchasing power will fall. The
extent to which inflation redistributes income depends, in part, on whether the inflation is anticipated.
B. The Problem with Anticipated Inflation

When inflation is anticipated, its main costs are that paper money loses value. Anyone holding paper
money will find its purchasing power decreasing each year by the rate of inflation. To avoid this cost,
workers and firms try to hold as little money as possible. Firms that print catalogs listing prices of
products will have to reprint them more frequently. Stores will devote more time and labor to changing
prices. Menu costs are the costs to firms of changing prices. Anticipated inflation raises taxes paid by
investors because they are taxed on the nominal payments they receive rather than on the real payments.
C. The Problem with Unanticipated Inflation

When people borrow money or banks lend money, they must forecast the rate of inflation so they can
calculate the real rate of interest on a loan. When the actual inflation rate turns out to be different from the
expected rate, some people gain, and other people lose. This apparently unfair redistribution is a key
reason why people dislike unanticipated inflation.
Extra Making
the How What’s So Bad about Falling Prices?
Connection
When the rate of inflation is higher than expected it can cause problems for consumers, workers, and
firms. But what if an economy begins to experience falling prices—deflation, rather than inflation? A
falling price level might seem like good news for the economy. After all, falling prices should encourage
consumers to increase their spending as goods and services become less expensive. In fact, though,
deflation tends to have the opposite effect on consumers. Episodes of deflation are relatively rare, but we
can draw some lessons from two important deflationary episodes: the United States during the 1930s and
Japan during the 1990s. In both cases, many consumers reduced their spending in the face of falling
prices, apparently because they were waiting for prices to go even lower. Waiting for prices to fall even
lower was also a problem for the U.S. housing market in the late 2000s. A large run-up in housing prices
took place from 2002 to 2006. When prices began to decline, many potential buyers postponed purchases
in the expectation that prices would continue to fall.

The following figure shows changes in the CPI in the United States during the years between 1925 and
1940. The beginning of the Great Depression in 1929 caused the country to experience severe deflation.
The deflation of the 1930s hurt the U.S. economy not just because it may have led some consumers to
postpone purchases but also because it increased the burden on borrowers. Suppose that in 1929 you had
borrowed money for five years at a nominal interest rate of 5 percent. What real interest rate would you
have paid during those years? We have seen that to calculate the real interest rate, we need to subtract the
inflation rate from the nominal interest rate. With deflation, the change in the price level is negative, so to
calculate the real interest rate, we are in effect adding the change in the price level to the nominal interest
rate. The following table uses the actual deflation rate in each year to calculate the resulting real interest
rates on your loan:
The bottom row of the table shows that although the nominal interest rate on your loan is only 5 percent,
in three of the five years the real interest rate you pay is greater than 10 percent. In fact, high real interest
rates inflicted serious losses on both household and business borrowers during the early 1930s and
contributed to the severity of the Great Depression.
During the 2001 and 2007–2009 recessions, some policymakers and economists feared that the U.S.
economy would experience deflation. Fortunately, significant deflation did not occur. If it had, those
recessions would likely have been more severe than they were.
Question
During the late nineteenth century in the United States, many farmers borrowed heavily to buy land.
During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation:
The price level declined each year. Many farmers engaged in political protests during these years, and
deflation was often a subject of their protests. Explain why farmers would have felt burdened by
deflation.
Answer
When there is unanticipated deflation, the real interest rate on loans increases. This result holds because
with the nominal interest rate on a loan fixed, falling prices (deflation) means that the real interest rate is
greater than the nominal interest rate. Therefore, the burden of debt on farmers would have increased
during these years.

Extra Economics in Your Life:

How will the real interest rate affect the cost of your car loan?
Let’s assume that the old clunker you have been driving needs $500 in repairs in order to pass an annual
car inspection. You are considering buying a new car, and you contact car dealers and banks to determine
the best deal you can get on a car loan. Assume two different scenarios: (a) The lowest interest rate you
find on a five-year car loan is 10 percent, and the annual rate of inflation for the next five years will be
9 percent. (b) The lowest interest rate you can find on a five-year car loan is 6 percent, and the annual rate
of inflation for the next five years will be 1 percent.
Question: Under which scenario—(a) or (b)—will you pay less, in real income, for your car loan?
Answer: Although the nominal interest rate is much lower under scenario (a), you should base your
decision on the real interest rate. Of course, you will not know what the actual rate of inflation will be in
the future, but if the rate of inflation is 9 percent annually, the real rate of interest on your car loan will be
only 1 percent. Under scenario (b), if the annual rate of inflation is 1 percent over the duration of your
loan the real rate of interest will be 5 percent. You will pay less in real income under scenario (a) even
though the nominal interest rate is much higher than it is under scenario (b).
Extra AN INSIDE LOOK News Article to Use in Class

Visit www.myeconlab.com for current An Inside Look news articles.

Solutions to End-of-Chapter Exercises
Measuring the Unemployment Rate, the Labor Force Participation Rate,

9.1 and the Employment-Population Ratio
Learning Objective: Define the unemployment rate, the labor force participation rate,
and the employment-population ratio and understand how they are computed.
Review Questions
1.1 The unemployment rate is calculated monthly from data gathered by the U.S. Bureau of the
Census in its household survey. The unemployment rate equals the percentage of the labor force
that is unemployed: (Unemployed/Labor Force) × 100. The three conditions to be counted as
unemployed are: the person (1) did not work in the previous week, (2) was available for work,
and (3) actively looked for work at some time during the previous four weeks.
1.2 The official Bureau of Labor Statistics (BLS) measure of the unemployment rate understates the
true degree of unemployment to the extent that it does not count discouraged workers as
unemployed because they have stopped looking for a job, and it counts involuntary part-time
workers as employed even though these workers would prefer to work more hours. The official
BLS measure overstates the true degree of unemployment because: (1) some people claim to be
actively looking for work but are not so they can remain eligible for government payments to the
unemployed, and (2) some people have jobs in the underground economy although they claim to
be unemployed.
1.3 African Americans and Hispanics tend to have above-average unemployment rates, and whites
and Asians tend to have below-average unemployment rates. High school dropouts and high
school graduates tend to have above-average unemployment rates, and college graduates tend to
have below-average unemployment rates.
1.4 The labor force participation rate measures the percentage of the working-age population that is
in the labor force: (Labor Force/Working-Age Population) × 100. Since 1948, the labor force
participation rate has decreased for men and increased for women.
1.5 The employment-population ratio measures the percentage of the working-age population that is
employed: (Employment/Working-Age Population) × 100. An unemployed person dropping out
of the labor force would decrease the unemployment rate, but it would not change the
employment-population ratio.
1.6 The household survey is a sample of 60,000 households chosen to represent the U.S. population
and provides information on the employment status of everyone in the household 16 years of age
and older. The establishment survey is a sample of 300,000 business establishments and gathers
information on the total number of people who are employed and on a company payroll. The
household survey includes information on both employment and unemployment, while the
establishment survey includes information only on employment. Many economists prefer the
establishment survey because it is based on actual payrolls, rather than on unverified answers as
in the household survey.

Problems and Applications

1.7
Working-age population 250,899,933
Employment 148,739,000
Unemployment 8,324,358
Unemployment rate 5.3%
Labor force 157,063,358
Labor force participation rate 62.6%
Employment-population ratio 59.3%
The number of people unemployed can be found using the definition that the unemployment rate
equals the number of unemployed divided by the sum of the number of unemployed and the
number of employed. The labor force equals the employed plus the unemployed. The working-
age population can be found using the definition that the labor force participation rate equals the
labor force divided by the working-age population. The employment-population ratio equals the
number of employed divided by the working-age population.
1.8 Including homemakers as employed would decrease the unemployment rate because it increases
the size of the labor force but leaves unchanged the number of unemployed. Including
homemakers as employed would increase the labor force participation rate because it increases
the labor force but leaves unchanged the working-age population. Including homemakers would
increase the employment-population ratio because it increases the number of employed but does
not change the working-age population.
1.9 The formula for the unemployment rate is: (Number of unemployed/Labor force) × 100. The
labor force is equal to the sum of the employed and the unemployed. Holding constant the
number of people employed in June 2015, an increase in the labor force participation rate would
mean the size of the labor force had increased, which could only have happened if the number of
people unemployed had increased. Both the numerator and the denominator in the above equation
for the unemployment rate would increase, but as we saw in Solved Problem 9.1 on page 660,
adding the same number to both the numerator and the denominator of a fraction that is less than
one increases the value of the fraction. Therefore, the unemployment rate would have been
greater than 5.3 percent in June 2015.
1.10 a. During an economic expansion we would expect that the number of jobs created to increase
as the economy expands, so the numerator of the employment-population ratio will increase
relative to the denominator, causing the ratio to increase.
b. As the unemployment rate decreased following the end of the 2007-2009 recession, the
employment-to-population “has increased far less…than the unemployment rate alone would
indicate” in part because during these years members of the baby boom generation began
retiring. But the employment-population ratio was also slow to recover for people 25 to 54
years of age, who typically are in the labor force. As the Making the Connection on page 664
discusses, there are several reasons, including “labor market scarring” and an increase in the
number of people receiving Social Security Disability Insurance, that help explain the slow
recovery of the employment-population ratio. A weakness of the unemployment rate is that it
does not count as unemployed those workers who drop out of the labor force. As a result,
some economists focus on the employment-population ratio because it measures the fraction
of the working-age population that has jobs.

1.11 The employment-population rate increases when the increase in the number of employed workers is
greater than the increase in population. The number of people in the labor force–the numerator of
the labor force participation rate—increases as the number of employed workers increases, but also
as the number of people who are counted as unemployed increases. Employment can increase
without increasing the labor force participation rate if unemployment increases at the same time,
perhaps because discouraged workers rejoin the labor force as they see more job opportunities being
created. In early 2015, the increase in the number of people employed must have occurred at the
same time as an increase in the number of people unemployed. The result was an increase in the
employment-population ratio but an unchanged labor force participation rate.
1.12 a. These workers are not counted as unemployed in the BLS data because they are no longer
actively looking for work.
b. The BLS will count these graduates as part of the labor force even if they don’t have jobs, so
long as they are actively looking for work.
1.13 The unemployment rate can increase while employment increases if the number of discouraged
workers and other people not previously counted as unemploymed entering the labor force more
than offsets the effect of the employment increase. In this case, the number of people counted as
unemployed in Georgia was increasing faster than the increase in employment, causing the
unemployment rate to increase.
1.14 President Obama was referring to the net increase in jobs. The U.S. economy would have created
far more than 11 million jobs over the five-year period, but it would have also destroyed many
jobs. There was a net increase of 11 million jobs.
9.2 Types of Unemployment

Learning Objective: Identify the three types of unemployment.
Review Questions
2.1 The three types of unemployment are frictional unemployment, structural unemployment, and
cyclical unemployment. Frictional unemployment is short-term unemployment that arises from
the process of matching workers with jobs. Structural unemployment is unemployment that arises
from a persistent mismatch between the skills and attributes of workers and the requirements of
jobs. Cyclical unemployment is unemployment caused by a business cycle recession. Cyclical
unemployment and structural unemployment result in greater hardship than frictional
unemployment, but it is difficult to conclude whether greater hardship results from cyclical or
structural unemployment. An important consideration is the length of time before the unemployed
can find new jobs. In a typical recession, the typical cyclically unemployed person is out of work
for a relatively brief period. The 2007-2009 recession is an exception to this generalization.
2.2 Frictional unemployment arises from the process of matching workers with jobs. Because job
search takes time, there are always some workers who are frictionally unemployed because they
have begun a job search and have not yet found a job. The more difficult or lengthier the job
search process is, the greater the amount of frictional unemployment.
2.3 The natural rate of unemployment is the normal rate of unemployment, consisting of frictional
unemployment plus structural unemployment. The natural rate of unemployment is considered
the full-employment rate of unemployment.


2.4 The decline in employment by the Ford Motor Company from 1980 to 2015 would primarily be
structural with some cyclical unemployment. Some of the decline in employment would be
cyclical because by 2015 the U.S. economy and the economies of other high-income countries
had still not fully recovered from the 2007–2009 recession. The long-term decline in employment
in the U.S. automobile industry indicates that some of the decline in Ford’s employment is
structural. Data on U.S. GDP relative to potential GDP and similar data for other high-income
countries would indicate whether a portion of the decline in employment is cyclical. Data on the
long-term decline in employment in the U.S. automobile industry could indicate the portion of the
decline in employment due to structural changes in the economy.
2.5 You should disagree. The economy would operate less efficiently if frictional unemployment
were eliminated. By devoting time to job search, workers end up with jobs they find satisfying
and in which they can be more productive. Similarly, by searching for employees who are well
suited to job openings, firms are able to operate more efficiently. Government policy to enhance
the job search process of matching workers with jobs could make the economy operate more
efficiently, but eliminating frictional unemployment would not be efficient.
2.6 For someone frictionally unemployed, good advice would be to keep searching. The person has
the required skills, but matching worker skills to job openings takes time. For someone
structurally unemployed, advice should center on the need to retrain, find another occupation, or
possibly move to another part of the country where jobs that require the person’s skills are more
readily available. Someone cyclically unemployed should be advised to realize that the search
will take longer because of the recession, and to consider temporarily taking a lower-paying job
or going back to school until the economy improves.
2.7 a. Unemployment that results from job quits would be classified as frictional unemployment,
assuming that those how quit their jobs wish to remain in the labor force.
b. Assuming that those who quit their jobs wish to remain in the labor force, an increase in the
number of quits suggests that it is becoming easier to find jobs. Those who quit their jobs
must be confident that they will find other, better jobs.
2.8 The workers referred to in the story are likely to be structurally unemployed because they lack the
skills required for the available jobs.
9.3 Explaining Unemployment

Learning Objective: Explain what factors determine the unemployment rate.
Review Questions
3.1 The payment of government unemployment insurance likely raises the unemployment rate.
Unemployment insurance payments lower the opportunity cost (the income lost by not working)
of continuing to search for a job, which leads the unemployed to spend more time searching for a
job. The payment of government unemployment insurance lessens the severity of recessions by
helping the unemployed maintain their income and spending.

3.2 The federal minimum-wage law and efficiency wages push the wage above the market wage,
causing some unemployment. In unionized industries, the wage is usually above what otherwise
would be the market wage, resulting in employers hiring fewer workers. Most economists do not
believe that the existence of unions increases the overall unemployment rate, though, because in
the United States fewer than 9 percent of workers outside the government sector are unionized.
3.3 A significant reason that the unemployment rate in the United States has been lower than the
unemployment rates in Canada and countries in Western Europe is the more generous
unemployment compensation payments and social insurance programs in Canada and Western
Europe, which lower the opportunity cost of continuing to search for a job.

3.4 If the proposal were enacted, the unemployment rate in France would be higher because the law
would substantially reduce the opportunity cost of continuing to search for a job as measured by
the income the unemployed give up by not working. So frictional unemployment would likely
have soared.
3.5 Unemployment rises during a recession, so unemployment claims and unemployment insurance
payments should go up. If unemployment insurance payments fail to rise during a recession the
unemployed workers would suffer large drops in income and the economy would suffer the
results of the drop in consumption spending by the unemployed workers.
3.6 a. and c. are likely to increase the unemployment rate. Lengthening the time workers are
eligible to receive unemployment insurance lowers the opportunity cost of a job search. An
increase in union membership pushes more wages above market wages, thereby increasing
unemployment.
b. and d. are likely to reduce the unemployment rate. Abolishing the minimum wage lowers the
wage from above the market wage for some workers. Making information on job openings
more available shortens the search involved in frictional unemployment.
3.7 Henry Ford was paying an efficiency wage, which can cut a firm’s cost by increasing the
productivity of workers, increasing the quality of workers willing to work for the firm, and
decreasing the turnover of workers.
3.8 a. Labor turnover refers to companies having to replace workers who quit their jobs.
b. One reason why Wal-Mart, IKEA and other firms increased the wages they pay to newly
hired workers was to decrease labor turnover. These firms probably believe that hiring and
training new workers would be more costly than paying workers higher wages.
Measuring Inflation
9.4 Learning Objective: Define the price level and the inflation rate and understand how
they are computed.
Review Questions
4.1 The GDP deflator is the broadest measure of the price level because it includes the prices of all
final goods and services included in GDP. The Consumer Price Index measures the prices of
goods and services purchased by a typical urban family of four. The Producer Price Index
measures the prices of goods and services at all stages of the production process.

4.2 The government uses the Consumer Price Index to measure changes in the cost of living because
the CPI tracks changes in the prices paid by a typical urban family of four.
4.3 The potential biases include substitution bias, increase in quality bias, new product bias, and
outlet bias. The Bureau of Labor Statistics updates the market basket every two years to reduce
substitution bias and new product bias, uses statistical methods to reduce quality bias, and
conducts point-of-purchase surveys to track where consumers actually make their purchases to
reduce outlet bias.
4.4 The Consumer Price Index is an average of the prices of final goods and services purchased by a
typical urban family of four. The Producer Price Index is an average of the prices received by
producers of goods and services at all stages of production, not just the final stage.

4.5 The statement misinterprets how economists use the CPI to calculate the inflation rate. The
inflation rate in 2014 is the percentage change in the CPI since 2013, not since the base year.
4.6 There is no contradiction because the inflation rate measures the percentage change in the price
level. The inflation rate says nothing about the level of prices. Prices of goods and services may
seem expensive even though those prices are increasing at a slow rate. As long as the inflation
rate is positive, the CPI will increase and each year its value will be “the highest it’s ever been.”
4.7
Base Year (1999) 2015 2016

Product Quantity Price Expenditure Price Expenditures Price Expenditures
Haircuts 2 $10.00 $ 20.00 $11.00 $ 22.00 $16.20 $ 32.40
Hamburgers 10 2.00 20.00 2.45 24.50 2.40 24.00
DVDs 6 15.00 90.00 15.00 90.00 14.00 84.00
Total 130.00 136.50 140.40
The CPI for 2015 = [($136.50/$130) × 100] = 105; CPI for 2016 = [($140.40/$130) × 100] = 108.
So, the inflation rate for 2016 = [(108 − 105)/105) × 100] = 2.9%.
4.8
City April 2014 April 2015 Percent Change
New York 174.5 179.3 2.75%
Miami 183.2 198.5 8.35%
Phoenix 145.4 150.4 3.44%
Dallas 136.8 148.8 8.77%
San Francisco 192.5 211.5 9.87%
a. The percent change is calculated as [(April 2015 index value – April 2014 index value)/April
2014 index value] × 100. As is shown in the table, housing prices in all five markets rose
from April 2014 to April 2015. The largest increase in prices occurred in San Francisco (9.87
percent). The smallest increase in prices occurred in New York (2.75 percent).
b. We cannot determine on the basis of these numbers which city had the most expensive homes
because the numbers are not dollar amounts but indexes that measure prices in each city in a
given month relative to what they were in that city in the base month.

4.9 a. During the period from point B to C when the CPI did not change, the country experienced
zero inflation.
b. During the period from point 0 to A when the CPI increased at an increasing rate, the country
experienced an increasing inflation rate.
c. During the period from point A to B when the CPI increased at a decreasing rate, the country
experienced a slowdown in inflation (disinflation).
d. During the period from point C to D when the CPI decreased, the country experienced
deflation.
4.10 The BLS’s motivation in changing its methods of calculating the CPI was to more accurately
measure the rate of inflation. Before these revisions most economists believed that the CPI had
biases that caused it to overstate the rate of inflation by as much as one percentage point.
4.11 Until the BLS updates the market basket of goods used to compute CPI to include the new iPhone
model, the introduction of the new iPhone will have no effect on the CPI. Note, though, that the
introduction of the new iPhone model contributes to the increase in quality bias that causes changes
in the CPI to overstate the true inflation rate. Consumers are getting a better product when they buy
the new iPhone model, but they are paying the same price as they did for the older model.
9.5 Using Price Indexes to Adjust for the Effects of Inflation

Learning Objective: Use price indexes to adjust for the effects of inflation.
Review Questions
5.1 A nominal variable is a variable measured in current dollars, which means that it is measured
using the actual prices from that time period. A real variable is a variable measured in constant
dollars, which means that it is measured using prices from a base year. That is, a real variable is
adjusted for the effects of inflation.
5.2 As prices of goods and services decrease during a period of deflation nominal earnings are likely
to rise slowly, and may even fall. Real earnings will not fall as much as nominal earnings, and
will rise if the decline in prices is greater than the decline in nominal earnings. Therefore, real
average hourly earnings are likely to increase faster than nominal average hourly earnings during
a period of deflation.

5.3
Real GDP
Nominal GDP (billions GDP Price Deflator (billions of 2009
Year of dollars) (2009 = 100) dollars)
1929 $104.6 9.9 $1,056.6
1933 57.2 7.4 773.0
Real GDP for 1929 = (Nominal GDP/GDP price deflator) × 100 = ($104.6 billion /9.9) × 100 =
$1,056.6 billion. Real GDP for 1933 = ($57.2 billion/7.4) × 100 = $773.0 billion. The percentage
decline in real GDP between 1929 and 1933 = [($773.0 billion – $1,056.5 billion)/ $1,056.6
billion] × 100 = –26.8%.

5.4 We can convert Fitzgerald’s 1924 nominal income of $36,000 to an equivalent income in 2014 by
multiplying the 1924 nominal income by the ratio of the CPI for 2014 to the CPI for 1924:
$36,000 × (237/17) = $501,882. So, you would have needed an income of 501,882 in 2014 to
have the same purchasing power that Fitzgerald’s $36,000 had in 1924.
5.5 In the United States, the real minimum wage in 1957 was $3.70: [($1.00/27) × 100], and in 2014
it was $3.06: [($7.25/237)  100]. In France, the real minimum wage in 1957 was €2.38:
[(€0.19/8) × 100], and in 2014 it was €9.07: [(€9.61/106) × 100].
Therefore, between 1957 and 2014, there was a 17.3 percent decrease in the real minimum wage
in the United States: [($3.06 – $3.70)/$3.70] × 100. And, there was a 281.1 percent increase in the
real minimum wage in France: [(€9.07 – €2.38)/€2.38] × 100.
It does not matter whether we have information about the base year as long as we have the CPI
data. Whatever the base year is, we would get the same percentage increase in prices. The
percentage increase in the price level was less in the United States—[(237 – 27)/27 × 100] =
777.8%—than in France—[(106 – 8)/8 × 100] = 1,225.0%.
5.6 If three cups of coffee and a doughnut can be purchased in 2014 for $10 and for $2,000 in 2054,
the CPI would have to be 200 times greater in 2054 than in 2014 because 200 × $10 = $2,000.
Therefore, the CPI in 2054 would be 237 × 200 = 47,400.
5.7 The real receipts in 2015 dollars for each film are listed in the last column below. The first
column shows the rankings of the top ten films based on their earnings in 2015 dollars.
Total Box Office Real Receipts

Rank Film Receipts Year Released CPI (2015 dollars)
1 Gone with the Wind $198,676,459 1939 14 $3,377,499,803
Snow White and the
2 Seven Dwarfs 184,925,486 1937 14 3,143,733,262
3 Star Wars 460,998,007 1977 61 1,798,647,962
4 The Sound of Music 158,671,368 1965 32 1,180,118,300
5 101 Dalmatians 144,880,014 1961 30 1,149,381,444
6 Jaws 260,000,000 1975 54 1,145,925,926
E.T. the Extra-
7 Terrestrial 435,110,554 1982 97 1,067,590,844
8 Titanic 658,672,302 1997 161 973,689,490
9 Avatar 760,507,625 2009 215 841,864,255
10 Star Wars: Episode I:
The Phantom Menace 474,544,677 1999 167 676,297,204
Marvel’s The Avengers 623,357,910 2012 215 645,039,924
Jurassic World 628,700,000 2015 238 628,700,000
The Dark Knight 534,858,444 2008 215 592,075,859
Shrek 2 441,226,247 2004 189 555,618,237
The Dark Knight Rises 448,139,099 2012 230 463,726,546
Avengers: Age of
Ultron 456,774,004 2015 238 456,774,004

Nominal Interest Rates versus Real Interest Rates

9.6 Learning Objective: Distinguish between the nominal interest rate and the real interest
rate.
Review Questions
6.1 The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the
nominal interest rate minus the inflation rate.
6.2 Because the nominal interest rate is the real interest rate plus the inflation rate, an increase in
expected inflation raises the nominal interest rate by the increase in the expected rate of inflation,
assuming that the real interest rate remains constant.
6.3 It is impossible to know whether a particular nominal interest rate is “high” or “low” without
knowing the inflation rate. It is the real interest rate that matters to borrowers and lenders, not the
nominal interest rate. A nominal interest rate of 5 percent with an inflation rate of zero results in a
higher real interest rate than a nominal interest rate of 20 percent with an inflation rate of
19 percent.
6.4 If the economy is experiencing deflation, the nominal interest rate will be lower than the real
interest rate. The real interest rate equals the nominal interest rate minus the inflation rate, but
with deflation the inflation rate is negative.

6.5 The reporter does not understand the definition of deflation. Deflation occurs when the price level
declines. Inflation, even if only half the national rate, increases the price level. It is not possible
for the CPI to drop below zero. The reporter should have written that the change in the CPI drops
below zero when there is deflation.
6.6 a. The real interest rate on a loan with a nominal interest rate of 20 percent and a 19 percent
inflation rate is 1 percent. The real interest rate on a loan with a nominal interest rate of 5
percent and a 2 percent inflation rate is 3 percent. Therefore, you should prefer the loan with
the 20 percent nominal rate.
b. JP Morgan Chase would earn a higher profit on a car loan with a 3 percent real interest rate
than it would from a car loan with a 1 percent real interest rate, so it would prefer the 5
percent car loan.
6.7 The inflation rate from June 2014 to June 2015 as measured by the CPI was: [(237.8 
237.3)/237.3] × 100 = 0.21 percent. With the nominal interest rate on the one-year Treasury bill
of 0.10 percent, the real interest rate equaled 0.10 percent – 0.21 percent = 0.11 percent.
Investors were willing to invest in Treasury bills in 2014 with negative real interest rates because
the bills have low risk (investors were certain the U.S. Treasury would pay the bills off when the
matured) and are easy to buy and sell (they have high liquidity).
6.8 If the monthly inflation rate is 4 percent, the annual inflation rate is about 60 percent. To see this,
notice that at a 4 percent inflation rate, the price level is rising 4 percent per month. If the price level
starts at 100, after two months it would have increased to 100 × 1.04 × 1.04 = 108.2; after three
months it would have increased to 100 × 1.04 × 1.04 × 1.04 = 112.5; and after twelve months to 100
× (1.04)12 = 160.1, or by 60.1 percent. So, the real interest rate would be 4% − 60% = –56%.

6.9 We can answer by using the method of calculating the real interest rate explained in the example
of DVDs on page 678 in the textbook: Real interest rate = Nominal interest rate – Inflation rate.
With $1,000 you can purchase 500 hamburgers at the beginning of the year. If you lend $1,000
for one year at an interest rate of 5 percent, you will receive $1,050 at the end of the year. With
the higher price of hamburgers, at the end of the year you can buy $1,050/$2.08 = 504.8
hamburgers. So, you can purchase [(504.8 − 500)/500] × 100 = 0.96% more hamburgers.
Therefore, the real interest rate you receive on the loan is 0.96 percent. Notice that this is very
close to the real interest rate on the loan calculated by subtracting the 4 percent inflation in
hamburger prices from the 5 percent nominal interest rate on the loan.
9.7 Does Inflation Impose Costs on the Economy?

Learning Objective: Discuss the problems that inflation causes.
Review Questions
7.1 We know from the circular flow of expenditures and income that when inflation increases the
nominal value of expenditures, it must also increase nominal incomes. Consequently, inflation
does not reduce the purchasing power of the average consumer.
7.2 Inflation affects the purchasing power of money. People with incomes that rise faster than the rate
of inflation enjoy an increase in purchasing power, while people with incomes that rise more
slowly than the rate of inflation are hurt by a decrease in purchasing power. In general, inflation
hurts people on fixed incomes, such as retired persons who may be receiving a pension of a fixed
number of dollars each year. (As noted in the text, though, Social Security payments received by
retired workers increase every year by an amount equal to the percentage change in the CPI.)
7.3 Unanticipated inflation is the greater problem. Anticipated inflation can be incorporated into
nominal interest rates and nominal wage contracts. Unanticipated inflation causes the actual real
interest rate and actual real wage rate received to differ from the expected real interest rate and
the expected real wage rate.
7.4 Menu costs are the costs to firms of changing prices. The Internet allows firms to change prices at
little cost so that it has reduced the size of menu costs.
7.5 Deflation can cause consumers to reduce their current spending in anticipation of future lower prices,
and unanticipated deflation increases the burden on borrowers by raising the real interest rate above
the expected real interest rate.

7.6 When the inflation rate turns out to be much higher than most people expected, then the real
interest rate is lower than it was expected to be when loans were made. In these circumstances,
you would rather be a borrower.
7.7 a. Real income is nominal income adjusted for increases in the price level. With inflation, the
real income for James will decrease because he receives a fixed income. However, the
interest income for Frank will likely increase with inflation. Therefore, it is likely that Frank
will have a higher real income 10 years from now.

b. If James’s pension increases each year by the same percentage as the inflation rate, then it is
likely that 10 years from now he will have a higher real income than Frank, whose interest
income is originally $200 less per month than James’s pension income.
7.8 The real interest rate is the cost to Apple of borrowing funds from investors. Therefore, a low real
interest rate is good for Apple and bad for investors, much like a low price is usually good for
consumers, but bad for producers. Inflation was expected to be 2 percent, but turned out to be
6 percent, causing the expected and actual real interest rates to differ. The expected real interest
rate equals the nominal interest rate minus the expected inflation rate. The actual real interest rate
equals the nominal interest rate minus the actual inflation rate. In this case, the expected real
interest rate is 4 percent but the actual real interest rate equals 0 percent (6 percent nominal
interest rate minus the 6 percent actual inflation rate). Because the actual real interest rate is less
than the expected real interest rate, Apple pays less than it thought it would to borrow, and it
gains. Because the investors are receiving a smaller payment than expected in return for lending
funds to Apple, the investors lose.
7.9 Consumers would defer purchases if they expected deflation to continue so that they would pay
even lower prices in the future. Consumers would buy more if they believed that inflation would
follow a period of falling prices.
7.10 When there is unanticipated deflation, the real interest rate on loans increases. This result holds
because with the nominal interest rate on a loan fixed, falling prices (deflation) means that the
real interest rate is greater than the nominal interest rate. Therefore, the burden of debt on farmers
would have increased during these years.
Real-Time Data Exercises

D9.1 a. The CPI for August 2014 was 237.409 and for August 2015 it was 237.931.
b. The inflation rate as measured by the CPI from August 2014 to August 2015 equaled:
[(237.931 – 237.409)/237.409] × 100 = 0.22%.
D9.2 a. and b. Data used in the graph in c. below covers the period from August 2010 to August 2015.
c.

d. The inflation rate of 3.85 percent in September 2011 was the highest during these years. The
inflation rate for each month equals the percentage change in the CPI over the previous
twelve months.
D9.3 a. and b. Data used in the graph in c. below covers the period from August 2007 to August 2015.
c.
d. The inflation rate as measured by the CPI was more volatile than the inflation rate as
measured by the CPI less prices of food and energy. In June 2009 the inflation rate measured
by the CPI was 1.23 percent; using the CPI less food and energy prices the rate of inflation
was 1.71 percent. The highest inflation rate as measured by the CPI less food and energy
prices between July 2007 and July 2015 was 2.50 percent in August 2008. The highest
inflation rate as measured by the CPI for the same time period was 5.50 percent in July 2008.
D9.4 a. The CPI for food and beverages in August 2015 was 247.25, and in August 2010, it
was 219.88. The CPI for apparel in August 2015 was 126.55, and in August 2010, it was
118.96. The CPI for transportation in August 2015 was 202.22, and in August 2010,
it was 192.29. The CPI for medical care in August 2015 was 446.81, and in August 2010, it
was 389.06.
b. The inflation rate over the entire period from August 2011 to August 2015 for food and
beverages was: [(247.25 – 229.50)/229.50] × 100 = 7.73%; for apparel, it was: [(126.55 –
123.71)/123.71] × 100 = 2.30%; for transportation, it was: [(202.22 – 214.59)/214.59] × 100
= 5.76%; for medical care, it was: [(446.81 – 401.38)/401.38] × 100 = 11.32%. These
inflation rates are the percentage changes over the entire four-year period, not annual
inflation rates.
c. Transportation experienced the lowest inflation rate (5.76 percent), and medical experienced
the highest inflation rate (11.32 percent).

D9.5 a. In August 2015, the number of unemployed equaled 8,029 thousand, the civilian labor force
equaled 157,065 thousand, and workers with part-time employment for economic reasons,
slack work, or business conditions equaled 3,841 thousand. These data are reported monthly
and measured in thousands of persons.
b. The civilian unemployment rate equaled [(8,029 thousand/157,065 thousand) × 100] = 5.1%.
The civilian unemployment rate including persons who are underemployed equaled: [(8,029
thousand + 3,841 thousand)/157,065 thousand] × 100 = 7.6%.
D9.6 a. In August 2015, the number of unemployed men equaled 4,261 thousand, the number of
unemployed women equaled 3,768 thousand, the civilian labor force for men equaled 83,472
thousand, and the civilian labor force for women equaled 73,593 thousand. These data are
reported monthly and are measured in thousands of persons.
b. The unemployment rate for men equaled: [(4,261 thousand/83,472 thousand) × 100] = 5.1%,
and the unemployment rate for women equaled: [(3,768 thousand/73,593 thousand) × 100] =
5.1%.
c. Discouraged workers are people who are available for work but have not looked for a job
during the previous four weeks because they believe no jobs are available for them. If there is
no other change in the labor force, an increase in discouraged workers would decrease the
unemployment rate because discouraged workers are not counted as unemployed.
D9.7 a. In August 2015, the number of unemployed equaled 8,029 thousand, civilian employment
equaled 149,036 thousand, and those not in the labor force equaled 94,031 thousand.
b. The working-age population equals the labor force plus those not in the labor force. In
August 2015, the labor force equaled: 8,029 thousand + 149,036 thousand = 157,065
thousand, and the working-age population equaled: 157,065 thousand + 94,031 thousand =
251,096 thousand. The employment-population ratio equals civilian employment divided by
the working-age population, which for August 2015 equaled: [(149,036 thousand/251,096
thousand) × 100] = 59.4%.
c. If the economy entered a recession, one would expect the employment-population ratio to
decline as fewer people would have jobs.
D9.8 a. The civilian unemployment rate equaled 5.1 percent in August 2015, and it equaled 7.2
percent in August 2013. The natural rate of unemployment equaled 5.06 percent in August
2015 and 5.16 percent in August 2013. Note that the natural rate of unemployment is
calculated on a quarterly, not monthly, basis.
b. The cyclical unemployment rate equals the unemployment rate minus the natural rate of
unemployment. The cyclical unemployment rate equaled (5.1%  5.06%) = 0.04 % in August
2015 and equaled (7.2%  5.16%) = 2.04% in August 2013.
c. In August 2015 the economy was very close to full employment and potential GDP.
D9.9 a. In August 2015, the number of unemployed equaled 8,029 thousand, civilian employment
equaled 149,036 thousand, employment level – part-time for economic reasons equaled 6,483
thousand, and not in the labor force, searched for work and available equaled 1,812 thousand.
b. The official unemployment rate equals the number of unemployed divided by the labor force,
which equals the unemployed plus the employed. For August 2015, the official
unemployment rate equaled: [(8,029 thousand/(8,029 thousand + 149,036 thousand) × 100]
= 5.1%.

c. This broader measure of the unemployment rate would include as unemployed the three
categories of unemployed: unemployed; employed but part-time for economic reasons; and
not in the labor force, searched for work and available. In August 2015, this broader measure
of the unemployment rate equaled: [(8,029 thousand + 6,483 thousand + 1,812
thousand)/(8,029 thousand + 6,483 thousand + 1,812 thousand + 149,036 thousand)] × 100=
9.9%.
d. One would expect the gap between the official rate of unemployment and the broader rate of
unemployment to widen during recessions and narrow during expansions. One would expect
the number of part-time workers for economic reasons and discouraged workers to rise during
a recession and fall during an expansion.
D9.10 a. In August 2015, the 3-month Treasury bill interest rate equaled 0.07 percent and the
University of Michigan inflation expectation equaled 2.8 percent.
b. The expected real interest rate equals the nominal interest rate minus the expected inflation
rate. In August 2015, the expected real interest rate for the three-month Treasury bill equaled
0.07%  2.8% = 2.73%.
c. If the actual inflation rate is greater than the expected inflation rate, borrowers gain and
lenders lose from the actual real interest (nominal interest rate minus the actual inflation rate)
being below the expected real interest rate.
D9.11 a. In August 2015 the CPI equaled 238.316 and average hourly earnings of private production
and nonsupervisory employees equaled $21.07, and in August 2014 the CPI equaled 237.852
and average hourly earnings equaled $20.68.
b. The average hourly real wage in August 2015 equaled [($21.07/238.316) × 100] = $8.84, and
in August 2014 equaled [($20.68/237.852) × 100] = $8.69. With the CPI having a base period
of 1982–1984, the real wage is measured in 1982–84 dollars.
c. The percentage change in the average hourly nominal wage equaled: [(21.07 – 20.68)/20.68]
× 100 = 1.89%, and the percentage change in the average hourly real wage equaled: [(8.84 –
8.69)/8.69] × 100 = 1.69%.
d. Given that the average hourly real wage increased 1.69 percent from August 2014 to August
2015, the average worker was better off.

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Brief Chapter Summary and Learning Objectives

9.2 Types of Unemployment (pages 667–670)

9.3 Explaining Unemployment (pages 670–672)

9.4 Measuring Inflation (pages 672–676)

9.7 Does Inflation Impose Costs on the Economy? (pages 680–683)

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Copyright © 2017 Pearson Education, Inc.

Measuring the Unemployment Rate, the Labor Force Participation Rate,

A. The Household Survey

B. Problems with Measuring the Unemployment Rate

C. Trends in Labor Force Participation

D. Unemployment Rates for Different Groups

E. How Long Are People Typically Unemployed?

F. The Establishment Survey: Another Measure of Employment

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H. Job Creation and Job Destruction over Time

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Copyright © 2017 Pearson Education, Inc.

Types of Unemployment (pages 667–670)

A. Frictional Unemployment and Job Search

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Extra Solved Problem 9.2

Unemployment Reason for Unemployment

Source: U.S. Department of Labor, Bureau of Labor Statistics. www.bls.gov.

Solving the Problem

Percentage of The Unemployed

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Explaining Unemployment (pages 670–672)

A. Government Policies and the Unemployment Rate

Extra Solved Problem 9.3

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Solving the Problem

Measuring Inflation (pages 672–676)

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A. The Consumer Price Index

B. Is the CPI Accurate?

C. The Producer Price Index

Extra Solved Problem 9.4

Solving the Problem

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Step 2: Determine the value of the market basket.

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Extra Solved Problem 9.5

Solving the Problem

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Copyright © 2017 Pearson Education, Inc.

Nominal Interest Rates versus Real Interest Rates (pages 678–680)

Extra Solved Problem 9.6

1980 1981 1984 1985 2011 2012 2013 2014 2015

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Solving the Problem

1980 1981 1984 1985 2011 2012 2013 2014 2015

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Does Inflation Impose Costs on the Economy? (pages 680–683)

A. Inflation Affects the Distribution of Income

B. The Problem with Anticipated Inflation

C. The Problem with Unanticipated Inflation

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Copyright © 2017 Pearson Education, Inc.

Extra Economics in Your Life:

Extra AN INSIDE LOOK News Article to Use in Class

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Solutions to End-of-Chapter Exercises