MONITORING JOBS

AND INFLATION*

Review Quizzes
1. What determines if a person is in the labor force?
2. What distinguishes an unemployed person from one who is not in the labor force?
3. Why does unemployment arise and what makes some unemployment unavoidable?
4. Define frictional unemployment, structural unemployment, and cyclical unemployment.
Give examples of each type of unemployment.
5. What is the natural unemployment rate?
6. How does the natural unemployment rate change and what factors might make it change?
7. Why is the unemployment rate never zero, even at full employment?
8. What is the output gap? How does it change when the economy goes into recession?
9. How does the unemployment rate fluctuate over the business cycle?
11. What is the CPI and how is it calculated?
12. How do we calculate the inflation rate and what is its relationship with the CPI?
13. What are the four main ways in which the CPI is an upward-biased measure of the price
level?
14. What problems arise from the CPI bias?
15. What are the alternative measures of the price level and how do they address the problem
of bias in the CPI?
Study Plan Problems and Applications
1. The Bureau of Labor Statistics reported the following data for 2008:
Labor force: 154,287,000
Employment: 145,362,000
Working-age population: 233,788,000
Calculate the
a. Unemployment rate.
b. Labor force participation rate.
c. Employment-to-population ratio.
Use the following information to work Problems 2 to 3.
The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought
in 2009. The average household spent $60 on juice and $30 on cloth in 2009 when the price of
juice was $2 a bottle and the price of cloth was $5 a yard. In the current year, 2010, juice is $4 a
bottle and cloth is $6 a yard.
2. Calculate the CPI basket and the percentage of the household’s budget spent on juice in
2009.
3. Calculate the CPI and the inflation rate in 2010.
Instructor Assignable Problems and Applications
4. What is the unemployment rate supposed to measure and why is it an imperfect measure?
5. A typical family on Sandy Island consumes only juice and cloth. Last year, which was the
base year, the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a
bottle and cloth was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length.
Calculate
a. The CPI basket.
b. The CPI in the current year.
c. The inflation rate in the current year.

Extra Problems
1. Michigan: Unemployment Record Holder
Michigan now holds a dubious record: It leads the U.S. in joblessness. The state’s
unemployment rate was 8.5% in May while the U.S. unemployment rate was only 5.5%. The
reason is clear: Detroit’s emphasis on big trucks and sport-utility vehicles has turned sour.
But even though the official unemployment numbers look awful, the reality is worse. The
official number does not reflect those who have given up looking for a job.
Business Week, June 24, 2008
a. Why is the reality of the unemployment problem in Michigan actually worse than the
8.5% unemployment rate statistic?
b. Is this higher unemployment rate in Michigan frictional, structural, or cyclical? Explain.
2. The Great Inflation Bias
In 1996 the Boskin Commission was established to determine the accuracy of the CPI. The
commission concluded that the CPI overstated inflation by 1.1%. The commission
described four biases in the way the CPI was determined.
Fortune, April 3, 2008
a. What are the main sources of bias that are generally believed to make the CPI overstate
the inflation rate? By how much did Boskin estimate the CPI overstates the inflation rate?
b. Do the substitutions among different kinds of meat make the CPI biased up or down?
c. Why does it matter if the CPI overstates or understates the rate of inflation?