Answers to the Study Plan Problems and Applications

1. The BLS reported the following data for January 2017:

Labor force: 160 million
Employment: 152 million
Working-age population: 254 million

Calculate the
a. Unemployment rate.
The unemployment rate is 5.0 percent. The unemployment rate is the percentage of the
labor force that is unemployed. The labor force is the sum of the people unemployed and
the people employed. So the number of people who are unemployed is 160 million minus
152 million, which is 8 million. The unemployment rate equals (the number of people
unemployed divided by the labor force) multiplied by 100. That is, (8 million/160 million) 
100, which is 5.0 percent.
b. Labor force participation rate.
The labor force participation rate is 63.0 percent. The labor force participation rate is the
percentage of the working-age population that is in the labor force. The working-age
population is 254 million and the labor force is 160 million, so the labor force participation
rate is (160 million/254 million) 100, which equals 63.0 percent.
c. Employment-to-population ratio.
The employment-to-population ratio is 59.8 percent. The employment-to-population ratio is
the percentage of the people of working age who have jobs. The employment-to-population
ratio is equal to the number of people employed divided by the working-age population then
multiplied by 100. The employment-to-population ratio is (152 million/254 million)  100,
which is 59.8 percent.

2. In July 2017, in the economy of Sandy Island, 10,000 people were employed, 1,000
were unemployed, and 5,000 were not in the labor force. During August 2017, 80
people lost their jobs and didn’t look for new ones, 20 people quit their jobs and
retired, 150 unemployed people were hired, 50 people quit the labor force, and 40
people entered the labor force to look for work. Calculate for July 2017
a. The unemployment rate.
The unemployment rate in July is 9.1 percent. The unemployment rate is the number
unemployed as a percentage of the labor force. The number of unemployed workers is
1,000. The labor force is the number employed plus the number unemployed so in July it is
11,000. The unemployment rate equals (1,000/11,000)  100, which is 9.1 percent.
b. The employment-to-population ratio.
The employment-to-population ratio is 62.5 percent. The employment-to-population ratio is
the number employed as a percentage of the working-age population. The number of

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 employed people is 10,000. The working-age population is the sum of the labor force and
the number of people who are not in the labor force, which is 16,000. The employment-to-
population ratio is (10,000/16,000)  100, which is 62.5 percent.

And calculate for the end of August 2017

c. The number of people unemployed.
The number of people who are unemployed at the end of August is 840. The number of
people who are unemployed at the end of August equals the number unemployed in July
plus the number of people who lost their job and who stayed in the labor market plus the
number of people entering the labor market minus the number of people who were hired
minus the number of people who left the labor market. So the number of people
unemployed equals 1,000 + 40  150  50, which is 840.
d. The number of people employed.
The number of people who are employed at the end of August is 10,050. The number of
people who are employed at the end of August equals the number employed in July minus
the people whom lost their jobs plus the number of people who gained jobs.
e. The unemployment rate.
The unemployment rate at the end of August is 7.7 percent. The unemployment rate equals
the number unemployed expressed as a percentage of the labor force. The number of people
who are unemployed is 840. The labor force equals the number employed plus the number
unemployed and at the end of August it is 10,890. The unemployment rate at the end of
August equals (840/10,890)  100, which is 7.7 percent.

Use the following data to work Problems 3 and 4.

In June 2015, the U.S. unemployment rate was 5.2 percent. In June 2017, the unemployment
rate was 4.4 percent. Predict what happened to:

3. Unemployment between June 2015 and June 2017, if the labor force was constant.
If the labor force is constant, the only way the unemployment rate can decrease is if the
number of unemployed workers decreases.

4. The labor force between June 2015 and June 2017, if unemployment was constant.
If unemployment is constant, the only way the unemployment rate can decrease is if the
labor force increases.

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5. Hiring Rise Sends U.S. Jobless Rate to a 10-Year Low
The U.S. unemployment rate fell to 4.4 percent. There was also a drop in the numbers
of discouraged workers, which lowered a broader measure of unemployment that
includes this category.
Source: The New York Times, May 6, 2017
What is a discouraged worker? Explain how a decrease in discouraged workers
influences the official unemployment rate and a broader measure. What is the broader
measure?
A discouraged worker is a person who currently is not working, would like a job, has
looked for one in the recent past, but has stopped looking for work because of repeated
failures in finding a job. If a worker who had not been looking for work starts looking, the
official unemployment rate, U-3, rises (until the worker finds a job). U-4 includes
discouraged workers among the ranks of the unemployed so when the worker starts looking
for work and is no longer a discouraged worker, the U-4 unemployment rate does not
change.
Use the following news clip to work Problems 6 and 7.
Singapore’s Unemployment Is Set to Increase
Singapore has been facing increasing unemployment due to a slowdown in economic growth
and disruptive technological advances. However, officials are more worried about the latter,
which is widening the gap between skills employees have and skills employers need.
Employers are laying off employees due to the slowing economy and, at the same time,
struggling to fill positions.
Source: Channel NewsAsia, May 5, 2017
6. What are the two types of unemployment described in the news clip? Why is one of
them more worrying for officials in Singapore?
The news clip mentions an increase in unemployment resulting from the decreased growth
of the economy. This is called cyclical unemployment, which is a result of lay-offs as firms
start to downsize. It also talks about structural unemployment, which results from a
mismatch between the skills needed and the skills employees have. Officials are more
worried about this because this type of unemployment is bound to increase in the future,
regardless of the recovery of the economy, because technology is changing quickly and
workers will take time have to acquire new skill sets to better match the new job
requirements.

7. Which types of unemployment could not have been prevented even if Singapore’s
economy did not slow down and the labor market was working properly?
The news clip mentions an increase in unemployment resulting from the decreased growth
of the economy. This is called cyclical unemployment, which is a result of lay-offs as firms

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 start to downsize. It also talks about structural unemployment, which results from a
mismatch between the skills needed and the skills employees have. This type is worrying
officials more than cyclical unemployment as it is bound to increase in the future, regardless
of the recovery of the economy, because technology is changing quickly and workers will
take time to acquire new skill sets through re-education or special training programs to
better match the new job requirements.

Use the following data to work Problems 8 and 9.

The people of Archy Archipelago buy only coconuts and shampoo. The CPI basket contains
the quantities bought in 2016. In the same year, the average household’s budget was €200 of
which 70 percent was spent on coconuts when one coconut cost €4 and shampoo was €6 a
bottle. In 2017, the price of a coconut was €3 and the price of shampoo was €8 a bottle. Take
2016 as the base year.

8. Calculate the CPI basket and the amount an average household spent on both goods in
2016.
The total amount spent on the CPI basket in 2016 was €200 of
which (€200 × 70)/100 = €140 was spent on coconuts. Therefore,
€60 were spent on shampoo.
The CPI basket is 35 coconuts and 10 bottles of shampoo.
The expenditure on coconuts in 2016 equals Pcoconut × Qcoconut, so
€140 = €4 × Qcoconut which results in Qcoconut = 35 coconuts. The
expenditure on shampoo bottles in 2016 equals Pshampoo × Qshampoo,
so €60 = €6 × Qshampoo which results in Qshampoo = 10 bottles.

9. Calculate the CPI and the inflation rate in 2016 and 2017.
The CPI in 2016 is 100 because 2016 is the base year and 92.5 in 2017.
The CPI in 2017 is the value of the CPI basket in 2017 divided by the value of CPI basket in
the base year (2016) times 100. The value of the CPI basket in 2017 is: (€3  35) + (€8 
10) = €185. The value of the CPI basket in 2016 is €200 (provided in the question). So the
CPI is (€185/€200)  100 = 92.5.
We cannot get the inflation rate in 2016 because we don’t have the CPI of 2015. The
inflation rate in 2017 is -7.5 percent, which means it is a deflation. The inflation rate equals
the CPI in 2017 year minus the CPI in 2016 expressed as a percentage of the CPI in 2016,
which is [(92.5 – 100)/ 100] × 100 = -7.5 percent. This is a deflation because the answer is
negative.

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Use the following data to work Problems 10 to 11.
The BLS reported the following CPI data:
June 2014 238.3
June 2015 238.6
June 2016 241.0

10. Calculate the inflation rates for the years ended June 2015 and June 2016. How did the
inflation rate change in 2016?
The inflation rate for the year ended June 2015 is 0.1 percent; the inflation rate for the year
ended June 2016 is 1.0 percent.
The inflation rate is the percentage change in the price level. It is equal to [(Pthis year – Plast
year )/ Plast year]  100. For the year ended in June 2015 the inflation rate is [(238.6 –
238.3)/238.3]  100, which is 0.1 percent. For the year ended in June 2016 the inflation rate
is [(241.0 – 238.6)/238.6]  100, which is 1.0 percent. The inflation rate increased in 2016.

11. Why might these CPI numbers be biased? How can alternative price indexes avoid this
bias?
The CPI numbers might be biased because of the new goods bias, the quality change bias,
the commodity substitution bias, and the outlet substitution bias. The new goods bias is that
new goods are often more expensive than the older goods that they replace. The quality
change bias is that increases in the quality of a good are often accompanied by increases in
the good’s price. The commodity substitution bias reflects the point that consumers will buy
less of a good whose price increased and more of a good whose price has not changed.
Finally the outlet substitution bias points out that when prices rise, consumers shop more
frequently at stores with cheaper prices.
Each of the alternative price indexes attempts to overcome some of the bias in the CPI
numbers. The chained CPI uses prices and quantities from the previous period and the
current period. The chaining process overcomes the commodity substitution process. And
because it contains current period quantities, it also does not suffer from the new goods
bias. The personal consumption expenditure deflator contains goods and services omitted
from the CPI. It is calculated from the nominal and real consumption expenditure data and
so it, too, is computed using a chaining procedure. Because the personal consumption
expenditure deflator is calculated using a chaining procedure, it does not suffer from the
commodity substitution bias or the new goods bias. The GDP deflator is calculated from
nominal and real GDP data. It is broader than the personal consumption expenditure
deflator because it contains goods and services in consumption expenditure, investment,
government expenditure, and net exports. The GDP deflator is calculated using a chaining
procedure and so it also avoids the commodity substitution bias and new goods bias.