exam 2 study guide - ECON 104 Fall 2016 REVIEW FOR EXAM 2 Key Terms and Concepts Chapter 9 268 Unemployment please refer to packet pages 60 through 62

exam 2 study guide - ECON 104 Fall 2016 REVIEW FOR EXAM 2...

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ECON 104 Fall 2016 REVIEW FOR EXAM 2 Key Terms and Concepts Chapter 9 : Unemployment, please refer to packet pages 60 through 62; text Chapter 9, pages 264 - 268: 1. Calculate Employment - Population Ratio: the fraction of the population that has jobs (employed / working age population ) x 100 2. Calculate Labor Force Participation Rate: percentage of population in the labor force (labor force / working age population) x 100 - labor force = employed + unemployed 3. Unemployment rate can be misleading - U could be falling because workers have dropped out (discouraged) or only part-time jobs are available to some workers who really want full time U6; discouraged workers; workers who are working part-time o U + Marginally attached workers + persons employed part-time for economic reasons Chapter 9: Inflation, packet pages 64 - 76, text Chapter 9, pages 278 - 289: 4. Calculate Inflation (Π) Rate: percent change in price level 5. Disinflation: Π > 0 but falling 6. Deflation: Π < 0 (negative) 7. Consumer Price Index; which item in the basket occupies the greatest weight? - housing occupies the greatest weight in the basket (41%) - focuses on just consumer goods - a measure of the average change over time (from the base year to the current year) in the prices of the goods and services purchased by the typical urban family of four - cost of living index Calculate CPI = (cost of basket in current year / cost of basket in base year) x 100 CPI inflation rate = [(new CPI - old CPI) / old CPI] x 100 8. Money illusion: they don’t think of things in real terms (RGDP v.s. NGDP) - we don’t take inflation into account when we think about the value or purchasing power of our money. 9. Consequences of inflation: Impact on purchasing power/standard of living o As CPI increases, the amount of goods and services the dollar can buy decreases as well does standard of living
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o Some workers receive a cost-of-living allowance (COLA) which automatically raises their wage when the CPI rises Inflation and income; calculate real income: measures purchasing power and standard of living o Inflation shrinks income Real income = nominal income / (CPI / 100) %Δ real income = %Δ nominal income - %Δ CPI o Nominal income: actual income received o Real income: income adjusted for changes in CPI Positive growth in real income shows increase in purchasing power and increase in standard of living Inflation and Interest Rates--nominal versus real o Interest rate is the cost of borrowing and the return to lending o Nominal interest rate (i): the stated interest rate on a loan, saving account, certificate of deposit (CD) i = r + Π o Real interest rate (r): is not observable r = i - Π expected o Lenders/savers versus borrowers Unanticipated Π > 0 hurts lenders/savers and benefits borrowers o r = i - Π expected < 0 SPEND o r = i - Π expected > 0 SAVE o
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