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Fall_06_Copy_of_Key_to_Practice_Questions_Midterm_2 -...

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Practice Midterm 2 Key Page 1 of 16 Macro Recommended key to practice questions for midterm 2 1 CPI= CPI = Note that you can convert the monthly expenses to a yearly expenditure by multiplying the values by 12. However, if you apply the procedure to the numerator and denominator simultaneously it will not effectively change any of the numerical results. CPI in current year= 107.37 CPI in base year = 100 (ALWAYS) a. Inflation rate is obtained by calculating the percentage change in the cpi (or relevant price index) Formula for percent change = = b. The family is worse off because the percentage increase in the prices of their consumption goods rose more rapidly than the percentage increase in income (7.37%> 5%) However, keep in mind that most economists believe that the CPI overstates true inflation. Make sure you can list the reasons why we believe the CPI is flawed (ie, read the article handout re: CPI) 2 Expenditures on fixed base year basket measured in current period prices Expenditures on fixed base year basket measured in base year prices X 100 Σ Price in current yr * Qty b Σ Price in base yr * Qty b = (20)(11) + (1)(640) + (1) (120)+(1) (40) (20)(10) + (1)(600) + (1) (100) + (1) (50) X 100 Where Qb is just the base year quantity (quantities) The summation runs from 1 to n where n would define the number of prices of the individual commodities included in the base year designated basket CPI = 1020 950 X 100 = 207.368 (final value-initial value) Initial value X 100 (107.37-100) 100 X 100 = 7.37%
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Practice Midterm 2 Key Page 2 of 16 Macro You can use the formula from the previous problem (part (a)) to calculate year to year inflation rates: inflation rate between: 90-91= 4.2% 91-92= 3.01% 92-93= 2.99% 93-94= 2.56% 94-95=2.83% 95-96= 2.95% 96-97= 2.29% 97-98=1.56% 98-99= 1.96% 3 Frictional Unemployment; The frictionally unemployed are people who are between jobs or just re-entering the labor force. For example all of the following would be classified as frictionally unemployed: students who are looking for their 1st full time jobs out of college housewives/home-makers who are re-entering the labor market service men/women who have recently been dischared those who leave their jobs voluntarily to look for a better job those who get fired Structurally Unemployment: Structural unemployment occurs when worker abilities do not match the requirements for a particular class of jobs as a result of , for example, some technological innovation or capital induced labor displacement.
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