CLEP Macro Economics

A flaw in the consumer price index cpi exaggerates

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a flaw in the Consumer Price Index (CPI) exaggerates real increases in the cost of living by failing to take substitution bias into account one reason why inflation is reported higher than it actually may be Quality Adjustment bias – occurs when fail to account for improvements in goods or services and incorrectly report inflation as higher improvements (price increases in a product) are often reported as inflation improvements are hard to measure Price Level – a measure of overall price at a specific point in the price index changes in price level reflect inflation levels over time Relative Price – price of a good or service in relation to the price of other goods and services changes in relative price do not reflect changes in inflation Hyperinflation – occurs when the rate of inflation is extremely high slow economic development severely because with constant price changes there is little stability Worker Mobility – movement of workers between jobs, companies, and industries Often with the help of Transition aids – helping workers with training and equipment, etc. Frictional Unemployment – individuals between jobs seeking new employment, people reentering the work force (moms after their kids are grown) or new entrants (college grads) Structural Unemployment – caused by changes in demand or technology long term and continual often results from lack of skills, language barriers, and discrimination Cyclical Unemployment – is caused by changes in the overall economy occurs during a recession also represents a decreased demand for goods and services and reflects declines in the real GDP
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Unemployment Insurance – payment that the government makes to unemployed workers intended to help workers’ maintain standard of living while searching for a job Labor Unions – organizations that act as moderators between employers and employees represent workers and negotiate contracts generally - wages, hiring, firing, and working conditions Principle of Diminished Returns – as companies hire more workers, the company receives less productivity per worker generally employers only hire if the workers production exceeds their wage value OR if the revenue of the goods produced exceed the salary of the worker Savings Rate – when an economic unit makes more than it spends divide savings by income, $1000 earnings $50 savings = 5% savings Expansion – a period above normal economic growth in the U.S. expansions have lasted longer than recessions Boom – extreme economic growth extremely fast increase in output that normally occurs near the end of an expansion period Potential (GDP) Output – the maximum amount that an economy can output over a period of time Indicated by Y* also know as Potential GDP grows over time to reflect increases in the labor force and real GDP changes can indicate recessions or expansions when economy is functioning at its potential output, unemployment is at what is called the “natural rate of unemployment” o Indicated by u*
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a flaw in the Consumer Price Index CPI exaggerates real...

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