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CLEP Macro Economics

Produced at 1 9 price adjusted for inflation

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produced at $1 @ = $9 (price adjusted for inflation) Underground Economy - all transaction that is never submitted to government officials or data agencies Both legal and illegal activities Prostitution, unreported babysitting, unreported house-cleaning service, undocumented cash sales of equipment, parts, etc. Labor Force – people above age 16, willing and able to work and who are not in the armed forces Participation Rate – percentage of working age (age 16 and over) in the labor force o Example: if the total labor force of a country is 100 million and the working –age population is 200 million, the participation rate would be 50% Labor Supply – amount of workers willing to work for real wages Reservation Price – the minimum wage a worker is willing to receive to work Unemployment Rate - the number of unemployed people without jobs divided by number of people in the labor force Person who is making an effort to find a work (interviewing) within a 4-week period High unemployment rate is a good indicator of poor economy High unemployment rate usually points to unutilized labor resources o When labor resources are not utilized, output falls below potential levels and a recessionary gap is created During a recession one of the last indicators to recover o Example: if there are a total of 6.2 million unemployed among the total labor force of 125 million the unemployment rate would be 5% (round to the nearest whole number) Consumer Price Index (CPI) – tool for measuring the price level and inflation in the US examines the average price “market basket” of goods and services purchased in a household measures a specific set of goods or services relative to the same goods or services in a different year, called base year specific to the United States useful in adjusting salaries, transfer payments, wages and contracted or regulated prices o Formula for determining CPI : total cost this period / total cost base period x 100
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Includes: major consumption items: tobacco, funeral expenses, haircuts, housing, rent, furniture, education expenses, transportation, new car, airline tickets, gasoline, registration fees, water, sewer bills, sales tax, food and beverages, pet supplies, etc. Does NOT include: stocks, bonds, investments, real estate, income tax, social security tax Real Quantity – actual measure in real terms of a good or service used to determine the effects of inflation on the economy, and specifically consumer’s buying power Real Wage – wage paid to workers that is measured in terms of purchasing power calculated by dividing the wage amount by a price index Indexing – increasing a nominal quantity so that it remains unaffected by increases in inflation protects individuals by preventing purchasing power from being diminished by increasing inflation Substitution Bias – When consumers choose equally desirable goods or services when the price of their preferred good or service increases a flaw in the Consumer Price Index (CPI) exaggerates real increases in the cost of living by failing to
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