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c. Seasonal variations and long-run trends complicate the measurement of the business cycle because


  • it is difficult to treat all the variations the same when the causes differ.
  • long-term trends have only recently been measured.
  • the seasons vary so the changes are not consistent.
  • normal seasonal variation does not signal boom or recession.


d. The consequence of a negative GDP gap is that


  • society must forgo goods and services that were not produced because some resources were involuntarily idle.
  • parents will not be able to afford to pay for their children to go away to university.
  • because it is not self-correcting only government intervention or new public policy can close the gap.
  • interest rates will fall and as a result savings will also fall leading to lower investment and lower future GDP.


b(1). Why is it difficult to distinguish between frictional, structural, seasonal and cyclical unemployment?


  • The total unemployment rate and the sum of frictional, seasonal, and structural unemployment are always changing. Because of this it is difficult to isolate the individual contribution of cyclical unemployment, which is also always changing, to the total rate.
  • There is no difference between frictional and stuctural unemployment.
  • It is only possible to measure cyclical unemployment when the economy is undergoing a recession.
  • People often mis-report the type of unemployment they are suffering in order to avoid embarrasment.




b(2). Suppose a person quits their job in search of a better one but before the worker finds a new job the economy slips into a severe recession.


  • This person was frictionally unemployed and then became cyclically unemployed when the economy slipped into a recession.
  • This person was structurally unemployed and then became cyclically unemployed when the economy slipped into a recession.
  • This person was cyclically unemployed and then became structurally unemployed when the economy slipped into a recession.
  • This person was cyclically unemployed and then became frictionally unemployed when the economy slipped into a recession.





a(1). The Consumer Price Index


  • measures the prices of the basket of goods and services preferred by the typical consumer each month. The market value of the basket of goods is compared to the market value of that basket in the previous month.
  • measures the prices of a fixed market basket of goods and services that is bought by a typical consumer. The market value of the basket of goods is compared to the market value of that basket in a base year.
  • measures the prices of the basket of goods and services preferred by the typical consumer each year. The market value of the basket of goods is compared to the market value of that basket in the previous year.
  • measures the prices of a fixed market basket of goods and services that is bought by a consumer selected by the government. The market value of the basket of goods is compared to the market value of that basket in a base year.



a(2). In Canada the CPI is constructed by


  • personnel at Statistics Canada who collect price quotes from selected retail outlets on a monthly basis.
  • personnel at the Department of Finance who collect price quotes from selected retail outlets on a monthly basis.
  • personnel at Statistics Canada who collect price quotes from selected retail outlets on a yearly basis.
  • personnel at the Department of Finance who collect price quotes from selected retail outlets on a yearly basis.



b. To calculate the rate of inflation from one year to the next (i.e. from year 1 to year 2)

  • subtract the first year CPI from the second year and then divide the result by the first year CPI. I.e. [(Year 2 CPI) - (Year 1 CPI)]/(Year 1 CPI)
  • subtract the first year CPI from the second year and then divide the result by the second year CPI. I.e. [(Year 2 CPI) - (Year 1 CPI)]/(Year 2 CPI)
  • add the first year CPI to the second year and then divide the result by the average of both years CPI. I.e. [(Year 1 CPI) + (Year 2 CPI)]/Average(Year1 CPI, Year 2 CPI)
  • add the first year CPI to the second year and then divide the result by the number of years involved. I.e. [(Year 1 CPI) + (Year 2 CPI)]/2






d. What items are excluded to calculate core inflation?


  • Food and gas.
  • Durable goods.
  • Commodities.
  • Only non-renewable energy.



e. Why do policymakers exclude these items and calculate core inflation?


  • Policymakers strip out volatile prices to find the underlying change in the CPI.
  • Policymakers think consumers value the items included in core inflation more than those excluded from it.
  • Policymakers value the items included in core inflation more than those excluded from it.
  • Prices of the excluded items cannot be collected to be included in the calculation.






Of the possible effects of hyperinflation, the following is not one of the main direct causes of a severe decline in total output:


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