Homework Set 10 Essays

Homework Set 10 Essays Homework Set 10 Essay Homework Set 10 Essay Sherisse’ Woodley C. Williams Macroeconomics 23 July 2013 Homework Set 10 1. List the four categories of unemployment. * Fictional * Structural * Cyclical * Seasonal 2. What measurement tool constructed by the Bureau of Labor Statistics is used to measure changes in the level of prices of goods and services? Consumer Price Index (CPI) 3. Who would benefit from unanticipated inflation –lenders or borrowers? Why? Who would benefits from anticipated inflation –lenders, borrowers, or neither? Why? Lenders will benefit from unanticipated inflation because they can rise interest and make more money.Bowers will benefit from anticipated inflation because they had time to plan. 4. If there were 1. 5 million unemployed persons in Canada with 15. 5 million employed and a population of 20 million, what would the unemployment rate equal? What would the labor force participation rate equal? 8. 82% 85% 5. In 2000, a price index for medical care in the United States increased from 254 to 265. Based on these figures, compute the rate of inflation or percentage increase in prices for this industry. How does this price change compare to that across the economy that year? 6.If the nominal interest on my mortgage is 3. 0 percent and the expected rate of inflation for next year is 0. 5 percent, what real interest rate will my mortgage lender earn? 2. 5% 7. Holding everything else constant, if the government were to decrease welfare, unemployment, and Social Security disability payments, how would this action change the labor force participation rate? How would it change the unemployment rate? What would be the immediate impact of this action on the level of income inequ ality? In the short term, would this action likely cause an increase or decrease in the urban crime rate?The labor force rate should increase. However, if there are not jobs/employment to replace the loss of benefits the rate will not increase. Unemployment rate should go down, however these individuals must be able to receive enough income to alleviate the loss of benefits and monetary resourced that were being received. Income equality will not change drastically at the onset. The individuals will still live in th same area and be receiving the same or less depending on the education level or their ability to acquire additional skill or trades.The increase in crime will go up at the onset because there will be individuals without employment and benefits to sustain their children and families. 8. Assume that at some point in your life, you will maintain several bank accounts including a checking account and a money market account. You might pay a fee of $100 each year for your bank to sweep funds to and from your checking account depending on the balances. At the same time, you might have a job that provides for an increase in your salary based on changes in the rate of inflation.In this situation, does a loss in purchasing power represent a cost of inflation? Why or why not? Do your banking fees represent a cost of inflation? Why or why not? 9. Assume that you loaned me $1,000 at a very generous nominal interest rate of 3 percent to be paid back in one year. There is a sudden upturn in the economy, however, and inflation increases to 5 percent next year. As a result, when I repay you the $1,000 plus your $30 interest, has your purchasing power increased or decreased as a result of this loan and the interest that you received? What would your real rate of return equal?Based on your answers to the previous two questions and with the benefit of hindsight, what is the lowest nominal interest that you would be willing to accept in this situation? Decreased. Willi ng to accept 4 lowest interest rate. 10. If GDP and the rate of inflation increased and the unemployment rate decreased, what phase of the business cycle would we assume the economy is in? Recession Answer Key Below are the correct answers to the mod 2 hw set for you to compare to your own: 1. The four categories of unemployment are frictional, structural, seasonal, and cyclical. . The consumer price index (CPI) is the measurement tool used to measure changes in price levels. 3. Borrowers would benefit from unanticipated inflation because the nominal interest rates for their loans would be too low to account for the actual level of inflation. As a result the real interest rate that borrowers would be forced to pay would decrease. No one would benefit from anticipated inflation because both lenders and borrowers could agree to a nominal interest rate that would account for the level of inflation. 4. The unemployment rate would be 8. % and the labor force participation rate would be 8 5%. 5. The rate of inflation in the medical industry was 4. 3% in the year 2000. In comparison, the rate of inflation across the economy was 3. 4%. 6. The real interest rate will be 3. 4%. 7. Cutbacks in these programs would cause an increase in the labor force participation rate and a decrease in the unemployment rate. However, such cutbacks would cause an increase in the level of income inequality. It is also likely that these actions would cause an increase in the crime rate. 8.In this situation, you would not incur a loss in purchasing power because your salary automatically increased as a result of inflation. The banking fees that you paid would represent a cost of inflation since you are using your resources to protect against the effects of inflation. 9. Your purchasing power would have decreased based on nominal interest of only 3. 0%. Your real rate of return would have been –2. 0%. With the benefit of hindsight you would require a nominal interest rate greater than 3. 0%. 10. We would assume that the economy is in an expansion.