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Homework #3
(1) Case, Fair, and Oster: Chapter 7 problem 10

a. More people are employed in Tappania now than at any time in the past 50 years
b. The unemployment rate in Tappania is higher now than it has been in 50 years. Can both of those statements be true at the same time? Briefly explain in four sentences or less. (5 points)

The unemployment rate measures the percentage of the labor force that is unemployed. If the increase in the unemployed is higher that the increase in labor force, that is, the total of the employed and the unemployed, those two statements could be true simultaneously.

(2) Case, Fair, and Oster: Chapter 7 problem 15
Suppose the number of employed people in an economy is 121,166,640. The unemployment rate in this economy is 10.4 percent or 0.104, and the labor force participation rate is 72.5 percent, or 0.725

a. What is the size of the labor force? (5 points)
121166640/(1-0.104)=135230625
b. How many people are unemployed? (5 points)
135230625-121166640=14063985
c. What is the size of the working-­‐age population? (5 points)
135230625/0.725=186525000

(3) Case, Fair, and Oster: Chapter 7 problem 16
On average, nations in Europe pay higher unemployment benefits for longer periods of time than does the United States. How do you suppose this would impact the unemployment rates in these nations? In three sentences of less, briefly explain which type of unemployment you think is most directly affected by the size and duration of unemployment benefits. (5 points)

The unemployment rates would be higher in these nations compared to the US. Structural unemployment would be the most directly affected because the people become unemployed due to a persistent mismatch between the skills and characteristics of the workers and the requirements of jobs. Therefore, those unemployed would unlikely to get a job with reasonable payment in a short time and receiving unemployment benefits would be a good option in that case.

(4) In each of the following cases, classify the person as cyclically unemployed, structurally unemployed, frictionally unemployed, or not in the labor force. Explain your answer in two sentences or less.
a. Hector lost his job as an assembly line worker at Chrysler due to the recession. (2 points)
Cyclically unemployed. Unemployment caused by a business cycle recession.

b. Alejandro, an advertising executive in Seattle, quit his job one month ago to look for a more prestigious advertising job in New York City. He is still looking for a job. (2 points)
Frictionally unemployed. It’s short-term unemployment arising from the process of matching workers with jobs.
c. Yvonne got laid off from her job as a financial analyst 3 months ago and has not looked for a new job since then. (2 points)
Not in the labor force. A person who is not looking for jobs is not in the labor force.
d. Taylor lost his job as a welder due to the introduction of robotic welding machines. (2 points)
Structurally unemployed. Unemployment arising from changes in the structure of the economy causing a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.
e. Ruby quit her job as a hotel concierge to become a full-­‐time student at a culinary school. (2 points)
Not in the labor force. Ruby is not part of non-institutional civilian population.

(5) What are some of the problems in using fixed weights to compute the price indexes? (5 points)
Ignores quality improvement
Long lag before the new technological goods being introduced
Ignores the substitution from goods whose price are increasing and towards goods whose price are decreasing or increasing less rapidly.

(6) Case, Fair, and Oster: Chapter 7 problem 17
Consider the following four situations. In which situation would a borrower be best off and in which situation would a lender be best off?
a. The nominal interest rate is 14 percent and the inflation rate is 17 per
A borrower would be best off.
b. The nominal interest rate is 7 percent and the inflation rate is 3 percent
A borrower would be best off.
c. The nominal interest rate is 4 percent and the inflation rate is -­‐2 percent
A lender would be best off.
d. The nominal interest rate is 6 percent and the inflation rate is 2 percent. A borrower would be best off.

(7) In year 1 and 2, there are two goods produced in a given economy: computers and bread. Suppose there are no intermediate goods. Production quantities and price are given in the following table:
COMPUTERS
BREAD
YEAR 1
PRICE
P1C= $1,000
P1B=$1
QUANTITY
Q1C= 20
Q1B=10,000
YEAR 2
PRICE
P2C=$1,500
P2B=$1.10
QUANTITY
Q2C= 25
Q2B=12,000

(a) Calculate the GDP Deflator in each year using year 1 as the base as well as the inflation rate (10 points)

(b) Calculate the GDP Deflator in each year using year 2 as the base as well as the inflation rate (10 points)

(c) Calculate the CPI in each year using year 1 as the base as well as the inflation rate (10 points)

(d) Calculate the CPI in each year using year 2 as the base as well as the inflation rate (10 points)