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REVIEW QUESTIONS FOR QUIZ 2

1. Female (head of household)—age 45, worked full time during the month as computer analyst – Employed part of CPS
Male—age 50, laid off last year, did not work or look for work during the month. Not in labor force – discouraged worker
Female—age 22, not working, applied for positions in retail sales during the month, Unemployed in labor force, part of CPS
Male—age 15, worked part time during the month at a restaurant, although he’s employed, not part of CPS or in labor force because of his age!
Male—age 70, retired. Not in labor force
Female—age 68, worked 30 hours per week as a substitute middle school teacher Employed, part of CPS, possibly underemployed

2. Using the following data, compute the following:
Number of people employed 120,500
Number of people unemployed 4,050
a. The number of people in the labor force. Answer: 4,050 + 120,500 = 124,550
b. The unemployment rate. Answer: (4,050 / (4,050+120,500) × 100) = 3.25%

3. a. Phil is structurally unemployed.
b. Jessica is frictionally unemployed.
c. Mary is structurally unemployed.
d. Barry is cyclically unemployed.
e. Sandy is frictionally unemployed

4. A. The natural rate of unemployment is the normal unemployment rate around which the actual rate of unemployment fluctuates. It is measured as follows:
Natural rate of unemployment = Frictional unemployment rate + Structural unemployment rate
b. Possible answers may include:
i. An increase in unemployment benefits can increase the natural rate of unemployment. ii. An increase in the number of new workers in the labor force increases the natural rate of unemployment. iii. A decline in union membership decreases the natural rate of unemployment. iv. An increase in labor productivity decreases the natural rate of unemployment.
c. If the actual rate of unemployment is greater than the natural rate of unemployment, then some workers are cyclically unemployed and the economy may be in a recessionary phase of the business cycle.

5. A. Samantha has not made a wise investment, as the real interest rate she is earning on this investment is negative. The real interest rate Samantha is earning is computed as follows:
Real interest rate = Nominal interest rate – Rate of inflation
Real interest rate = 4.25% – 5% = –0.75%
b. William must receive a minimum nominal annual rate of interest equal to 11%, which is computed as follows:
Real interest rate = Nominal interest rate – Rate of inflation 7% = Nominal interest rate – 4%
Nominal interest rate = 11%

6. China’s real GDP per capita will be $8,000. The gap goes from a 8 fold difference to a 2 fold difference.

7. A.

b.

8. Possible answers:
a. Conducting business meetings via video conferencing rather than by traveling to a destination for a meeting.
b. Computer-aided design programs used by architects and engineers to create and test their designs.
c. Computerized inventory control systems that are linked to check-out stations in stores.
d. E-mail used in place of traditional mail or paper documents.
e. Use of company or university Web pages to display information and reduce the need for printed documents.

9. Possible Answers:
1. Increases in human capital have made labor more productive.
2. Increases in physical capital have made labor more productive.
3. Technological improvements have increased total factor productivity.
4. Improvements in health care have increased labor productivity.
5. Improvements in infrastructure have increased total factor productivity.
6. Development and use of new technologies have reduced the need for natural resources, such as energy-saving capital, or use of fertilizers on inferior agricultural land.

10. a. The equilibrium wage rate is $10. At this wage rate, there will be 50,000 employed workers, no unemployed workers, a labor force of 50,000, and an unemployment rate of 0%.

b. If the government of Profunctia sets a minimum wage equal to $12, then 60,000 workers (the size of the labor force) will be looking for work but only 40,000 will find jobs. There will be 20,000 unemployed workers, and the unemployment rate will be 33.3% ((20,000/60,000) × 100).

c.If unions bargain with the firms in Profunctia and set a wage rate equal to $14, then 70,000 workers (the size of the labor force) will be looking for work but only 30,000 will find jobs. There will be 40,000 unemployed workers, and the unemployment rate will be 57.1% ((40,000/70,000) ×100).

d. If the concern for retaining workers and encouraging high-quality work leads firms to set a wage rate of $16, then 80,000 workers (the size of the labor force) will be looking for work but only 20,000 will find jobs. There will be 60,000 unemployed workers, and the unemployment rate will be 75% ((60,000/80,000) ×100).

11.a. If the government reduces the time during which an unemployed worker can obtain benefits, workers will be less willing to spend time searching for a job. This will reduce the amount of frictional unemployment and lower the natural rate of unemployment.
b.Since teenagers have a higher rate of frictional unemployment, this will lower the overall amount of frictional unemployment and lower the natural rate of unemployment.
c.Greater access to the Internet would facilitate job searches, reducing frictional unemployment and lowering the natural rate of unemployment.
d.Since strong unions negotiate wages above the equilibrium level, they are a source of structural unemployment. A decline in union membership will reduce structural unemployment and, with it, the natural rate of unemployment.

12. One-year loans in Albernia would have been especially attractive from about 1998 to 2003. During this time, inflation was higher than interest rates on one-year loans, making real interest rates negative. Whenever nominal interest rates are lower than inflation, borrowers are better off and lenders are worse off.

13.

14. The accompanying table shows each nation’s real GDP per capita in terms of its 1960 and 2009 levels.

b.South Korea experienced the greatest increase in living standards from 1960 to 2009; in 2009 it produced 1,405% ($125,029/$1,782 ×100) of what it produced in 1960. Argentina experienced only a modest growth in living standards over the same period, and Argentina’s path was less consistent than that of Ghana. Compared with real GDP per capita in 1960, the United States in 2009 produced 266% ($41,102/$15,438 ×100) of what it produced in 1960. The growth in living standards in Argentina, Ghana, and South Korea reflects the pattern for their different regions of the world. South Korea, like many other East Asian countries, had high productivity growth because of high savings and investment rates, a good education system, and substantial technological progress. Living standards grew more modestly in Argentina, as in other Latin American countries, because of low savings and investment spending rates, underinvestment in education, political instability, and irresponsible government policies. Ghana, in particular recently, has made some progress. Living standards in Africa suffered because of major political instabilities, poor education and infrastructure, and disease.

15. Physical capital, human capital, technology, and natural resources play important roles in influencing long -run growth in real GDP per capita. Increases in both physical capital and human capital help a given labor force to produce more over time. Although economic studies have suggested that increases in human capital may explain increases in productivity better than do increases in physical capital per worker, technological progress is probably the most important driver of productivity growth. Although natural resources played a prominent role historically in determining productivity, today they play a less important role in increasing productivity than do increases in human or physical capital in most countries.

16. The accompanying table shows real GDP per capita (2005 U.S. dollars) in France, Japan, and the United Kingdom as a percentage of real GDP per capita in the United States.

Growth of real GDP per capita in France, Japan, and the United Kingdom closed some of the gap in living standards with the United States between 1950 and 2009. Japan’s real GDP per capita grew from only 23.7% of that in the United States to 77.8%, and France’s rose from 53.9% to 75.0%. Living standards in the United Kingdom relative to those in the United States rose relatively little; real GDP per capita grew from 78.9% of that in the United States to 81.2%. The real GDP per capita in these countries has converged.