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Answers to 4 Exam Questions about Unemployment & Inflation

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1. Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 140; unemployed, 36; part-time workers looking for full-time jobs, 10. What is the size if the labor force? What is the official unemployment rate?

2. Suppose that the natural rate of unemployment is particular year is 5 percent and the actual rate of unemployment is 13 percent. Use Okun's law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output in being forgone because of cyclical unemployment.

3. If the CPI was 120 last year and is 138 this year, what is the year's rate of inflation? In contrast, suppose that the CPI was 120 last year and is 116 this year. What is this year's rate of inflation? What term do economists use to describe this second outcome?

4. If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation?

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Solution Summary

This solution gives detailed calculations to answer 4 common questions found on Macroeconomics exams. The topics covered are:

1. Labor force & unemployment rate
2. Okun's law
3. CPI & inflation
4. Nominal vs Real income

Solution Preview

1.
Labor force = 500 - 120 - 140 = 240
Unemployment rate = 36/240 = 0.15 = 15%

2.
Okun's law states that for every 1% increase in the unemployment rate, GDP will be ...

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