Question

1. Suppose that 10,000 discouraged workers begin to actively look for jobs (in the last 4 weeks). How would this

impact the official unemployment rate?

2.  Some economists argue that the official unemployment rate understates the true unemployment rate. Explain.

     Feel free to use bullet points.

3. The following table includes a hypothetical market basket for a typical urban consumer for two years.  

2018 is the reference base year.

Table 1

                                                               

Item	Quantity	2018 Price	2019 Price
Movie tickets	4	$5.00	$7.50
Bags of popcorn	2	$3.00	$3.00
Drinks of soda	4	$1.00	$1.50

a. Refer to Table 1. What is the value of the CPI for 2019?

b. Refer to Table 1. What is the rate of inflation?

                   Round to the nearest hundredths (two places to the rights of the decimal point).

Answer 1

1. Impact on the official unemployment rate?

10,000 discouraged workers start looking for jobs in the last four weeks, thus they would be considered under the unemployed persons. The number of unemployed people would increase as the discouraged workers would be added to the labor force. And the official unemployment rate would change as additional unemployed would get added to the numerator and the labor force would also increase by that level and more number of people will constitute the number of unemployed vs. employed (unchanged), increasing the unemployment rate.

2. Official unemployment rate understates the true unemployment rate.

Economists argue that the official unemployment rate is smaller than the true unemployment rate because not all people are considered in the official unemployment rate who are without jobs.

Only those who are actively searching are considered.

The rate doesn't consider the discouraged workers who have stopped looking for jobs, but are still unemployed and would like to work, it doesn't consider thus the majority part of the population who are homemakers, prisoners, etc. leading to the true unemployment rate being significantly larger than the official unemployment rate.

3. a.

		2018	2019	2018	2019
Item	Quantity	Price	Price	Total basket	Total basket
Movie tickets	4	5	7.5	20 (5 * 4)	30 (7.5 * 4)
Bags of popcorn	2	3	3	6 (3 * 2)	6 (3 * 2)
Drinks of soda	4	1	1.5	4 (4 * 1 )	6  (1.5 * 4 )
				$30	$42
			CPI	100	140

Thus total expenditure for 2018 is $30, while for 2019 is $42. Multiplying the quantities with prices of the respective years.

Now CPI for 2018 is (30 /30 ) * 100 = 100 as 2018 is the base year.

CPI for 2019 is ( 42 / 30 ) * 100 = 140

Thus 140 is the CPI for 2019

b. Rate of inflation is [ ( 140 / 100 ) - 1 ] * 100 = [ 1.4 - 1 ] * 100 = 0.4 * 100 = 40.00%