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File 8 Questions for homework 

1. This analysis demonstrates how the inflation 
of the late 1970's and early 1980's caused a decrease in the standard of living
for the average person living in the United States. Using the data below, 
calculate a consumer price index, real disposable personal income, nominal per
capita disposal personal income, and real per capita disposable personal income.
Use 1981 as the base year. Round CPI to whole numbers and others to thousands of
dollars. Data given represents actual data for the period.

 

Year	Cost of a Basket of Goods	CPI	DPI in Billions	Real DPI  1991 $'s	Population  in Millions	Nominal/ Capita DPI	Real/Capita DPI
1978	$400	72	$1, 551	$2,154	223	$6,955	$9, 659
1979	445	80	1,729	2,161	225	7,684	9,604
1980	505	91	1,918	2,108	228	8,412	9,246
1981	557	100	2,128	2,128	230	9,252	9,252
1982	592	106	2,261	2,133	232	9,746	9,194
1983	611	110	2,428	2,207	235	10,332	9,391
1984	637	114	2,669	2,341	237	11,262	9,878

2. Explain the economic ramifications of your answer to Question #1.  

The data demonstrated how real disposable income stagnated during the period. 
As with any average, the extremes are not evident. In this case, the Midwest 
was hit hard and became known as the Rust Belt. New England and California 
weren't hit as hard. 

Chapter 9 Questions for homework

1. First, calculate two annual rates of inflation for a basket of goods that increased 
in price from $600 to $630 and then to $693 over two years. Second, calculate the inflation 
rate over two years. Why was the inflationary rate over two years exactly .5% higher than 
the sum of the rate changes for each year?

(P_L - P_E)/P_E = $630 - $600 = $30 = .05 = 5%
                                  $600        $600

(P_L - P_E)/P_E = $693 - $630 = $63 = .1 = 10%
                                   $630      $630

2. Calculate the total unemployment cost incurred by a 5 trillion dollar economy 
of 250 million people during the 1990-92 recession and subsequent slow recovery. 
Assume the unemployment rate was up an average of 1.5% each year for the three- 
year period. What was the total cost to a family of four?

GNP change = 2.5 x Unemployment = (2.5)(1.5%) = 3.75%

annual absolute change = (3.75)(GNP) = (3.75%)($5 trillion) = $187,500,000,000

annual per capita change = GDP change population
= $187,500,000,000 250,000,000 people = $750/person

annual cost to a family of 4 = (4)($750) = $3,000 and the three year cost is $9,000

3. Contrast cost-push and demand-pull inflation.
Cost-push inflation is the result of a shortage in supply. It often accompanies the end of the expansionary stage of the business cycle when resources become scarce. Demand-pull inflation begins in the recovery stage of the business cycle and continues to increase with expansion.

4. Who is helped and hurt by inflation? Give examples from your own experiences.
A. Debtors (homeowners, business, and government) are helped by moderate inflation. 
The economic effects of the high inflation of the 1970's continue today. The US 
struggles with the high cost COLA's, the end of tax bracket creep, high social
security payments, and other programs adopted because of high inflation.
B. Fixed income earners and creditors are hurt by inflation
Note: The high inflation in home prices on each coast helped the lucky owners
who sold at the right time and traded down but, it will be many years before 
those who bought high get back to even.
5. Define and give examples of the three types of unemployment.
A. Frictional unemployment is the result of time lags in the operation of the 
labor market as people require time to find new jobs, careers, etc.

B. Structural unemployment is the result of changes in product demand and technology. 
Both the Rust Belt of the 1980's and New England's computer industry of the early 1990's are good examples.
C. Cyclical unemployment is the result of a decrease in total economic activity. 
An example is the recession of the early 1990's. Demand slowed for a number of 
reasons, not the least of which was the high structural unemployment of the period. 
Structural and cyclical unemployment began to feed on each other. As a result, the 
recession dragged on and the recovery was slower (weaker) than average recoveries.

6. Draw and label a graph depicting the business cycle. (see figure 21 graph page 2)