1.1

Overview The 1930s were marked by periods of chronically high unemployment in the United States. After World War II, Congress passed the Employment Act of 1946, which stated that it was the policy and responsibility of the federal government to use all practical means to promote maximum employment, production and purchasing power. The Employment Act of 1946 established three important goals for the economy: 1. Full employment (also called the natural level of employment) exists when most individuals who are willing to work at the prevailing wages in the economy are employed and the average price level is stable. Even under conditions of full employment, there will be some temporary unemployment as workers change jobs and as new workers seek their first jobs (frictional unemployment). In addition, there will be some structural unemployment. Structural unemployment exists because there is a mismatch between the skills of the people seeking jobs and the skills required for available jobs. 2. Price stability exists when the average level of prices in the economy is neither increasing nor decreasing. The goal of price stability does not imply that prices of individual items should not change only that the average level of prices should not. A sustained rise in the average level of prices is called inflation; a sustained decline is called deflation. 3. Economic growth exists when the economy produces increasing amounts of goods and services over the long term. If the increase is greater than the increase in population, the amount of goods and services available per person will rise, and thus the nation's standard of living will improve. In 1978, Congress passed the Full Employment and Balanced Growth (Humphrey-Hawkins) Act establishing two additional goals: an unemployment rate of 4 percent with a zero-percent inflation rate.

ANSWER CHOICES:

a. average prices do not increase or decrease rapidly.

b. workers change jobs, new workers seek their first job, and some workers lack the necessary skills to acquire jobs.

c. an unemployment rate of 4% with zero- percent inflation rate.

d. to deal with higher unemployment rates in the United States.

e. the nation's standard of living will improve.

QUESTIONS:

1. Why did Congress pass the Employment Act of 1946?

2. Why will full employment never equal 100%?

3. What is the goal of price stability?

4. What happens when an economy increases its goods and services faster than the increase in population?

5. What two goals were added when Congress passes the Full Employment and Balanced Growth (Humphrey-Hawkins) Act?

1.2

Measuring Employment The civilian unemployment rate measures how well we are achieving the goal of full employment. The unemployment rate is derived from a national survey of about 60,000 households. Each month the federal government asks these households about the employment status of household members aged 16 and older (adult population). The survey puts each person in one of three categories: employed, unemployed or not in the labor force. People who are at work (the employed) plus those who are actively looking for work (the unemployed) make up the labor force. The labor force is much smaller than the total adult population because many individuals are too old to work, some people are unable to work and some choose not to work.

The unemployment rate (UR) is defined as UR = number of unemployed/labor force x 100 The labor force participation rate (LFPR) is defined as:

LFPR = number in labor force/adult population x 100

ANSWER CHOICES:

a. Yes

b. Those who are employed and those who are not seeking employment.

c. No

d. Those employed and those who are actively seeking employment.

QUESTIONS:

1. Which two groups of individuals are included in the labor force?

2. If an individual chooses not to work, will he/she still be included in the labor force?

1.3

Directions: Use the formulaprovided tocalculatethe unemployment rate for each decade. All of the population and labor-force data are in millions.

The Unemployment rate (UR) is defined as:

UR = number of unemployed/labor force x 100

Civilian Employment 1960 to 2000

Year	Population (16 and Over)	Labor Force	Employed	Unemployed	Unemployment Rate
1960	117	70	66	4
1970	137	83	79	4
1980	168	107	99	8
1990	188	124	117	7
2000	209	141	135	6

ANSWER CHOICES:

a. 7.48%

b. 4.26%

c. 5.65%

d. 4.82%

e. 5.7%

QUESTIONS:

1. Calculate the unemployment rate for 1960.

2. Calculate the unemployment rate for 1970

3. Calculate the unemployment rate for 1980

4. Calculate the unemployment rate for 1990

5. Calculate the unemployment rate for 2000.

1.4

Inflation is defined as a sustained increase in the average price level of goods and services produced in an economy. The fundamental cause of inflation is that the rate of growth of the money supply is greater than the rate of growth of goods and services. In a period of inflation, money loses value as goodsand services become more expensive. Unanticipated inflation can have serious negative consequences for individuals and for the countries experiencing it. People lose the value of their savings and cannot plan for the future. Since interest rates do not keep up with price increases, lenders lose and borrowers gain, causing wealth transfers and disrupting financial markets.

Question: During periods of high inflation:

a. People want to hold on to money.

b. Money gains value.

c, The government has printed too little money.

d. Money loses value.

1.5

Hyperinflation is defined as an exceptionally high rate of inflation. If the rate of inflation is 100 percent, prices double, meaning that what you could have bought for $100 a year ago would cost $200 today. Therefore, if the rate of inflation is 89 percent as it was in Estonia in 1993, Estonians would need $189 [or 189 kron] in 1993 to buy what $100 [or 100 kron] would have bought in 1992. If the inflation rate is 4,735 percent as it was in Ukraine in 1993, Ukrainians would need $4,835 [or 4,835 gryvnia] to buy what $100 [or 100 gryvnia] would have bought in 1992.

Question: A very high rate of inflation is called:

a. Stagflation.

b. Monoinflation.

c. Hyperinflation.

d. Disinflation.

1.6

ESTONIA (1993 INFLATION RATE : 89 PERCENT ) Since the end of 1980s and until 1992, inflation in Estonia was very high reaching 500 percent per year. Before that pensioners (retirees) were putting money aside for future funerals, as is our custom, but during the period of high inflation these savings were brought to zero. During the period of high inflation Estonians greatly increased the reserves of cheese, canned meats, linens, etc. Many didn't even pay attention to the sizes of clothing, and people were buying children clothes for many years in advance. They knew that it was better to buy now, because prices would be higher in the future. Those who had savings tried to exchange it into hard currency such as U.S. dollars or German marks, although our country had a shortage of it. These currencies were more stable and safer. There were many limitations on currency exchange operations. Only a few banks were exchanging rubles into hard currency, and these banks had very long lines. Those who had friends, relatives or other connections in these banks were able to protect themselves better from inflation. In 1992, Estonia implemented monetary reform targeted at fighting inflation. People could exchange 2,000 Soviet rubles for 200 Estonian krons. This took all money reserves other thankrons out of the economy.

QUESTION:

As the Soviet rubles continued to lose their value, Estonians who had money attemptedto exchange it for other forms of currency.

a. True

b. False

1.7

LITHUANIA (1993 INFLATION RATE : 390 PERCENT ) Inflation made many troubles for all Lithuanians, no matter rich or poor, and for my family as well. During Soviet times, my family was from the middle class with medium earnings. We had the opportunity to save some money. My mother thought about me and my future. She put some rubles in a savings account in our Saving Bank of the Lithuanian Republic every year from my birthday. It was an agreement that I should get 1,000 rubles on my wedding day. In the 1970s and 1980s, the sum of 1,000 rubles would be a very nice wedding gift from parents. However, I am 28 and I am not yet married. I will never get this gift, but not because I am not going to marry someone. I will not get the gift due to inflation. In terms of litas, the new Lithuanian currency, 1,000 rubles are worth nothing. Now, 10 years after Lithuania became independent from the Soviet Union, the government has started to compensate people for their lost savings, but the compensation is much less than the money lost. In another way my mother was able to benefit from inflation. In 1990 under the Soviet system, cars and one-room apartments were given the same price. When Lithuania became independent my mother foresaw that property like houses or apartments would be worth more than cars. So she sold our car, a new one but a Soviet model, and bought a one-room apartment. Now the price of the apartment is more than 1,000 percent higher and worth much more than a car. So now I do have my own valuable property and that is a result of inflation, and because of my very clever mother.

ANSWER CHOICES:

a. The value decreases.

b. The value increases.

QUESTIONS

1. What happens to the value (purchasing power) of money, saved over time, during periods of high inflation?

2. What happens to the value of an asset like a home during times of high inflation?

3. Even though the value of the home grew more than 1000% making it a better investment, what do you think also happened to the value of other items that people need.

1.8

Measuring Price Changes (Inflation or Deflation) Price indexes measure price changes in the economy. By using a price index, you can combine the prices of a number of goods and/or services and express in one number the average change for all the prices. The consumer price index, or CPI, is the measure of price changes that is probably most familiar to people. It measures changes in the prices of goods and services commonly bought by consumers. Items on which the average consumer spends a great deal of money such as food are given more weight (importance) in computing the index than items such as newspapers, magazines and books, on which the average consumer spends comparatively less. The index itself is based on a "market basket" of approximately 400 goods and services weighted according to how much the average consumer spent in the base year.

To construct any price index, economists select a previous period, usually one year, to serve as the base period. The prices of any subsequent period are expressed as a percentage of the base period. For convenience, the base period of almost all indexes is set at 100. For the consumer price index, the formula used to measure price change from the base period is;

Consumer price index = weighted cost of base-period items in current-yearprices /weighted cost of base-period items in base-year prices x 100

We multiply by 100 to express the index relative to the figure of 100 for the base period.

To keep things simple, let's say an average consumer in our economy buys only three items. First we will compute the cost of buying all the items in the base year (see below):

	Quantity Bought in Base Year	Unit Price in Base Year	Spending in Base year	Unit Price in Year 1	Spending in Year 1	Unit Price in Year 2	Spending in Year 2
Whole Pizza	30	$5.00	$150	$7.00	(30 x $7) = $210	$9.00	(30 x $9) =
Bags of Chips	40	$6.00	$240	$5.00	(40 x $5) = $200	$4.00	(40 x $4) =
Six-Pack of Soda	60	$1.50	$90	$2.00	(60 x $2) = $120	$2.50	(60 x $2.50) =
Total	---------------	---------------	$480	---------------		---------------

To compute the consumer price index for Year 1 in Figure 11.2, find the cost of buying these same items in Year 1. The consumer price index for Year 1 is then equal to (Total $ for Year 1 / $480) x 100, which equals "?".

Subtract the base year index of 100.0 from the consumer price index for year 1, we get the percentage change in prices from the base year.

Remember that the weights used for the consumer price index are determined by what consumers bought in the base year; in the example we used base-year quantities to figure the expenditures in Year 1 as well as in the base year. The rate of change in this index is determined by looking at the percentage change from one year to the next. If, for example, the consumer price index were 150 in one year and 165 the next, then the year-to-year percentage change is 10 percent. You can compute the change using this formula:

Price Change = Change in CPI / beginning CPI x 100

Price Change = Change in CPI / beginning CPI x 100

answer choices

a. 20.8%

b. $580 $530

c. 2.7%

d. 10.4%

e. 120.8 [(580/480) x 100]

f. 110.4

QUESTIONS:

1. What is the total cost of buying all the items for year 1?

2. What is the total cost of buying all the items in Year 2?

3. compute the consumer price index for Year 1

4.What is the percentage change in prices from the base year?

5. What is the CPI for Year 2?

6. What is the percentage increase in prices from the base year to Year 2?

7. In August 2000 the CPI was 172.8 (beginning CPI), and in August 2001 the CPI was 177.50. What was the percent change in prices for this 12-month period?