TEST YOURSELF

2.   If output has not kept pace with the increase in hours worked productivity has decreased. In this example productivity has decreased by approximately 9% (35%/40% = 8.8%).

DISCUSSION QUESTIONS

4.   “Full employment” certainly implies some unemployment, that is to say, frictional unemployment, and it is difficult to determine just how much that is. In addition, many economists are willing to concede that some level of structural unemployment can remain at “full employment,” since the attempt to eliminate it would entail more inflation than the country should tolerate. The experience of the mid 1990’s indicates that a realistic goal may be an unemployment rate in the neighborhood of 5 to 5.5 percent.

5.   (a)  Inflation robs only those whose incomes rise slower than prices, while it actually helps those whose incomes rise faster. Average wage increases usually keep pace fairly closely with inflation.

       (b)  Working people often cannot buy many of the things they were hoping to buy, but inflation does not make this problem more difficult unless wages rise more slowly than prices.

        (c)  Neither economic theory nor historical experience confirms the view that creeping inflation necessarily accelerates to hyperinflation. There can be many different causes of creeping inflation, but the only plausible cause of hyperinflation is a rapid increase in the money supply.

CHAPTER 6 APPENDIX

 2.

a)

 b), c)

4.

            CPI   = (Cost of budget in 2013/Cost of budget in 1983) x 100

                     = (909/300) x 100 = 303

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