Exam Questions

Topics: Unemployment, Inflation, Economics Pages: 2 (540 words) Published: April 22, 2013
Exam Essays

Why is there unemployment even when the economy is at “full employment”?
Full employment is when the natural employment rate equals the unemployment rate which means there is unemployment occurring even at full employment. There is always going to be natural unemployment due to the fluctuations of the economy and the innovations in technology or cheaper labor elsewhere.

So you imagine that if you have full employment then there is economic growth happening in an economy and there is no recession, which means there is no cyclical unemployment. With that happening you probably have frictional unemployment which is when you have people quitting their jobs to find better ones, but the firms won’t choose the first person who decides to apply and the workers won’t settle for the first job either. The other way is due to structural unemployment which happens from innovations in technology which requires a different skill set and outsourcing of jobs because of cheaper labor.

This is why there is unemployment at full employment because of frictional and structural unemployment but this only can happen if we have no cyclical unemployment.

Is the CPI a perfect measure of the cost of living?
In my opinion, the CPI isn’t the perfect measure of the cost of living because there are many factors that it doesn’t put into consideration. There are four biases that the CPI contains, which are the new goods bias, Quality Change Bias, commodity substitution bias, and the outlet substitution bias. These biases are very consequential in a measure of the cost of living.

So the new goods bias is when a new good such as a lab top or computer replaces an old good like a typewriter, and we can’t compare these goods because we didn’t have the same baskets from either time period. This bias puts an upward bias into the measure of the inflation rate and the bias goes upwards. With the Quality Change Bias you items such as car getting better brakes, engines etc....
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