04 Jun Question (110 points total) Instructions: Please show all work or points will be
Question
(110 points total)
Instructions: Please show all work or points will be taken off. Good luck!
1. (25 points – 5 points each part)
a. On the Colbert Report, March 17, 2008, Stephen Colbert makes fun of the fact
that the unemployment rate fell even though less people are working (feel free to
Google it). Using the formula for the unemployment rate, show how this, the
idea that the unemployment rate can fall even though less people are employed,
is not as unusual as one may think. Be specific as to what happens, exactly, to the
numerator and the denominator of the unemployment rate expression.
We are now going to use real economic data to confirm that this phenomenon,
the fact that the unemployment rate can fall along with the employed did occur
just as Stephen Colbert said. Stephen was referring to the one month change in
the unemployment rate between January and February 2008.
b. Go to FRED and using the series UNRATE, confirm that the unemployment rate
did fall between these two months (simply report the statistics from FRED)
c. Using FRED again, search for NPPTTL (these are payrolls – the number of
people working) and confirm that payrolls did decline between these two months.
d. Finally, using FRED once again, search for UNEMPLOY (the number of people
unemployed) and confirm that your reasoning in part a) above was correct.
e. Suppose you are talking with someone, call her Mary, shortly after this
particular report came out. Mary was trying to convince you that this report,
showing that the unemployment fell between January and February 2008, clearly
indicates that labor market conditions are getting better. Given that you know the
facts, give Mary two specific reasons that suggest that labor market conditions
are getting worse rather than better.
2. (20 points total, 5 points each part) The table below shows the hypothetical basket(s) of
consumption goods for a ‘typical’ Penn State college student for 2012 and 2013. Answer
the following questions using the information in the table.
2012 Basket for typical PSU college student
2013 Basket for typical PSU college student
Item
Price
Quantity
Item
Price
Quantity
Textbooks
$80
6
Textbooks
$90
6
Rent
$700
1
Rent
$800
1
PSU sporting
events
$15
6
PSU sporting
events
$20
3
Dinners in
State College
$25
6
Dinners in
State College
$25
8
a. Calculate the rate of inflation between 2012 and 2013 assuming 2012 is the base
year. Please show all work. Note, calculate the rate of inflation using price indexes.
b. Now update the base year to 2013 and recalculate the rate of inflation between 2012
and 2013. Again, show all work! Calculate the rate of inflation using price indexes.
c. Which rate of inflation accounts for the substitution bias? In your answer, identify
and explain why, using relative prices, the substitution that this PSU college student
rationally made.
d. Calculate the Chain Weighted rate of inflation (again, show all work).
3. (10 points) Discuss the problems associated with using the unemployment rate as a gauge
of labor market conditions. In your answer, make sure you mention how underemployment,
discouraged workers, and working under the table play a role in terms distorting the signal
that we would want the unemployment rate and changes in the unemployment rate to send
in terms of labor market conditions.
4. (5 points) Go to FRED and search for UNRATE (the unemployment rate) and NROUST
(NAIRU) and using the most recent available data, compare the two. How much and in
what direction would the actual unemployment rate have to change to get us to full
employment = NAIRU? Note that NROUST is quarterly data so simply use the quarter that
includes the month of the most recent UNRATE statistic.
5. (25 points total) In this problem we are going to calculate real interest rates, both ex-post
and ex-ante. The data you need for this problem are given in the links below:
2
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