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Key Terms and Problems
2.3
Inflation Rates and Interest Rates
Explain how the inflation rate is measured, and distinguish between real and nominal
interest rates.
Review Questions
3.1
What biases in the way the CPI is calculated may
cause it to overstate the actual inflation rate?
3.2
How is the CPI inflation calculated? What is the
difference between the CPI and the GDP deflator?
3.3
If the actual inflation rate is greater than the
expected inflation rate, do borrowers gain or lose?
Briefly explain.
3.5
Suppose that a virus wipes out half the apple crop,
causing the quantity produced to go down and the
price to increase. Other fruits can be substituted
for apples in many cases, so some consumers will
switch to other items. What would be the effect of
this on the CPI? On the core inflation?
3.6
During the 2008–2009 recession and financial crisis, nominal interest rates fell to nearly 0%, while
the rate of inflation remained positive.
a. What happened to the real interest rate?
Problems and Applications
3.4
2.4
b. How would this movement in the real interest
rate affect savers and borrowers?
Explain the major difference between the CPI and
the core inflation. Why does the Bank of Canada
prefer to use the core inflation to measure the
inflation rate?
c. If nominal interest rates were negative, what
would happen if you put money in a savings
account at a bank?
Measuring Employment and Unemployment
Understand how to calculate the unemployment rate.
Review Questions
4.1
How is the unemployment rate calculated?
4.2
What do economists mean by discouraged workers? Explain the effect discouraged workers have
on the measured unemployment rate and the
degree of joblessness in the economy. Why might
the unemployment rate understate the extent of
unemployment?
f. Christina just graduated from college and is
applying for jobs.
4.4
b. If workers have stopped seeking jobs, how does
the Statistics Canada count those workers?
For each of the following, state whether the individual is included or not included in the labour force
and, if included, whether that person is counted as
employed or unemployed.
c. Use this information to explain why, when
the economy begins to recover from a recession, the unemployment rate may initially
increase.
a. Soma is employed as a chef at a restaurant in
Timmins.
b. Randy is working part time but is looking for a
full-time job.
c. Bruce would like a job but has stopped looking.
During recessions, industries such as construction
often cut back on employees. The newly unemployed workers may seek jobs for a while and
then become discouraged if they do not find new
jobs.
a. If workers are seeking jobs, how does the Statistics Canada count those workers?
Problems and Applications
4.3
65
4.5
Suppose that all workers in the economy are currently working 40 hours a week.
d. Jessie won the lottery and quit her job. She is not
seeking a new job.
a. If all employers cut worker hours so that each
employee is working 20 hours a week, what
would happen to the unemployment rate?
e. José is in college.
b. What would happen to real GDP?
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