Unemployment and Consumer Price Index

Unemployment and Consumer Price Index

Topic 1

What are the different types of unemployment and how are they related to the condition of the economy during a given period? Is it possible for the number of employed workers to increase while the unemployment rate rises? Explain

Unemployment is explained as the situation in which individuals are actively searching for jobs but could not one. However, the following are types of unemployment. First, we have frictional unemployment, and it occurs in circumstances when workers try to move from one job to another since it takes them time to find a new job that fits them. Such type of unemployment only lasts for a short period (Mankiw, 2014). Second, we have occupational or structural unemployment. It occurs when a country’s labor market is not in a position to provide jobs to every individual who is searching for employment. Therefore, the mismatch between the skills required in the market and that of the unemployed workers contribute to this type of unemployment.

The third type is cyclical unemployment. It occurs when the economy experiences a fall in aggregate demand. In such a case, the firms will respond by lowering their demand for labor since less production of goods is required. Similarly, for this type of unemployment, the number of jobs available is less than the number of unemployed workers (Mankiw, 2014). Fourth, we have geographical unemployment. It is caused by the inability of workers to move freely from one geographical area to another. The rate of owner-occupation and obstacles to free movement contribute to geographical immobility of labor. Lastly, causal employment is as a result of individuals who have the ability to work but they do not wish to do so. Such people have enough cash hence they do not find the need to work.

Does an Increase in the Minimum Wage Rate result in a Higher Unemployment Rate? What is your opinion on the relationship between unemployment benefits and labor market participation of the unemployed people?

No, it is not possible. The number of currently employed workers is inversely proportional to the employment rate. Therefore, an increase in the number of employed workers should lead to a decrease in the employment rate.

An increase in the minimum wage rate increases the unemployment rate. An increase in the minimum wage will increase the income of the employees, and most individuals will rise above the poverty line. However, since small businesses are not able to cope with the increase minimum wage, therefore, they will reduce hiring and promotion of employees causing an increase in unemployment rate.

Unemployment benefit relates to the labor market participation of the unemployed people in the following way. Unemployment benefits encompass the social welfare payments that unemployed people receive from the state or any other authorized body. However, these benefits are on the conditions that the unemployed individuals in the labor market should actively be participating in searching for jobs and also, they should not have the job currently.

Topic 2

How do we use consumer price index (CPI) to measure the cost of living? What is the relationship between CPI and the rate of inflation?

The Bureau of Labor Statistics (BLS) gathers data each month on the prices of goods and services. The BLS will make adjustments for changes in the package sizes and quality and post the results as a weighted average. Therefore, if the consumption pattern of a person is close to the average, the change in consumer price index will depict how harder or easier it is to maintain a standard of living on a given nominal income.

The CPI is also used to measure inflation and provide information about price changes. The government, business people, and citizens can use the information to make economic decisions. In situations when the value of the CPI goes up, the value of the dollar will automatically go down.

What is the importance of measuring price fluctuations? How does the change in average price help explain the difference between nominal and real interest rates?

Measuring price fluctuations using CPI provide information on the average changes in the prices of goods and services purchased by households in the nation. Therefore, when we use the household’s consumption at a given time as a reference period, the CPI portrays changes in the expenditure required to buy the equivalent goods and services purchased by the household using the given reference period.

Changes in price level cause inflation, and this can explain the difference between the real and nominal rate of interests in the following way. The real rate of interest refers to the rate that does not take into account the rate of inflation. Therefore, it is affected by the changes in the price level. On the other hand, the nominal rate of interest takes into account the rate of inflation. Precisely, it depicts actual numbers before adjusting for changes in the price level.

Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics. Cengage Learning.

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