Chapter 26 Homework
name_________________________
26-2 (Key Question) Assume the following data for a country: total population, 500; population under
16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time
workers looking for full-time jobs, 10. What is the size of the labor force? What is the official
unemployment rate?
Labor force = 230 (= 500 – [120 + 150])
Official unemployment rate = 10 percent (= [23 / 230] X 100)
26-3 (Key Question) Suppose that the natural rate of unemployment in a particular year is 5 percent
and the actual rate of unemployment is 9 percent. Use Okun’s law to determine the size of the
GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much
output is being forgone because of cyclical unemployment?
GDP gap = 8 percent (= [9 – 5] X 2)
Forgone output = $40 billion (= .08 X $500 billion)
26-4 (Key Question) If the CPI was 110 last year and is 121 this year, what is this year’s rate of
inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this
year’s rate of inflation? What term do economists use to describe this second outcome?
This year’s rate of inflation is 10 percent (= {[121 – 110] / 110} X 100).
The rate of inflation would be -1.8 percent (= {[108 – 110] / 110} X 100). This is deflation.
26-5 How long would it take for the price level to double if inflation persisted at (a) 2 percent per
year, (b) 5 percent per year, and (c) 10 percent per year?
(a) 35 years (= 70 / 2)
(b) 14 years (= 70 / 5)
(c) 7 years (= 70 / 10)
26-6 If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year,
by what percentage would your real income (approximately) increase? If your nominal income
rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been
the (approximate) rate of inflation?
Real income would increase by 1.5 percent (= 5.3 percent – 3.8 percent).
The rate of inflation must have been 1.7 percent (= 2.8 percent – 1.1 percent).
26-7 Suppose that the nominal interest rate is 4 percent and the inflation premium is 2 percent. What
is the real interest rate? Alternatively, assume that the real interest rate is 1 percent and the
nominal interest rate is 6 percent. What is the inflation premium?
The real interest rate is 2 percent (= 4 percent – 2 percent).
The inflation premium is 5 percent (= 6 percent – 1 percent).