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Appendix: Think Like an Economist – Unemployment Policies<br />

In the U.S., most workers are “at-will” and can be dismissed immediately for any (or no) reason.<br />

What if U.S. policymakers determine that young workers (under the age of 26) are more likely to<br />

be fired than older workers? To change this pattern, the U.S. government passes a law making it<br />

more difficult and costly for employers to fire workers under the age of 26. Thinking like an<br />

economist, will this law reduce unemployment among young workers? Why or why not?<br />

Study Guide for Chapter 4<br />

Chapter Summary for Chapter 4<br />

Three macroeconomic goals that societies wish to achieve are price level stability, full<br />

employment, and economic growth.<br />

Inflation is an increase in the price level. The price level depends on the relationship between the<br />

quantity of money spent and the quantity of products purchased. If the quantity of money spent<br />

increases relative to the quantity of products purchased, the price level will increase.<br />

One measure of the price level is the consumer price index (CPI), which is based on the price of<br />

a market basket of goods. The consumer price index can be used to compute the rate of inflation.<br />

The rate of inflation is the percentage annual increase in the index. The consumer price index can<br />

be used to adjust nominal values to real values. To adjust a nominal value to a real value, the<br />

nominal value is divided by the nominal price index (the price index of the year of the nominal<br />

value) divided by the price index adjusted to.<br />

The goal for the unemployment rate is to achieve full employment (the natural unemployment<br />

rate). The natural unemployment rate is the lowest unemployment rate that can be sustained<br />

without causing increasing inflation.<br />

In measuring the unemployment rate, all persons 16 years and older are classified into one of<br />

three categories; employed, unemployed, or not in the labor force. The labor force is the sum of<br />

the number of people employed plus the number of people unemployed. The unemployment rate<br />

is the percentage of the labor force that is unemployed.<br />

Frictional unemployment is due to the time required to match workers with jobs. In structural<br />

unemployment, workers do not have the skills required in available jobs. The sum of frictional and<br />

structural unemployment is the natural unemployment rate. Cyclical unemployment is due to<br />

downturns in the business cycle.<br />

Technological advance is the ability to produce more output per resource. Technological advance<br />

destroys jobs. Individually, we want jobs and we don’t want our jobs to be destroyed. As a<br />

society, we want to destroy jobs, to free up labor to produce more goods and services. Job<br />

destruction makes economic growth possible.<br />

Questions for Chapter 4<br />

Fill-in-the-blanks:<br />

1. ______________________ is an increase in the price level.<br />

2. The price level in the economy depends on the relationship between the quantity of<br />

______________________ spent and the quantity of ______________________<br />

purchased.<br />

FOR REVIEW ONLY - NOT FOR DISTRIBUTION<br />

3. The ______________________ ______________________ is the sum of the number of<br />

people employed plus the number unemployed.<br />

4 - 11 Inflation and Unemployment

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