Microeconomics - Practice

Hope this helps me, and you!

What is inflation?

A general increase in prices and fall in the purchasing value of money

How do you calculate CPI?

(Cost of basket in current year / Cost of basket in base year) × 100

How do you calculate the inflation rate using CPI?

(CPI in current year - CPI in previous year) / CPI in previous year × 100

What does the unemployment rate measure?

The unemployment rate measures the percentage of the labor force that is unemployed and actively seeking employment.

Unemployment Rate Formula

(Number of unemployed / Labor force) × 100. The unemployment rate formula calculates the percentage of individuals in the labor force who are unemployed yet actively looking for work.

What is the difference between nominal and real GDP?

Nominal GDP reflects the current market value of goods and services produced in an economy, while real GDP accounts for inflation, providing a more accurate reflection of an economy's size over time by adjusting for price changes.

How do you calculate Real GDP?

(Nominal GDP / GDP Deflator) × 100

What does real GDP per capita measure?

The average economic output per person, adjusted for inflation.

What is the small country model assumption in trade?

The country is too small to affect world prices; it takes the world price as given.

What happens when the world price is lower than domestic price in a small country?

The country will import the good, as it is cheaper than domestic production.

Define specialization in trade.

When a country focuses on producing goods for which it has a comparative advantage.

What is a tariff?

A tax imposed on imported goods to raise their prices and protect domestic industries.

A basket of goods costs $200 in the base year and $250 in the current year.
→ What is the CPI in the current year?

The Consumer Price Index (CPI) is calculated by dividing the current cost of the basket by the cost in the base year, then multiplying by 100; thus, CPI = (250/200) x 100 = 125.

The labor force is 500, and 45 people are unemployed.
→ What is the unemployment rate?

The unemployment rate is calculated by dividing the number of unemployed individuals by the total labor force and multiplying by 100; thus, unemployment rate = (45/500) x 100 = 9%.

What does the CPI measure?

The cost of Living

A country has a Real GDP of $800 billion and a population of 40 million.
→ What is the real GDP per capita?

Real GDP per capita is calculated by dividing the Real GDP by the population; thus, real GDP per capita = $800 billion / 40 million = $20,000.

Real GDP per capita increases when

the Real GDP grows faster than the population.

Last year’s CPI was 130. This year it’s 143.
→ What’s the inflation rate?

The inflation rate is calculated by taking the difference between the current year's CPI and last year's CPI, dividing by last year's CPI, and multiplying by 100. In this case, inflation rate = ((143 - 130) / 130) * 100 = 10%.

If the CPI rises from 100 to 120, what has happened to the average price level?

The average price level has increased by 20%, indicating inflation.

In 2023, the CPI was 250. In 2024, it rose to 270. A worker’s nominal salary increased from $60,000 to $63,000 during that time.
→ Did the worker experience a real increase in purchasing power? Show your work.

To calculate the real salary, first find the inflation rate using the CPI: inflation rate = ((270 - 250) / 250) * 100 = 8%. Then, adjust the nominal salary for inflation to determine the real salary.

The CPI increased from 210 to 231 over one year. A consumer's nominal income rose from $55,000 to $59,000.
→ Which of the following is TRUE?

A. The consumer’s real income has increased significantly
B. Inflation was 10%, and real income stayed the same
C. Inflation was about 10%, and real income slightly increased
D. Real income decreased because the CPI rose more than income

Answer: C

CPI may overstate inflation because:

A. It includes luxury goods
B. It assumes consumers don’t switch to cheaper substitutes
C. It adjusts for quality improvements
D. It excludes taxes

Answer: B

The working-age population is 100 million. 65 million are employed, 5 million are unemployed, and the rest are out of the labor force.
→ Calculate: (a) the labor force, (b) the labor force participation rate, (c) the unemployment rate.

The labor force consists of the total number of employed and unemployed individuals within the working-age population, which is 70 million. The labor force participation rate is calculated as (70 million / 100 million) * 100 = 70%. The unemployment rate is determined by (5 million unemployed / 70 million labor force) * 100 = 7.14%.

The labor force participation rate can increase even if the unemployment rate increases. This occurs when:

A. Unemployed workers leave the labor force
B. Retired individuals begin working again
C. More people begin actively seeking work
D. Fewer jobs are created than workers lost

Answer: C

Nominal GDP in a country doubled over a 10-year period, but the GDP deflator also doubled. What happened to real GDP?

It doubled
B. It stayed the same
C. It decreased by half
D. It quadrupled

Answer: B

A country has a population of 50 million. 30 million are employed, 5 million are unemployed, and 5 million are not actively looking for work.
→ Calculate the unemployment rate and the labor force participation rate.

The unemployment rate is calculated as (5 million unemployed / 35 million labor force) * 100 = 14.29%. The labor force participation rate is (35 million / 50 million) * 100 = 70%.

Explain how structural unemployment differs from cyclical unemployment, and give a real-world example of each.

Structural unemployment occurs when there is a mismatch between the skills of the labor force and the needs of employers, often due to technological changes or shifts in the economy. For example, factory workers losing jobs due to automation represent structural unemployment, while cyclical unemployment arises from economic downturns, such as workers being laid off during a recession.

What does it mean if unemployment is above the natural rate and inflation is low?

A. The economy is at full employment
B. The economy is experiencing stagflation
C. The economy is below potential output
D. The labor market is overheating

Answer: C

An economist wants to adjust GDP for inflation and population. Which measure should they use?

A. Nominal GDP
B. Real GDP
C. GDP deflator
D. Real GDP per capita

Answer: D

Real GDP per capita fell, even though real GDP increased.
→ How is this possible? What might this indicate about the economy?

This situation can occur if the population grows at a faster rate than real GDP, leading to a decline in the average income per person. It may indicate that economic growth is not benefiting individuals equally, signaling potential issues such as increased inequality or a rise in living costs.