Question

1. Economists in Olliestan estimate the natural rate of unemployment is 7 percent. The table below lists unemployment rates from the Labour Force Survey for selected months.

Month	Structural	Seasonal	Frictional	Cyclical
March	3%	1%	2%	5%
April	3%	2%	3%	3%
May	3%	1%	1%	4%

2. During which months did Olliestan have a recessionary gap?

A) March, April and May

B) March and April, but not May

C) April and May, not March

D) Only March

E) Only May

When the price level falls by 20 percent, products that used to cost $600 now cost

A) $120.

3. Consumers in Student land buy Pizza and Pepsi — nothing else. Prices and quantities are shown in the table below.

Year	Slices of Pizza	Price per Slice	Cans of Pepsi	Price per Can
2015	40	10	10	20
2016	60	12	20	24

The annual rate of inflation between 2015 and 2016 was

A) 60 percent.

B) 40 percent.

C) 100 percent.

D) 67 percent.

E) 20 percent.

B) $580.

C) $300.

D) $500.

E) $480.

4. Compared to the inflation rate calculated using the Consumer Price Index (CPI), the core inflation rate

A) measures the prices of all products and services, not just those in the CPI basket.

B) allows quantities to change in the basket of products and services.

C) is always higher.

D) is always lower.

E) is none of the above.

Answer 1

1. Olliestan have a recessionary gap in “March, April and May”

Natural rate of unemployment is 7%, but the current unemployment rate excedds the Natural rate(structural + Frictional), thus all months have recessionary gap

2. When the price level falls by 20 percent, products that used to cost $600 now cost “480$” (600 * 80 / 100 =480 )

3. The annual rate of inflation between 2015 and 2016 was 100 Percent

Inflation rate = cost of basket of goods in 2016 / 2015 - 1 * 100

= 44/22 - 1 * 100 = 100 %

4. Answer is “None of the above”

The core inflation rate can be higher or lower in the economy as compared to CPI inflation rate. The core inflation data dosent include volatile items like oil and food, which are part of Inflation calculated with CPI.