■ Inflation is the general rise of the price level over a sustained period of time. The Consumer Price Index and the
GDP deflator measure inflation.
■ There are two types of inflation: cost-push and demand-pull. Cost-push is when the production costs of a supplier
increase, forcing the producer to raise its price. Demand-pull is when the overall demand in the economy surpasses
the productive capacity of the economy, forcing producers to raise their prices.
■ The Bureau of Economic Analysis calculates unemployment as all people 16 and over, not incarcerated, who are
willing and able to work but do not have a job.
■ There are three types of unemployment: frictional, structural, and cyclical. Between 4 percent and 5 percent of
the labor force can be unemployed and the country can still be considered at full employment.
■ Purchasing power is the value a consumer’s money holds after the rate of inflation has affected it.
■ The business cycle reflects the normal fluctuations of a market economy. The four phases of the business cycle
are expansion, peak, contraction, and trough.
Chapter Review Questions
- Which one of the following statements is true regarding GDP?
A. It measures the total value of all goods and services inside and outside of the economy.
B. It measures only the value of intermediate goods and services.
C. It is calculated with two different approaches.
D. It measures well-being and the underground economy.
E. None of the above.
- What does cyclical unemployment refer to?
A. People who don’t have jobs because of choice
B. Students who just graduated from college
C. Firms that hire workers and then fire them because of poor performance
D. The part of the labor force that is unemployed due to the expansion phase of the business cycle
E. None of the above
- Which of the following best describes cost-push inflation?
A. A rise in the price level as a result of too much demand
B. A rise in the price level as a result of high production costs
C. A rise in the price level as a result of too little demand
D. A rise in the price level because producers want to make a bigger profit
E. A fall in the price level as a result of production costs
- The Consumer Price Index could most closely be associated with which of the following?
A. A gauge of unemployment
B. A measure of well-being
C. A measure of GDP
D. A measure of the price level
E. A measure of taxation
- How is the GDP deflator used?
A. To calculate nominal GDP
B. To deflate the Consumer Price Index
C. To calculate real GDP
D. To calculate inflation
E. To calculate unemployment 43
National Income Accounting
