Econ Test 4

Frictional Unemployment

is unemployment due to the time workers spend in job search.

Expansionary Fiscal Policy:

Expansionary fiscal policy is fiscal policy that increases aggregate demand. Expansionary fiscal policy is implemented by: an increase in government spending a cut in taxes an increase in government transfers

Actual Unemployment

Natural unemployment + Cyclical unemployment

Unemployment Rate =

Number of unemployed workers/ Labor Force x 100.

Inflation Rate =

Price index in yr 2 - Price index in yr 1/ Price index in year 1 x 100.

Real Income

Real income is income divided by the price level

Shoe Leather Costs:

Shoe-leather costs are the increased costs of transactions caused by inflation.

Last month Brent lost his job at the auto parts factory because his factory, like many others, relocated to Asia. Brent has been looking for similar factory jobs in his town but has found no openings. Brent is best classified as:

Structurally Unemployed

Labor force percentage rate =

Labor Force/ Population age 16 and older x 100.

Lump Sum Taxes

Lump-sum taxes are taxes that do not depend on the taxpayers income.

Unit -of-account costs:

Unit-of-Account costs of inflation are costs arising from the way inflation makes money a less reliable unit of measurement.

Structural Unemployment:

When the government sets a minimum wage, WF, that exceeds the market equilibrium wage rate, WE, the number of workers, QS, who would like to work at that minimum wage is greater than the number of workers, QD, demanded at that wage rate. This surplus of labor is considered structural unemployment. Mismatches between employees and employers in skill or another area can cause structural unemployment.

Labor Unions

can have an effect similar to minimum wage. By bargaining for all the firm's workers collectively (collective bargaining), unions can often win higher wages than otherwise provided with individual bargaining.

Social insurance programs are:

government programs intended to protect families against economic hardships.

Discouraged Workers

are nonworking people who are capable of working but have given up looking for a job given the state of the job market.

Efficiency Wages

are wages above the equilibrium wage rate as an incentive for better performance.

Cyclical Unemployment

is a deviation in the actual rate of unemployment from the natural rate due to downturns in the business cycle.

Natural Rate of Unemployment

is the normal unemployment rate around which the actual unemployment rate fluctuates.

Underemployment

is the number of people who work part time because they cannot find full-time jobs.

Fiscal Policy

is the use government spending and taxes to simulate aggregate demand.

Structural Unemployment

is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.

The rate of unemployment is found by dividing the:

number of people looking for work by the number of people looking for work plus the number of people who are employed.

The labor force is:

the total of the employed and the unemployed.

Marginally attached workers

would like to be employed and have looked for a job in the recent past but are not currently looking for work.

If the marginal propensity to consume is 0.8 and government spending decreases by $50 million, then equilibrium GDP will decrease by:

$250 million. Multiplier = 1/(1-‐MPC) <=> 1/(1-‐0.8)=5. Similar to the problem above, since the multiplier is equal to 5 and the spending decreases by $50 million then this will lead to a total decrease of 250 million in the equilibrium GDP (=-‐50x5=-‐250 million).

A minimum wage of $7.25 per hour might cause structural unemployment if the equilibrium wage in that labor market is:

$6.85. Structural unemployment is caused only when the minimum wage (or price floor) is binding and this happens when the minimum wage is above the equilibrium wage. Thus, in this particular case, the only situation in which the equilibrium wage is below the minimum wage is in option (c).

If the rate of unemployment is 10% and the labor force is 130 million, the number of unemployed workers is:

13 million. Unemployment Rate = [Number of Unemployed/Labor Force]x100% => Number of Unemployed = [Unemployment Rate/100%]xLabor Force = [10/100]x130,000,000 = 13 million.

A survey reveals that on a small island 1,000 people have jobs, 200 people are looking for jobs, and 200 people are neither working nor looking for work. The unemployment rate on the island is:

16.7%. Unemployment Rate = [Number of Unemployed/Labor Force]x100% Unemployment Rate = [200/(200+1000)]x100%=16.67%

If a country has a working-‐age population of 200 million, 120 million people with jobs, and 30 million people unemployed and seeking employment, then its unemployment rate is:

20%. Unemployment Rate = [Number of Unemployed/Labor Force]x100% Unemployment Rate = [30,000,000/(30,000,000+120,000,000)]x100%=20%

Autonomous Change:

An autonomous change in aggregate spending is an initial change in the desired level of spending by firms, households, or government at a given level of real GDP

Jim has a part-‐time job and would prefer to have full-‐time work but has been unable to find it. Jim is classified as:

An underemployed worker

Automatic Stabilizers

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands. .

Contractionary Fiscal Policy:

Contractionary fiscal policy is fiscal policy that reduces aggregate demand. Contractionary fiscal policy is implemented by: Reduction in government spending Increase in taxes Reduction in government transfers

Disinflation

Disinflation is the process of bringing the inflation rate down, which is difficult and costly.

Natural Unemployment

Frictional unemployment + Structural unemployment

A recent college graduate with a major in economics attends a job fair but has not yet found a job. This graduate is counted as:

Frictionally Unemployed

Where T is the value of tax revenues and G is government purchases of goods and services, in the basic equation of national income accounting, the government directly controls _____ and influences ______.

G;C and I

Implicite Liabilities

Implicit liabilities are spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics

Discretionary Fiscal Policy:

In contrast, discretionary fiscal policy is fiscal policy that is the result of deliberate actions by policy makers rather than rules.

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Increase government spending by $20 billion. Multiplier = 1/(1-‐MPC) <=> 1/(1-‐0.8)=5. Thus to cover the gap of $100 billion given a multiplier of 5 the government would have to increase spending by 20 billion (20x5=100 billion, which will cover the recessionary gap).

Generous unemployment benefits are likely to:

Increase the unemployment rate

Interest Rate

The interest rate on a loan is the price, calculated as a percentage of the amount borrowed, that a lender charges a borrower for the use of their savings for one year.

Which of the following statements is true?

The labor force is the total number of people working plus those who are unemployed.

What is the labor force participation rate?

The labor force participation rate is the percentage of the population aged 16 or older that is in the labor force.

Menu Costs

The menu cost is the real cost of changing a listed price

Multiplier:

The multiplier is the ratio of the total change of real GDP caused by an autonomous change in aggregate spending to the size of the autonomous change.

Nominal Interest Rate:

The nominal interest rate is the interest rate expressed in dollar terms.

Real Interest Rate:

The real interest rate is the nominal interest rate minus the rate of inflation.

Real Wage

The real wage is the wage rate divided by the price level.

The significance of the unemployment rate.

The unemployment rate can overstate the true level of unemployment because it will never be zero. The unemployment rate can understate the true level of unemployment because people who have given up looking for a job are not counted.

A person without a job who is actively seeking and available for work is considered:

Unemployed

Which of the following statements is false?

Unemployment always falls during economic expansions.

Which of the following lending agreements represents the highest rate of return for a bank?

a fixed interest rate of 8% with 1% inflation.

Which of the following is not an example of government purchases of goods and services?

a surgeon's bill reimbursed under the Medicare program

Changes in the natural rate of unemployment can be caused by:

changes in labor force characteristics changes in labor market institutions changes in government policies

If the current level of real GDP lies above potential GDP, then an appropriate fiscal policy would be to _____, which will shift the aggregate demand curve to the _____.

decrease government purchases; left.

Internet employment agencies have simplified the job search for the applicants. They have also led to a(n):

decrease in frictional unemployment.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes

The largest source of federal tax revenues is:

personal income taxes

Social Insurance

programs are government programs intended to protect families against economic hardship.

Government Policies

public policies designed to help workers who lose their jobs, often have structural unemployment as an unintended side effect.

Cyclical unemployment is characterized as:

the deviation in the actual rate of unemployment away from the natural rate.