Chapter 8

Shoe-leather costs

the increased costs of transactions caused by inflation.

Nominal interest rate

the interest rate expressed in dollar terms

Why do we need estimates of the natural rate of unemployment?

to make forecasts and to conduct policy analyses.

Name that unemployment: Phil is currently unemployed because the tire factory where he used to work installed robots, which replaced 500 laborers, including Phil.

Structural unemployment = because it happens when there are changes to the labor market and installing robots will change the the labor market

Name that unemployment: Mary is unemployed because she lost her job at McDonald's after the state increased the minimum wage.

Structural= changing minimum wage is structural

Measuring the labor force participation rate

The % of the adult (16+) non-institutionalized civilian population who are working or actively looking for work.

The official unemployment rate reported by the government may tend to understate the amount of unemployment because it:

excludes discouraged workers

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

frictional

Types of unemployment

frictional structural cyclical

Natural unemployment equation

frictional +structural

Natural unemployment

frictional unemployment and structural unemployment (because they are always present)

union

an association of workers that bargains collectively with employers over wages, benefits, and working conditions

To be counted as unemployed, one must:

be out of work and be actively looking for a job during the past four weeks

Real Income

is income divided by the price level

Real Wage

is the wage rate divided by the price level

causes for structural unemployment

labor unions efficiency wages side effects of government policies mismatches between employees and employers

It's crucial to distinguish between the _______ and the _______.

levels of prices; inflation rate

If inflation is different from predictions, some will _____ and some will ____.

lose; benefit

Since cash _______ its value quickly during ________, people waste more time running around to spend it as fast as they can.

loses; high inflation

reasons for cyclical unemployment (2)

lower growth is usually correlated with higher unemployment for two reasons 1. When GDP falls, firms lay off workers. 2. Idle labor and capital -> economic growth not being maximized -> decreasing ability of the economy to create more jobs

structural unemployment

more people are seeking jobs in a particular labor market then there are jobs available at the current wage rate, even then the economy is at the peak of the business cycle

Actual unemployment

natural unemployment + cyclical unemployment

Generally there is a ______ relationship between economic growth and the unemployment rate.

negative

Why is some unemployment natural?

new entrants, people switching jobs

times of high unemployment are especially hard on who?

new graduates

discouraged workers

nonworking people who have given up looking for work for the time being NOT CONSIDERED UNEMPLOYED

You are a college student and not working or looking for work. You are:

not part of the labor force.

The labor force is the total

number of people who are employed or unemployed

underemployed workers

people who work part time because they cannot find full-time jobs

The inflation rate is the:

percentage change in the price level from one year to the next

Interest Rate

the price (calculated as a percentage of the amount borrowed) that a lender charges for the use of his or her savings for one year

Menu Cost

the real cost of changing a listed price

marginally attached workers

those who were available and actively looked for work recently but not currently looking (in the past 12 months but NOT in the past 4 weeks)

cyclical unemployment

unemployment correlated with the business cycle- the deviation from the natural rate

frictional unemployment

unemployment due to the time workers spend in the job search (matching people to jobs takes time

During a recession:

unemployment increases and the growth rate of real GDP decreases

efficiency wages

wages that employers set above the equilibrium rate as an incentive for better employee performance

Labor force (definition)

all workers, employed or unemployed

A drop in the inflation rate is called:

disinflation

Unemployment rate (%) (equation)

( #unemployed / (#unemployed + #employed)) X100 or ( #unemployed / Labor Force) X 100

Labor Force Participation Rate (equation)

( (#unemployed + #employed) / Adult Population ) X 100

If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment then its unemployment rate is:

( 15 / 150 ) X 100 = 10%

Inflation Rate Equation

((Price level in year 2 - Price level in year 1) / (Price level in year 1)) X 100

What causes changes in the natural rate of unemployment?

-changes in characteristics of the labor force (changing demographics) -changes in labor market institutions (unions, temp agencies, and new technology) -changes in government policies (job training programs)

Why is the unemployment rate not a perfect measure of the labor market?

-fails to measure quality of jobs -doesn't look at how good of a match a job is

What else do economists look at besides the unemployment rate?

-labor force participation -average wages -number of full-time jobs

In February 2012, the Bureau of Labor Statistics calculated the unemployment rate to be 8.3%. If frictional unemployment was 2% and structural unemployment was 3.2%, then cyclical unemployment was:

3.1% 3.2% + 2% = 5.2% 8.3% - 5.2% = 3.1%

If the actual unemployment rate is 7% and the cyclical unemployment rate is 2% then the natural rate of unemployment is?

7% - 2% = 5%

Suppose banks are issuing personal loans at 9%. If expected inflation is 3%, then the nominal interest rate is ______ and the real interest rate is _______.

9%; 6%

Unemployment rates are usually highest for?

African American teenagers

Name that unemployment: Barry is unemployed because he was laid off by the automobile factory when the economy entered a severe prolonged recession.

Cyclical = because of the time in the business cycle was a recession

Name that unemployment: Jessica is unemployed because she is in the process of reentering the labor force after taking time off to have a baby.

Frictional = because she is searching for a job after being out of the labor market for a while

Name that Unemployment: Sandy left her former job at an accounting firm a month ago. She is in the process of interviewing for a similar position at six different accounting firms, although she has not accepted a job yet.

Frictional = because she is searching for the "match" frictional accounts the time it takes to match employers and employees

Measuring Unemployment

The unemployment rate is the % of the labor force without a job

What do Economists mean by the natural rate of unemployment?

Unemployment that is always present

Can actual unemployment be higher then the natural rate? If it can, what does it mean if actual unemployment is higher than the natural rate?

Yes It means that cyclical unemployment is present.

Donna was laid off at the beginning of 2011. She looked for a job for three months but could not find anything suitable. She then decided to volunteer for a soup kitchen and stopped looking for a job. Donna is considered to be:

a discouraged worker

jobless recovery

a period in which the real GDP growth rate is positive but the unemployment rate is still rising

Unit-of-account costs

costs arising from the way inflation makes money a lass reliable unit of measurement

The _________ the recession, the ________ discouraged workers there are.

deeper; more

As unemployment goes _________, growth goes _______>

down; up

All of the following are costs of inflation except ________ costs. menu shoe-leather unit-of-account efficiency wages

efficiency wages

Inflation does not make everyone _______ because ________ often ______ with prices.

poorer; incomes; rises

Unemployment that results when more people are seeking jobs then there are jobs available is __________ unemployment.

structural

Real Interest Rate

the nominal interest rate minus the rate of inflation

Unemployment rate (definition)

the percent of the total number of people in the labor force who are unemployed

labor force participation rate (definition)

the percentage of adults (people 16 and over) in the labor force