Econ 201 Ch 24 27, Chapter 23 - Unemployment and Inflation, Econ 201- Chapter 22, Econ 201-Chapter 21, Econ 201 Chapters 1-7, Econ 201 Chapter 8

as a percentage of GDP, federal purchases have increased since 1960

Are federal expenditures higher today than they were in 1960?

as a percentage of GDP, federal purchases have decreased since 1960

Are federal purchases higher today than they were in 1960?

Social Security, Medicare, and unemployment insurance.

Around half of federal expenditures are spent on transfer payments like _____, ____, and ____ ____.

Increase the most

Personal income tax

inflation rate

Price Index in year 2 - Price Index in year 1 / Price Index in year 1 x 100

Increase, decrease

Recession - unemployment Insurance payments ____ and Tax Revenues _____.

-Accept lower pay. possibly cut back hours. AND SRAS shifts RIGHT

Recession: What causes long run adjustment back to potential GDP?

Discretionary Fiscal Policy

Refers to intentional actions the government takes to change spending on taxes.

Decrease

SR In Supply shock RGDP will

Decrease (always shifts left)

SR In a recession AD will

Decreases

SR In a recession Price Level will

Decrease

SR In a recession real GDP will

Decrease and shift LEFT

SR In a supply shock SRAS will

Increase

SR In an expansion PL will

Increase

SR In an expansion RGDP will

Increase (always shifts right)

SR in an expansion

Increase

SR In a recession Unemployment will

Increase

SR In supply shock PL will

Increase

Social Security income payments to retirees will

Payroll taxes

Social insurance

Decrease

Social security taxes paid into the program will

1. Personal income taxes 2. Social insurance taxes 3. corporate income taxes 4. Indirect business taxes ( excise taxes)

Sources of tax revenue:

cyclical unemployment

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

nominal interest rate

the interest rate expressed in dollar terms

real interest rate

the nominal interest rate minus the rate of inflation

underemployed

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

unemployment rate

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

interest rate

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

disinflation

the process of bringing inflation down

menu cost

the real cost of changing a listed price

natural rate of unemployment

unemployment rate that arises from the effects of frictional plus structural unemployment - normal rate to which the actual unemployment rate fluctuates

structural unemployment

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

Automatic Stabilizers

upSome forms of government spending and taxes automatically increase or decrease along with the business cycle

efficiency wages

wages that employers set above the equilibrium wage rate as an incentive for their workers to perform better.

-Expected changes in future price level -Adjustments of workers and firms to errors in past expectations about price level -Unexpected increase in the price of an important natural resource

what causes SRAS to decrease and shift left?

job search

workers who spend time looking for employment

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

Supply Shock

An unexpected event that caused the short-run aggregate supply curve to shift.

factors that change the natural rate of unemployment

- changes in labor force statistics - changes in labor market institutions - changes in government policies

factors that change the rate of structural unemployment

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

Medicare

65 years old. 1.45% paid by employers. 1.45 paid by employees.

Social Security

65 years old. 6.2% paid by employers. 6.2 paid by employees.

Stagflation

A combination of inflation and recession, usually resulting from a supply shock.

Aggregate Demand Curve

A curve that shows the relationship between the price level and quantity of real GDP demanded by households, firms, and the government.

Long-run Aggregate Supply Curve

A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

AD Right

A decrease in interest rates will make the _____ curve shift _______________.

movement along

A decrease in the price level would cause a ________________ (shift to the right/movement along) the short - run aggregate supply curve.

Government consumption of goods and services

A smaller portion of federal expenditures is now spent on _______ and ____. (Mostly military spending)

Price level, quantity of real GDP demanded

An important point to remember is that the aggregate demand curve tells us that the relationship between the ____ and ______, holding everything else constant.

Decrease in Aggregate Demand

Ch. 24.3 work sheet What caused Recession?

Fiscal Policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. (State taxes and spending are NOT generally aimed for affecting national-level objectives.)

AD Right

Consumers become more optimistic and increase their consumption spending. This will make the _____ curve shift _______________.

AD Right

Decreases in the value of the dollar relative to foreign currencies will make the _____ curve shift _______________

Decrease, Increase

Expansions: unemployment Insurance payments ____ and Tax Revenues _____.

-Increasing taxes -Decreasing benefits (including slower benefit growth, perhaps differently for different income groups) -Decreasing eligibility (SSI age already increasing from 65 to 67) Finding a way to reduce medical costs.

How can Social Security and Medicare continue to exist? Most important element?

Decrease price falls

How does price level and real GDP change in the short run?

LRAS shift to right

If technological change occurs in the economy, on the long run aggregate supply curve we will see _______________ (LRAS shift to the right/LRAS shift to the left/move up the LRAS/move down the LRAS).

Not be affected

If the U.S. experiences 2% inflation the LRAS will ____________________ (shift left/shift right/not be affected).

Movement up along the curve.

If the price level increases/inflation occurs, there is a

SRAS Left

If there are expectations of an increase in the future price level, the __________ curve will shift ______________.

Increase

LR In an Expansion PL will

Increase

LR In a recession RGDP will

Increases and shifts right

LR In a recession SRAS will

Decrease

LR In an expansion RGDP will

Increase

LR In an expansion workers will ask for an ____ in wages.

Increase

LR In supply shock RGDP will

Increase and shift right

LR In supply shock SRAS will

Decrease

LR In supply shock workers accept a ____ in pay.

-Workers accept lower pay -Business operating costs decrease -Businesses hire more people

LR three things that happen in a recession

Decrease

LR In a recession PL will

Decrease

LR In supply shock PL will

Decrease and shift left

LR in an expansion SRAS will

One-seventh

Taxes on corporate profits constitute about ____ of federal receipts.

Movement up along

The U.S. economy experience 2% inflation. This causes a ___________________ (shift to the left of/movement up along) the Aggregate Demand curve.

AD Left

The federal government decreases government purchases. This will make the _____ curve shift _______________.

crime prevention and education

The rest of federal expenditures is spent on grants to state and local governments to support their activities, like ____ ____ and ____; and on paying interest on federal debt.

Upward

Three most common explanations as to why a short-run aggregate supply curve slopes ____ include

1. Contracts make some wages and prices "sticky" 2. Firms are often slow to adjust wages. 3. Menu costs make some prices sticky.

Three most common explanations as to why a short-run aggregate supply curve slopes upward include:

1. Increases in Labor Force and in the Capital Stock 2. Technological Change 3. Expected Changes in the Future Price Level 4. Adjustment of Workers and Firms to Errors in Past Expectations about the Price Level 5. Unexpected Changes in the Price of an Important Natural Resource

Variables that shift the short-run aggregate supply curve

-Decrease in govt spending -Rise in personal income or business taxes -Households become pessimistic -Firms become pessimistic -Imports increase and net exports decrease -A foreign country is growing slower than the US

What causes AD to decrease and shift left?

-Increase in govt spending -Decrease in personal income or business taxes -Households become optimistic -Firms become optimistic -Imports decrease and net exports increase -A foreign country is growing faster than the US

What causes AD to increase and shift right?

-Unexpected decrease in the price of an important natural resource -Increase in labor force or capital stock -Technological change (improvement)

What causes SRAS to increase and shift right?

Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments

What is the difference between federal purchases and federal expenditures?

Short-run Aggregate Supply Curve

a curve that shows the relationship in the short run between the PRICE LEVEL and the QUANTITY OF REAL GDP supplied by FIRMS

jobless recovery

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

unit-of-account costs

arise from the way inflation makes money a less reliable unit of measurement

25%

as a percentage of GDP, federal expenditures are now higher than ever- almost ___ of GDP

normal unemployment =

frictional unemployment + structural unemployment

real income

incomes divided by the price level

shoe-leather costs

increased costs of transactions caused by inflation

labor force participation rate

labor force/population age 16 and over x 100

actual unemployment

natural unemployment + cyclical unemployment

discouraged workers

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

unemployment rate =

number of unemployed workers / labor force x 100

labor force

the sum of employment and unemployment - of people currently working and people currently looking for work

What is moral hazard?

the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour

employment

the total number of people currently employed, either full time or part time; excludes retirement and disability

unemployment

the total number of people who are actively looking for work but aren't currently employed

real wage

the wage rate divided by the price level

frictional unemployment

unemployment due to the time workers spend in job search