ECON2105 Midterm 3

Working-age population

noninstitutionalized civilians age 16+

employed

people with jobs

unemployed

people without jobs who are actively looking for a job

business cycle

short term fluctuations in economic activity. reflects the tendency for actual output to deviate from potential output. this deviation is measured using the output gap

output gap

the difference between actual and potential output

inflation

a generalized rise in the overall level of prices. inflation can also be described as a rise in the cost of living. as a result, inflation is also a decline in the purchasing power of money

peak

a high point in economic activity

trough

a low point in economic activity

recession

a period of declining economic activity

expansion

a period of increasing economic activity

real variable

a variable that has been adjusted to account for inflation

actual output

measured as a percentage of potential output

nominal variable:

a variable measured in dollars (whose values may fluctuate over time)

an involuntarily part time worker is one who: a) is marginally attached to the labor force b) has taken a part time job in order to go to school full time c) works full time but wants to find a part time job d) works part time but wants to find a full time job

d) works part time but wants to find a full time job

annualized rate

data converted to the rate that would occur if the same growth rate had occurred throughout the year

seasonally adjusted

data tripped of predictable seasonal patterns

if the frictional rate of unemployment is 1.4%, the structural rate of unemployment is 2.3%, and the total unemployment rate is 6%, then we can conclude that the cyclical unemployment rate is ____ percent (round to the nearest 10th of a percent):

2.3

suppose a labor market is described by the demand equation, Qd =200 - 3w, and the supply equation, Qs=-300 +7w, where Qd is the quantity demanded of labor in millions, Qs is the quantity supplied of labor in millions, and w is the wage in dollars. if the government institutes a minimum wage of $45, how many workers will be willing to work in this market (in millions)?

50 -step 1: equilibrium: Qd=Qs=>w*=$50,Q*=50 -step 2: minimum wage ($45)<w*$50=> no effect -step 3: wage will still be $50 and Qs=-300+7*50=50=Q*

Not in the labor force

Neither employed nor unemployed

supposed the supply equation is Qs = 300 +7w, where Qs is the quantity supplied of labor (in million), and w is the wage (in dollars). how many workers (in millions) will be willing to work at a wage of $45?

Qs($45)=-300+7*45= 15

if the frictional rate of unemployment is 1.45%, the structural rate of unemployment is 2.3%, and the total unemployment rate is 6%, then we can conclude that the: a) economy is experiencing an economic downturn b) labor force participation rate has fallen significantly c) economic growth rate has decreased by 2.25% D) equilibrium rate of unemployment is 2.25%

a) economy is experiencing an economic downturn

Labor Force

Working-age population that either has a job or would like a job

Consumer Price Index (CPI)

an index that tracks average price consumers pay over time for a representative "basket" of goods and services

money

any asset regularly used in transactions - medium of exchange - unit of account - store of value

In December of 2018, West Virginia reported a civilian labor force of 784,574 people. The number of employed people was 744,178. What was the unemployment rate?

E+UE=LF (744,178+UE=784,574) UE=40,336 UER+UE/LF (UER=40,336/784,574)x100 UER=5.1%

In order to be considered employed, a person must: (I) be part of the working-age population (II) be actively looking for work (III) not have been self employed (IV) must be non institutionalized

(I),(II),(IV)

output gap

(actual output - potential output)/ potential output x 100

inflation rate calculator

(price level this year - price level last year)/ price level last year x 100

costs of unemployment

- lower wages and worse career opportunities - permanent joblessness can arise from periods of high unemployment - lower tax revenue and higher government spending -unemployment is isolating and painful - long-term unemployment is associated with worse outcomes -children whose parents experience unemployment suffer

Causes of unemployment

1) frictional unemployment 2) structural unemployment 3) cyclical unemployment

unexpected inflation

1. confuses the signals that prices send 2. redistribution

okuns rule of thumb

for every percentage point that actual output falls below potential output, the unemployment rate is around half a percentage point higher cyclical unemployment = -(1/2) * output gap actual unemployment = (frictional UE + structural UE) (equilibrium UE or natural rate) + cyclical UE

features of the business cycle

1. business cycles are not cycles 2. recessions vary in their causes, their duration, and their depth. 3. some variables lead recessions, while others lag 4. the business cycle is persistent 5. a typical business cycle involves a short, sharp recession, followed by a long and gradual expansion 6. many economic variables move up and down together over the business cycle

different measures of inflation

1. consumer prices 2. business prices

business prices

1. cost of inputs --> producer price index (PPI) 2. estimating the price of all output and hence real GDP --> GDP deflator

Consumer prices

1. cost of living adjustments ---> CPI 2. A target for monetary policy ---> Personal consumption expenditure deflator 3. Forecasting underlying inflation trends --> core inflation (excluding food and energy)

the costs of inflation

1. expected inflation 2. unexpected inflation

to measure inflation

1. find out what people buy and construct a representative basket of goods and services 2. collect prices from the stores where people do their shopping 3. tally up the cost of the basket of goods and services 4. calculate the inflation rate: the annual percentage increase in the average price level

expected inflation

1. menu costs for sellers 2. shoe-leather costs for buyers

top 10 economic indications

1. real GDP growth 2. real GDI growth 3. change in nonfarm payrolls 4. unemployment rate 5. initial unemployment claims 6. business confidence 7. consumer confidence 8. inflation rate 9. employment cost index 10. stock market

adjusting for the effects of inflation

1. real variable 2. nominal variable you can convert nominal variables into real variables by applying the inflation adjustment formula: Todays dollars=another times dollars x (price level today/price level in another time)

underemployed

someone who has some work but wants more hours or whose job isn't adequately using their skills

marginally attached

someone who wants a job, and who has looked for a job within the past year, but who isn't counted as unemployed because they aren't currently searching for work.

involuntarily part time

someone who wants full-time work and is working part time because they haven't found a full time job

the inflation fallacy

the (mistaken) belief that inflation destroys purchasing power

money illusion

the (mistaken) tendancy to focus on nominal dollar amounts instead of inflation-adjusted amounts. - creates nominal wage rigidity (reluctance to cut normal wages)

measuring inflation

the inflation measure that's most relevant to your life as a consumer is calculated using the consumer price index (CPI)

unemployment rate

the share of the labor force that's unemployed. (unemployed/labor force) x 100

Labor force participation rate

the share of the working-age population that is either employed or unemployed. (labor force/working age population) x 100

equilibrium unemployment rate

the unemployment rate to which the economy tends to return in the long run

frictional unemployment

unemployment due to the time it takes for employers to search for workers and for workers to search for jobs - job search resources - skills mismatched - unemployment insurance and other income support

cyclical unemployment

unemployment that is due to a temporary downturn in the economy

structural unemployment

unemployment that occurs because wages don't fall to bring labor demand and supply into equilibrium - efficiency wages: higher wages paid to encourage greater worker productivity -institutional causes: unions, job protection regulations, minimum wage laws

revisions

updates to earlier estimates

real variables

variables adjusted for inflation so you're comparing quantities, holding prices constant

nominal variables

variables expressed in the prices of the year of the data

lagging indicators

variables that follow the business cycle with a delay

leading indicators

variables that tend to predict the future path of the economy

real interest rate

~ nominal interest rate - inflation rate

percent change in real value

~percent change in nominal value - percent change in prices