Macroeconomics: Chapter 7

U.S. civilian noninstitutional adult population

1) 16 years and older 2) Exclusions: prison, mental facilities, retirement homes

Discuss the trend of unemployment in the last 30 years.

1) 1980s-2000 period of increased employment. Pretty good financially 2) Growth rates have dropped during the new millenia

Described the percentage of the unemployed that lost their job, quit, just joined, or are rejoining the labor force

1) 60% lost their jobs 2) Quit, just joined, or are rejoining

Why are lenders and borrowers more worried about the real interest rate? What's the problem with this?

1) Because of the inflation rate it can cause a loss of spending power 2) However, the real interest rate is only known after inflation actually occurs

Unemployment Benefits

1) Cash transfers to those who lose their jobs and actively seek employment 2) Social Security Act of 1935- financed by tax on employers 3) Usually up for 6 months but usually extended during recessions 4) Most go to those who lost their jobs, not those who quit or were fired for a just reason 5) Usually about 50% of take-home pay 6) Can reduce opportunity cost of remaining unemployed and reduce incentives to find work 7) But also can provides for a higher quality job search because of more time and can result in a better match between job skills and requirements, promoting economic efficiency

Seasonal Unemployment

1) Caused by seasonal changes in the demand for certain kinds of labor 2) i.e. jobs in winter, jobs in summer, etc. 3) Monthly employment data are seasonally adjusted to smooth out unemployment bulges from seasonal factors 4) Policy makers and economists not that concerned about seasonal unemployment

What are relative prices? Why are they important?

1) Describe the exchange rate among goods, that is how much one good costs compared to another 2) Important signals for allocating the economy's resources efficiently

Why may the unemployment rate be underestimated?

1) Doesn't include retired, students, those caring for children at home, those who don't want to work or can't 2) Part timers who want to be fully employed are counted as employed 3) Doesn't include discouraged workers

Full Employment

1) Employment level when there is no cyclical unemployment 2) In a healthy economy, always going to be some frictional, structural, and seasonal unemployment 3) Changes in product demand and technology continually alter the supply and demand for particular types of labor 4) 4-6% unemployment is considered full employment

Inflation _______ _________ in the ______ ____ _________ _______ over the ________ term

1) Erodes confidence 2) Value of the dollar 3) Long

Contrast the U.S. unemployment rate with that of Europe's

1) Europe's was about 8.3% over last 3 decades while U.S. was 6.2% 2) Ratio of unemployment benefits to average pay is higher and sometimes benefits last longer 3) Less incentive to find work 4) Government regulations have made European employers more reluctant to hire new workers because firing them is difficult

The higher the _____ _______, the higher the _____ _____ of _____ that lenders require and borrowers are wiling to pay.

1) Expected inflation 2) nominal rate 3) Interest

Cyclical Unemployment

1) Fluctuates with business cycles, increasing during contractions and decreasing during expansions 2) Means economy is operating inside its production possibilities frontier 3) Government policies that stimulate aggregate demand aim to reduce cyclical unemployment

What are the 4 sources of unemployment?

1) Frictional 2) Seasonal 3) Structural 4) Cyclical

How does inflation affect changes in relative prices?

1) It doesn't necessarily cause a change in relative prices but it can obscure that change 2) During periods of volatile inflation there's greater uncertainty about relative prices 3) Sometimes dangerous to tie prices to inflation rate because it can result in a price that's too high or low based on market conditions

Contrast the U.S. unemployment rate with that of Japan's

1) Japan's is relatively low because firms offer job security for life 2) labor laws and social norms limit layoffs in Japan

Frictional Unemployment

1) Job seeks and employers need time to find each other 2) Employers need to learn about the talent available and job seekers need to find out their opportunities 3) Usually doesn't last long and results in a better match/efficiency 4) Policy makers not that concerned

Why is the unemployment rate higher for teenagers?

1) Little education/job experience 2) Last hired, first fired 3) Move in and out of labor force very frequently because of school

What often causes differences in inflation rates across metropolitan areas? Do most prices of goods differ across regions?

1) Local housing prices 2) No

If inflation is lower than expected, who wins? Who loses?

1) Losers- Those who agreed to pay a price that anticipated higher inflation 2) Winners- Those who agreed to sell at that price

If inflation is higher than expected, who wins? Who loses?

1) Losers- those who agreed to sell at a price that anticipated lower inflation 2) Winners- Those who agreed to pay that price

What are the true costs of unemployment

1) Lost output 2) economic and psychological cost on the individual and the family 3)Lasting effect on family stability, economic welfare, self-esteem, and personal identity

The national unemployment rate ___________ across the country and even across individual _________.

1) Masks differences 2) States

Why do people view inflation negatively?

1) People sometimes just think of it in terms of spending, where you have to pay higher prices 2) See them as robbing them of purchasing power

What can cause the unemployment rate to be overstated?

1) People who would prefer to work part time but can only find full-time and those who would prefer to work less in general 2) People who only seek jobs to get the benefits 3) People in the underground economy who don't admit they have jobs because they're breaking the law

Unemployment also varies across ________ and ______

1) Region 2) Occupation

Structural Unemployment

1) Skills demanded by employers don't match those of employed 2) Unemployed don't live where the jobs are 3) Occurs because changes in tastes, technology, taxes, and competition reduce demand for certain skills and increase demand for other skills. Technology can replace those skills, or people just don't want those skills anymore 4) It's not easy to move- it's expensive and want to be with friends and relatives or stay with spouse. And the regions with jobs may have a higher living cost 5) Some federal retraining programs try to reduce structural unemployment

Define Inflation. What does it result from?

1) Sustained increase in the economy's price level 2) Either an increase in aggregate demand- demand-pull inflation or a decrease in aggregate supply- cost-pull inflation or both

_____________ ___________ creates more problems than ______________ ____________.

1) Unanticipated inflation 2) Anticipated inflation

What are the transaction costs of variable inflation?

1) Uncertainty 2) Have to anticipate inflation and for firms they have to anticipate exchange-rate relative to the dollar 3) Managers have to shift attention from production decisions to anticipating effects of inflation and exchange-rate changes on firm's finances

Discuss unemployment among various groups

1) Unemployment rate higher for 16-19 year olds as opposed to those older than 20 2) Asian --> White --> Hispanic --> Black (from lowest unemployment to highest unemployment) 3)

Describe the graph of the market for loanable funds. What does the intersection of the 2 curves represent?

1) Upward sloping of the supply curve and a downward sloping of the demand curve 2) Quantity of loanable funds demanded increases as the interest rate decreases 3) The intersection represents the equilibrium nominal rate of interest, i

Teenagers have an unemployment rate about ___________ that of adults

3X

Multiple Currency System

A country that takes more than one currency. This can be due to hyperinflation, where more stable currencies are taken rather than the local currency which becomes almost worthless

Disinflation

A reduction in the rate of inflation

Deflation

A sustained decrease in the price level

Cost-Push Inflation

A sustained rise in the price level caused by a leftward shift of the aggregate supply curve

Demand-pull Inflation

A sustained rise in the price level caused by a rightward shift of the aggregate demand curve

Hyperinflation

A very high rate of inflation

The inflation rate is usually measured how?

Annually

What can cause the unemployment rate to be understated?

Because it counts underemployment, those who are overqualified, and counts those who are working part-time as employed

What gets COLA?

Benefits paid through Social Security

Transaction Cost

Cost incurred when making an economic exchange

COLA

Cost-of-living adjustment; an increase in a transfer payment or wage that is tied to the increase in the price level

What is the overall trend in the annual inflation rate among major economies?

Decreasing towards lower inflation

Interest

Dollar amount paid by borrowers to lenders

Lenders and borrowers base their decisions on ___________.

Expected real interest rate

What can cushion the shock of unemployment?

Having more than one family member in the labor foce

Higher wages must result in _____ ______ (unless there is an increase in productivity)

Higher prices

What is the view of inflation from the income side?

Higher prices mean higher receipts for resource suppliers, including higher wages for workers

Interest Rate

Interest per year as a percentage of the amount loaned

Nominal Interest Rate

Interest rate expressed in dollars of current value (that is, not adjusted for inflation) as a percentage of the amount loaned; the interest rate specified on the loan agreement

Describe the relationship between interest rates and the quantity of loanable funds.

Inversely related

What is another name for those who are discouraged workers and those who want to look for work but for some reason can't?

Marginally attached to the labor force

Real interest rate= ____________________

Nominal interest rate - Inflation rate

Stagflation

Prices increase and real GDP decreases

Loanable funds

The amount of money people are willing to lend other things constant

Real Interest Rate

The interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate

Labor Force Participation Rate

The labor force as a percentage of the adult population

Unemployment Rate

The number unemployed as a percentage of the labor force (only a small percentage of those not working are considered to be unemployed)

Why is one reason that inflation is so unpopular?

There are arbitrary gains and losses from unanticipated inflation and it doesn't just seem fair

Labor force

Those 16 years of age and older who are either working or looking for work

Long-term Unemployed

Those out of work for 27 weeks or longers

Discouraged Workers

Those who drop out of the labor force in frustration because they can't find work

Unemployed

Those who want a job and have looked at least once in the preceeding 4 weeks but can't find one

Who does inflation affect the most?

Those whose incomes are fixed in nominal terms (such as pensions)

Describe the inflation-deflation cycle.

Usually there are periods of inflation during wars followed by periods of deflation after. So there tends to be confidence that the dollar will retain its purchasing power

Underemployment

Workers are overqualified for their jobs or work fewer hours than they would prefer

People are more concerned about the __________ _______ in the price level than the price level itself.

Year-to-year changes

Uncertainty about inflation undermines _____ ______ __ ____ ___ _____ _____ ____ _______.

money's ability to link the present with the future