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