Macroeconomics - chapter 9
How do you calculate the CPI for any particular year?
(Price of the most recent market basket in the particular year/ price estimate of the market basket in 1982-1984) x 100
What is the formula for unemployment rate?
(Unemployed/labor force) x 100
What is price stickiness?
?
What is a monetary factor?
? pertaining to money?
What is cyclical unemployment caused by?
A decline in total spending
What is real income?
A measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation
What does it mean when the business cycle is at recession?
A period of decline in total output, income, and employment. Lasts 6 months or more, and is market by the widespread contraction of business activity in many sectors of the economy along with declines in real GDP, significant increases in unemployment occur
How does mixed effects be a redistribution issue?
A person who is simultaneously an income earner, a holder of financial assets, and a debtor will probably find that the redistribution impact of unanticipated inflation is cushioned. If the person owns fixed-value monetary assets (savings accounts, bonds, and insurance policies), inflation will lessen their real value. But that same inflation may produce an increase in the person's nominal wage. Also, if the person holds a fixed-interest-rate mortgage, the real burden of that debt will decline. In short, many individuals are simultaneously hurt and helped by inflation. All these effects must be considered before we can conclude that any particular person's net position is better or worse because of inflation
What is cost-push inflation?
A rise in the general price level resulting from an increase in the cost of production. These were periods when output and employment were both declining (evidence that total spending was not excessive) while the general price level was rising.
What is inflation?
A rise int he general level of prices; an increase in an economy's price level
What does severe cyclical unemployment mean/cause?
A social catastrophe. Unemployment means idleness. And idleness means loss of skills, loss of self-respect, plummeting morale, family disintegration, and sociopolitical unrest. Widespread joblessness increases poverty, heightens racial and ethnic tensions, and reduces hope for material advancement
What is hyperinflation?
A very rapid rise in the price level; and extremely high rate of inflation.
How does one calculate the GDP gap?
Actual GDP - Potential GDP
What does the "Not in labor force" consist of?
Adults who are potential workers but are not employed and are not seeking work. EX: stay at home parents, full-time students, or retirees
Business cycles
Alternating rises and declines in the level of economic activity, sometimes over several years
What are Cost-of-living adjustments?
An automatic increase in income that keeps up with the cost of living
What is an increase in the price level usually caused by?
An excess of total spending beyond the economy's capacity to produce. Where inflation is rapid and sustained, the cause invariably is an over issuance of money by the central bank (the Federal Reserve in the United States). When resources are already fully employed, the business sector cannot respond to excess demand by expanding output
What us unanticipated inflation?
An increase of the price level (inflation) at a rate greater than expected
What is anticipated inflation?
An increase of the price level (inflation) at the expected rate
Why can hyperinflation have a devastating impact on real output and employment?
As prices shoot up sharply and unevenly during hyperinflation, people begin to anticipate even more rapid inflation and normal economic relationships are disrupted. Business owners do not know what to charge for their products. Consumers do not know what to pay. Resource suppliers want to be paid with actual output, rather than with rapidly depreciating money. Money eventually becomes almost worthless and ceases to do its job as a medium of exchange. Businesses, anticipating further price increases, may find that hoarding both materials and finished products is profitable. Individual savers may decide to buy nonproductive wealth—jewels, gold and other precious metals, real estate, and so forth—rather than providing funds that can be borrowed to purchase capital equipment. The economy may be thrown into a state of barter, and production and exchange drop further. The net result is economic collapse and, often, political chaos.
What are examples of irregular innovation?
Automobile, railroad, computer, and internet
What are examples of consumer durables?
Automobiles, personal computers, refrigerators
Why do many economists refer to talk of business "fluctuations" rather than cycles?
Because cycles imply regularity while fluctuations do not
How does irregular innovation contribute to the variability of economic activity?
Because innovations occur irregularly and unexpectedly
What are examples of financial instability?
Bubbles (rapid asset price increases), bursts (abrupt asset price decrease)
How do financial bubbles and bursts affect the economy?
By expanding or contracting lending and boosting or eroding the confidence of consumers and businesses. Booms and busts in the rest of the economy may follow
What is a complexity of cost-push inflation?
Cost-push inflation is automatically self-limiting; it will die out by itself. Increased per-unit costs will reduce supply, and this means lower real output and employment. Those decreases will constrain further per-unit cost increases. In other words, cost-push inflation generates a recession. And in a recession, households and businesses concentrate on keeping their resources employed, not on pushing up the prices of those resources
What are the effects in unanticipated deflation?
Declines in the price level—are the reverse of those of inflation. People with fixed nominal incomes will find their real incomes enhanced. Creditors will benefit at the expense of debtors. And savers will discover that the purchasing power of their savings has grown because of the falling prices
What are three other redistribution issues?
Deflation, mixed effects, and arbitrariness
What does it mean when inflation occurs?
Each dollar of income will buy fewer goods and services than before. Inflation reduces the "purchasing power" of money.But inflation does not mean that all prices are rising. Even during periods of rapid inflation, some prices may be relatively constant and others may even fall. For example, although the United States experienced high rates of inflation in the 1970s and early 1980s, the prices of video recorders, digital watches, and personal computers declined
What is a discouraged worker?
Employees who have left the labor force because they have not been able to find employment
Within cyclical unemployment, when the demand for goods and services decreases,...
Employment falls and unemployment rises
What is a long-run trend of the U.S economy?
Expansion and growth
What will happen to the economy if total spending unexpectedly sinks and firms cannot lower prices?
Firms will find themselves selling fewer units of output (since with prices fixed, a decreased amount of spending implies fewer items purchased). Slower sales will cause firms to cut back on production. As they do, GDP will fall. And because fewer workers will be needed to produce less output, employment also will fall. The economy will contract and enter a recession
What does Okun's law say?
For every 1% point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of a bout 2% occurs. With this information we can calculate the absolute loss of output associated with any above natural unemployment rate
What is the basic economic cost of unemployment?
Forgone output. When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost
How many phases of the business cycle are there? And what are they?
Four - peak, recession, trough, expansion
What is the distinction between frictional and structural unemployment?
Frictional unemployed workers have marketable skills and either live in areas where jobs exist or are able to move to areas where they do. Structurally unemployed workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating. Frictional unemployment is short-term; structural unemployment is more likely to be long-term and consequently more serious
What are examples of capital goods?
Housing, commercial buildings, heavy equipment, farm implements
What does rapid spread of irregular innovation do to the economy in the short run?
Increase investment, consumption, output, and employment
What is demand-pull inflation?
Increases in the price level (inflation) resulting from increases in aggregate demand. The essence of this type of inflation is "too much spending chasing too few goods"
What are the five possible general sources of shock that can cause business cycles?
Irregular innovation, productivity changes, monetary factors, political events, and financial instability
How do political events affect the economy?
It can create economic opportunities or strains, in adjusting to these shocks, the economy may experience upswings or downswings
What does it mean when the business cycle is at a peak?
It has reached a temporary maximum. The economy is near or at full employment and the level of real output is near or at full employment and the level of real output is at or very close to the economy's capacity. The price level is likely to rise during this phase
Why are firms and industries producing capital goods and consumer durables affected most by the business cycle?
It is easy for people to cut back on these goods. When recession strikes, firms patch up their old equipment and make do. Families repair their old cars and appliances rather than buy new ones. So firms producing these products suffer
Unemployment pertaining to education:
Less-educated workers, on average, have higher unemployment rates than workers with more education. Less education is usually associated with lower-skilled, less-permanent jobs; more time between jobs; and jobs that are more vulnerable to cyclical layoff
How do you calculate real income?
Nominal income/ price index (in hundredths)
Why do unemployment rates differ greatly among nations at any given time?
One reason is that nations have different natural rates of unemployment, another is that nations may be in different phases of their business cycle
If the level of spending unexpectedly rises, what will happen to the economy?
Output, employment, and income will rise. The economy will boom and enjoy expansion. Over time, prices become more flexible and then prices are also likely to rise as a result of the increased spending
What are examples of unexpected political events?
Peace treaties, new wars, and 9/11
Why are service industries and industries that produce nondurable consumer goods protected from severe effects of recession?
People find it much harder to cut back on needed medical and legal services and nondurable goods like clothes and food. The purchases will decline but not as much as capital and consumer goods
What does the labor force consist of?
People who are able and willing to work. Both those who are unemployed but actively seeking work
What is frictional unemployment?
People who are either searching for jobs or waiting to take jobs in the near future. Includes people who have been laid off. People who are between jobs
Who are flexible-income receivers?
People who have flexible incomes may escape inflation's harm or even benefit from it. For example, individuals who derive their incomes solely from Social Security are largely unaffected by inflation because Social Security payments are indexed to the CPI. Benefits automatically increase when the CPI increases, preventing erosion of benefits from inflation. Some union workers also get automatic cost-of-living adjustments (COLAs) in their pay when the CPI rises, although such increases rarely equal the full percentage rise in inflation
Who are fixed-income receivers?
People whose incomes are fixed see their real incomes fall when inflation occurs. The classic case is the elderly couple living on a private pension or annuity that provides a fixed amount of nominal income each month. They may have retired in, say, 1993 on what appeared to be an adequate pension. However, by 2009 they would have discovered that inflation had cut the annualPage 192purchasing power of that pension—their real income—by one-third. Similarly, landlords who receive lease payments of fixed dollar amounts will be hurt by inflation as they receive dollars of declining value over time. Likewise, public sector workers whose incomes are dictated by fixed pay schedules may suffer from inflation. The fixed "steps" (the upward yearly increases) in their pay schedules may not keep up with inflation. Minimum-wage workers and families living on fixed welfare incomes also will be hurt by inflation
How does one calculate the percentage change in real income?
Percentage change in nominal income - percentage change in price level
What is a major factor preventing the economy from rapidly adjusting to shocks?
Price stickiness
What is potential output?
Real GDP that occurs when the economy is "fully employed"
Does inflation alter an economy's overall real income?
Real income will remain the same when nominal income rises at the same percentage rate as does the price index. But when inflation occurs, not everyone's nominal income rises at the same pace as the price level. Therein lies the potential for redistribution of real income from some to others. If the change in the price level differs from the change in a person's nominal income, his or her real income will be affected
How is the nominal interest rate calculated?
Real interest rate + inflation premium (the expected rate of inflation)
How do cost-push inflation and real output relate?
Recall that abrupt and unexpected rises in key resource prices such as oil can sufficiently drive up overall production costs to cause cost-push inflation. As prices rise, the quantity demanded of goods and services falls. So firms respond by producing less output, and unemployment goes up.
What are a few examples of structural unemployment?
Sewing clothes or working on farms may decline or even vanish while the demand for designing software or maintaining computer systems with intensify
What are fluctuations driven by?
Shocks
What is irregular innovation?
Significant new products or production methods
Who is unaffected or helped by the inflation?
Some people are unaffected by inflation and others are actually helped by it. For the second group, inflation redistributes real income toward them and away from others (Flexible-income receivers, debtors)
What is a complication of both cost-push inflation and demand-pull inflation?
Some price-flexible items within the consumer price index—particularly, food and energy—experience rapid changes in supply and demand and therefore considerable price volatility from month to month and year to year. For example, the prices of grain, fruit, vegetables, and livestock sometimes move rapidly in one direction or the other, leading to sizable changes in the prices of food items such as bread, oranges, lettuce, and beef. Also, energy items such as gasoline and natural gas can rise or fall rapidly from period to period. These ups and downs of food and energy prices usually are temporary and often cancel each other out over longer periods.
Give an example of cost-push inflation or supply shocks:
Specifically, abrupt increases in the costs of raw materials or energy inputs have on occasion driven up per-unit production costs and thus product prices. The rocketing prices of imported oil in 1973-1974 and again in 1979-1980 are good illustrations. As energy prices surged upward during these periods, the costs of producing and transporting virtually every product in the economy rose. Cost-push inflation ensued
What is the market basket for the CPI based on?
Spending patterns of urban consumers in a specific period, presently 2009-2010. The BLS updates the composition of the market basket every 2 years so that it reflects the most recent patterns of consumer purchases and captures the inflation that consumers are currently experiencing. The BLS arbitrarily sets the CPI equal to 100 for 1982-1984
Unemployment pertaining to age:
Teenagers have much higher unemployment rates than adults. Teenagers have lower skill levels, quit their jobs more frequently, are more frequently fired, and have less geographic mobility than adults. Many unemployed teenagers are new in the labor market, searching for their first jobs. Male African-American teenagers, in particular, have very high unemployment rates. The unemployment rate for all teenagers rises during recessions
What can the GDP gap show?
The GDP gap can be either negative (actual GDP < potential GDP) or positive (actual GDP > potential GDP). In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP
What is per-unit production costs?
The average coast of a particular level of output
What is the GDP gap?
The difference between actual and potential GDP
What happens after the economy has largely absorbed the new innovation?
The economy may for a time slow down or possibly decline
What do most economists agree the immediate cause of economic shock is?
The large majority of cyclical changes in the levels of real output and employment is unexpected changes in the level of total spending
What is the consumer price index or (CPI)?
The main measure of inflation in the US. The government uses this index to report inflation rates each month and each year. It also uses the CPI to adjust Social Security benefits and income tax brackets for inflation. The CPI reports the price of a "market basket" of some 300 consumer goods and services that are purchased by a typical urban consumer
What is nominal income?
The number of dollars received as wages, rent, interest, or profit
Unemployment pertaining to duration:
The number of persons unemployed for long periods—15 weeks or more—as a percentage of the labor force is much lower than the overall unemployment rate
What is the nominal interest rate?
The percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation
What is the real interest rate?
The percentage increase in purchasing power that the borrower pays the lender
What is unemployment rate?
The percentage of the labor force unemployed
What is full-employment rate of unemployment OR natural rate of unemployment (NRU)?
The rate at which there is no cyclical unemployment (how they describe full employment)
How does on calculate the rate of inflation?
The rate of inflation is equal to the percentage growth of CPI from one year to the next. For example, the CPI was 236.7 in 2014, up from 233.0 in 2013. So the rate of inflation for 2014 is calculated as follows: ((236.7 - 233.0)/233.0) x 100 = 1.6%
Redistribution issue in regards to arbitrariness:
The redistribution effects of inflation occur regardless of society's goals and values. Inflation lacks a social conscience and takes from some and gives to others, whether they are rich, poor, young, old, healthy, or infirm.
Unemployment pertaining to race and ethnicity:
The unemployment rates for African Americans and Hispanics are higher than that for whites. The causes of the higher rates include lower rates of educational attainment, greater concentration in lower-skilled occupations, and discrimination in the labor market. In general, the unemployment rate for African Americans is twice that of whites and rises by more percentage points than for whites during recessions
Unemployment related to gender:
The unemployment rates for men and women normally are very similar. But in the recent recession, the unemployment rate for men significantly exceeded that for women
What is productivity?
The value of a particular product compared to the amount of labor needed to make it (output per unit of input)
How does the U.S. Bureau of Labor Statistics (BLS) determine who is employed and who is not employed?
They conduct a nationwide random survey of some 60,000 households each month
How is the economy forced to respond to shocks in the short run?
Through changes in output and employment rather than through changes in prices
What is the per-unit production cost equation?
Total input coast/units of output
What are debtors?
Unanticipated inflation benefits debtors (borrowers). In our earlier example, Chase Bank's loss of real income from inflation is Bob's gain of real income. Debtor Bob borrows "dear" dollars but, because of inflation, pays back the principal and interest with "cheap" dollars whose purchasing power has been eroded by inflation. Real income is redistributed away from the owners of Chase Bank toward borrowers such as Bob. The federal government, which had amassed $18.2 trillion of public debt through 2015, has also benefited from inflation. Historically, the federal government regularly paid off its loans by taking out new ones. Inflation permitted the Treasury to pay off its loans with dollars of less purchasing power than the dollars originally borrowed. Nominal national income and therefore tax collections rise with inflation; the amount of public debt owed does not. Thus, inflation reduces the real burden of the public debt to the federal government
Who are creditors?
Unanticipated inflation harms creditors (lenders). Suppose Chase Bank lends Bob $1,000, to be repaid in 2 years. If in that time the price level doubles, the $1,000 that Bob repays will have only half the purchasing power of the $1,000 he borrowed. True, if we ignore interest charges, the same number of dollars will be repaid as was borrowed. But because of inflation, each of those dollars will buy only half as much as it did when the loan was negotiated. As prices go up, the purchasing power of the dollar goes down. So the borrower pays back less-valuable dollars than those received from the lender. The owners of Chase Bank suffer a loss of real income.
Who is hurt by inflation?
Unanticipated inflation hurts fixed-income recipients, savers, and creditors. It redistributes real income away from them and toward others. (Fixed-income receivers, savers, and creditors)
Who are savers?
Unanticipated inflation hurts savers. As prices rise, the real value, or purchasing power, of an accumulation of savings deteriorates.Paper assets such as savings accounts, insurance policies, and annuities that were once adequate to meet rainy-day contingencies or provide for a comfortable retirement decline in real value during inflation. The simplest case is the person who hoards money as a cash balance. A $1,000 cash balance would have lost one-third its real value between 1995 and 2015. Of course, most forms of savings earn interest. But the value of savings will still decline if the rate of inflation exceeds the rate of interest.
What are the three groups the BLS divides the total U.S. population into?
Under 16 and/ or institutionalized, not in labor force, and employed
What does the not under 16 and/or institutionalized group consist of?
Under 16 or people in mental hospitals of correctional institutions
What is cyclical unemployment?
Unemployment caused by a decline in total spending and typically begins in the recession phase of the business cycle
What are example of productivity change?
Unexpected changes in resource availability (oil or agricultural commodities) or from unexpected changes in the general rate of technological advances
What are shocks?
Unexpected events that individuals and firms may have trouble adjusting to
What happens to the economy when productivity changes?
Unexpectedly increases, the economy booms; unexpectedly decreases, the economy recedes
What does the rule of 70 tell us?
We can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70. Example: So a 3 percent annual rate of inflation will double the price level in about 23 (= 70 ÷ 3) years. Inflation of 8 percent per year will double the price level in about 9 (= 70 ÷ 8) years.
What does it mean when the business cycle is in the expansion phase?
What a recession is usually followed by. Could be considered recovery. A period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment. If spending then expands more rapidly than does production capacity, prices of nearly all goods and services will rise... inflation will occur
What happens to the economy when there are changes in monetary factors?
When a nation's central bank shocks the economy by creating more money than people were expecting, an inflationary boom in output occurs. In contrast, printing less money than people were expecting triggers an output decline and, eventually, a price-level fall
What does it mean when the business cycle is in the trough?
When output and employment "bottom out" at their lowest levels. The lowest point of the recession. Could be either short-lived or very long
When does full employment occur?
When there is only frictional and structural unemployment, NO cyclical unemployment
Unemployment pertaining to occupation:
Workers in lower-skilled occupations (for example, laborers) have higher unemployment rates than workers in higher-skilled occupations (for example, professionals). Lower-skilled workers have more and longer spells of structural unemployment than higher-skilled workers. They also are less likely to be self-employed than are higher-skilled workers. Moreover, lower-skilled workers usually bear the brunt of recessions. Manufacturing, construction, and mining tend to be particularly hard-hit, and businesses generally retain most of their higher-skilled workers, in whom they have invested the expense of training
Are part-time workers considered employed?
Yes. These people are partially employed, and partially unemployed. By counting them as fully employed, the official BLS data is understated
What is structural unemployment?
unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand
