Ch13 Economic Challenges. Unemployment Frictional Unemployment – Looking for new work Seasonal Unemployment – Farm work, Holiday Seasons Structural Unemployment

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  • Ch13 Economic Challenges

  • UnemploymentFrictional Unemployment Looking for new workSeasonal Unemployment Farm work, Holiday SeasonsStructural Unemployment Changing workplaceCyclical Unemployment Business CyclesUnderemployed More qualified than job requiresDiscouraged workers

  • InflationInflation is the general increase in prices over timeInflation vs. Purchasing Power How much do you get?Inflation is usually measured by looking at groups of common goods in a price index

  • Causes of InflationQuantity Theory Too much money in the supplyDemand-Pull Theory Demand for goods exceeds supplyCost-Push Theory Costs for making goods increasesWagePrice Spiral The wage price spiral is where wages increase, causing increased demand, causing prices to go up, leading to a need for higher wages, etc.

  • Short-Run Trade-Off between Inflation and Unemployment Unemployment and InflationSociety faces a short-run tradeoff between unemployment and inflation.If policymakers expand aggregate demand, they can lower unemployment, but only at the cost of higher inflation.If they contract aggregate demand, they can lower inflation, but at the cost of temporarily higher unemployment.The Phillips Curve shows the short-run trade off between inflation and unemployment.

  • The Phillips CurveUnemploymentRate (percent)0InflationRate(percentper year)

  • How the Phillips Curve is Related to Aggregate Demand and Aggregate SupplyQuantityof Output0(a) The Model of Aggregate Demand and Aggregate Supply UnemploymentRate (percent)0InflationRate(percentper year)PriceLevel(b) The Phillips Curve

  • An Adverse Shock to Aggregate SupplyQuantityof Output0PriceLevelAggregatedemand(a) The Model of Aggregate Demand and Aggregate Supply UnemploymentRate0InflationRate(b) The Phillips CurveAggregatesupply, ASPhillips curve, PC

  • Disinflationary Monetary Policy in the Short Run and the Long RunUnemploymentRate0Natural rate ofunemploymentInflationRateLong-runPhillips curve

  • The Long-Run Phillips CurveUnemploymentRate0Natural rate ofunemploymentInflationRateLong-runPhillips curve

  • How the Phillips Curve is Related to Aggregate Demand and Aggregate SupplyQuantityof OutputNatural rateof outputNatural rate ofunemployment0PriceLevel Long-run aggregatesupplyLong-run Phillipscurve(a) The Model of Aggregate Demand and Aggregate Supply UnemploymentRate0InflationRate(b) The Phillips Curve

  • SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF SUPPLY SHOCKSHistorical events have shown that the short-run Phillips curve can shift due to changes in expectations. The short-run Phillips curve also shifts because of shocks to aggregate supply. Major adverse changes in aggregate supply can worsen the short-run trade-off between unemployment and inflation.An adverse supply shock gives policymakers a less favorable trade-off between inflation and unemployment.

  • The Phillips Curve in the 1960s123456789100246810UnemploymentRate (percent)Inflation Rate(percent per year)

  • The Breakdown of the Phillips Curve123456789100246810UnemploymentRate (percent)Inflation Rate(percent per year)

  • The Supply Shocks of the 1970s123456789100246810UnemploymentRate (percent)Inflation Rate(percent per year)

  • The Volcker Disinflation123456789100246810UnemploymentRate (percent)Inflation Rate(percent per year)

  • The Greenspan Era123456789100246810UnemploymentRate (percent)Inflation Rate(percent per year)

  • PovertyThe poverty threshold is the income level needed to support a families minimum needsFamily of 4 (2 adults, 2 children) $18,850/yr (2004)Poverty depends on family size and location

  • Reasons for povertyLack of educationLocationRacial and Gender DiscriminationEconomic ShiftsFamily ProblemsHealthGreed

  • Income DistributionIn 2003, median family income was $43,318 (half earned more, half less)The Lorenz Curve shows that the wealthiest 20% made as much as the other 80% of AmericansThe GDP (Gross Domestic Product) of the poorest 48 nations (i.e. a quarter of the worlds countries) is less than the wealth of the worlds three richest people combined. In the 1970, the top 1% made less than 9% of all income, in 2007, the top 1% took in more than 27% of all income

  • Welfare ReformMany poor receive Federal Aid, in the form of housing subsidies, food stamps, direct cash payments, and health related services. In 1996, welfare reform was enacted because there was a growing perception that the poor were living off of the state, creating a tax burden for everyone else. This welfare reform reduced payments, and gave some training assistance, to get people into the work force.

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