Chapter 13 Section 1 Chapter 13 Section 1 UnemploymentUnemployment

Frictional Unemployment-Occurs b/c of the time Frictional Unemployment-Occurs b/c of the time required to match qualified job seekers w/ required to match qualified job seekers w/ available openings.available openings.

Structural unemployment-Occurs b/c job seekers Structural unemployment-Occurs b/c job seekers do not have the skills demanded.do not have the skills demanded.

Cyclical unemployment-Occurs b/c of the jobs lost Cyclical unemployment-Occurs b/c of the jobs lost during the recession phase of the business cycle.during the recession phase of the business cycle.

Seasonal unemployment-Occurs b/c of seasonal Seasonal unemployment-Occurs b/c of seasonal changes in labor demand during the year.changes in labor demand during the year.

Full employment-Occurs when there is no cyclical Full employment-Occurs when there is no cyclical unemployment; relatively low unemployment.unemployment; relatively low unemployment.

continuedcontinued Problems w/ official Unemployment Estimates.Problems w/ official Unemployment Estimates. Discouraged workers, in effect, dropped out of Discouraged workers, in effect, dropped out of

the labor force, so they are not counted as the labor force, so they are not counted as unemployed.unemployed.

B/c official unemployment rate ignores B/c official unemployment rate ignores discouraged workers, it may underestimate discouraged workers, it may underestimate unemployment in the economy.unemployment in the economy.

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

PhD of English would work for a bookstore. PhD of English would work for a bookstore. Underemployed.Underemployed.

The Cost and Measure of The Cost and Measure of UnemploymentUnemployment

The lost output together w/ the economic and The lost output together w/ the economic and psychological damage to unemployed workers and psychological damage to unemployed workers and their families represents the true cost of their families represents the true cost of unemployment.unemployment.

Unemployment Rate-Measurement of Unemployment Rate-Measurement of unemployment begins w/ the U.S. noninstitutional unemployment begins w/ the U.S. noninstitutional adult population, which consists of all those 16 adult population, which consists of all those 16 years of age, and older, except people military, in years of age, and older, except people military, in prisons, or in mental in the hospitals.prisons, or in mental in the hospitals.

Labor force-consists of those in the adult Labor force-consists of those in the adult population who are either working or looking for population who are either working or looking for work.work.

Those w/ no job who are looking for work are Those w/ no job who are looking for work are counted as unemployed.counted as unemployed.

continuedcontinued

Unemployment rate equals the Unemployment rate equals the number unemployed-that is, people number unemployed-that is, people w/o jobs who are looking for work-w/o jobs who are looking for work-divided by the number in the labor divided by the number in the labor force.force.

Unemployment rate= Unemployment rate= Number Number unemployedunemployed

Number in the Number in the labor forcelabor force

Labor Force Labor Force Participation RateParticipation Rate

Therefore equals the number in the Therefore equals the number in the labor force divided by the adult labor force divided by the adult population. population.

Changes in Unemployment Rate-Changes in Unemployment Rate-1900 indicate periods of recession 1900 indicate periods of recession and depression.and depression.

Great DepressionGreat Depression Unemployment for Various Groups.Unemployment for Various Groups.

Unemployment BenefitsUnemployment Benefits Two workers in the labor force, becomes Two workers in the labor force, becomes

unemployed, another is likely to still have a unemployed, another is likely to still have a job that may provide health insurance and job that may provide health insurance and other benefits.other benefits.

Unemployment benefits- Cash transfers to Unemployment benefits- Cash transfers to unemployed workers who actively seek unemployed workers who actively seek work and who meet other qualifications.work and who meet other qualifications.

Unemployment Benefits and Work Unemployment Benefits and Work Incentives- unemployment benefits reduce Incentives- unemployment benefits reduce the opportunity cost of remaining the opportunity cost of remaining unemployed, they also may reduce the unemployed, they also may reduce the incentive to find work.incentive to find work.

Chapter 13 Section 2 Chapter 13 Section 2 InflationInflation

Inflation- An increase in the Inflation- An increase in the economy’s general price level.economy’s general price level.

Inflation reduces the value of money Inflation reduces the value of money and is usually measured on an and is usually measured on an annual basis.annual basis.

Annual Inflation rate is the Annual Inflation rate is the percentage increase in the general percentage increase in the general price level from on year to the next.price level from on year to the next.

Types of InflationTypes of Inflation

Hyper inflation-Extremely high Hyper inflation-Extremely high inflation, such as the experience in inflation, such as the experience in Brazil.Brazil.

Disinflation-A reduction in the rate Disinflation-A reduction in the rate of inflation.of inflation.

Deflation-A decrease in the general Deflation-A decrease in the general price level.price level.

Two Sources of InflationTwo Sources of Inflation

Demand-pull inflation- Inflation Demand-pull inflation- Inflation resulting from a right ward shift of resulting from a right ward shift of the aggregate demand curve.the aggregate demand curve.

A rightward shift of the aggregate A rightward shift of the aggregate demand curve pulls up the price demand curve pulls up the price level.level.

Cost-push inflation-inflation Cost-push inflation-inflation resulting from a leftward shift of the resulting from a leftward shift of the aggregate supply curve.aggregate supply curve.

Consumer Price IndexConsumer Price Index

CPI measures the cost of the market CPI measures the cost of the market basket of consumer goods and basket of consumer goods and services over time.services over time.

The price level is measured by an The price level is measured by an index relative to the base period of index relative to the base period of 1982 to 1984.1982 to 1984.

Impact of InflationImpact of Inflation

Consumer price index has increased by Consumer price index has increased by an average of 3.9 percent per year.an average of 3.9 percent per year.

Inflation reduces the value of the dollar Inflation reduces the value of the dollar and takes away confidence in the value and takes away confidence in the value of the dollar over the longer term.of the dollar over the longer term.

Expected Versus Unexpected Inflation-Expected Versus Unexpected Inflation- Unexpected inflation creates more Unexpected inflation creates more

problems for the economy than does problems for the economy than does expected inflation.expected inflation.

ContinuedContinued The Transaction Costs of Unexpected The Transaction Costs of Unexpected

InflationInflation Inflation and Interest RatesInflation and Interest Rates Interest- is the cost of borrowing and the Interest- is the cost of borrowing and the

reward for savings.reward for savings. Nominal interest rate-The interest rate Nominal interest rate-The interest rate

expressed in current dollars as a percentage expressed in current dollars as a percentage of the amount loaned, the interest rate on the of the amount loaned, the interest rate on the loan agreement.loan agreement.

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

continuedcontinued

Real interest =Real interest =

Nominal interest rate – Inflation rateNominal interest rate – Inflation rate

Chapter 13 section 3Chapter 13 section 3 The Great Depression and BeforeThe Great Depression and Before Laissez-faire-The doctrine that the Laissez-faire-The doctrine that the

government should not intervene in a market government should not intervene in a market economy beyond the minimum required to economy beyond the minimum required to maintain peace and property rights.maintain peace and property rights.

From the Great Depression to the Early From the Great Depression to the Early 1970s1970s

Stimulating Aggregate DemandStimulating Aggregate Demand Demand-Side Economics-Macroeconomics Demand-Side Economics-Macroeconomics

policy that focuses on shifting the aggregate policy that focuses on shifting the aggregate demand curve as a way of promoting full demand curve as a way of promoting full employment and price stability.employment and price stability.

continuedcontinued Employment Act of 1946, which imposed a Employment Act of 1946, which imposed a

clear responsibility on the federal clear responsibility on the federal government to foster “maximum government to foster “maximum employment, production, and purchasing employment, production, and purchasing power.”power.”

Required the president to report annually Required the president to report annually on the state of the economy and to appoint on the state of the economy and to appoint a Council of Economic Advisers.a Council of Economic Advisers.

Council of Economic Advisers- is a three-Council of Economic Advisers- is a three-member panel of economist, w/a member panel of economist, w/a professional staff, to provide the president professional staff, to provide the president w/ economic advice.w/ economic advice.

Keynesian Keynesian EconomicsEconomics

Golden age of Keynesian economics - Golden age of Keynesian economics - 1960s, low unemployment & healthy 1960s, low unemployment & healthy growth, modest inflation. growth, modest inflation.

Recession 1970s 74-75 and 79-80. Recession 1970s 74-75 and 79-80. Confidence demand-side policies Confidence demand-side policies was shaken.was shaken.

The Great Stagflation The Great Stagflation 1973-1980.1973-1980.

Reduction in Aggregate Reduction in Aggregate Supply.Supply.

Stagflation of the 1970s, or a contraction, Stagflation of the 1970s, or a contraction, in the economy’s aggregate output in the economy’s aggregate output combined w/ inflation, or a rise, in the combined w/ inflation, or a rise, in the economy’s price level.economy’s price level.

Stagflation Repeats in 1980. Stagflation Repeats in 1980. Since 1980 Since 1980 Supply-Side Economics-Macroeconomics Supply-Side Economics-Macroeconomics

policy that focus on a rightward shift of the policy that focus on a rightward shift of the aggregate supply curve through tax cuts or aggregate supply curve through tax cuts or other changes that increase production other changes that increase production incentives.incentives.

Giant Federal DeficitsGiant Federal Deficits

Annual deficits accumulated of prior Annual deficits accumulated of prior deficits.deficits.

Measured relative to GDP, the Measured relative to GDP, the federal debt nearly doubled.federal debt nearly doubled.

Chapter 13 Section 4Chapter 13 Section 4

Poverty and the EconomyPoverty and the Economy

Poverty and Jobs-poverty rate is much Poverty and Jobs-poverty rate is much higher among families w/ no higher among families w/ no workers.workers.

Poverty and UnemploymentPoverty and Unemployment

Unmarried Motherhood and PovertyUnmarried Motherhood and Poverty

Unplanned Result of Unplanned Result of Income AssistanceIncome Assistance

Why work?Why work?An increase in earnings reduces benefits from An increase in earnings reduces benefits from

cash assistance, Medicaid, food, stamps, cash assistance, Medicaid, food, stamps, housing assistance, energy assistance, and housing assistance, energy assistance, and other poverty programs. other poverty programs.

In some cases total welfare benefits are cut by In some cases total welfare benefits are cut by $1 or more as earned income increases by $1.$1 or more as earned income increases by $1.

B/c welfare benefits decline w/ earnings, this B/c welfare benefits decline w/ earnings, this reduces the incentive to find work.reduces the incentive to find work.

The high tax rate on each additional dollar The high tax rate on each additional dollar earned discourages employment and self-earned discourages employment and self-sufficiency.sufficiency.

continuedcontinued

Long-term DependencyLong-term Dependency Cycle of Poverty-Children in welfare Cycle of Poverty-Children in welfare

families may end up on welfare families may end up on welfare themselves when they grow up.themselves when they grow up.

Welfare Reform-An overhaul of the Welfare Reform-An overhaul of the welfare system in 1996 that impose welfare system in 1996 that impose a lifetime welfare limit of five years a lifetime welfare limit of five years per recipient and other conditions.per recipient and other conditions.