Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010-

Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2010-2011

8CHAPTERUnemployment and Inflation

Macro


LO1

Unemployment Unemployment Personal cost Cost on the economy Measuring unemployment Civilian non-institutional adult

population Labor force Employed + Unemployed Unemployment rate Percentage of unemployed in the labor

force


LO1

Adult population Employed Working full time or part time Not working Unemployed (looking for work) Not in labor force Retired; students; don’t want to work Discouraged workers

Unemployment


LO1

Labor force participation rate Number in labor force / Adult population Unemployment over time Rise during contractions Fall during expansions Overall downward trend (1980s to

2000) Growing economy Fewer teenagers in workforce

Unemployment


LO1

The U.S. Unemployment Rate Since 1900

Exhibit 2


Unemployment Rates for Various Groups

LO1 Exhibit 3(a)


Unemployment Rates for Various Groups

LO1 Exhibit 3(b)

Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Unem

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LO1

Sources of Unemployment Frictional unemployment

Bring together employers and job seekers

Doesn’t last long

Better match workers and jobs

Seasonal unemployment

Seasonal changes


LO1

Sources of Unemployment Structural unemployment

Mismatch of skills or geographic location

Problem

Cyclical unemployment

Increases during recessions

Decreases during expansions


LO1

Full Employment Full employment

No cyclical unemployment

Some unemployment

Frictional

Structural

Seasonal

Estimates: 4-6%


LO1

Unemployment Compensation Unemployment benefits

Half of the unemployed

Criteria

Lost job

Looking for work

Time limit: 6 months

40% of wages

May reduce the incentive to find work


Inflation

LO2

Inflation Sustained increase in price level Annual inflation rate Percentage increase in price level Hyperinflation Extremely high inflation Deflation Sustained decrease in price level Disinflation Decrease in inflation


Two Sources of Inflation

LO2

Increase in AD Demand-pull inflation Increased government spending Social programs Decrease in AS Cost-push inflation Increase cost of production Push up the price level Stagflation


Inflation Caused by Shifts of Aggregate Demand and Aggregate Supply Curves

Aggregate output0

Pricelevel

P’

P

AS

AD’

AD

(a)Demand-pull inflation: inflation caused by an increase of aggregate demand

An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’.

Aggregate output0

Pricelevel

P’

P

AS

AD

(b) Cost-push inflation: inflation caused by a decrease of aggregate supply

A decrease of aggregate supply to AS’ “pushes” the price level up from P to P’.

AS’

LO2 Exhibit 6


Inflation Since 1913

LO2 Exhibit 7(b)

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Why is Inflation Unpopular?

LO2

Pay higher prices Inflation = Penalty Receive higher receipts Higher income ‘Well-deserved’ reward Fixed nominal income Unadjusted for inflation Social Security Adjusted for inflation (COLA)

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Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010-