UnemploymentUnemployment 5,655,0005,655,000Unemployment Rate = Unemployment Rate = Labor ForceLabor Force x 100; 4.0% = x 100; 4.0% = 140,863,000140,863,000 x 100 x 100 [Employed + unemployed][Employed + unemployed] [135,208,000+5,655,000][135,208,000+5,655,000]

IIn n Forney, 42 Forney, 42 are are unemployed & 658unemployed & 658 are are employed. Temployed. The he unemployment rateunemployment rate is is __ __%.%.

One milOne mil. are . are unemployedunemployed & & 19 mil19 mil. are . are employedemployed. The unemploy. rate is __%.. The unemploy. rate is __%.6655

NS 41NS 4141. If the total population is 280 million, 280 million, and the civilian labor forcecivilian labor force includes 129,558,000129,558,000 with jobswith jobs & 6,739,000 unemployed & 6,739,000 unemployed but looking for jobs, then the unemployment rateemployment rate would be ____%. 4.94.9

[6,739,000/136,297,000 x 100 = 4.9%][6,739,000/136,297,000 x 100 = 4.9%]

NegativeNegative//PositivePositive GDP GapsGDP Gaps

““Natural Rate of Unemployment” [4-6%]Natural Rate of Unemployment” [4-6%]

ADAD33ADAD11

ADAD22

ASAS

1111%% 6 6%% 11%%

YYRR Y* Y*FF YYii

YYAA Y YP P YYAA

$9$9 T T $10 $10 T T $11 $11 TT

RRecessionaryecessionary GDP Gap GDP Gap

InflationaryInflationary GDP Gap GDP Gap

Three Types of UnemploymentThree Types of UnemploymentFrictionalFrictional – “temporary”, “transitional”, “short-term.”(“between jobs” or “search” unemployment)

Examples:1. People who get “fired”“fired” or “quit”“quit” to look for a better one.2. “Graduates”“Graduates” from high school or college who are looking for a job.3. “Seasonal”“Seasonal” or weather-dependent jobs such as ““agricultural”agricultural”, “construction”“construction”, “retail”“retail”, or “tourism”“tourism”. [lifeguards, resort workers, Santas, & migrant workers.]Frictional unemployment signals that “new jobs”“new jobs” are availableand reflects “freedom of choice”“freedom of choice”..

These are qualified workers “transferable” skills.These are qualified workers “transferable” skills.

2.2. Structural Structural UnemploymentUnemploymentStructuralStructural – “technological”“technological” or “long term”“long term”.. There are basic changes in the “structure”“structure” of the labor force which make certain “skills obsolete”“skills obsolete”..

AutomationAutomation may result in job losses.Consumer tasteConsumer taste may make a good “obsolete”.The autoauto reduced the need for carriage makers.

Farm machineryFarm machinery reduced the need for farm laborers.““Creative destruction”Creative destruction” means as jobs are created, other jobs are lost. Jobs of the future destroy jobs oftoday. Frictional and Structural make up the “natural“naturalrate of unemployment”rate of unemployment”..

““These jobs do not come back.”These jobs do not come back.”““Non-transferable skills”Non-transferable skills” – choice is prolonged unemployment or retraining.

3. CCyclical yclical UUnemploymentnemployment

CyclicalCyclical – ““economiceconomic downturns” downturns” in the business cyclebusiness cycle.

““Cyclical fluctuations”Cyclical fluctuations” caused by “deficient AD”“deficient AD”““Durable goods jobs”Durable goods jobs” are impacted the most.These cancan be be postponedpostponed because they can be repairedcan be repaired.““Cyclical unemployment”Cyclical unemployment” is “real unemployment”“real unemployment”..

““These jobs do come back.”These jobs do come back.”

Survey on UnemploymentSurvey on Unemployment

BLS calls 60,000 households every month. BLS calls 60,000 households every month. They ask three questions: 1. 1. Are you working?Are you working? If the answer is nono, 2. Did you work at all this month-even 1 day?Did you work at all this month-even 1 day? You are a member of the LF if “yes”“yes” on 1 or 2.

3. Did you look for work during the last month?Did you look for work during the last month? [agency, resume, interview] A “yes”“yes” counts you aspart of the LFLF. A “no”“no” means you are not countednot counted.You are a “discouraged worker.”“discouraged worker.” The labor force consists of the employedemployed and unemployedunemployed.

1. A man working for Ford Motor Company is replaced by a robot.2. A homebuilder loses his job during the recession because houses are not selling.3. A person who has worked his way through medical school (he has now graduated) has quit his job as a cook at McDonald’s and is interviewing to become a brain surgeon.4. Automation has cost Alexandria her office job. 5. Now that the economy has improved from a business contraction, Rick is looking to get his old job back at Ford.

6. A California citrus picker is temporarily unemployed because of the weather.

7. A bank teller loses her job to an ATM machine.8. Santa lost his job after Christmas.9. A Lynch student graduates after 7 years in high school (had to repeat econ 4 times) & is trying to get her first job at Arby’s.10. Joel is fired at Wendy’s but is interviewing at McDonald’s.

..

1. 1. BB 2. 2. CC 3. 3. AA 4. 4. BB 5. 5. CC 6. 6. AA 7. 7. BB 8. 8. AA 9. 9. AA 10. 10. AA

Unemployment QuizUnemployment QuizA. Frictional B. Structural C. CyclicalA. Frictional B. Structural C. Cyclical

NS 15-21NS 15-2115. The business cyclebusiness cycle is defined as the _______

and _______ in business activity.

A. EXPANSION B. PEAK C. CONTRACTIONA. EXPANSION B. PEAK C. CONTRACTION D. TROUGHD. TROUGH

___ 16. High pointHigh point of expansion___ 17. Period of growth (GDP increasesGDP increases)___ 18. “Bottoming out”“Bottoming out” of business activity___ 19. Laid off workers are called backLaid off workers are called back.___ 20. Near or at full employmentNear or at full employment (4-6%)___ 21. Have averaged 11 monthsaveraged 11 months since W.W.II.

upturnsupturns downturnsdownturns

BB

DDAABBCC

AA

NS 31-49 NS 31-49 31. (Frictional/Structural/Cyclical) is “temporary”, “short-term“short-term”” unemployment.32. (Frictional/Structural/Cyclical) is technological, “long-term”“long-term” unemployment.33. (Frictional/Structural/Cyclical) is unemployment resulting from recessionsrecessions.

A. FRICTIONAL B. STRUCTURAL C. CYCLICALA. FRICTIONAL B. STRUCTURAL C. CYCLICAL

___ 34. Michael lost his job due to the recessionrecession [business cycle downturn].___ 35. College graduateCollege graduate is searching for his first job.___ 36. Amanda is quittingquitting Wendy’s to work at McDonald’s.___ 37. There are job losses at Ford due to a decrease in ADdecrease in AD.___ 38. LifeguardsLifeguards in the winter and SantasSantas during the spring.___ 39. The auto replaces carriage makersauto replaces carriage makers.___ 40. ATM machines replace bank tellersATM machines replace bank tellers.

45. The cost of unemploymentcost of unemployment can be measured by the amount by which (potential/actual) GDP exceeds (potential/actual) GDP.46. If the unemployment rate is 8%unemployment rate is 8%,, we can infer that the (potential/actual) GDP is in excess of (potential/actual) GDP.47. (Inflation/Disinflation/Deflation) is a general increase in pricesgeneral increase in prices.48. (Inflation/Disinflation/Deflation) is a decline in pricesdecline in prices.49. (Inflation/Disinflation/Deflation) is a decrease in the rate of inflationdecrease in the rate of inflation.

CCFFFFCCFFSSSS

AD/AS Primer - AD/AS Primer - NoNo RecessionaryRecessionary//InflationaryInflationary GapGap

EE – No INFLATIONARYINFLATIONARY or RECESSIONARY GAPRECESSIONARY GAP [Y*]Potential Potential outputoutput[$10 tr$10 tr.] equals actual actual output[$10 tr.]output[$10 tr.]Actual unempl. rate[6%]Actual unempl. rate[6%] equals potential unempl. rate[6%]potential unempl. rate[6%]

66% %

Y*Y*FF

$$1010 tr. tr.

[Frictional+Struc.][Frictional+Struc.]

3%3%

UnemploymentUnemployment1. FrictionalFrictional a. quitquit for better job b. firedfired c. graduatedgraduated d. seasonalseasonal2. StructuralStructural [[“technological”“technological”]] replaced by machinery 3. CyclicalCyclical downturn in downturn in business cyclebusiness cycle [“real”“real” unemployment]

Real GDPReal GDP

ADAD ASAS

FE GDPFE GDP “Bull’s Eye”“Bull’s Eye”

EE

OKUN’S LAWOKUN’S LAW

• For every one percentage point by which the For every one percentage point by which the actual unemployment rate exceeds the actual unemployment rate exceeds the "natural" rate of unemployment, , real gross domestic product is reduced by 2% to 3%. is reduced by 2% to 3%. That is, unemployment above the inflation-That is, unemployment above the inflation-threshold unemployment rate reduces GDP below threshold unemployment rate reduces GDP below potential output, and for every 1% excess of the , and for every 1% excess of the natural unemployment rate, a 2% to 3% natural unemployment rate, a 2% to 3% reduction in GDP is predicted. The difference reduction in GDP is predicted. The difference between actual and potential GDP is called the between actual and potential GDP is called the GDP gap. It may be expressed as a percentage or . It may be expressed as a percentage or an absolute amount. an absolute amount.

Okun’s LawOkun’s LawGDP Gap = Unemployment Rate over 6% x2GDP Gap = Unemployment Rate over 6% x27.5% unemployment, so 1.5 x 2% = 3%.7.5% unemployment, so 1.5 x 2% = 3%.[$3 bil. GDP Gap($100 Bil. nominal GDPx3%; or $100 B x .03 =$3 B.)

1. Unemployment is 7%; Nominal GDP is $200 billion. Real unemp. is __%. The % gap is __%. Y being forgone is $__ B.

2. Unemployment is 8%; Nominal GDP is $500 billion. Real unemp. is __%. The % gap is __%. Y being forgone is $__ B.

3. Unemployment is 10%; Nominal GDP is $100 billion. Real unemp. is __%. The % gap is __%. Y being forgone is $__ B.

GDP Gap (Okun’s Law)GDP Gap (Okun’s Law)Unemployment Rate above 6% x 2Unemployment Rate above 6% x 2

22 44

44 2020

88 88

11

22

44 NS 43 & 44NS 43 & 4443.Unemployment is 17%. Nominal GDP is $200 billion. What % is the GDP gap? __% What output is forgone? $___44. Unemployment is 16%. Nominal GDP is $300 billion. What % is the GDP gap? __% What output is forgone? $___

2222 4444

2020 6060

NS 50, 51, & 52NS 50, 51, & 5250.The CPI was 166.6 in 1999 and 172.2 in 2000. Therefore, the rate of inflation for 2000 was (2.7/3.4/4.2)% 51. If the CPI falls from 160 to 149 in a particular year, the economy has experienced (inflation/deflation) of (5/-4.9/-6.9)%.52. If CPI rises from 160.5 to 163.0 in a particular year, the rate of inflation for that year is (1.6/2.0/4.0)%.

[-11/160 x 100 = -6.9%][-11/160 x 100 = -6.9%]

(2006-later year) (2005-earlier year)(2006-later year) (2005-earlier year) Current year’s index – last year’s indexCurrent year’s index – last year’s index 199.1 – 192.7 [6.4]199.1 – 192.7 [6.4]C.P.I. = Last year’s index(earlier year) x 100; 192.7 x100 = 3.3%C.P.I. = Last year’s index(earlier year) x 100; 192.7 x100 = 3.3%

130.7-124.0(6.7)130.7-124.0(6.7) 116-120(-4)116-120(-4) 333-300(33)333-300(33) 124.0 x 100 = ____ 120 x 100 = ____ 300 x 100 = ____124.0 x 100 = ____ 120 x 100 = ____ 300 x 100 = ____

Figuring InflationFiguring Inflation[Change/Original X 100 = inflation]

5.4%5.4% -3.3%-3.3% 11%11%

[5.6/166.6 x 100 = 3.4%][5.6/166.6 x 100 = 3.4%]

So, 3.3% increase in SocialSo, 3.3% increase in SocialSecurity benefits for 2007Security benefits for 2007

Consumers in this economy buy only two goods–hot dogs & hamburgers.Step 1. Fix the basket. What percent of income is spent on each. Consumers in this economy buy a basket of:

4 hot dogs and 2 hamburgers4 hot dogs and 2 hamburgers

Step 2. Find the prices of each good in each year. YearYear Price of Hot DogsPrice of Hot Dogs Price of HamburgersPrice of Hamburgers 20012001 $1 $1 $2$2 20022002 $2 $2 $3$3

Step 3. Compute the basket cost for each year. 2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $82001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8 2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $142002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14

Step 4. Choose one year as a base year (2001) and compute the CPI 2001 ($8/$8) x 100 = 1002001 ($8/$8) x 100 = 100 2002 (14/$8) x 100 = 1752002 (14/$8) x 100 = 175

Step 5. Use the CPI to compute the inflation rate from previous year 2002 (175/100 x 100 = 175%) or to get actual % (175-100)/100 x 100 =75%(175-100)/100 x 100 =75%

(42%)(42%) 18. Suppose that a typical consumer buys the following quantities of thesebuys the following quantities of these three commodities in 2000 and 2001three commodities in 2000 and 2001.

CommodityCommodity QuantityQuantity 2000 per2000 per Unit PriceUnit Price 2001 per2001 per Unit PriceUnit PriceFood 5 units $6.00 $5.00Clothing 2 units $7.00 $9.00Shelter 3 units $12.00 $19.00

Which of the following can be concluded about the CPI for this individual from concluded about the CPI for this individual from 2000 to 20012000 to 2001? a. It remained unchanged. c. it decreased by 20% b. It decreased by 25%. d. It increased by 20% e. It increased by 25%.(Answer)(Answer) Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36,Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36,for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)]for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)]

Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57, Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57, for value of $100. CPI for value of $100. CPI =125 ($100/$80 x 100 = 125% for 2001)=125 ($100/$80 x 100 = 125% for 2001)]]

So, the CPI increased by 25%CPI increased by 25%..

__________________________““Rule of 70”Rule of 70” = % annual rate of increase (3%) = 23 years

[InflationInflation (prices to double)] 70 70 70 [InvestmentsInvestments to double] 10 = ______ 12 = _____ 9 = _____ [GDP GDP (standard of living) to double]

““Rule of Rule of 70”70”

7 7 yearsyears 6 6 yearsyears 8 8 yearsyears

70

7070

NominalNominalIncomeIncome

RealRealIncomeIncome

InflationInflationPremiumPremium

-16%16%

1010%%

66%%

[[NominalNominal income – income – inflationinflation rate rate == RealReal Income Income]]

=

““Real Income”Real Income” measures the amount of goods/services nominal income will buy.

[% change[% change in in real incomereal income = % change% change in in nominal incomenominal income - % change% change in in PLPL.] 5%5% 10%10% 5%5%

Nominal income rose byNominal income rose by 10% 10%,, PL PL increased byincreased by 4% 4% - then real income rose byreal income rose by ___%.Nominal income rose byNominal income rose by 20% 20%,, PL PL increased byincreased by 5% 5% - then real income rose byreal income rose by ___%.

““Real Real Income”Income”

661515

““You will get a 10% raise”You will get a 10% raise”

Inflation Since 1954Inflation Since 1954

47. Inflation – overall increase in prices47. Inflation – overall increase in prices 48. Deflation – decrease in prices (1954)48. Deflation – decrease in prices (1954)

49. Disinflation – decrease in inflation(1980-83)49. Disinflation – decrease in inflation(1980-83)

Up in 2004Up in 2004Tomatoes 50%Tomatoes 50%Fuel Oil 40%Fuel Oil 40%Butter 28%Butter 28%Gasoline 26%Gasoline 26%Home gas 16%Home gas 16%Chicken 8%Chicken 8%CCol.ol. Tuition 9% Tuition 9%Sausage 7%Sausage 7%SSportsports tickets tickets 7%7%

Down in 2004Down in 2004EggsEggs -20% -20%PCsPCs -14% -14%PhotosPhotos -14% -14%TVs -12%TVs -12%Lettuce -8%Lettuce -8%ToysToys -6% -6%Cars -4%Cars -4%Girls cloth -1%Girls cloth -1%

Above about Above about 3.0%3.0% inflation is inflation is considered too much. [considered too much. [2.5%2.5% in in 20062006]]

Take some money Take some money out of circulation out of circulation to make it more to make it more valuable. valuable.

ADAD11 ADAD22

Demand-Pull InflationDemand-Pull Inflation[“Good News” – more jobs; “Bad News” – higher prices][“Good News” – more jobs; “Bad News” – higher prices]

ASAS

PLPL11

PLPL22

YY** YYII

““Good News” Good News” - more jobs- more jobs

““Bad News”Bad News”-higher prices-higher prices

EE11

EE22

ADAD22

ADAD11

Disinflationary RecessionsDisinflationary Recessions[“[“Good NewsGood News”–”–lower priceslower prices; “; “Bad NewsBad News”–”–job lossesjob losses]]

ASAS

PLPL11

PLPL22

YYRR YY**

““Good news”Good news”-lower prices-lower prices

““Bad news”Bad news”- job losses- job losses

Adverse Supply ShocksAdverse Supply Shocks[“bad news” – job losses; “bad news” – inflation][“bad news” – job losses; “bad news” – inflation]

ADAD ASAS11

PLPL11

YY**YYRR 1010%%

ASAS22

$2.25$2.25

This economy is

stagnatingstagnating but

inflatinginflating..

StagStagflationflation

PLPL22[10[10%%]]

StagnatingStagnating

InflatingInflating

Traditional Traditional Fiscal PolicyFiscal Policy [“G”[“G” & “T”]& “T”]

will not work with will not work with StagStagflationflationADAD11

4%4%

YY**

1010%%

1010%%

ASAS22

StagStagflationflation

ADAD22

15%15%

1515%%

AD3AD3

Beneficial Supply ShocksBeneficial Supply Shocks[“[“good newsgood news”–”–job gainsjob gains; “; “good newsgood news”–”–disinflationdisinflation]]

ADAD ASAS11

PLPL11

YY**

PLPL22

YY22

99 cents99 centsASAS22

(Measures of Inflation PPI)(Measures of Inflation PPI)

Prices at the wholesalewholesale or production level which are early early indicators of indicators of inflationinflation. The 2,800 2,800 itemsitems include prices for raw raw materialsmaterials, intermediate goodsintermediate goods, and finished goodsfinished goods. The PPI does not include servicesdoes not include services.

PPI was 5.4 in 2005, highest since1990. The “corecore PPI” [no volatile food and energy] was only 1.7%.

2003

Consumer Price Index (CPI)Consumer Price Index (CPI)

[CPI measures cost of living relative to a base year[100][CPI measures cost of living relative to a base year[100]

The CPI is a market basket of 364 items364 items at 21,00021,000establishmentsestablishments in 91 cities91 cities that the typical householder buys. It does not include exports because we do not buy exports but does include imports. About 55% of the CPI is services55% of the CPI is services.

Household10.0%

Food18.0%

Alcohol4.5%

Recreation10.4%

Clothing6.6%

Health4.3%

Transportation18.3%

Shelter27.9%

HealthHealth4.3%4.3%

What’s in the CPI’s Basket?

TransportationTransportation18.3%18.3%

ShelterShelter27.9%27.9%

HouseholdHousehold10.0%10.0%

ClothingClothing6.6%6.6%

AlcoholAlcohol4.5%4.5%

RecreationRecreation10.4%10.4%

FoodFood18.0%18.0%

The The “Market Basket”“Market Basket”

PPIPPI and and CPICPI in March 2005 in March 2005

Box Office ReceiptsMovieMovie Receipts (mil.)

1. Avatar $2,7882. Titanic 2,1863. Avengers 1,5184. H. Potter(DH2) 1,3415. Frozen 1,2746. Iron Man 3 1,2157. Transformers 3 1,1238. LOTR ROTKing 1,1199. Skyfall 1,10810.Transformers 4 1,08711.Dark Knight 1,08412.Pirates: DMC 1,066

Inflation-Adjusted RInflation-Adjusted ReceiptseceiptsMovieMovie Year Receipts(mil.)1. Snow White 1937 $6$6,729,7292. Gone With the Wind 1939 6,5883. Bambi 1942 3,8274. Titanic 1997 3,1695. Avatar 2009 3,0186. Star Wars 1977 2,9787. Sound of Music 1965 2,1148. The Exorcist 1973 2,1119. JAWS 1975 2,03610. ET 1982 1,912

What was the What was the most popular moviemost popular movie of all time? of all time? [Mr. Index Goes To Hollywood]

History of Inflation, 1860-2004History of Inflation, 1860-2004

2007

$1.50$1.50 $11$11

$7$21$21

1962 Prices1962 Prices v. 2015 Prices2015 Prices• Tuition at Harvard - $900Tuition at Harvard - $900• Starting salary - $6,000 [college Starting salary - $6,000 [college

graduate]graduate]• FICA of 3.125 of $4,800 [$150 FICA of 3.125 of $4,800 [$150

maximum]maximum]• Top marginal tax rate of 91% of Top marginal tax rate of 91% of

incomes over $200,000.incomes over $200,000.• New house for $10-15,000 [2.5 New house for $10-15,000 [2.5

times the income of a new times the income of a new college graduate]college graduate]

• Coke - 10 centsCoke - 10 cents• Movies - .50 Movies - .50 • Gas, a gallon - $.29Gas, a gallon - $.29• 1962 Chevy - $1,5001962 Chevy - $1,500

• Tuition at Harvard - $58,607Tuition at Harvard - $58,607• Starting salary - $48,700 Starting salary - $48,700

[college graduate][college graduate]• FICA of 6.2 of $118,500 FICA of 6.2 of $118,500

[$7,254 maximum][$7,254 maximum]• Top marginal tax rate of 39.6% Top marginal tax rate of 39.6%

of incomes over $400,000of incomes over $400,000• New median house price is New median house price is

$188,900 [3.88 times the income of $188,900 [3.88 times the income of today’s college grads] today’s college grads]

• Coke - $1.60Coke - $1.60• Movies - $8.38Movies - $8.38• Gas, a gallon - $2.31Gas, a gallon - $2.31• 2015 Chevy - $27,0602015 Chevy - $27,060

62 Corvette62 Corvette $2,995$2,995 2015 Corvette2015 Corvette $54,000$54,000

Unemployment 1900-Unemployment 1900-19901990

UnemploymentUnemployment,, InflationInflation,, & & Business Business CyclesCycles

Inflation – “too many dollars chasing Inflation – “too many dollars chasing too few goods.”too few goods.”Deflation – “too few dollars chasing Deflation – “too few dollars chasing too many goods.”too many goods.”

..

Downturns in the Business CycleDownturns in the Business Cycle

HardHard//SoftSoft Good Price/Production DropsGood Price/Production Drops

Indicators of the Business CycleIndicators of the Business Cycle[“The leading indicators have predicted

11 of the last 15 recessions”]

Leading IndicatorsLeading IndicatorsAve. work week Building permitsCredit Delivery timesNew orders InventoriesNew businesses Materials pricesStock prices Money supplyNew orders Unemployment claims

Had a Had a recessionrecession in 2001 in 2001

““BarometerBarometerOf The Future”Of The Future”

[6-9 months][6-9 months]

A A drop for drop for three straight three straight monthsmonths usually indicates usually indicates a recession is coming.a recession is coming.

““Where we are heading”Where we are heading”

Indicators of the Indicators of the BusinessBusiness Cycle Cycle

Coincident IndicatorsCoincident Indicators1. Personal income minus transfer payments2. Nonagricultural payrolls3. Industrial production4. Manufacturing and trade sales

““Where we are now”Where we are now”

Indicators of the Business CycleIndicators of the Business Cycle

Lagging IndicatorsLagging IndicatorsLabor cost, unemployment rate & duration, prime rates, CPI for services, commercial loans, etc.

““Where we have been”Where we have been”

Full Employment = 4-6% unemploymentFull Employment = 4-6% unemployment

Discouraged workersDiscouraged workers – those who have given up.Unemployed workersUnemployed workers - those who are actively looking.Part-time workersPart-time workers – half employed, half unemployed,but counted as fully employed.Employed workersEmployed workers – those who work for even one hourper week for wages or 15 hours a week if not getting paid.

We have full employmentfull employment when cyclical unemploymentcyclical unemployment is is ““00””.In EuropeEurope, full employment is 8-10%8-10%.

Wish I had Wish I had not dropped not dropped

out of school.out of school.Will WorkWill WorkFor FoodFor Food

22. During a recessionrecession, jobs relating to (durable/nondurable) goods are affected the most because they are

postponablepostponable and have monopoly powermonopoly power (few sellers).

23. (Leading/Coincident/Lagging) indicators – statistics that illustrate the direction the economy is heading in 6-9economy is heading in 6-9 months.

24. (Leading/Coincident/Lagging) indicators – snapshot of the economy “at this time”“at this time”.

25. (Leading/Coincident/Lagging) indicators – statistics that tell where the economy has beeneconomy has been.

26. Full employmentFull employment occurs when we have ______% unemployment. The current unemployment rate is ____%.

27. (Discouraged workers/Temporary unemployed workers) are those who have given upgiven up looking for a job.

28. The presencepresence of of discouraged workersdiscouraged workers & counting part-time workers ascounting part-time workers as fully employedfully employed results in the official rate being (understated/overstated).

29. If 2 million 2 million out ofout of 8 million unemployed workers become “discouraged” 8 million unemployed workers become “discouraged”

& quit looking& quit looking for work, the official rate would (incr/decr/be unchanged).

30. If 3 million part time workers switch to full time work3 million part time workers switch to full time work, the official rate will (fall/rise/remain unchanged).

NS 22-30NS 22-30

4-64-655

Demand-Pull InflationDemand-Pull Inflation – increase in AD.[“Too many dollars chasing too few goods”][“Too many dollars chasing too few goods”] Originates from “buyers side of the market”“buyers side of the market”

Cost-Push InflationCost-Push Inflation – 3 things maycause “cost-push” inflation.1. Wage-pushWage-push – strong labor unions2. Profit-pushProfit-push – companies increase prices when their costs increase.3. Supply-sideSupply-side cost shocks cost shocks – unanticipated

increase in raw materials such as oil.

Demand-PullDemand-Pull && Cost-PushCost-Push InflationInflationDD1 1 DD22

““Demand-pull”Demand-pull”

PP22

““Wage-price”Wage-price”SpiralSpiral

SS11SS22DD

PLPL22

PLPL11

““Cost-push”Cost-push”

PP11

SS

The debtor winsdebtor wins with 20%20% unanticipated inflationunanticipated inflation.(some examples)

1. In 1914, total German mortgage debt was $10 German mortgage debt was $10 billionbillion marks marks. In 1923, $10 $10 billionbillion marks marks was was worth 1 worth 1 centcent. All debt All debt was was wiped outwiped out.

2. Signed union contracts agreeing to 3% raises3% raises for next 3 years3 years. (A $30,000 salary$30,000 salary would increase to $32,782$32,782 but it would take $51,840$51,840 to buy what $30,000 would buy 3 years before)

3. Signed union contracts agreeing to COLAsCOLAs for next 3 years. (So a $30,000 salary$30,000 salary of 3 years ago would now pay $51,840$51,840 which would buy what $30,000 would buy 3 years ago.

4. Your Econ teacher buys a $300,000 CD$300,000 CD from the 1st Econ Bank which pays him 5% interest5% interest for the next 3 years. [SaverSaver] Mr. Econ would earn $47,288earn $47,288 in interest at 5%5%, however at 20%20%,, he could earn $218,400$218,400.] So the saver looses heresaver looses here.

Who wins/loses with 20Who wins/loses with 20% % Unanticipated InflationUnanticipated Inflation??

[[CreditorsCreditors, , DebtorsDebtors, , SaversSavers]]

InflationInflation• Who is Who is Hurt by InflationHurt by Inflation??

–Fixed-Income ReceiversFixed-Income Receivers–SaversSavers–CreditorsCreditors

• Who is Who is UnaffectedUnaffected by Inflationby Inflation??–Flexible-Income ReceiversFlexible-Income Receivers

• Cost-of-Living Adjustments Cost-of-Living Adjustments (COLAs)(COLAs)

–DebtorsDebtors

54. (Demand-pull/Cost-push) inflation results from an increase in increase in aggregate demandaggregate demand [AD].55. (Demand-pull/Cost-push) inflation results from an increase inincrease in production costsproduction costs [wages or input cost].56. The only group that benefits from inflationbenefits from inflation are (creditors/debtors/fixed income pensioners).

NS 54-60NS 54-60

The EndThe End