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Chapter 7Chapter 7
Unemployment and InflationUnemployment and InflationUnemployment and InflationUnemployment and Inflation
UnemploymentUnemployment
What is the lost to the us- personally and for the economy when unemployment happens? Personally:
Steady Paycheck to consumers Social loss: low self-esteem and lost of identity
To the economy: Lost output due to decreased disposal income in the
economy
What does the unemployment rate measure?
What does the unemployment rate measure?
The unemployment rate measures the healthiness of a specific economy.
Measuring UnemploymentMeasuring Unemployment Civilian non-institutional adult population: all civilian
(meaning excluding the military) age 16 or older, except those in prison, mental facilities or in homes for the aged.
Labor Force: people in the adult population who are either working or looking for work People looking for a job, but cannot find one are unemployed
Not in the work force: Stay at home moms College students not looking for work Retired workers
Measuring UnemploymentMeasuring Unemployment
Measuring UnemploymentMeasuring Unemployment Under-employed: individuals who are working part-time
but would prefer full-time status. These individuals are counted in the employed rate, making the
unemployment rate seem better than it actually is.
Where are we now:
http://data.bls.gov/timeseries/LNS14000000
LO1
The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor
Force: February 2009 (in millions)
Exhibit 1
LABOR FORCE
(154.2)
Employed
(141.7)
NOT WORKING
(93.2)
Not in labor force
(80.7)
Unemployed
(12.5)
Labor Force Participation RateLabor Force Participation Rate This measures the total number of people in a nation
that are ACTIVELY participating in the labor force, i.e. they are working a part-time or full-time job. Increase in women participates from 34% of adult women in
1950 to 60% of adult women today
LO1
The U.S. Unemployment Rate Since 1900
Exhibit 2
Unemployment among Various Groups
Unemployment among Various Groups
Unemployment in various groups: Age: Higher unemployment among teenagers Race Gender Geography Occupation
Unemployment Rates for Various Groups
LO1
Exhibit 3(a)
Unemployment Rates for Various Groups
LO1
Exhibit 3(b)
Unemployment varies across occupations and regions
Unemployment varies across occupations and regions
Varies by occupations
Blue-collar workers- higher unemployment that professional and technical workers
Varies by regions
Specific regions have higher unemployment rates
Unem
plo
ym
ent
Rate
s D
iffer
Acr
oss
U.S
. M
etr
opolit
an A
reas
LO1
Exhibit 4
Sources of UnemploymentSources of Unemployment Frictional Unemployment: occurs when job seekers and
employers are not matched up. The employer cannot find a qualified candidate The job seeker is unable to find a match for his/her background
Seasonal Unemployment: occurs during seasonal changes throughout the year Landscapers Snow Plowers Amusement park operators
Sources of UnemploymentSources of Unemployment Structural Unemployment: occurs when the skills
demanded by employers do not match those of the unemployed or the unemployed do not live where the jobs are Financial Analyst looking in a small town
Cyclical Unemployment: occurs with fluctuations to the business cycle, increase during recessions and decrease during booms When cyclical unemployment is present, then the economy is
inside it’s PPF The government will begin to make economic policy to increase
Aggregate Demand
Duration of UnemploymentDuration of Unemployment Long-term unemployed: Those who have been out of
work for 27 weeks or longer
What is full employment?What is full employment?
What is full employment so important? It measures the health of the economy This happens when cyclical unemployment is zero This does not mean zero unemployment, but low
unemployment between 4 to 6 %
Unemployment CompensationUnemployment Compensation Cash transfers to those who lose their jobs and actively
seek employment Benefits can last up to 6 months, during recessions
sometimes longer Opportunity cost of unemployment benefits:
They may reduce the incentive for some individuals to find work
During the Last Quarter Century, the U.S. Unemployment Rate Fell, Europe’s Remained High,
and Japan’s Rose
LO1
Exhibit 5
Problems with official unemployment figures
Problems with official unemployment figures
Under-employment: the problem of individuals working a part-time job when they actually want a full-time job This is not measured in the unemployment rate Example: M.S. in Economics working at a p-t bank teller
Some people may be pretending to look for jobs Underground economy
Selling baked goods to friend Selling illegal drugs Doing the books for a friend
InflationInflation What is inflation?
This is when the average price level increases for all goods This has been a current concern due to the aggressive monetary
policy done by Ben Bernanke during the last few years
Duck Tales explains InflationDuck Tales explains Inflation
HyperinflationHyperinflation Hyperinflation: A very high rate of inflation. VERY
DANGEROUS!!!
In 1923 Germany faced this, please read the article on Germany and watch this short youtube video
Germany explains hyperinflationGermany explains hyperinflation
Two Sources of InflationTwo Sources of Inflation Demand-pull inflation: a sustained rise in the price level
caused by a rightward shift of the aggregate demand curve. Increase in consumers purchasing ALL consumer items on the
average This has not been a concern in the last few years because
consumers have not been consuming items due to the uncertainty in the economy.
Two Sources of InflationTwo Sources of Inflation Cost-push inflation: a sustained rise in the price level
caused by a leftward shift of the aggregate supply curve. Also know as stagflation
A little look at inflation:
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
A little history on inflation and the price level
A little history on inflation and the price level
Since 1913, steady increase in price levels Before 1950s
High inflation that was war related, then in 1930s deflation occurred
Since 1950s Inflation around 3.8% per year
Consumer Price Index Since 1913LO2Exhibit 7(a)
Inflation Since 1913
LO2
Exhibit 7(b)
Anticipated Versus Unanticipated Inflation
Anticipated Versus Unanticipated Inflation
Unanticipated will create more problems that anticipated inflation Example: Expected inflation of 3%, so lenders (such as banks)
will plan for this. However, if inflation increases to 5%, then the lender will lose out, but the borrower will win!
Problems: Real wages decrease- the dollar has less value Real interest rates decrease- lenders lose money
Result: Overall lose to the economy
Avera
ge A
nn
ual In
flati
on
fro
m 2
00
4 t
o
20
08
Diff
ere
d a
cross
U.S
. M
etr
op
olit
an
A
reas
LO2Exhibit 8
Inflation and Interest RatesInflation and Interest Rates What is interest?
The dollar amount paid by borrowers to lenders
Interest Rate: the amount paid per year as percentage of the amount borrowed. The lower this rate, the cheaper it is to borrow or invest in the
economy
Nominal Interest Rate: the interest rate expressed in dollars of value as a percentage of the amount loaned (it is not adjusted for inflation)
Inflation and Interest RatesInflation and Interest Rates Real interest rate: the nominal rate minute the inflation
rate Real interest rate= Nominal interest rate – inflation rate
What happens if expected inflation is high? The nominal interest rate will increase because lenders want to get
them money back with INTEREST!!
The Market for Loanable Funds
Loanable funds per period0
Nom
inal
inte
rest
rat
e
i
D
S The upward sloping supply curve, S, shows that more loanable funds are supplied at higher interest rates.The downward-sloping demand curve, D, shows that the quantity of loanable funds demanded is greater at lower interest rates.The two curves intersect to determine the market interest rate, i.
LO2
Exhibit 10
Why are we scared of inflation?Why are we scared of inflation? The presence of inflation means EVERYTHING cost
more, so the price of goods goes up What does this mean?
It is hard for firms to hire as much It makes it hard for consumers to buy as much!!!
Why do we care? These two things decrease economic growth!!!