Unit 5 Econ Quiz 11/22

Four Objectives of Macroeconomics

Four Objectives of Macroeconomics

full employment, stable prices, economic growth, equitable distribution of income

Unemployment

A person that is a part of the labor force and is actively seeking work but unable to find employment.

Calculating unemployment rate

(number of unemployed/persons in labor force) * 100

Labor force

Anyone of legal working age that has a job or is looking for a job

Unemployment rate does not include:

Discouraged workers (people that have stopped looking for a job) and underemployed workers (those working part-time but desire full-time employment).

Unemployment rate is _____ than reality

typically lower

Types of unemployment

include frictional, structural, cyclical, and seasonal unemployment.

Seasonal unemployment

occurs when workers are unemployed at certain times of the year, often due to seasonal demand for labor.

Frictional unemployment

occurs when individuals are temporarily unemployed while transitioning between jobs or entering the workforce for the first time.

Structural unemployment

occurs when there is a mismatch between workers' skills and job requirements

Cyclical unemployment

Occurs when there are not enough jobs to go around

Economic consequences of unemployment

Loss of GDP (no income means no spending) Loss of tax revenue (less income means fewer taxes collected) Greater budget deficits (gov aid increases?) Downward pressure on wages (ppl willing to work for less) Greater income disparities (low income jobs more likely to become employed)

Personal consequences of unemployment

Increased stress (heart attacks) Increased indebtedness (ppl borrow money to survive) Increased familial breakdown (homelessness & marriage strain)

Social consequences of unemployment

Increased crime rates (ppl need goods & money, little empirical evidence) Increased risk to health & productivity (health insurance typically links to employment)

Full employment

Lowest possible unemployment rate with the economy growing and all factors of production being used as efficiently as possible (NOT 0) Achieved when no cyclical unemployment, historically 4% - 6% (natural employment)

Inflation

An increase in the average price level of most goods

Consumer price index (CPI)

compares a variety (market basket updated every 10 yrs) of goods and services from last yr to this yr price-wise

CPI formula

(basket cost in yr/basket cost in base yr) * 100

Inflation rate formula

[(new-old)/old] * 100

Limitations of CPI

Does not reflect purchases of all households in a nation Does not reflect changes in quality of products Does not reflect price changes that affect producers

Causes of inflation

Demand pull: When AD increases Cost push: When AS decreases

Deflation - Degrees of price Changes

When the inflation rate is negative

Disinflation - Degrees of price Changes

When the inflation rate falls/slows

Creeping inflation - Degrees of price Changes

1-3, low and stable, goal for most countries

Walking/trotting inflation - Degrees of price Changes

3-10, rises a little too quickly, wages don’t keep up

Galloping inflation - Degrees of price Changes

10, very concerning :(

Hyperinflation - Degrees of price Changes

50, rare, germany 1920s, zimbabwe 2000s, venezuela 2010s

Costs of inflation

Shoe leather: the costs incurred from trying to avoid holding cash during periods of high inflation Menu: the costs that businesses incur when they have to change their prices due to inflation Unit of account: the inefficiencies and confusion that arise when inflation reduces the ability of money to serve as a consistent measure of value

Consequences of inflation

Lower real income Lower real interest rate for savers: money worth less when spent in future Higher nominal interest rate for borrowers: Borrowers benefit, so lenders increase interest Reduction of international competitiveness (bc prices go up)

Consequences of Deflation

Benign deflation: When SRAS goes up Malign deflation: When AD goes down Rising unemployment Delayed consumption Declining investment Cost to borrowers

US Goal

Note: unemployment and inflations are typically inverse Stagflation: both up US considers 2% stable