Macro Final

Natural rate of unemployment

amount of unemployment that that economy normally experiences

Cyclical unemployment

has a different explanation that does the natural rate of unemployment, refers to the year-to-year fluctuation in unemployment around an economy's natural rate of unemployment, and is closely associated with short run ups and downs of economic activity

"natural" implies that the natural rate of unemployment

does not go away on its own even in the long run

unemployment data are collected

through a regular survey of about 60000 households

the labor force participation rate is computed as

(labor force / adult population) x 100

Recent entrants into the labor force account for about

1/3 of those who are unemployed

people who are unemployed because they are in search of a job that suits their skills are included within

frictional unemployment

spells of unemployment end about

1/2 of the time with the person leaving the labor force

people who are unemployed because of job search are best classified as

frictionally unemployed

explanations for the existence of structural unemployment

efficiency wages, minimum-wage laws, and unions

the natural unemployment rate includes

both frictional and structural unemployment

what helps to reduce frictional unemployment

government-run employment agencies and public training programs

who is eligible for unemployment insurance benefits

the unemployed who are laid off because their previous employers no longer needed their skills

causes of frictional unemployment

the destruction of manufacturing jobs, a worker leaving a job t find one with better benefits, and unemployment insurance

a price floor is

a legal minimum on the price at which a good can be sold, often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor, and a source of inefficiency in a market

if a price floor is not binding, then

the equilibrium price is above the price floor and there will be no effect on the market price or quantity sold

a binding price floor

causes a surplus and is set at a price above the equilibrium price

after a binding floor becomes effective, a

smaller quantity of the good is bought and sold

a price floor is binding when it is set

above the equilibrium price, causing a surplus

labor unions

raise wages in unionized industries

unions contribute to

structural unemployment

The Wagner Act of 1935

prevents employers from interfering when workers try to organize a union

The theory of efficiency wages

explains why it may be in the best interest of firms to offer wages that are above the equilibrium level

Efficiency wages

increase productivity but increase unemployment

example of an efficiency wage

an above equilibrium wage paid by a firm to reduce turnover costs

Why might a firm pay efficiency wages?

to reduce incentives to shrink, reduce turnover, and attract a well-qualified pool of applicants

(*16) Money

is more efficient than barter, makes trades easier, and allows greater specialization

functions of money

a unit of account, a store of value, and a medium of exchange

assets from most to least liquid

money, bonds, cars, houses

Money is

the most liquid asset but an imperfect store of value

paper dollars

are fiat money and gold coins are commodity money

currency includes

paper bills and coins

a central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

monetary policy

a central banks setting of the money supply

the federal reserve

created in 1913, is the us's central bank, and has other duties in addition to controlling the money supply

Members of the federal reserve's board of governors

are appointed by the president of the us and confirmed by the us senate

has 12 regional banks. the board of governors has 7 members who serve 14-year terms

the regional federal reserve banks

the FOMC

meets to discuss changes in the economy and determine monetary policy

at the federal reserve

the nation's monetary policy is made by the federal open market committee, which meets about every 6 weeks

The voting members of the Federal Open Market Committee include

five of the presidents of the regional Federal Reserve banks, the president of the federal reserve bank of New York, and the seven members of the board of governors

the new York federal reserve bank

president always gets to vote at the FOMC meetings, conducts open market transactions, and is one of 12 regional Federal Reserve banks

in a system of 100% reserve banking

banks do not make loans

a banks assets equal its liabilities under

both 100%-reserve banking and fractional-reserve banking

reserves are

deposits that banks have received but have not yet loaned out

Bank regulators impose capital requirements in order to

ensure banks can pay off depositors

what can the fed do to change the money supply

change reserves or change the reserve ratio

When conducting an open-market sale, the fed

sells government bonds, and in so doing increases the money supply

when conducting an open-market purchase, the fed

buys government bonds, and in so doing increases the money supply

open-market operations

the tool of monetary policy the fed uses most often

When the fed decreases the discount rate, banks will

borrow more from the fed and lend more to the public. The money supply increases

The fed can increase the money supply by conducting open-market

purchases or by lowering the discount rate

if the federal reserve increases the interest rate on bank deposits at the fed, banks will want to hold

more reserves, so the reserves ratio will rise

in a fractional-reserve banking system, an increase in the reserve requirements

decreases both the money multiplier and the money supply

The money supply increases when the fed

buys bonds. the increase will be larger, the smaller is the reserve ratio

the fed increases the reserve requirement, but it wants to offset the effects on the money supply. what should it do?

buy bonds to increase reserves

if the public decides to hold more currency and fewer deposits in banks, bank reserves

decrease and the money supply eventually decreases

to increase the money supply, the fed could

decrease the discount rate

today, bank runs are

uncommon because of FDIC deposit insurance

the federal funds rate is the

interest rate at which banks lend reserves to each other overnight

an increase in the money supply might indicate that the fed had

purchased bonds in an attempt to reduce the federal funds rate

fed policy decisions influence

inflation and employment

collective bargaining refers to

the process by which unions and firms agree on the terms of employment

Consumers decide to rode bikes more and drive cars less. Bicycle companies expand production while automobile companies fire workers. this is an example of

frictional unemployment created by sectoral shifts

When prices are falling, economists say that there is

deflation

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

quantity theory of money

when the price level falls, the number of dollars needed to buy a representative basket of goods

decreases, so the value of money rises

when there is inflation, the number of dollars needed to buy representative basket of goods needed to buy a representative basket of goods

increases, and so the value of money falls

if P denotes the price of goods and services measures in terms of money, then

1/P represents the value of money measured in the terms of goods and services, P can be regarded as the "overall price level", an increase in the value of money is associated in the value of money is associated with a decrease in P

the supply of money is determined by

the Federal Reserve System

with the value of money on the vertical axis, the money supply curve is

vertical

money demand refers to

hoe much wealth people want to hold in liquid form

as the price level decreases, the value of money

increases, so people hold less money to purchase goods and services

When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money

demanded increases

when the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money

increases, so the quantity of money demanded decreases

when the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustment in

the price level

when the money market is drawn with the value of money on the vertical axis, if the value of money is above the equilibrium level,

the price level will rise

when the money market is drawn with the value of money on the vertical axis, an increase in the money supply

increases the price level and decreases the value of money

a decrease in the money supply creates an excess

demand for money that is eliminated by falling prices

economic variables whose values are measured in monetary units are called

nominal variables

the price level is a

nominal variable

classical economic theory argues that long-run changes in the money supply

affect nominal variables, but not real variables

according to the classical economic theory

the GDP is not influenced by long-run monetary factors

according to the classical economic theory

The price level and nominal interest rates are influenced by long-run monetary factors

the principle of monetary neutrality implies that in the long-run, an increase in the money supply will

increase the price level, but not real GDP

according to the principle of monetary neutrality, a decrease in the money supply in the long run will not change

unemployment

most economists believe that monetary neutrality provides

a good description of the long run, but not the short run

the velocity of money is

a average number of times per year a dollar is spent

if velocity and output were nearly constant, then

the inflation rate would be about the same as the money supply growth rate

based on past experience, if a country is experiencing hyperinflation, them which of the following would be a reasonable guess?

the country has high money supply growth, inflation is acting like a tax on everyone who holds money, and the government is printing money to finance its expenditures

the inflation tax

is an alternative to income taxes and government borrowing, taxes most those who hold the most money, and is the revenue created when the government prints money

the fisher effect says that

the nominal interest rate adjusts one for one with the inflation rate

suppose that monetary neutrality and the fisher effect both hold. an increase in the money supply growth rate increases

the inflation rate and the nominal interest rate by the same number of percentage points

shoeleather costs arise when higher inflation rates induce people to

hold less money

when inflation rates rise, people tend to go to the bank

more often, giving rise to shoeleather costs

menu costs

deciding on new prices, printing new price lists, and advertising new prices

in the us people are required to pay taxes on

nominal interest earnings, irrespective of their real interest earnings

wealth is redistributed from debtors to creditors when inflation was expected to be

high and it turns out to be low

if the inflation rate is higher than expected

creditors receive a lower real interest rate than they had anticipated

the monetary policy

is neutral in the long run, it may have effects on real variables in the short run

what type of economy interacts with other economies

only open economies