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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
Note
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