Chapter 6

Unemployment, Inflation, Economic Growth and Fluctuations

Macroeconomic Model

Aggregate Demand – total demand Aggregate Supply – total supply Price Level – CPI Quantity – Real GDP

Unemployment

Measurement Civilian Noninstitutionalized Adult Population (CNAP) –

16 years and older Labor Force = Employed + Unemployed Unemployed – looking for work but can’t find it Labor force participation rate = labor force/CNAP

Women and baby boomers Unemployment rate = unemployed/labor force

Types

Frictional – New entrants (9%), Reentrants (34%), Between jobs (12%)

Structural (45%) – Mismatch of skills and jobs and wrong location

Seasonal – Only work during certain seasons Cyclical – fluctuates with the business cycle

Full employment – no cyclical unemployment

Reasons for unemployment

Job leaver Reentrant New entrant Job Loser

Costs

Loss of incomes Loss of self esteem Loss of goods Loss of taxes Social Costs

Brenner study (1984) Suicide Heart disease Mental Illness Health problems Child abuse Crime Drug use

Waste resources Increase in transfer payments

Burden

Blue collar Nonwhite Young Low educated

Minimum Wage

Causes unemployment in teens

Inflation

Inflation – rising average price level (CPI)

Definitions Disinflation – lowering inflation Deflation - falling average price level Hyperinflation – extremely high rate of inflation

Types Anticipated Inflation – what we believe will occur

Expected price level Unanticipated Inflation – surprise inflation

Measurement

CPI – Weighted average market basket

Results

Costs Real income declines: Money loses value Menu costs - Shoe leather costs Distortion costs – uncertainty and confusion Time costs – delays in production and distribution

Types Demand pull: Increased AD Cost push: Decreased AS

Real Interest Rate

Real Interest Rate = Nominal Interest Rate – Inflation Rate

Economic Growth

Increase in the Real GDP over a long period of time

Shifting the PPC outward Increase quantity of resources Increase quality of resources

Economic Fluctuations (Business Cycles) – deviations from the long term trend

Phases Peak – highest economic activity Contraction – decreasing Real GDP for six months

Unemployment Sub-Phases

Slowdown (Downturn) Recession They have to end as cars and appliances have to be

replaced, clothes wear out Trough – lowest economic activity Expansion – increasing Real GDP for six months

Over employment Sub-Phases

Recovery Prosperity