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Macroeconomics CH. 28&29

by: bauer47 Notetaker

Macroeconomics CH. 28&29 ECN-120

bauer47 Notetaker

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These notes cover chapters 28 & 29 of macroeconomics.
Principles of Macroeconomics
Joshua M. Phillips
75 ?




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This 5 page Bundle was uploaded by bauer47 Notetaker on Thursday March 10, 2016. The Bundle belongs to ECN-120 at Iowa Central Community College taught by Joshua M. Phillips in Fall 2015. Since its upload, it has received 31 views. For similar materials see Principles of Macroeconomics in Economcs at Iowa Central Community College.


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Date Created: 03/10/16
Unit 4- Chapters 28 & 29 Chapter 28- Unemployment 1. Labor Force Statistics a. Produced by BLS in US Dept. of Labor b. Based on regular survey of 60,000 households c. Based on “adult population” (16+) d. Divides into 3 groups: i. Employed ii. Unemployed iii. Not in the labor force e. Labor force: i. Total # of workers, including employed and unemployed f. Unemployment rate: i. Percent of labor force that is unemployed ii. U-rate = 100% x (# of unemp. / labor force) g. Labor Force Participation Rate: i. % of adult pop. In labor force ii. LFPR = 100% x (labor force / adult pop.) 2. The Duration of Unemployment a. Most spells are short term i. 1/3 of unemp. Under 5 wks ii. 2/3 of unemp. Under 14 wks b. Most unemployment observed is long term 3. Cyclical Unemployment vs. the Natural Rate a. U-rate fluctuates from year to year b. Natural Rate: i. “normal rate” of unemployment around which the actual unemployment rate fluctuates c. Cyclical Unemployment: i. Deviation of unemployment from its natural rate d. Frictional Unemployment: i. Occurs when workers spend time searching for jobs that best suit their skills ii. Short term for most workers e. Structural Unemployment: i. Occurs when there are fewer jobs than workers ii. Usually long-term f. Job Search: i. Workers have different skills 1. Jobs have different requirements ii. Process of matching workers with appropriate jobs iii. Sectoral shifts: 1. Changes in the composition of demand across industries or regions of the country 2. Displace some workers, who must search for new appropriate jobs iv. Frictional unemployment is inevitable v. Gov’t employment agencies and public training programs are necessary g. Unemployment Insurance: i. Gov’t program that partially protects workers’ incomes when they become unemployed ii. Increases frictional unemployment iii. Benefits end when worker finds job 1. Less incentive to search or take jobs right away h. Reasons for Structural Unemployment: i. Minimum Wage Laws ii. Unions 1. A worker association that bargains with employers over wages, benefits, and working conditions 2. Exert their market power to negotiate higher wages for workers 3. The typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work iii. Efficiency Wages 1. Firms voluntarily pay above-equilibrium wages to boost worker productivity 2. Why? a. Worker health b. Worker turnover c. Worker quality d. Worker effort Chapter 29- The Monetary System 1. What is money and why is it important? a. Without money, trade would require barter, the exchange of one good or service for another b. Every transaction would require a double coincidence of wants- the unlikely occurrence that two people each have a good the other wants c. Most people would have to spend time searching for others to trade with- a huge waste of resources d. This searching is unnecessary with money i. The set of assets that people regularly use to buy G&S 2. 3 Functions of Money a. Medium of exchange: an item buyers give to sellers when they want to purchase G&S b. Unit of account: the yardstick people use to post prices and record debts c. Store of value: an item people can use to transfer purchasing power from the present to the future 3. 2 Kinds of Money a. Commodity money: takes the form of a commodity with intrinsic value b. Fiat money: money without intrinsic value, used as money because of gov’t decree 4. The Money Supply: (or money stock) the quantity of money available in the economy a. What assets should be considered part of the money supply? i. Currency: the paper bills and coins in the hands of the non-bank public ii. Demand Deposits: balances in bank accounts that depositors can access on demand by writing a check 5. Measures of the US Money Supply a. M1: currency, demand deposits, traveler’s check, other checkable deposits b. M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds 6. Central Banks & Monetary Policy a. Central Bank: an institution that oversees the banking system and regulates the money supply b. Monetary Policy: the setting of the money supply by policymakers in the central bank c. Federal Reserve (Fed): the central bank of the US 7. Structure of the Fed a. Consists of i. Board of Governors (7 members) ii. 12 regional Fed banks iii. Federal Open Market Committee (FOMC) 1. Includes the Board of Governors and presidents of some of the regional Fed banks 2. Decides monetary policy 8. Bank Reserves a. In a fractional reserve banking system, banks keep a fraction of deposits as reserves and use the rest to make loans b. The Fed establishes reserve requirements, regulations on the minimum amount of reserves that banks must hold against deposits c. Banks may hold more than this minimum amount if they choose d. The reserve ratio = R i. Fraction of deposits that banks hold as reserves ii. Total reserves as a percentage of total deposits 9. Bank T-Account a. T-Account: a simplified accounting statement that shows a bank’s assets and liabilities 10.The Money Multiplier a. The amount of money the banking system generates with each dollar of reserves b. Equals 1/R 11.A more realistic balance sheet a. Assets b. Liabilities c. Bank Capital: the resources a bank obtains by issuing equity to its owners d. Leverage: the use of borrowed funds i. Ratio: the ratio of assets to bank capital 12.Fed’s Tools of Monetary Control a. Open market operations: i. The purchase and sale of US gov’t bonds by the Fed b. Discount rate: i. The interest rate on loans the Fed makes to banks c. Reserve Requirements i. Regulations on the minimum amount of reserves banks must hold against deposits d. Pay interest on Bank’s deposits at the Fed 13.Problems controlling money supply: a. If households hold more of their money as currency, banks have fewer reserves, banks hold me reserves than required, they make fewer loans, and money supply falls b. If banks hold more reserves than required, they make fewer loans, and money supply falls c. Fed can compensate 14.Bank Runs and the Money Supply a. A run on banks: i. When people suspect their banks are in trouble, they may “run” to the bank to withdraw their funds, holding more currency and less deposits


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