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Econ 225 Chapter 9 Book/PowerPoint Notes

by: Danielle Rios

Econ 225 Chapter 9 Book/PowerPoint Notes EC 225

Marketplace > Southeast Missouri State University > Economics > EC 225 > Econ 225 Chapter 9 Book PowerPoint Notes
Danielle Rios
GPA 3.6

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About this Document

These notes outline Chapter 9 in Macroeconomics 6th Edition by R. Glenn Hubbard and Anthony Patrick O'Brien. They also summarize the PowerPoint on Moodle.
Principles of Macroeconomics
Dr. Chen Wu
Class Notes
Econ, Macroeconomics
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This 4 page Class Notes was uploaded by Danielle Rios on Friday August 26, 2016. The Class Notes belongs to EC 225 at Southeast Missouri State University taught by Dr. Chen Wu in Fall 2016. Since its upload, it has received 28 views. For similar materials see Principles of Macroeconomics in Economics at Southeast Missouri State University.


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Date Created: 08/26/16
Chapter 9- Unemployment and Inflation 9.1 Measuring the Unemployment Rate, the Labor Force Participation, and the Employment-Population Ratio  The Household (Current Population) Survey o Employed- anyone who has a job or is on temporary leave o Unemployed- anyone without a job, but is capable of working and is in search of a job o Labor Force- employed + unemployed o Unemployment Rate- (unemployed/labor force) * 100 o Not in the Labor Force- students, prisoners, retirees, etc. o Discouraged Workers- people who are capable of working, but has not looked for a job in the previous month o Labor force participation rate is a determining factor of how much labor an economy will have from its population and measures the percent of working-age (16+) individuals in the labor force- (labor force/working-age population) * 100 o Employment-population ratio measures the percent of the working-age who are employed- (employment/working-age population) * 100 = employment – population ratio o Example on 278-279  Problems with Measuring the Unemployment Rate o Unemployment rate may understate how many are unemployed  It does not take economic recessions into consideration  It takes people’s word on whether or not they are actively looking for work o Or overstate how many are unemployed  Those who work for under the table money are counted as unemployed  Trends in Labor Force Participation o A high labor force participation rate indicates a high GDP for the economy and per capita o See Figure 9.3 on page 280  Unemployment Rates for Different Groups o Many factors affect unemployment rates  Ethnicity and education level are the two main factors o See “Eight Million Workers Are Missing” on 282  How Long Are People Typically Unemployed? o The longer a person is unemployed, the harder it becomes to work again. o Currently, the average turnover rate is a few months  The Establishment/Payroll Survey o Measures total employment through a business’ company payroll o Drawbacks  Does not take self-employed into account  New firms are not considered  Values may change by the time the survey ends  Job Creation and Destruction Over Time o Job creation and destruction is normal in any economy o Net changes in who is employed or unemployed is not completely representative of how much the job market changes 9.2 Types of Unemployment (3 types)  Frictional Unemployment- unemployment in the short term which comes from job/worker compatibility o Includes people who are in between jobs and actively searching for a new one o Includes seasonal unemployment  Structural Unemployment- unemployment which comes from worker skill not always matching the tasks of the job o If someone is trained to do a job one way and they switch locations or the job description changes, the skills necessary for the job may also change. These changes make it difficult for the current employees to keep up, so they may become unemployed.  Cyclical Unemployment- unemployment which comes from recessions in the business cycle  Full Employment o When structural and frictional unemployment are the only unemployment (natural rate of unemployment) 9.3 Explaining Unemployment  Government Policies and the Unemployment Rate o Attempts to help reduce frictional unemployment through making the process of finding and filling jobs quicker o They also attempt to help reduce structural unemployment through policies which call for employers to retrain employees o However, unemployment insurance and minimum wage laws potentially increase the unemployment rate  Unemployment Insurance and Other Payments to the Unemployed o Some people who qualify for unemployment benefits will put off searching for a new job until they no longer qualify  Minimum Wage Laws o As minimum wage increases, people become more satisfied with not pursuing a better paying job if they are able to provide for themselves o Companies become more selective with who their employees  Labor Unions o Those who try to persuade employers to give employees better benefits  Efficiency Wages o When employers increase wages to increase how productive their employees are 9.4 Measuring Inflation  Remember price levels and inflation rate from Ch. 8  Consumer-Price Index o Measures change in prices of g/s, over time, an urban family of four pays o (expenditures in current years/ expenditures in base year) * 100 o Example on pg. 292  Is the CPI Accurate? o Substitution Bias- consumers buy less of a product if it increases in price o Increase in Quality Bias o New Product Bias- if a product is new, it will increase in sales before decreasing after it is not the newest item o Outlet Bias- items purchased at a discount are not included  Producer Price Index o Refers to the prices of g/s producers receive during the production process 9.5 Using Price Indexes to Adjust for the Effects of Inflation  Price indexes allow comparisons between inflation rates and how much a dollar is worth from different years  Example on pg. 295 9.6 Nominal Interest Rates vs. Real Interest Rates  Nominal: a loan’s standard interest rate (6% now)  Real: nominal interest rate – inflation rate  Deflation is a decrease in prices (example on pgs. 300-301) 9.7 Does Inflation Impose Costs on the Economy  Inflation Affects the Distribution of Income o Predictions on how inflation will affect people applies not to every person, but to the average person  The Problem with Anticipated Inflation o Redistribution of income o People who hold onto paper money will see a decrease in their purchasing power o Menu costs- the costs a firm experiences to change their prices o For investors, nominal returns (as opposed to real returns) are taxed  The Problem with Unanticipated Inflation o The process of borrowing and lending becomes risky Notes by Danielle Rios


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