ECN 150: Week 7 Notes
ECN 150: Week 7 Notes ECN 150
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This 4 page Class Notes was uploaded by Alexis Ibarra on Tuesday March 8, 2016. The Class Notes belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 11 views. For similar materials see Macroeconomics in Economcs at La Salle University.
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Date Created: 03/08/16
WEEK 7 NOTES 2/2916 Each year’s budget is reviewed and approved by Congress, and then reviewed and approved by the President as well. Then each department is given their share of money to spend. If a department like a construction company begins working on a project and paying out of pocket (they will get paid for the work later), and their budget comes out to be less than what they spent, they will be in a deficit. This will increase the deficit, and thus increase the National Debt. Does congress know that their approved budget has a deficit associated with it that will cause the National debt to increase? YES THEY KNOW! Our system dictates that the congress that approved the budget, has to return for a later vote to give permission for the debt ceiling to grow. So the same congress that approved a budget that approved a deficit to begin with, now has to come back and vote to see if they allow an increase in the debt ceiling. And they can say no!! So now the government can’t come up with enough money to pay for the deficit in the budget that they approved. Businesses will have to lay off workers. 3/2/16 Keynesians say that if we are in a recession, government just have to intervene and tax less and spend more so that we can expand again. And if we are expanding too much then government just has to intervene and tax more and spend less. But then in the 70s stagflation occurred… Stagflation: Both high unemployment and high inflation at the same time. So now what? Recognition Lag: The period of time between when a problem begins and when it is acknowledged that there is a need for corrective action A detailed bill needs to be drafted and then approved by congress and then eventually the President. Administrative Lag: The period of time between when a problem is identified and when a bill is created and passed to become a law The increase in spending then takes time to actually happen Operational Lag: The period of time between when a bill is passed and the actions of the bill are implemented (Classicals say that during all this time the economy could have already selfcorrected. But now, the increase in spending is going to cause problems like stagflation.) When evaluating GDP, distinguish between nominal GDP or real GDP: Nominal GDP: Values the nation’s output in terms of current day prices Real GDP: Values the nation’s output in terms of a base year prices Output is a loaf of bread. Current day price is $3 for a loaf. Nominal GDP=$3. In year 2, loaf of bread is $6. Nominal GDP=$6. But real GDP if base year is year 1= $3. So for year 2, Real GDP=$3. 3/4/16 Unemployment ¿of unemployed Unemployment %= Labor force Labor force= employed+unemployed In the United States, the unemployment rate is calculated by the Bureau of Labor Statistics. This bureau assigns workers to each call 65,000 families a month (of which they probably actually talk to 62,000) and they ask questions. Based on the responses of those phone calls, the unemployment rate is calculated. People question the integrity of this method but a statistician would say that that is a big enough sample as long as the sample is of different kinds of people (demographically diverse). Example: Husband Wife College Grad HS student Wife’s Parent Questions the Lost his job, looking Has a full Stopped looking for Works 4 Previously a bureau will ask for a new job time job work, trying to get hours every brain surgeon accepted into Grad Saturday who got laid school now pumping off, so he gas works at McDonald’s # of People over 1 1 1 1 1 5 age of 16 # of people who 0 1 0 1 1 3 (# of worked at least 1 employed paid hr during the people) week that contained the 12th of the month Of those not 1 0 1 (# of working, how unemployed many are looking people ) for work? (Labor force= employed + unemployed= 3 + 1 = 4) Discouraged workers: Those who do not want to compete with the market so they go back to school or accept early retirement. (Ex: The College student) If they would be considered unemployed, our unemployment rate would be considered higher The # of employed includes those who are underemployed (The wife’s parent). Therefore the unemployment rate that we calculate is understated , or under project . However, it does give us a sense of whether we are leaning towards reaching our goal or not. Goals: Sustained, satisfying, growing GDP, full employment (≠ 0 unemployment), and stable value of money. Full employment ≠ 0 unemployment There is Frictional, Structural, and Cyclical unemployment Frictional unemployment: Between jobs (your company shut down and you lost your job but you are looking for a new one) Structural unemployment: When a product become obsolete and all companies in that industry close **Both frictional and Structural unemployment are not to be addressed by the government! Natural rate of unemployment = frictional + structural The nation is discerned to be at full employment when we have achieved the natural rate of unemployment. 4 Companies: A, B, C companies are doing great and being efficient, D company has not done a good job and has been inefficient. So D gets shut down. D’s workers are frictionally unemployed. A, B, C companies produce vacuum tubes but vacuum tubes are no longer needed. So A, B, C become obsolete. All companies in that industry close. This is structural unemployment. Cyclical unemployment: During a recession, spending is decreasing, and businesses in operation have to lay workers off. (unemployment rate is higher than natural rate) **This unemployment is because of a recession so should the government get involved? Classical vs Keynesian
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