Review Questions 1. What is nominal interest rate? 2. What is inflation? 3. What is real interest rate? 4.What is a spending share? 5. If one spending share goes up what must happen to at least one other share? Why? 6. What is the relationship between real interest rate and the spending shares of: consumption, investment, net export, and government purchases? 8. Do real interest rates affect government share? nongovernment? How? 7. You borrow $100 from me at 5%. Inflation is 6%. What is the real interest rate?

Figure 1(pg 58): History of Spending Shares in GDP C = Consumption G = Government I = Investment X = Net Exports Share: percentage of total GDP *If one share goes up, another must go down because they add up to 100%.

Figure 5 (pg 66): Summing Up Consumption, Investment, and Net Exports Shares Higher real interest rates = less spending + less exports Why have high interest then?

Ghost towns

Why have higher interest rates? 1. Encourage useful spending 2. Encourage people to save money

Net Exports Share and Real Interest Rate (pg 63-64) Real Interest RatesExchange RateNet Export Up > Down People all over the world want to make $ in USA banks. They deposit lots! Demand and price of American $ goes up because must deposit in $USD Foreign countries can’t buy cheap products in USA because the $ is too expensive Down > Up

Chapter 4 Unemployment: Data & Definitions 1.What is unemployment and how is it measured. 2.What are the reasons for unemployment. 3.The different affects of unemployment on individuals and the economy. 4.New words: Unemployment Rate, Labor force participation rate, Employment-to-population ratio, natural unemployment, and more! Today’s goals:

1. 1. When an economy is growing and unemployment is low what kind of jobs can people find? (Para. 1) A: jobs that are satisfying to them and that pay well 2. When an economy is in recession and unemployment is high what will many people experience? (Para. 1) A: hard to find jobs, people will settle for jobs that don’t closely match their skills, people will take lower paying jobs A: income loss, family stress/pressure, loss of self-esteem (happiness), young people fail to develop job skills/experience

3. When unemployment is high an economy is underutilizing what? (Para. 1) A: productive resources (human resources/labor) 4. When unemployment is high why might more people go back to school? (Para. 2) A: to get more skills and delay entry into the labor market (wait for a better time) 5. What groups of individuals could have different unemployment rates than the general population? (Para. 3) A: gender, age, race, education, different countries

6. From our studies on long-term growth and fluctuation of GDP, how does unemployment affect GDP? Theory of GDP Growth vs. Fluctuation GrowthFluctuation Influenced by Aggregate Supply: Influenced by Aggregate Demand: Labor, Capital, Technologyconsumers, businesses, government, and foreigners

The U.S. Census Bureau surveys 60,000 households in the United States every month. Working-age population: people age Labor force: all workers (age 16-65) who are either employed or unemployed. Employed person: someone (age 16-65) who has a job outside the home or a paid job inside the home. Unemployed person: a person (age 16-65) who does not have a job and is looking for work. Unemployment rate: the percentage of workers (labor force) who are unemployed. How Is Unemployment Measured?

Figure 1 (pg 85)

1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed? 17 year old factory worker

71 year old teacher 1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed?

Full-time university student, age Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed?

Your retired grandma

1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed? A rich 30 year old man who has been travelling around the world for three years

1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed? A 40 year old stay at home mom

1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed? 15 year old man who is working at McDonalds

1. Working –age population? 2. Labor force, not labor force? 3. Unemployed, employed? 25 year old girl who quit her job last week.

Three Labor Market Indicators 1. The unemployment rate: the percentage of the labor force that is unemployed. 2. The labor force participation rate: the ratio of the labor force to the working-age population. 3. The employment-to-population ratio: the ratio of employed workers to the working- age population. How Is Unemployment Measured?

Figure 1 (pg 85)

Country of John: Employed: 120 million Working-age population: 245 million Labor force: 150 million 1. What is the unemployment rate? 2. Labor force participation rate? 3. Employment-to-population ratio? Three Labor Market Indicators

Four types of unemployment: Natural unemployment Cyclical unemployment Frictional unemployment Structural unemployment

Natural unemployment rate: the unemployment rate that exists when there is neither a recession nor a boom and real GDP is equal to potential GDP. Cyclical, Frictional, and Structural Unemployment

The change in the unemployment rate above the natural unemployment rate is called cyclical unemployment because it is a short-term fluctuation caused by recession. The natural unemployment rate is caused by a combination of frictional and structural unemployment. Cyclical, Frictional, and Structural Unemployment

Natural Unemployment RateCyclical Unemployment Frictional UnemploymentStructural Unemployment