Macro Chapter 8 Economic Fluctuations, Unemployment, and Inflation

5 Learning Goals 1)Characterize fluctuations in economic growth. 2)Relate fluctuations in GDP to employment and the demand for labor. 3)Classify unemployment into three categories. 4)Distinguish the difference between full employment and the natural rate of unemployment and correlate both to potential GDP. 5)Determine inflation’s effect on the economy.

Class Activity: Identify at least two products that are made in 2011 that you don’t think will be made in Briefly explain why you think they won’t be produced any longer.

Swings in the Economic Pendulum

The Business Cycle See Exhibit 1 on p. 171 and Exhibit 2 on p. 172

Source: Economic Report of the President, various issues. Annual growth rate of real GDP Long-run growth rate (approx. 3%) 2009

The four phases of the business cycle are expansion, peak, contraction, and recessionary trough. Time Real GDP Business peak Recessionary trough Contractio n Expansion The Hypothetical Business Cycle Business peak Recessionary trough Trend line

Key Points: 1)The business cycle varies and is unpredictable 2)The average annual growth rate is 3%

Economic Fluctuations and the Labor Market

Q8.1 A person not working is considered unemployed. 60 1)True 2)False

This section describes the categories of people Total population divided into two categories: –(1) Under age 16 & institutionalized people –(2) Over age 16 Over age 16 divided into two categories: –(1) Not in labor force – students, retirees, disabled –(2) In labor force In labor force divided into two categories: –(1) Employed –(2) Unemployed, but want to be employed

Definition of unemployed: A person not currently employed but (1) actively seeking a job, or (2) waiting to begin or return to a job See BLS FAQs BLS FAQsBLS FAQs

U.S. Population, Employment, and Unemployment Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) Employment / Population Ratio = Number employed Civilian population (16+) Rate of Unemployment = Number unemployed Civilian labor force

See Current Population Survey Current Population SurveyCurrent Population Survey

Class Activity: Recall the two products you predicted wouldn’t be produced in Is it “good” or “bad” that those products won’t be made any longer? Why?

Q8.2 Mary is a homemaker. Last week, she was busy with her normal household chores. She is 60 1)a member of the civilian labor force who is employed. 2)a member of the civilian labor force who is unemployed. 3)a member of the civilian labor force who is underemployed. 4)a discouraged worker who is not a member of the labor force. 5)not a member of the labor force.

Two calculations to know 1)Labor force participation rate = (employed + unemployed) / civilian pop. over age 16 2)Unemployment rate = unemployed / (employed + unemployed) OR unemployed / labor force

Q8.3 Which of the following would be officially classified as unemployed? 1.a school administrator who has been working as a substitute teacher one day per week while looking for a full-time job in administration 2.a mathematician who returned to graduate school after failing to find a job the last four months 3.a 60-year-old former steel worker who would like to work but has given up actively seeking employment 4.a laid-off construction worker waiting to return to a previous job 60

Three Types of Unemployment

3 general reasons why people are unemployed: (1) Frictional – imperfect information (2) Structural – workers don’t possess desired skills (3) Cyclical – result of business cycle

Watch video: Stossel Macro Clip 03- unemployment and labor mobility

Employment Fluctuations- The Historical Record

Proposal to reduce unemployment: Recall those two goods you predicted wouldn’t be produced in I propose we make it illegal to lay off those workers. Keep them employed making those goods.

Class Activity: What do you think will happen to the people who used to make the two products you predicted wouldn’t be produced in 2021? Will they ever work again? Watch video: Treycycle employs NASA engineers

Q8.4 Which of the following is a positive effect of job search and the unemployment that often accompanies it? 1.It keeps wages and income levels low. 2.It permits individuals to better match their skills and preferences with the requirements of a job. 3.It reduces the wage gap between high skill workers and those with few skills. 4.It creates political pressure for an increase in the minimum wage, which will reduce the rate of unemployment in the long run. 60

Some unemployment is unavoidable and arguably desirable Natural rate of unemployment: “normal” frictional and structural unemployment The natural rate occurs when the economy is operating at a sustainable rate Full employment is when the natural rate of unemployment exists Natural rate equals about 5%

Q8.5 Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of 1.structural and frictional unemployment. 2.cyclical and frictional unemployment. 3.structural and cyclical unemployment. 4.structural, frictional, and cyclical unemployment. 60

Actual and Potential GDP

Potential output is the economy’s maximum sustainable output; occurs when the natural rate of unemployment exists; occurs when full employment exists Potential output is perhaps best thought of as the 3% growth rate discussed earlier Actual output can be greater than or less than potential; again, think about the actual growth rate

Trend line = maximum sustainable rate Business Cycle = actual output Time Real GDP Business peak Recessionary trough Contraction Expansion Business peak Recessionary trough Trend line

Another way to think about these: When you read the BEA report about quarterly GDP, if the reported (actual) growth rate is near 3%, then the economy is at it’s potential output. At 3% actual growth, the unemployment rate will likely be around 5% (i.e. full employment is 95%) The economy can never eliminate frictional and structural unemployment for an extended period.

Q8.6 Actual GDP will be below potential GDP 1.when the economy is at full employment. 2.during an economic boom. 3.when resources are fully utilized. 4.during a recession. 60

The Effects of Inflation

See BLS CPI release BLS CPI releaseBLS CPI release

Q8.7 Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true? 60 1.Your real wage fell. 2.Your nominal wage fell. 3.Both your nominal and real wages decreased. 4.Although your nominal wage fell, your real wage increased. 5.Both nominal and real wages increased.

Inflation is a persistent increase in the general level of prices

Case Study: Zimbabwe In February, 2008 a loaf of bread was 200,000 Zimbabwe dollars In August, 2008, that same loaf of bread was 1.6 trillion dollars That’s 11.2 million percent!

Watch video: Ducktales-inflation

Why is inflation “bad”? 1)It reduces investment: long-term projects are more risky 2)It distorts information delivered by prices: relative prices are skewed because some prices adjust more quickly than others 3)It results in less productive use of resources: people will spend more time trying to combat the effects of inflation rather than engaging in productive activity

Question Answers: 8.1 = = = = = = = 1