AP Macro Week#6 Fall 2014

Economics 10/6/14 http://mrmilewski.com OBJECTIVE: Measurements of Economic Performance AP Macro-I.E Language objective: SWBAT define essential vocabulary on the business cycle, unemployment and inflation . In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Journal#20 -Do Now: Draw a graph of the Business Cycle and label the four phases of it. II. Homework -Questions #3-6, problems #2 and #3 on page 544-545.

The Unemployment Rate Once the BLS has determined the number of people in the labor force, they calculate the percentage of the labor force that is unemployed. This statistic is one of the major statistics economists use in determining the health of the economy. It is known as the Unemployment Rate.

Types of Unemployment Frictional- Those who are between jobs and looking for work. Structural- Those who have lost their job because their skills have become obsolete. Cyclical – Those who have lost their job because of a recession phase of the business cycle.

Definition of Full Employment Since frictional and cyclical unemployment is unavoidable, having 100% employment is not possible. The Natural Rate of Unemployment is considered to be between 4% and 6%. It includes Frictional plus Structural.

Economic Cost of Unemployment Excessive unemployment involves great economic and social costs. The basic cost of unemployment is lost output. Firms are not efficient and operating within the PPC. Economists call this sacrifice of output a GDP Gap. A positive GDP gap occurs when actual GDP exceeds potential GDP. A negative GDP gap occurs when actual GDP falls short of potential GDP.

Okun’s Law Macroeconomist Arthur Okun discovered the relationship between the unemployment rate and the GDP gap. For every point that the actual unemployment rate increases over the natural rate, a negative GDP gap of about 2 percent occurs.

Who Suffers Most From Unemployment Unfortunately, unemployment’s effect impacts some more than others. Lower-skilled workers, teenagers, African Americans and Hispanics, and less educated workers bear a disproportionate burden of unemployment. Widespread joblessness increases poverty, heightens racial and ethnic tensions, and reduces hope for material advancement.

Homework Tonight Questions #3-6, problems # 2 and #3 on page 544-545.

Economics 10/7/14 http://mrmilewski.com OBJECTIVE: Measurements of Economic Performance AP Macro-II.B Language objective: SWBAT define essential vocabulary on the business cycle, unemployment and inflation . In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Journal#21 Do Now: If the natural rate of unemployment was 4% and the real unemployment rate for the year was 10%, what would the GDP gap for the year? What would be its impact on GDP if GDP for the year was 600 billion? II. Homework -Questions #7-10, problems #4-7 on page 544-545.

Inflation Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. It reduces “the purchasing power” of money.

Measuring Inflation To measure inflation, we use the Consumer Price Index. The CPI uses a “market basket” of 300 consumer goods and services purchased by the typical urban consumer. This “market basket” is updated every two years so that it reflects the most recent pattern of consumer tastes. The base year is 1982-1984 and is set at 100.

Using the CPI To measure inflation from one year to another, we compare the CPI of each year and times it by 100. Question: What is the inflation rate if the CPI was 207.3 in 2007 and it was 201.6 in 2006? Answer: 2.8%

Rule of 70 We have previously learned how the rule of 70 can tell us how long it will take a measure to double. Question: If the annual rate of inflation is 3%, how many years will it take to double? Answer: About 23 years

Types of Inflation Demand-Pull Inflation- Usually prices increases are a result of spending exceeding production, or demand is higher than supply. This is generally a result of the Federal Reserve over-issuing money. When resources are already fully employed, firms cannot respond to the excess demand by increasing production. So the excess demand “pulls” up the prices of goods and services.

Types of Inflation Cost-Push Inflation- Inflation can also occur because of a supply shock. When costs of resources suddenly increase for producers, they will produce less. This will force the price of the good higher even though demand remains unchanged. The costs “push” the prices up of goods and services.

Core Inflation Price flexible items within the CPI, particularly food and energy prices, can distort inflation. These goods can adjust their prices very quickly. They are not “sticky”. To avoid being misled by a sudden increase in inflation of these goods, economists will strip these prices from the CPI to better judge a sudden increase in overall inflation and just look at the core, or more stable goods prices.

Nominal vs. Real Income Inflation redistributes real income. This change in income helps some, hurts others, and some are not effected. Nominal Income is the income earned from wages, rents, interest and profit. Real Income is what your money can really buy. It is adjusted for inflation. If your nominal income rose 6.2% and inflation is 5.4%, how is your real income effected?

How Does Inflation Affect People? Those Hurt by Inflation: People on a Fixed Income- When inflation occurs, people on a fixed income have less purchasing power. People who save- With inflation, the money they have saved is not worth as much as it was when they started saving it. Creditors- Lenders are hurt by inflation because the money being paid back to them is not worth as much as it was when they people borrowed it.

Those who are unaffected or helped by inflation: Flexible Income Receivers- Individuals who receive Social Security payment. Union workers who receive cost-of-living adjustments (COLA). These peoples incomes are adjusted for inflation. Debtors- The money they originally borrowed is worth more than the money they are paying back to the creditor.

Real Interest Rate vs. Nominal Interest Rate To try and adjust for inflation, lenders will anticipate inflation and charge an inflation premium. The Real Interest rate is the original amount charged to the borrower. The Inflation Premium is added to the real interest rate. The nominal rate is the sum of the two and that is what is charged to the borrower.

Homework Tonight Questions #7-10, problems #4-7 on page 544-545.

Economics 10/8/14 http://mrmilewski.com OBJECTIVE: Measurements of Economic Performance AP Macro-II.B Language objective: SWBAT define essential vocabulary on the business cycle, unemployment and inflation . In addition, swbat write notes on performance and read and write answers to questions and problems regarding the objective. I. Film: Econ USA episode#7 Inflation -answer questions about inflation II. Practice FRQ -answer practice FRQ with a partner Homework: Review Chapters#23,24, & 26

Homework Tonight Review Chapters#23,24,&26.