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Chapter 9 Unemployment and Stagflation

Chapter 9 Unemployment and Stagflation. These slides supplement the textbook, but should not replace reading the textbook. What is the labor force?. All non-institutionalized individuals 16 years of age and older who are either working or looking for work. Who is unemployed?.

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Chapter 9 Unemployment and Stagflation

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  1. Chapter 9Unemploymentand Stagflation These slides supplement the textbook, but should not replace reading the textbook

  2. What is thelabor force? All non-institutionalized individuals 16 years of age and older who are either working or looking for work

  3. Who is unemployed? Anyone 16 years of age or older who is actively seeking employment

  4. What is the unemployment rate? The number of unemployed individuals expressed as a percentage of the labor force

  5. How do we measure unemployment? The number of unemployed divided by the labor force

  6. Who measures unemployment? The Bureau of Labor Statistics surveys 60,000 households each month

  7. What is covered employment ? Employment that qualifies for full benefits

  8. What is adiscouraged worker? A person who has dropped out of the labor force due to a lack of success in finding a job

  9. Are discouraged workers considered a part of the labor force? No, people who quit looking for work are not considered a part of the labor force

  10. What aboutpart-time workers? Part-time workers are considered fully employed

  11. What is underemployment? A situation in which workers are overqualified for their jobs or work fewer hours than they would prefer

  12. What is the labor force participation rate? The ratio of the number in the labor force to the adult population

  13. What percentage of the labor force is female? Almost half

  14. What are the types of unemployment? • Frictional unemployment • Structural unemployment • Seasonal unemployment • Cyclical unemployment

  15. What isfrictional unemployment? Unemployment that arises because of the time needed to match job seekers with job openings

  16. Why will people be looking for work even in the best of times? • school graduates • job advancement • downsizing • weak markets

  17. What isstructural unemployment? Unemployment that arises because: • the skills demanded by employers do not match those of the unemployed • or the unemployed do not live where the jobs are

  18. What isseasonal unemployment? Unemployment caused by seasonal shifts in labor supply and demand

  19. What iscyclical unemployment? Unemployment that fluctuates with the business cycle, increasing during recessions and decreasing during expansions

  20. What is full employment? The level of employment when there is no cyclical unemployment

  21. What is considered full employment? 4 to 6% unemployment is considered full employment

  22. Why 4 to 6%? Because even in the best of times some people are always looking for work

  23. What would make unemployment increase beyond 6% Excessive inventories

  24. What is the current unemployment rate? http://www.forecast-chart.com/forecast-unemployment-rate.html

  25. Is the unemployment rate valid? Yes, as long as it is calculated consistently, we can get an accurate comparison from one time period to the next

  26. What was the unemployment rate at the worst of the Great Depression? In 1932 there was 25% unemployment

  27. What caused the buildup of excessive inventories in the late 1920’s? Business owners keeping prices high and wages low

  28. What caused the severity of unemployment in 1932? The Smoot Hawley Tariff Higher taxes Decrease of money supply

  29. What are the two types of fiscal policy? Discretionary Automatic stabilizers

  30. What are failings of discretionary fiscal policies? • Time lags • Knowing the multiplier • Politics – world viewpoint • Structural changes • Accurate forecasting • International events • Ignorance of economics

  31. What are some recent laws that change the economy structurally? • Health care bill (2700 pgs) • Financial Reform bill (2100 pgs) • Consumer Financial Protection Bureau • Foreign Account Tax Compliance Act (FATCA)

  32. How does the Health Care Bill Work? • Must cover everyone who applies • Everyone must purchase insurance or pay a fine ($750 individual $2,250 per family) • Companies with 50+ employees must offer health insurance or $750 per worker

  33. How does the Financial Reform law protect big business? Identifies which nonbank financial institutions might cause instability if they fail – if so stringent regulation by the Fed in exchange for protection

  34. Which firms can get preferential treatment? Participants in rent seeking leading to a symbiotic relationship between politicians and business

  35. What is the Consumer Financial Protection Bureau? • Established by the Dodd-Frank Financial Reform law • Under the Fed but not responsible to the Fed • Impose rules on banks • Not approved by Senate • Receive 10% combined earnings of the Fed

  36. How does FATCA Work? Foreign banks must identify Americans and provide financial information to the IRS or face a 30% of the banks U.S. income

  37. What affect of big government onnational debt? • 40% of national budget is borrowed money • 70% of federal securities are purchased by the Fed

  38. What are unemployment benefits? Cash transfers provided to unemployed workers who actively seek employment and who meet other qualifications

  39. What is thePhillips Curve? Shows an inverse relationship between inflation and unemployment

  40. What is stagflation? Unemployment and inflation increase at the same time

  41. Why is stagflation a dilemma for policy makers? By using typical Keynesian tools whatever you do to fight one problem the other gets worse

  42. What is a conflict? Fiscal and monetary policies can move in opposite directions

  43. What is the Full Employment and Balanced Growth Act of 1978? Mandated the Fed to ensure full employment and stable prices

  44. What is the cycle imposed by monetary and fiscal policies? Choices are made and then reversed as each problem gets better and worse again

  45. Decrease in Supply Early 1970s Higher Prices and More Unemployment S' S P2 P1 D 0 Q2 Q1

  46. What caused the supply curve to shift to the left in the early 1970s? OPEC Unions

  47. What is fine tuning and stable policy settings? • Demand management • Policy rules

  48. What is the difference in opinion concerning the equilibrium? • Fine tuning – less than full employment equilibrium • Rules – full employment equilibrium

  49. What happened in 1980-1981? • President Reagan lowered taxes on business • Paul Volcker, chairman of the Fed, decreased the money supply for a long time

  50. What agreement between those who favor rules and a more active approach? • Attention to lag effects • Policy stability • Long term effects

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