Business Cycle, Inflation, Unemployment (Extended Answer) Flashcards
What is the unemployment rate?
The unemployment rate is the number of people unemployed over the number of people in the labor force, times a 100.
Why is complete full employment practically unachievable?
Due to factors such as frictional, structural and cyclical unemployment.
What is frictional (seasonal) unemployment defined as?
The labor market matching the demand for labour with the supply of labour. Search unemployment. Could also be made redundant
What is the term length of frictional unemployment and what is it caused by?
Short term; caused by change in regional economic structure
Short term-negative; long term benefit? Frictional unemployment
financial stress for induvial affected, potentially beneficial to firms and workers through search finding better employment opportunities.
Unemployment definition
Is when people who are willing and able to work have not held a paid job for at least one hour per week.
Underemployed definition
People who hold a paid job but are willing to work more hours.
Underutilization rate
Sum of unemployment rate and underemployment rate
Involuntary unemployment
Getting fired or laid off
The natural rate of unemployment
The minimum level of unemployment that can be sustained given current labour market conditions.
Natural rate of unemployment equation
NRU = frictional + structural unemployment
What does NRU being similar to actual rate indicate in the economy?
If actual unemployment is close to the natural rate, this represents inflationary pressure building up
What usually causes structural unemployment
technological advancement or change in occupational structure
Cyclical and structural unemployment levels relative to recession and boom conditions.
In a recession, cyclical and structural unemployment is higher; In a boom, cyclical is zero and structural unemployment is lower, but frictional is higher due to job search confidence
What does the Phillips curve show?
Negative relationship between inflation and unemployment rate; inflation on y, unemployment rate on x
refer to book
What does lower unemployment lead to? How does this lead to increase in wages.
Increasing wages due to competition for labour. increased spending, increased demand for labour
What is participation rate
The proportion of people in the labour force that are in the working age pop aged 15 or over x 100
What is the boom? What strategies are employed?
The boom is a period when the rate of economic growth and the general level of economic activity is above average. Contractionary economic policy is taken; fiscal (GS decreases and taxes increase, (monetary) interest rates increase
What is a recession?
Two successive quarters of economic downturn
What are the three types of economic indicators with definitions and give two examples of each?
Leading indicators: Occur before a direction of change is evident in economic activity; Share prices, Inventory, consumer expectations
Coincident indicators: Occur in line with economic activity; GDP, retail sales, manufacturing output
Lagging indicators; Doesn’t show any change until the trend in economic activity is confirmed; Interest rates, unemployment, consumer debt
Exogenous factors?
Factors that affect economic activity outside the economy involved.
What is inflation?
Inflation is the persistent and appreciable rise in the general price level of goods and services in an economy.
What is the CPI?
The measurement of inflation in which the change in price of a weighted basket of goods is measured annually
What is headline inflation?
It is a very broad measure of change in the cost of purchases made by wage and salary households in capital cities.
What is underlying inflation?
Gives a more accurate measurement of the drivers of price change. Removes volatile priced goods
Deflation
Negative inflation
Trimmed mean
Top 15% and bottom 15% of large, small price movements are removed
Weighted median
Is the inflation rate of the item at the middle of the price changes in the CPI basket
Demand Pull inflation
High demand due to high disposable income, but low supply.
Cost push inflation
Occurs when rising input costs are passed on to final price of G&S
What does the GDP gap represent?
The difference between actual and potential output and income of the economy. The gap is between the frontier (potential) and interior (actual) due to unemployment.
What is the labour force?
People who are 15 or over, who are working or are seeking work.
Underemployment/ underemployment rate
the number of people who are employed but would like to work longer hours due to part time work/labour force x 100
Underutilization rate formula
Underemployment rate + unemployment rate
Cyclical unemployment? Causes?
Follows the contraction or trough of a business cycle. Due to demand deficiency.
is inflation a counter-cyclical variable?
no, it is procyclical
is unemployment a counter-cyclical variable?
Yes, it is a countercyclical variable
Inflation target
2-3%
Unemployment target
4-5%
What is structural unemployment
Occurs when there is a mismatch of available and required skills in a sector of occupation or geographical region. Employees may be laid-off
How could a minimum wage impact unemployment?
Increase, as firms may look for technological or automated alternatives that are cheaper
