Chap. 4 - Unemployment and Inflation Flashcards
What does the Labor Force include?
Labor Force includes both the employed and the unemployed. To be considered unemployed you must be looking for work or about to return to a job. Otherwise, you are NOT IN THE LABOR FORCE.
What is the Unemployment Rate equation?
UR = (Unemployed/Civilian Labor Force) X 100
Calculate the Unemployment Rate: Civilian Non-Institutional Population 237,830,000 Civilian Labor Force 153,889,000 Employed 139,064,000 Unemployed 14,825,000 Not in the Labor Force 83,941,000
(14,825,000/153,889,000) * 100 = 9.63%
What are the three different types of Unemployment?
Frictional, Structural, and Cyclical
What is Frictional Unemployment?
Frictional Unemployment is a temporary, usually very short term, type of unemployment. It is sometimes referred to as the worker simply being “between jobs.” Even in a very healthy economy, there will always be some unemployment of this type.
What is Structural Unemployment?
Structural Unemployment is unemployment due to a mismatch between the structure of the economy and the skills of the workers.
What is Cyclical Unemployment?
Cyclical Unemployment is unemployment that follows the business cycle of the economy. In booms there are more jobs available and in recessions there are less jobs available.
What does it mean when the economy is at Full-Employment level of Unemployment, or Natural Rate of Unemployment?
When the economy is at its peak there will be no Cyclical Unemployment, though Frictional and Structural Unemployment may still exist. The rate of unemployment in an economy when there is NO Cyclical Unemployment (in other words when the economy is very healthy and producing at its full capacity)
What is potential GDP?
The potential GDP of the economy is the amount we can produce when we are at full employment or at the Natural Rate of Unemployment.
What is the GDP Gap? What does it represent?
The difference between the potential GDP and the actual GDP is called the GDP Gap. This gap represents the lost output that results from operating at less than full employment, and is sometimes used to measure a recession’s impact on the economy.
What is Okun’s Law?
Okun’s Law states that for every 1% increase in the Cyclical Unemployment rate, the GDP will be approximately 2% lower than the potential GDP.
What is Inflation, Inflation Rate, and the equation for Inflation Rate?
Inflation is the rise in the average price level in the economy. The rate of inflation is the rate of change in the price level.
I.R. = [(P1 – P0)/P0] x 100%
Where P1 is the average price level this year and P0 is the average price level last year.
The most used index to measure inflation is what?
CPI - consumer price index
CPI = (Price of a market basket of goods in a given year / Price of the same goods in the base year) x 100
What is the equation for Real Income?
Nominal Income - Inflation Rate = Real Income
Do debtors like inflation? Why or Why not?
Yes they do. If you went to bank to take out a loan and the banker wants to make at least 4% off of the loan and his expectations for next year’s inflation is 2% he would charge a 6% nominal rate. But if next year the inflation rate is actually 5% instead of 2% the real rate of interest is only 1%. Thus the debtor pays him back with cheaper dollars, and wealth is transferred from the creditor to the debtor.
