Chapter 7 Flashcards
what is the working age population
age 15 and up
employed
working full time or part time at a paid job
unemployed
not doing paid work and actively searching for a job or on temporary lay off or about to start a new job
not in the labour force
does not fit into employed or unemployed categories (full time students, homemakers, retiree)
unemployment rate formula
unemployed/ labour force x100
labour force formula
employed + unemployed
labour force participation rate
labour force/ working age population x100
unemployment rate misses
- involuntary part-time workers
- discouraged workers
frictional unemployment
- due to normal labour turnover and job search
- HEALTHY
structural unemployment
- due to technological change or international competition making worker’s skills outdates/ useless
- HEALTHY
seasonal unemployment
- due to seasonal changes in weather
- HEALTHY
cyclical unemployment
- due to business cycle fluctuations in economic activity
- UNHEALTHY
natural rate of unemployment
- unemployment rate at FULL EMPLOYMENT
- full employment is not 0% unemployment but 0% cyclical unemployment
when real GDP = potential GDP
output gap: NONE
unemployment rate: natural rate of unemployment (full employment)
when real GDP is below potential GDP
output gap: RECESSIONARY GAP
unemployment rate: above natural rate (cyclical unemployment)
when real GDP is above potential GDP
output gap: INFLATIONARY GAP
unemployment rate: below natural rate (less than normal healthy unemployment)
inflation
both a peristent rise in average prices and a fall in the value of money
ALWAYS CAUSED BY THE INCREASE IN QUANTITY OF MONEY
- when inflation occurs:
1. you must spend more to get the same products and services as before
2. your money is worth less
consumer price index (CPI)
- measure of average prices of fixed shopping basket of products
formula: basket total cost current year/ basket total cost base year x100
- CPI fixed quantities in the shopping basket to isolate the impact of changing prices only on cost of living
- inflation rates based on the CPI overstates increases in cost of living
inflation rate
annual % change in CPI
formula: inflation = CPI for current year -CPI for previous year/ CPI for previous year x100
nominal interest rate
observed interest rate that equal # of $’s received per year in interest as % of # of $ saved
real interest rate
- nominal interest rate adjusted for effects on inflation
- nominal interest rate - inflation rate
deflation
persistent fall in average prices and a rise in value of money
- deflation benefits savers but hurts borrowers and is worse than low inflation
FORMULA FOR ANY ECONOMY WITH MONEY
M x V = P x Q (real GDP)
M: quantity of money
V: velocity of money
P: average price
Q: aggregate quantity of real output
P x Q represents nominal GDP
velocity of money
number of times per year a dollar is spent on final goods and services
quantity theory of money
states that an increase in the quantity of money causes an equal % increase in the inflation rate
2 assumptions of the quantity theory of money
- takes equation M x V = Px Q and fixes V at potential GDP
- fixes Q at potential GDP
Phillips Curve
the higher the unemployment rate, the lower the inflation rate … INVERSE RELATIONSHIP
demand pull inflation
rising average prices caused by increases in demand
- the phillips curve is consistent with the story of demand pull inflation
- causes expansion, demand is a key force causing shortages and pulling up prices for inputs like wages and for outputs
cost push inflation
rising average prices caused by decreases in supply which DOES NOT fit the phillips curve
- caused by SUPPLY SHOCKS: events directly affecting business’ costs of prices and supply
- causes contractions in the economy by increasing both unemployment and inflation due to the decease in supply which forces the pushing up of output prices
stagflation
caused by cost push inflation
- the combination of recession (higher unemployment) and inflation (higher average prices)
