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E1010 > Chapter 7 | Unemployment and Inflation > Flashcards

Chapter 7 | Unemployment and Inflation Flashcards

1
Q

Healthy & Unhealthy Unemployment

A

The unemployment rate measures the percentage of the labour force who are out of work and actively searching for jobs, but misses involuntary part-time workers and discouraged workers

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2
Q

There are four types of unemployment

A
  • frictional
  • structural
  • seasonal
  • cyclical
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3
Q

Statistics Canada sorts working-age population (age 15 and over) into three categories

A

Employed

Unemployed

Not in labour force

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4
Q

Employed

A

working full-time or part time at paid job

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5
Q

Unemployed

A

not doing paid work and actively searching for job: on temporary layoff; about to start new job

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6
Q

Not in labour force

A

not employed or unemployed (full-time student, homemaker, retiree)

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7
Q

Labour Force

A

employed + unemployed

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8
Q

Unemployment Rate

A

Percentage of people in labour force who are unemployed

Unemployment Rate = Unemployed / Labour Force (x100)

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9
Q

Labour Force Participation Rate

A

Percentage of working-age population in the labour force (employed or unemployed)

Labour Force Participation Rate = Labour Force / Working-Age Population (x100)

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10
Q

Unemployment rate misses

A

Involuntary part-time workers

Discouraged workers

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11
Q

Involuntary part-time workers

A

employed part time, would rather have full-time jobs, but can’t find one

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12
Q

Discouraged workers

A

want to work but have given up actively searching for jobs

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13
Q

Labour Underutilization Rate

A

unemployment rate including unemployed, involuntary part-time workers, discouraged workers

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14
Q

Healthy and unhealthy types of unemployment

A

Frictional Unemployment

Structural Unemployment

Seasonal Unemployment

Cyclical Unemployment

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15
Q

Frictional unemployment

A

due to normal labour turnover and job search; healthy part of a changing economy; not a problem

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16
Q

Structural unemployment

A

due to technological change or international competition making workers’ skills obsolete; mismatch between skills workers have and skills new job require; healthy part of changing economy; problem requiring retraining

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17
Q

Seasonal unemployment

A

due to seasonal changes in weathers healthy; not a problem

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18
Q

Cyclical unemployment

A

due to business cycle fluctuations in economic activity; unhealthy part of changing economy; problem needs fixing

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19
Q

Natural Rate of Unemployment

A

The natural rate of unemployment occurs at full employment, when there is only healthy frictional, structural, and seasonal unemployment. Relative to the natural rate, the unemployment rate is higher in a recessionary gap and lower in an inflationary gap.

20
Q

Natural Rate of Unemployment Def.

A

unemployment rate at full employment; includes frictional, structural, seasonal unemployment

21
Q

Full employment

A

not zero percent unemployment, but zero percent cyclical unemployment

22
Q

Relation between natural rate of unemployment and potential GDP

A

When unemployment = natural rate; real GDP = potential GDP; full employment

When unemployment > natural rate; real GDP < potential GDP; recessionary output gap; cyclical unemployment

When unemployment < natural rate; real GDP > potential GDP; inflationary output gap

23
Q

Inflation

A

Inflation is measured by changes in the Consumer Price INdex, hurts those on fixed incomes, creates risk for business investment, and, through expectations, can create a vicious cycle of more inflation. The inflation rate overstates increases in the cost of living by missing switches to cheaper substitutes and new/improved products/services.

24
Q

Inflation def.

A

persistent rise in average prices and fall in value of money

You must spend more to get same products and services as before

Your money is worth less

25
Q

Consumer Price Index (CPI)

A

measure of average prices of fixed shopping basket of products and services

CPI = 100 for the base year, currently 2002

26
Q

Inflation Rate

A

annual percentage change in Consumer Price Index

Inflation Rate = CPI for current year - CPI for previous year / CPI for previous year (x100)

27
Q

Core Inflation Rate

A

inflation rate excluding volatile categories

CPI-trim; CPI-median, CPI-common

Better measure of underlying inflation trend

28
Q

Inflation is a worry because of falling value of money

A

Inflation reduces purchasing power of people with fixed (unchanged dollar) income or savings

29
Q

Inflation affects interest rates

A

Nominal Interest Rate

Realized Interest Rate

30
Q

Nominal Interest Rate

A
  • observed interest rate; dollars received per year in interest as percentage of dollars saved
  • nominal interest rate adjusted for inflation = nominal interest rate – inflation rate
31
Q

inflation is a worry because

A

Unpredictable prices create risk and discourage business investment

Expectations of inflation can cause inflation

32
Q

Predictable inflation rates between 1 and 3 percent are Bank of Canada’s aim

A

Predictable inflation rates between 1 and 3 percent are Bank of Canada’s aim

33
Q

Deflation

A

persistent fall in average prices and a rise in value of money

Consumers postpone spending, causing economic contraction and increasing unemployment

Deflation benefits savers but hurts borrowers

Deflation is worse than low inflation

34
Q

CPI fixes quantities in the shopping basket to isolate impact of changing prices only on cost of living

A

When prices rise, CPI misses quantity switches to cheaper substitutes and new/improved products

Inflation rate based on the CPI overstates increases in cost of living

35
Q

For any economy with money, M x V = P x Q, where

A

M quantity of money

V velocity of money
Number of times a unit of money changes hands during a year

P average prices – Consumer Price Index

Q aggregate quantity of real output

P x Q nominal GDP

36
Q

There must be enough money, multiplied by velocity, to allow sales of all output produced (nominal GDP)

A

There must be enough money, multiplied by velocity, to allow sales of all output produced (nominal GDP)

37
Q

Quantity Theory of Money

A
  • increase in quantity of money causes an equal percentage increase in inflation rate

Takes equation M x V = P x Q, fixes V and fixes Q at potential GDP

“Printing money causes inflation”

38
Q

Inflation is always accompanied by increases in quantity of money

A

But increase in quantity of money does not always cause inflation, especially when Q (real GDP) is below potential GDP

Not all inflation is caused by increases in quantity of money

39
Q

Unemployment-Inflation Trade-Offs

A

The Phillips Curve shows an immediate trade-off between unemployment and inflation consistent with demand-pull stories on inflation.

Cost-push inflation (simultaneous unemployment and inflation) changes in expectations and changes in the natural rate of unemployment complicate the original Phillips Curve.

40
Q

Phillips Curve

A
  • graph showing inverse relation between unemployment and inflation
41
Q

Demand-pull Inflation

A
  • rising average prices caused by increases in demand - explains Phillips Curve’s trade-off between unemployment and inflation
    During expansions, demand is key force causing shortages and pulling up prices for inputs (wages) and outputs
42
Q

Cost-push inflation

A

rising average prices caused by decreases in supply

Does not fit Phillips Curve

Caused by supply shocks

Decrease in supply pushes up output prices, while pushing economy into contraction, increasing unemployment

Can cause stagflation

43
Q

supply shocks

A

events directly affecting buusinessess’s costs, prices, and supply

44
Q

stagflation

A

combination of recession (unemployment) and inflation

45
Q

Both demand-pull and cost-push inflation require and accompanying increase in the quantity of money

A

Both demand-pull and cost-push inflation require and accompanying increase in the quantity of money

46
Q

Over time, trade-offs between unemployment and inflation of the original Phillips Curve become complicated due to changes in

A

Expectations of inflation

Natural rate of unemployment

E1010 (22 decks)

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