Econ 202 Middle Flashcards
what is the unemployment rate? (broad definition)
the number of people who cant find a job, expressed as a percentage of all those who either have a job or are actively looking for one
what is the unemployment rate an indicator of? (in terms of health)
the labor market
what is the labor market?
the aggregate activity of firms searching for workers and workers searching for employment
how does unemployment represent wasted resources? (two ways)
1) loss of production and income, felt mainly by those who are unemployed
2) lost human capital for the people who are unemployed, especially if the unemployment lasts a long time
what survey measures the unemployment rate in the US?
the current population survey (CPS), monthly survey of 60k households
aka the household survey
what is human capital?
the knowledge and skill that people obtain from education, on-the-job training, and work experience
what is the total population of the US?
336 million
how does the CPS first separate the total population? (two groups)
1) those who are unable to work; they are less than 16 yrs old or are institutionalized (in prison, a hospital, etc)
2) the working age population: the total number of people aged 16 years and over who are not institutionalized
how many people are unable to work in the US?
68 mil
how many people are able to work in the US? (the working age population)
268 mil
which 3 ways is the working age population split into?
1) employed
2) unemployed
3) not in the labor force
what does employed mean? how many people in US are employed?
you must have either a full or part-time job
161 mil
which 3 categories does it take to be considered unemployed in relation to the working age population?
1) you have made specific efforts to find a job within the previous four weeks
2) you are waiting to be called back to a hob from which you have been laid off
3) you are waiting to start a new job within 30 days
how many people does the unemployed category represent?
6.4 mil
what does it mean to be not in the labor force? how many people does it represent?
if you are in the working age population but are not employed or unemployed
100 mil
what is an example for someone who is not in the labor force?
a stay at home parent, a student/college student
what is the labor force?
the sum of the number of employed and unemployed persons
what is the formula for the unemployment rate?
(number unemployed/labor force) * 100
what is the current total unemployment rate in the US?
3.8%
what are the 2 categories of people who are often consider misclassified in the official statistic?
1) marginally attached workers (including discouraged workers)
2) economic part-time workers
what is a marginally attached worker?
a person who is currently not working and has not looked for work in the previous four weeks, but has indicated they want and are available for work and have looked for work sometime in the recent past
what is a discouraged worker?
a marginally attached worker who has stopped looking for a job because of repeated failures to find one
how many marginally attached workers in US?
5.4 mil
what are economic part-time workers?
workers who hold part-time jobs but wish to have full-time jobs
when an unemployed person becomes a discouraged worker, what effect does this have on the official unemployment rate?
Unemployment Rate = (Number Unemployed/(Number Unemployed + Number Employed)) * 100
when workers go from being unemployed to a discouraged worker, both the numerator and denominator go down; reducing the unemployment rate
what is the U-6 unemployment rate?
measure of the unemployment rate that counts marginally attached workers as unemployed and economic part-time workers as partially unemployed
what percent rate is the U-6 at as of 2024?
7.3%
what are the two types of unemployment that are always around?
frictional and structural
what is frictional unemployment?
“normal labor market turnover.”
when people enter or re-enter the labor
force, unemployment occurring when someone quits their job to
search for a new one, as well as unemployment occurring because
of the ongoing creation and destruction of jobs
also when their going through life stages
why does frictional unemployment exist?
because it takes time for workers and employers to match up
what are some examples of what could influence the amount of frictional unemployment?
increased unemployment benefits will tend to raise frictional unemployment because they enable workers to spend longer searching for a new job
increase in the rate at which young people enter the labor force will tend to increase frictional unemployment as these workers search for jobs
what is structural unemployment?
exists when changes in the economy change the skills needed to perform jobs
or change the location of jobs
why does structural unemployment tend to last longer?
it takes time and is costly to retrain and/or
relocate. It also often ends with a worker taking a lower-skilled, lower-paying job.
what is cyclical unemployment?
A worker who is laid off because the economy is in a recession and is then
rehired during an expansion experiences cyclical unemployment
dependent/follows the business cycle
what kinds of unemployment can be zero?
only cyclical, frictional and structural will always exist
what does cyclical unemployment do during recessions and expansions?
increases during recessions, decreases during expansions
inverse relationship
what is the natural unemployment rate?
the ur that exists when all unemployment is either frictional or structural
what happens when the unemployment rate equals the natural unemployment rate?
there is no cyclical unemployment
how can the natural unemployment rate change over time?
changes in the amounts of frictional/structural unemployment
what is the current natural unemployment rate?
4.4%
what is full employment?
the aggregate number of hours work done by workers in an economy when the unemployment rate equals the natural unemployment rate
what happens to the aggregate number of hours of work over long periods of time?
itll tend to move towards full employment
what is the real wage rate?
the “price” of an hour of labor
the nominal wage rate adjusted for inflation
what is the aggregate labor market?
a simplified version of the collective markets under one large labor market
what is the demand for labor?
The relationship between the aggregate quantity of labor demanded by firms and the real wage rate.
will firms hire more or less hours of labor if the real wage rate declines?
more
what is the supply of labor?
The relationship between the aggregate quantity of labor supplied by workers and the real wage rate
what will happen to the labor supply if the real wage rate increases?
workers will supply more hours of work
because there are less employees to evenly spread the workload
what is the labor market equilibrium?
labor demanded = labor supplied
what will the real wage rate do in relation to aggregate labor market equilibrium?
adjust towards equilibrium
is there ever no frictionally or structurally unemployed people?
no
would mean there is new jobs, switches between jobs, and no tech advances
what happens in the aggregate labor market equilibrium?
everyone willing to work at the prevailing wage rate is employed, there is no additional unemployment besides frictional and structural
what is potential real GDP?
the quantity of real gdp produced at full employment
basically what could happen in an ideal world, where everyone able to is working and producing at efficient capacity – accounting for inflation
why will the level of real GDP adjust toward potential real GDP over longer periods of time?
the real wage rate adjusts to put the labor market in equilibrium
what happens over shorter periods of time to real gdp and potential rg?
it will deviate away from potential real
GDP due to the business cycle. These are periods of time over which the labor
market is not in equilibrium
what is the output gap? what does it do?
shows the distance between real GDP and potential real GDP
= real gdp - potential real gdp
what determines how big potential real gdp is? (two things)
1) the number of hours of labor worked at full employment
2) labor productivity
what is labor productivity?
The quantity of real GDP produced by an hour of labor
how is labor productivity determined?
1) stock of capital goods
2) human capital
what is stock of capital goods?
How many and what type of capital goods are in the economy
what is human capital?
The knowledge and skill that people obtain from education, on-the-job training, and work experience.
what determines growth in potential real GDP? (two things)
1) growth in the number of hours worked at full employment
ex. population growth, demographics
2) growth in labor productivity caused by growth in: stock of capital goods (determined by GPDI) and growth in human capital (education, training) AND TECH ADVANCES!! both categories influenced by tech
what is the primary way real GDP per person grows?
growth in potential real GDP that comes from labor productivity growth
what is the growth rate of real GDP?
the annual percentage growth rate of Real GDP
in which ways can real GDP grow?
1) potential real GDP is growing
2) real GDP is growing as it returns to potential real GDP following a recession
what is economic growth?
the growth of potential real GDP
what is the formula for growth rate of real GDP per person in year z? (percentage change function)
(real gdp per person in year z - real gdp per person in previous year)/real GDP per person in previous year *100
what is the rule of 70? what does it do?
small changes in the growth rate of real GDP per person can add up to very large changes in average incomes
rule tells us that the number of years it takes any variable to double is approximately 70 divided by the annual percentage growth rate of that variable
what is “money”?
any commodity or token that is a medium of exchange, meaning it is generally acceptable as a means of payment
what does a means of payment mean?
a method of settling a debt
why do we need money? what does money eliminate?
medium of exchange eliminates the need for barter
what is bartering?
goods and services must be exchanged directly for other goods and services
why is bartering inefficient?
requires a double coincidence of wants
what is a double coincidence of wants?
for an exchange of goods or services to occur, both sides must want the good or service that the other is offering
what other two functions does money perform besides acting as a medium of exchange?
1) unit of account
2) store of value
what is a unit of account?
the agreed upon measure for stating the prices of goods and services
what is the store of value?
something that can be held and exchanged later for goods and services
what are the two items that are counted as money today?
currency and deposits
what is currency?
notes and coins held by individuals and businesses
what are deposits?
held at banks and other depository institutions
what are money aggregates?
official measures of the amount of money in the US
what is the primary monetary aggregate called?
M2
what is the goal of M2?
to capture liquid assets in the economy
what are liquid assets?
assets that are easily convertible into a means of payment without loss in value
what does M2 consist of?
1) currency
2) checking deposits at depository institutions
3) other liquid deposits (primary savings account)
4) time deposits
5) deposits with money market mutual funds
what is the current M2 number about?
20.8 trillion
which M2 category makes up the most of the trillions?
other liquid deposits, 52% but actually checking deposits as its own category (24%)
what is roughly the amount of currency per person?
$6700
who has all the currency?
held by legal businesses, the underground economy, most is held by people outside of the US
why do people outside the united states want to hold US dollars?
dollars are an attractive store of value compared to many other currencies
what is a depository institution?
a financial firm that takes deposits from households and firms and makes loans to other households and firms
what are the three types of depository institutions?
1) commercial banks
2) thrift institutions
3) money market mutual funds
what are the three types of depository institutions?
1) commercial banks
2) thrift institutions
3) money market mutual funds
what are the categories of thrift institutions?
- savings and loan associations
- savings banks
- credit unions
what are reserves?
currency in the banks vaults and deposits held with the Federal Reserve
kept on hand in case a depositor wishes to withdraw money
what are other cash assets?
primarily loans to other banks, earn interest at an interest rate known as the Federal Funds Rate
what are securities?
very low risk investments in the US gov treasury bills and corporate bills, as well as higher risk investments in the US gov treasury and corporate bonds and mortgage-backed securities
what are loans?
loans are made to businesses and individuals, these are the banks riskiest and highest earning asset
what is the macroeconomic role of depository institiutions?
banks take deposits from depositors and we pay interest on these deposits
use these deposits to make loans to other and collect high interest on these loans
why are banks able to make loans in ways that would be impossible for individuals?
1) banks create liquidity
2) banks pool risk
3) banks lower to cost of borrowing
4) banks lower to cost of monitoring loans
what does banks create liquidity mean?
Banks are able to make longer term loans, while at the same time standing ready to return deposits to depositors. If depositors made loans directly, they would lose this easy access to their funds
what does banks pool risk mean?
banks can make a lot of loans, which means if some of them are not repaid it is not a disaster for the bank or the banks depositors — an individual would only be able to ameka small number of loans, meaning if one went unpaid the individual would lose a large percentage of their money
what does banks lower the cost of borrowing mean?
by creating a centralized location to obtain a loan, banks make it easier for borrowers to find a lender
what does banks lower the cost of monitoring loans mean?
because they make lots of loans, banks become experts in monitoring and working with borrowers, which can help prevent defaults
what number does the Federal Deposit Insurance Corporation (FDIC) guarantee deposits up to?
250,000
what are the three primary roles of the central bank?
1) serves as a bank for depository institutions
2) regulates depository institutions
3) conducts monetary policy
what is monetary policy?
adjusting the amount of money in the economy and influencing interest rates
what is the central bank of the US?
Federal Reserve System aka Fed
where is the Fed’s primary goals in conducting monetary policy laid out?
Federal Reserve Act
what is the Fed’s dual mandate?
1) Keep inflation low, about 2% inflation
2) maintain full employment
what are three components of the Federal Reserve System?
1) board of governors
2) regional federal reserve banks
3) federal open market committee or FOMC
what does the board of governors consist of?
seven members, each appointed by the president and confirmed by the Senate, 14 year term
terms are staggered so that one seat becomes available at least every two years
who is the chair of the board of governors?
currently Jerome Powell
how many regional federal reserve banks are there?
12
what services does the regional federal reserve banks do?
1) holding reserves for depository institutions
2) lending reserves to depository institutions
3) issuing and distributing paper currency
what is the Federal Open Market committee (FOMC) in charge of?
conducting monetary policy (regulating the quantity of money in the economy)
what are the voting members of the FOMC?
1) the 7 members of the board of governors
2) the president of the Federal Reserve Bank of New York
3) 4 presidents of other 11 regional FRB on a rotating basis
who is the chair of the FOMC?
the same as the board of governors, Jerome Powell
how often does the FOMC meet?
8
what is the primary tool the Federal Reserve uses to change the amount of money in the economy?
an open market operation
what is an open market operation?
the purchase or sale of financial assets by the Fed in the open market
what does financial assets mean in reference to open market operations?
usually include things like the US gov treasury bonds and bills, but have been expanded to other things when necessary
what is an open market purchase?
when the Fed conducts an open market purchase of financial assets, the Fed simply creates the funds used to pay for the assets
these funds end up as deposits in a depository institution, which increases the quantity of money in the economy
what is an open market sale?
the purchasers of the assets pay for the assets pay for the assets with deposits
reduces the amount of deposits in depository institutions, which decreases the quantity of money in the economy
what happens to the funds that are paid to the Fed during an open market sale?
the Fed deletes them
what are unplanned reserves?
if the bank has reserves above its desired reserves
what is the money multiplier process?
after an open market purchase the bank ends up with additional reserves
when a bank has unplanned reserves they may lend them to a borrower, loan is credited to the borrowers checking account
by loaning out unplanned reserves bank has created additional money — deposits have risen by the amount of the loan
loans will be spent on g/s and these payments will work their way into other banks, enabling these banks to made additional loans and create additional deposits
what is the monetary base?
the sum of the currency and banks’ reserves held with the Fed
what is the formula for the money multiplier?
(change in quantity of money)/(change in monetary base)
how is the amount of money in the economy determined?
the federal reserve and the money multiplier process
what is the money supply?
the amount of money in the economy at a particular point in time known as the money supply
what is the real money supply formula?
money supply/price level
what is wealth?
the sum of the values of the assets that they own
what is real wealth?
wealth/price level
what is real money demand?
the amount of real money that people choose to hold as part of their real wealth
what are the two assumptions about money demand and interest rates?
1) assume money earns zero interest
2) assume that the only other asset people own is an asset that earns interest — this asset is called bonds
what is the nominal interest rate?
the annual interest received expressed as a percentage of the amount of funds provided
what is interest?
payments made from a borrower to a lender as compensation for the lender making funds available to the borrower
what is the real interest rate?
the annual real interest received by the lender, expressed as a percentage of the real amount of funds provided
what is the formula for the real interest rate?
= nominal interest rate - inflation rate
what are some facts about bonds?
- new bonds are auctioned for a price
- the issuer of the bond receives the price paid for the bond
- the purchaser of the bond is entitled to payments from the bond issuer at specified dates in the future
- after the initial auction, bonds are bought and sold in a secondary market, and the price of the bond fluctuates as a result
- bonds are issued by companies and governments at all levels
what do higher bond prices mean in relation to nominal interest rates?
lower nominal interest rates
what does a lower bond price mean in relation to nominal interest rates?
higher nominal interest rates
what happens when people hold real money?
1) real money depreciates at the inflation rate
2) real money doesn’t earn the real interest rate that could be earned with real bonds
what happens when the nominal interest rate rises?
people wish to hold less real money and more bonds
what happens when the nominal interest rate falls?
people wish to hold more real money, and less bonds
what happens if the price level does not increase?
an increase in the real money supply
what will real variables not do in the longer run?
will not change simply by increasing the nominal money supply
what is the equation of exchange?
nominal money supply * velocity = price level/100 * real gdp
what is velocity?
the average number of times a dollar of money is used annually to buy the g/s that make up nominal GDP
what happens to the growth rate over longer periods of time?
increases in the growth rate of the nominal money supply will tend to be matched by increases in the inflation rate
