Final Topic 16

Question 1

marginally attached to the labor force

Answer 1

one who did not look for a job in the preceding 4 weeks but did look for a job in the last 12 months (not in labor force category)

Question 2

three categories of employment

Answer 2

1. employment: worked for pay for any length of time during the previous week (if not ill or on vacation), or part-time work, or family-owned business work.
2. unemployed: not employed but looked for a job in the previous 4 weeks.
3. not in the labor force: not employed and did not look for employment in the last 4 weeks.

Question 3

unemployment spell

Answer 3

period that someone is unemployed.

Question 4

duration

Answer 4

length of each unemployment spell. a measure of the distress and long-term implications caused by unemployment (loss of income, loss in future earnings, loss in retirement benefits).

Question 5

unemployment rate

Answer 5

unemployed-to-labor force

Question 6

working share

Answer 6

employment-to-population

Question 7

participation rate

Answer 7

labor-force-to-population

Question 8

natural rate of unemployment

Answer 8

unemployment rate consistent with ‘full’ employment. u*

derives from frictional, seasonal, and structural reasons.

Question 9

frictional unemployment

Answer 9

results from a matching process between workers and firms. “search and find”–>job turnovers and matching issues, (time of job announcements, interviews, hiring, paperwork, etc.).

Question 10

structural unemployment

Answer 10

derives from the discrepancy between skills demanded by firms and skills that workers supply. (contraction of some sectors releases workers that should flow to expanding sectors, but these new sectors may require skills)

Question 11

seasonal unemployment

Answer 11

changes in economic activities because of seasonal changes (agriculture, construction, tourism)

Question 12

cyclical unemployment

Answer 12

rigidities in labor markets that cause employment and GDP to differ from full employment
(when Nu* and vice versa).

The difference between actual unemployment and the natural rate of unemployment is cyclical unemployment.

Question 13

Okun’s Law

Answer 13

quantifies the negative association between economic activity and the unemployment rate.

Question 14

Unemployment of US was affected by recession more than Okun’s law predicted. Why?

Answer 14

1. Underestimation of recession
2. policies and institutional framework (policy responses were delayed b/c US labor market has a history of resilience)
3. Sectoral shocks and misdiagnoses (contraction in construction sector and financial sector–and US has larger financial sector. Also, geographical ‘lock-in’ effect that limited mobility of labor force in the US.)
4. Credit rationing (lack of credit meant that startups were limited in funds and couldn’t hire as much to absorb the labor force released by other sectors)
5. Uncertainty and expected duration of recession. (Firms decided not to hoard labor because they knew it would take longer for markets to recover.)

Question 15

Costs of unemployment

Answer 15

1. opportunities of unemployed resources.
2. loss of human capital due to long-term unemployment
3. negative consequences on long-term income profiles (foregone income during unemployment and potentially lower re-entry income)
4. stress for government budgets (transfers, insurance programs, training programs, etc.)
5. social and psychological costs (poverty, health, crime, opportunities for offspring).

Question 16

anticipated inflation

Answer 16

when inflation equals expected inflation. It does not change the real values of economic variables and is an element of long-term contracts (as part of expectations).

Question 17

costs of anticipated inflation

Answer 17

1. menu costs (updating/printing new prices)
2. shoe leather costs (resources spent to reduce real money holding)
3. forecasting costs: costs spent to forecast inflation.

Question 18

unanticipated inflation

Answer 18

when inflation is > or < expected inflation. It results in distortions of real values and exchanges, which causes both distributional consequences and risk for each involved contracting party.

Question 19

if inflation is greater than expected

Answer 19

redistribution from workers to firms and from lenders to borrowers. [ w(contract) > w – r(contract) > r ]

Question 20

if inflation is less than expected

Answer 20

redistribution from firms to workers, and from borrowers to lenders [ w(contract) < w – r(contract) < r ]

Question 21

Keynesian perspective on upward sloping SRAS

Answer 21

nominal wages are sticky, but prices are flexible. Firms adjust their prices of goods and services immediately but contracted labor wages do not adjust as quickly. Therefore, they pay a lower real wage (w goes down). As marginal cost goes down, the quantity in the short run produced goes up, and the output in the short run (Ysr) goes up.

Question 22

Classical perspective

Answer 22

firms cannot distinguish between inflation and greater demand for their product relative to other products out there. When price index is greater than what they expect, they believe that the demand for their product has increased, while leads them to increase production to meet the greater demand.

Question 23

trade-off of disinflation, if people don’t believe the CB’s announcement

Answer 23

trade-off between improving the CB’s reputation at the cost of temporary unemployment or losing its reputation at the benefit of reversing the caused unemployment.

Question 24

how to increase credibility of CB

Answer 24

1. appoint a central bank director with a credible reputation to fight inflation
2. improve communication–announcement of policy goals, ‘step-wise’ implementation for evaluation and lower costs if people do not believe the announcement.
3. increase independence of the CB–board cannot be forced to purchase government bonds and to create political favors around elections.
4. import credibility by pegging domestic currency to currency of another country.