Unemployment, Inflation and Output Gap Flashcards
what were some features of the roaring 20s
jazz era, consumerism, investment, inventions, advertising
when was the stock market crash
1929
what does theory say should happen to inflation and growth if unemployment goes down
inflation up,
growth up
what does war do to gdp growth
falls (economic shock) then rises after as economy is restructured
what happened to gdp growth and unemployment during ww1
low gdp growth, high unemployment
what happened to gdp growth and unemployment during the roaring twenties
high gdp growth, low unemployment
what are two features of the great depression
stock market crash,
one of the big consequences is unemployment
what is the relationship between inflation and growth
positive relationship
what is the relationship between unemployment and inflation
negative relationship
what is the relationship between unemployment and growth
negative relationship
unemployed d (loose)
looking for a job, able to work but cannot find one
unemployment rate equation
unemployed / labour force x 100
participation rate equation
labour force / population of working age
what does N mean
employment, number of people working
what does U mean
unemployed, number of people unemployed, millions
what does L stand for
labour force (willing and able)
what does u stand for
unemployment rate
equation for u in symbols
u = U/L = (L-N)/L
what is unemployment rate (u) a good indicator of
how easy or difficult it is to find a job
what can the unemployment rate (u) overstate
those who are confident that they will find a job but haven’t accepted position
how can the unemployment rate (u) understate unemployment
discouraged to search for a job,
working part-time but want full time,
whose skills are not supported by job (phd),
marginally attached (looked in recent past but not currently looking)
frictional unemployment d
unemployment that exists in the economy due to people moving from one job to another, because of frictions in the market
structural unemployment d
unemployment resulting from a mismatch of skills due to the changing nature of the market
creative destruction (in terms of unemployment)
unemployment due to changing nature of the workplace due to advancements in technology etc
what does u* mean
natural rate of unemployment
symbol for natural rate of unemployment
u*
natural rate of unemployment equation (in words)
structural + frictional unemployment
cyclical unemployment d
unemployment due to the economic cycle
do countries have different or the same natural rates of unemployment
different
what is the uk natural rate of unemployment
6.9%
what is something that the unemployment rate cannot tell us (u)
if the rate is high because people are staying unemployed longer or because more workers lost jobs
who are the three states in the employment diagram
employment, out of labour force, unemployment
what are the flows between out of labour force and employment in the diagram
new entries (from out of labour force to employment), retirements (from employment to out of labour force)
what is the flow from employment to itself
quit to other jobs
what are the flows between employment and unemployment in the diagram
job finds (from unemployment to employment), lay offs / quits (from employment to unemployment)
what are the flows between unemployment and out of labour force in the diagram
unsuccessful new entries (from out of labour force to unemployment),
discouraged (from unemployment to out of labour force)
what does s mean
share of employed who lose or leave jobs in every period (job separation)
what does f mean
fraction of unemployed who find job each period (rate of job finding)
what does L mean§
labour force
equation for L using s and f
L = Nt + Ut
formula for ∆Ut+1 (star)
∆Ut+1 = sNt - fUt,
change in unemployment rate = employed who lose their jobs - unemployed who find new jobs
what is the change in unemployment rate given by (words)
difference between inflows into unemployment and outflows
equation for natural rate of unemployment using symbols
u* = s / (s+f)
beveridge curve d
curve that reflects the negative relationship between vacancies and unemployment
what was lord william beveridge’s statement
as vacancies increase the number of unemployed declines
explain the beveridge curve diagram
x - unemployment rate percentage
y - job vancancy rate percentage,
downward sloping curve like an l
where i the labour market tight and slack on the beveridge curve
tight at point a which is to the left at the top,
slack at point b which is to the right and at the bottom
explain features of tight labour market and where it is on the beveridge curve
at point a top left,
demand for labour high, low unemployment, employers experience difficulty finding qualified workers so vacancy rate high
explain features of slack labour market and where it is on the beveridge curve
at point b bottom right,
demand for labour low, high unemployment, few employers posting job offerings so vacancy low
what do points a and b relate to on the beveridge curve diagram (x - unemployment rate % y - job vacancy rate % downward sloping curve)
a = boom, b = recession
what are movements along the beveridge curve associated with
business cycle
what does the further the beveridge curve is away from the origin mean
the further away the curve from the origin the more inefficient the labour market is at matching open vacancies with people that are unemployed
what are features of a beveridge curve shift to the right (away from the origin)
more labour market inefficiency,
both higher job vacancy rates and higher unemployment than before,
both more open jobs and more unemployed people
what does frictional unemployment do to the Beveridge curve
more unemployment arises because it takes time to find a job that is a good fit, Beveridge curve shifts to the right
what does structural unemployment do to the beveridge curve
skills of labour force don’t match with skills employers want, higher vacancy and unemployment so shifts to the right
what does economic uncertainty do to the beveridge curve
when an economy’s outlook is uncertain, firms hesitant to make commitment to hire, beveridge curve shifts to the right
what are some other factors that could affect the beveridge curve
changes in the prevalence of long-term unemployment,
changes in the labour participation rate (don’t think you have to worry about this card too much)
hello future matthew
i am very interested as to when you will be seeing this,
it is currently 11/2/17 i hope revision is going well and i hope you’re happy and over anna more,
got sub focus tonight so its that weekend she was meant to be here and i just got a little sad listening to our songs,
i hope youre alright and revision is going well
who is searching for a job costly for
it is costly for both employer and employee to search for jobs
what does asymmetric information create in the job search market and what are some examples of asymmetric information in the job market
asymmetric information creates inefficiency (shift out of beveridge curve),
stuff like wages (sometimes not stated when applying) or other specific things)
why would a beveridge curve be far away from the origin
workers badly informed,
unable to take up offers due to mobility,
inadequate skills,
unwilling to change or adapt
why do we have people unemployed and at the same time vacant jobs not filled
labour market doesn’t clear in same way as goods market due to frictions, and matching newly unemployed with newly posted jobs is difficult
what is trade in the labour market for firms and workers
uncoordinated, time consuming and costly
how is trade in the labour market costly for workers
workers need to spend time and resources to locate suitable job opportunities
how is trade in the labour market costly for firms
firms need to spend time and resources to locate and screen job applicants
explain a perfectly competitive labour market
firms and workers meet costlessly and trade at a single wage, any excess labour supply absorbed instantaneously through fall in equilibrium wage
explain the current exam setup
section A - multiple choice 10%,
section B - 3 questions 25 marks each,
section C - 2 short questions, only answer 1, 15 marks2q
what does the matching function do
brings unemployed workers and vacancies together
what is the matching function (formula)
m(u,v),
u is stock of unemployed,
v is stock of vacant posts
what is the equation for the matching function
m = u^α v^(1-α),
u is stock of unemployed,
v is stock of vacant posts
what is the equation for labour market tightness
θ = v/u,
labour market tightness = stock of vacant posts / stock of unemployed
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β = 1
constant returns to scale
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β > 1
increasing returns to scale
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β < 1
decreasing returns to scale
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α > 0
positive marginal returns (is the same for beta repectively)
in the cobb douglas function of (Y=AL^αK^β) what does it mean if 0 < α < 1
increasing at a decreasing rate (is the same for beta repectively)
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α=1
increasing at a constant rate (is the same for beta repectively)
in the cobb douglas function of (Y=AL^αK^β) what does it mean if α > 1
increasing at an increasing rate (is the same for beta repectively)
if the matching function is m=Au^αv^(1-α) then what could bring about a change in the A
cv website,
improvement in the job centre processes,
(these are improvements in matching)
if u goes up what does that do to the labour tightness equation
u up theta down, slack market, favours firms,
(θ = v/u,
labour market tightness = stock of vacant posts / stock of unemployed)
if v goes up what does that do to labour tightness equation
v up theta up, tight market, favours workers
job finding rate d
probability of unemployed worker finding a job
what is the job finding rate first bit of equation
m(u,v)/u,
matching function divided by the stock of unemployed workers (not sure about little u and U)
what is the job finding rate equation (f)
m(u.v)/u = (u^αv^1-α)/u = u^α-1v^1-α = (v/u)^1-α = θ^1-α=f,
where θ = v/u
are you more or less likely to get hired if the labour market is tight
more likely to be hired
what is the probability of finding a job related to
labour market tightness
what is the formula for the rate at which the position will be filled (start with matching function)
m(u,v)/v = (uαv^1-α)/v = u^αv^-α = (u/v)^α = (1/θ)^α = θ^-α
equation for change in the number of people unemployed
∆U = sN - fU = s(L-U) - fU,
change in number of people unemployed = separation rateno. employed - finding rateno. unemployed, L is size of labour force for that last bit
what does sNt represent
separation rate * number of people employed,
number of people who move from employment to unemployment in time period t
what does fUt represent
finding rate * number of people unemployed,
number of people who move from unemployment to employment in time period t
what is fU
probability will find job x no. unemployed
what is sN
probability will lose job x no. employed
what is N equal to in terms of L and U
N = L - U
what do you to to equation (∆U = s(L-U) - fU) now
divide by L to get,
∆U/L = S(L-U)/L - f(U/L)
what do you do to equation (∆U/L = S(L-U)/L - f(U/L)) now
∆u = s(1-u) - fu
what do you do to (∆u = s(1-u) - fu) to find the steady rate of unemployment
∆u = 0 so fu = s(1-u)
what is the steady rate of unemployment
the unemployment rate is constant over time
what do you do to this (∆u = 0 so fu = s(1-u)) to find a value for u
sub in the finding rate f=θ^1-α,
θ^1-αu = s(1-u) then rearrange to get,
u = s/(s+θ^1-α),
this is the inverse beveridge curve
what curve is this the equation for (u = s/(s+θ^1-α))
beveridge curve
explain chain of reasoning for beveridge, lots of vacancies
lots of vacancies, lots of jobs, so low unemployment
explain chain of reasoning for beveridge, few vacancies
few vacancies, few jobs, high unemployment
what is the final step in beveridge curve derivation (u = s/(s+θ^1-α))
θ=v/u so,
u = s/(s+(v/u)^(1-α))
what does this equation mean if V goes up or down u = s/(s+(v/u)^(1-α))
v up u down,
v down u up
what is disinflation
lower rate of inflation (but still inflation)
CPI d
headline measure of inflation, derived from movements in a weighted basket of consumer goods
difference between the CPI and RPI
rpi includes housing costs such as mortgage interest payments and council tax
what is zero inflation
constant price level from year to year
equation for the growth rate of inflation if P is the consumer price index
πt = (Pt - Pt-1) / Pt-1
what symbol is the CPI index
P
country example of inflation
zimbabwe
country example of deflation
japan
what are the causes of inflation
cost-push inflation,
print money,
demand pull inflation
explain demand pull inflation
increase in aggregated demand for goods and services not followed by aggregate supply increases lead to price increase
explain cost push inflation
supply side factors trigger inflation (oil price for example), price rise translates higher costs into higher prices,
or fall in currency increase production costs
explain print money inflation
waters down the value of money already in circulation, more money chasing same goods so lead to increased demand and higher prices
what countries cannot print money
eurozone countries because do not have control of their own monetary policy
tell me about changes in zimbabwe’s inflation rate
1980s - annual inflation 5.4%,
2008 - monthly inflation 2600.2%
yearly inflation 231 million %
what was the first part that caused zimbabwe’s inflation problem
weakening began in 1999 due to periods of drought adversely affected the agriculturally dependent nation,
output fell 50% between 2000 and 2009,
decline in main foreign exchange tobacco
what was the second part that caused zimbabwe’s inflation problem
uncontrolled government spending,
increased taxes however failed after tu led protests,
printed money to finance government spending and corruption,
spend more due to congo civil war 1998,
keep on printing money to cover expenditure,
wave of emigration falling population and labour force,
shrinking tax base and revenue so print more money
fact about emigration from zimbabwe
2010 emigrated totalled 1.25 million 9.9%
what were effects of zimbabwe inflation
had to abandon currency,
population displacement,
unemployment 80%
what is ricardian equivalence
economic theory that suggests when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged (public saves excess money to pay for future expected tax increases that will be used to pay off the debt)
what was the first part of the japan deflation
low overnight call rate, heavy investment spending, asset bubble due to low interest rates, high growth, this is all in 1986-1989
when was the japan economy doing well before the deflation
1986-1989
what was the second part of the japan deflation
increase in interest rates to avoid inflation,
at same time asset price bubble crashes and crash in stock market,
1990s deflation
what were the effects of the 1990s deflation in japan
national wealth declined as property values fall,
companies didn’t invest so didn’t expand,
postponing consumption (belief things become cheaper),
prices decline more => save more because price drop,
companies lost more and laid off workers,
deflationary spiral and depression
deflation doesn’t just mean lower prices, it also means …
higher unemployment and lower wages
what does nirp stand for
negative interest rate policy
purchasing power parity d
exchange rates that take into account how much a typical basket of goods in one country costs compared to another country
how is economic growth measured
as percentage change in real gdp
what symbol is used for gdp per capita
y
equation for growth rate of GDP per capita
(Yt+1 - Yt) / Yt
what is the equation of the quantity theory of money
Mt x Vt = Pt x Yt,
money supply x velocity of money = CPI x real GDP
what is the symbol for velocity of money and what is it
Vt,
average number of times per year that each piece of paper currency is used in transaction
what is assumed to be constant in the quantity theory of money (MV=PY)
V, velocity of money
transform the equation MV=PY to show the growth rates of each variable
gM + gV = gP + gY
what do you do next to the growth equation of the quantity theory of money (gM + gV = gP + gY)
assume that velocity of money is constant and the growth rate of CPI is inflation so π,
gM + 0 = π + gY
what do you do to the growth rate of money supply equation to show inflation (gM + 0 = π + gY)
π = gM - gY,
and because the growth rate of a country is assumed to be constant this shows that inflation is equal to the money supply (controlled by the central bank)
what was Milton Friedman’s point
inflation is always and everywhere a monetary phenomenon
what can be said about this equation if gY is constant (π = gM - gY)
an increase in the money supply = increase in inflation
example of where growth rate of money leads to inflation
zimbabwe
example where growth rate of money did not lead to inflation
US during financial crisis
example of which does not agree with quantity theory of money
hyperinflation in germany where inflation was a lot higher than the money supply
what symbol is the output gap shown by
Xt
equation for output gap
Xt = (Yt - Ybart) / Ybart
what is the output gap in the long run
0, because on long run trend
what is the aim of policy makers in terms of output gap
on trend because don’t want inflation (+ve output gap) or unemployment (-ve output gap)
what is the symbol for potential output
Ybart
what does this symbol represent - Ybart
potential output
what is the conflicting objective of low and stable inflation
high unemployment and low output growth
what is the conflicting objective of low unemployment
high inflation
what is the conflicting objective of high output growth
high inflation
what does ∆ut equal (change in rate of unemployment)
ut - ut+1
what does the β symbol mean in the Okun’s law equation (ut - ut+1 = -β(gyt - gbary))
Okun’s coefficient
what does gyt mean
growth rate in output
what is the equation for Okun’s law in terms of growth
ut - ut+1 = -β(gyt - gbary),
change in unemployment = okun’s coefficient x difference between current growth and trend growth
what does the β in Okun’s law represent
how much the growth rate affects unemployment
with Okun’s law growth rate equation (ut - ut+1 = -β(gyt - gbary)) what does a low β mean in terms of the line
flatter line
example of Okun’s law growth rate equation (ut - ut+1 = -β(gyt - gbary)) with low β and why is this
more flat line, Japan because of labour contracts, even if in recession do not let go of workers
what happens to unemployment when an economy grows fast and output is above trend
demand for labour is strong and unemployment falls below equilibrium levels
equation for Okun’s law relating to output gap
ut - u* = -hxt,
unemployment - natural rate of unemployment = okun’s coefficient x output gap
what does the h in okun’s law for output gap represent
okun’s coefficient
what two letters represent okun’s coefficient
h and β
for the okun’s law equation what happens to unemployment if xt > 0 (ut - u* = -hxt)
unemployment below natural rate
what happens in terms of workers bargaining power and stuff when unemployment is low
workers have more bargaining power so can ask for higher wages etc because smaller pool of unemployed people for firms to hire from
phillips curve d
an economic model that shows a trade off between inflation and unemployment
when did the phillips curve become unstable and why
1970s,
oil shocks,
many phillips curves after that
if π=0 what is unemployment doing
economy is on natural rate of unemployment
equation for πt
πt = -α(ut - u*),
what symbol is used to represent an oil shock in the inflation calculations
η,
eta
how does the equation πt = -α(ut - u*) change when there is an oil shock = η
πt = -α(ut - u*) + η
πt = -α(ut - u*) + η,
what does this equation tell us
even at the natural rate of unemployment there is inflation,
there is +π for every level of unemployment
what does oil shock do to phillips curve
curve shifts up
what is the symbol for expected inflation
πe (e is high)
after 1970 what is inflation now
πe no longer 0, now positive
what does future inflation encourage
encourages consumption now, this creates inflation
what does a government aim for in terms of output gap
want to avoid an output gap both ways
how do you combine these two equations okun’s output and phillips curve equation,
Ut - U* = -hXt,
πt = πe - α(ut - u*) + η (star)
πt = πe - α(-hxt) + η
how does this equation change when you substitute (-α)*(-h)=γ,
πt = πe - α(-hxt) + η
πt = πe + γxt + η
what happens to equation πt = πe + γxt + η if we use adaptive expectations (star this card
πet = πt-1, so, πt = πt-1 + γxt + η, so, ∆πt = γxt + η, ∆πt = demand pull inflation + supply shock inflation
what does adaptive expectations means for inflation
πet = πt-1
what is the symbol for the number of people in the labour force
L with a line over the top like mean, bar
what is the equation for number of people in the labour force
Et + Ut,
no of employed and no of unemployed
equation for bathtub model
∆Ut+1 = sbarEt - fbarUt,
change in unemployment = employed people who lose their jobs - unemployed people who find new jobs
symbol for job separation rate
sbar
symbol for job finding rate
fbar
equation for number of employed people who lose their job in the period
sbarEt,
job separation rate * number of employed people
equation for number of unemployed people who find new jobs in the period
fbarUt,
job finding rate * number of unemployed people
how do you solve the bathtub model mathematically,
write down on paper
set ∆Ut+1=0,
0=sbarEt - fbarUt,
=sbar(Lbar - Ut) - fbarUt,
0 = sbarLbar - (fbar + sbar) Ut
what happens when you solve this equation for Ut (0 = sbarLbar - (fbar + sbar) Ut),
write down on paper)
U* = (sbar Lbar) / (fbar + sbar),
this gives the number of people unemployed in steady state
what do you do to equation (U* = (sbar Lbar) / (fbar + sbar)) to get unemployment rate (unemployment rate is fraction of labour force that is unemployed) (write it down)
u* = U* / Lbar = sbar / fbar + sbar
what did beveridge notice
that when unemployment was high, the vacancy rate was low, and when unemployment was low, the vacancy rate was high
what is the beveridge curve
the relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force)
what are reasons why there can be vacant jobs that are not filled and unemployed people looking for a job at the same time
mismatch between the location and nature of the workers looking for jobs and jobs looking for workers (skills),
either jobseekers or those seeking to hire may not have relevant information
what should be a central component of any adequate description of the “equilibrium” in labour markets
a model of the job matching process
what is churning in the economy
job loss, quits and job creation are related to the overall pace of reallocation or ‘churning’ in the economy
what does more churning imply
lower job tenure,
more time spent moving among firms,
each month more workers flow into unemployment and more new vacancies are posted (shifts beveridge curve outwards)
what would greater job matching efficiency do to the beveridge curve
bring about an inward shift
whats the equation for a change in unemployment rate (it makes a graph)
∆Ut = - β (gyt - gbary)
what does this equation look like on a graph and what are the axis, ∆Ut = - β (Gyt - gbary)
y = Ut,
x = gyt,
downward sloping line going through points (0,4) and (4,0) roughly
in the equation (∆Ut = - β (Gyt - gbary)), what happens to unemployment if growth increases by 1%
the change in unemployment is -β
how do you use equation (∆Ut = - β (Gyt - gbary)) to calculate long term growth rate
set the change in unemployment equal to 0,
then solve for gbary because that is the long term growth rate (try and find example question because am a bit confused by this)
what does less liquid mean
harder to turn into currency in a short period of time
what does the quantity theory of money allow us to make a connection between
money and inflation
what is the equation for the rate of inflation from the quantity theory of money equation MV=PY given what you know about two of them being constant and the equation for calculating growth rates (try and acc do this and not just look at the answer and remember it)
MV=PY,
gm +gv = gp + gy,
velocity constant so gv = 0,
π* = gm - gy
what is adaptive expectations
firms expect the rate of inflation in the coming year to equal the rate of inflation that prevailed during the past year
what is the equation for inflation in symbols (equation of phillips curve) not including shocks *
πt = πt-1 + vbarY~bart, inflation = expected inflation due to adaptive expectations + demand conditions (vbar measures how sensitive inflation is to demand conditions and Y~bart is the output gap)
explain both parts of this vbarY~bart used in the equation for the phillips curve
vbar measures how sensitive inflation is to demand conditions,
Y~bart is the output gap at time t
what is the equation for inflation in symbols (equation of the phillips curve) with all bits *
πt = πt-1 + vbarY~bart + obar, inflation = expected inflation due to adaptive expectations + demand conditions (vbar measures how sensitive inflation is to demand conditions and Y~bart is the output gap) + shock to inflation (denoted by o to suggest oil price shocks)
what is the equation for the change in inflation (similar to phillips curve)
∆πt = vbarY~bart + obar,
because of adaptive expectations you can get rid of the πt-1 term because it is the same as last year so the only change comes from these terms
wha does an oil price shock do to the phillips curve,
inflation on y, output gap on x
shifts it up
what is the vbarY~bart term referred to as in the phillips curve equation
demand-pull inflation
velocity of money d
average number of times per year that each piece of paper currency is used in a transaction
what are the determinants of velocity of money
institutions in economy that affect the way individuals conduct transactions,
introduction of credit cards required less money in economy,
if more convenient to pay with cash then more money used to conduct the transactions
is milton friedman’s statement that “inflation is always and everywhere a monetary phenomenon” true
it is accurate in the long run, but is not supported by the data for the short run
