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macro UGH kms > week 3 > Flashcards

week 3 Flashcards

unemployment

1
Q

define employed

A

people who work

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2
Q

define unemployed

A

not employed, but want to work and actively looking for a job

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3
Q

define economically inactive

A

not employed nor unemployed; not in labour force

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4
Q

reasons for economic inactivity in UK?

A
  1. student
  2. long-term sick
  3. looking after family
  4. retired
  5. other
  6. temp sick
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5
Q

______ more people out the labour force due to long-term sickness

A

half a million

between June-Aug 2022, 2.5million reported long term sickness as main reason for economic inactivity

UP from 2 mil in 2019

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6
Q

patterns of unemployment

A

more than one-third of unemployed are recent entrants into the labour force

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7
Q

not all unemployment ends with the job seeker finding a job….

A

HALF of all spells of unemployment end when the unemployed person leaves the labour force and become economically inactive

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8
Q

who are “discouraged workers”?

A

individuals who would like to work but have given up looking for a job

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9
Q

calculation for labour force?

A

no. of employed + no. of unemployed

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10
Q

formula for unemployment rate?

A

it’s the % of labour force unemployed

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11
Q

what is labour-force participation rate?

A

% of the total adult population that is in the labour force

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12
Q

formula for labour-participation rate?

A

79.80% in Jan.2020 (which was an all time high).

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13
Q

do econ. inactive ppl affect unemployment rate?

A

economically inactive people are not in labor force, they do not impact the unemployment rate

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14
Q

labour force participation rate UK

A
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15
Q

male + fem participation rates in UK

A
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16
Q

Labour-force participation of men & women in US/UK

A

reasoning:

  1. Women’s role in society has changed dramatically over the past century
    - New technologies have reduced amt of time required to complete routine household tasks
  • Improved birth control have reduced the number of children born to the typical family
  • Changing political and social attitudes
  1. Fall in men’s labour-force participation
    - Young men stay in school longer + older men retire earlier and live longer
  • more women employed so More fathers now stay at home to raise their children
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17
Q

2 ways to measure unemployment?

A
  1. Claimant Count CC
  2. Labour force survey LFS
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18
Q

what is the claimant count?

A

number of people claiming Job Seeker’s Allowance (JSA) is counted

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19
Q

The rate of unemployment differs by age, sex, ethnicity (just like the participation rate does)

A

or example, in the 3 months to November 2020 the unemployment rate for males in the United Kingdom was 5.4 percent, while for females it was 4.7 percent.

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20
Q

Long run vs Short run unemployment

A

Natural rate of unemployment vs Cyclical unemployment

The “natural rate of unemployment” is the baseline unemployment rate that exists even when the economy is doing well. It doesn’t disappear over time and can be influenced by long-term factors.

“Cyclical unemployment” refers to the fluctuations in unemployment that occur due to economic cycles, like recessions and expansions. It’s a temporary deviation from the natural rate. - often called “the gap”

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21
Q

Natural rate of unemployment has 2 main components:

A
  1. Structural unemployment results because the no. of jobs available in some labour markets is insufficient to provide a job for everyone who wants oneCould be caused by a variety of factors, including e.g. minimum wages
  2. Frictional unemployment results because it takes time for workers to search for the jobs that best suit their tastes and skills
    • Regional changes
    • Changes in composition of industries (professions “disappear”, new ones are born=sectoral shifts)
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22
Q

Frictional Unemployment POLICY aims to do what?

A

Aims to reduce the time it takes unemployed to find jobs

+ retrain people with “unwanted” skills → (will reduce natural rate of unemployment)

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23
Q

How to help frictional unemployment?

A

government programmes to facilitate job search:

  • Government-run employment agencies [E.g., job centres]
  • Public training programmes, apprenticeship schemes
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24
Q

what would hayek + friedman say about policies to combat frictional unemployment?

A

government intervention would likely do more harm than good. For example, the current government is keen on getting people back to the office

Which may be holding back an inevitable structural shift (or may not)

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25
Q

policy strategy to reduce structural unemployment - why controversial?

A

Addressing this component is controversial as it may require “forcing down real wages”.

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26
Q

How to reduce structural unemployment?

A

Install a policy to:

Shorten duration of unemployment insurance

(FORCES ppl 2 search harder + work at lower wages)

– lower minimum wage → easier to hire and fire workers → increase wage flexibility

Wages are said to be flexible when they respond to changes in supply and demand and lead to the market clearing wage being se

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27
Q

Minimum-wage [or “living wage”] laws can cause unemployment… how?

A

forces the wage to remain above the equilibrium level

  • Higher quantity of labour supplied
  • Smaller quantity of labour demanded

Surplus of labour –> unemployment

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28
Q

diagram of min. wage unemployment

A

UNEMPLOYMENT due to **wage above the Eq. Level **

In this labour market:

The wage where S + D balance is WE.

@ This eq wage → the Q of labour supplied + the Q of labour demanded both equal LE.

By contrast, if wage forced to remain above the WE level (coz of a minimum-wage law)

→ The Q of labour supplied rises to LS, and the Q of labour demanded falls to LD.

The resulting surplus of labour, LS – LD, represents unemployment.

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29
Q

what is a union?

A

a worker association which typically bargains w/ employers over wages, benefits + working conditions

RESULT: higher wages + less flexibility

higher wages (unionised workers earn 10-20% more)

less flexibility (difficult to lower salaries + fire workers)

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30
Q

If unions bargain the wage above the equilibrium level… then?

A

same result as with a minimum wage

  • Unemployment (“outsiders” worse off)
  • But employed workers (“insiders”) better off
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31
Q

Are unions good or bad for the economy?

A

in favor:

  1. Unions are a necessary antidote to the market power of the firms that hire workers
    – In the absence of a union, firms pay lower wages and offer worse working conditions
  2. Unions help firms respond efficiently to workers’ concerns
    • Keep a happy and productive workforce
32
Q

investments stem from …?

A

savings

33
Q

what is the financial system?

A

A group of institutions in the economy that help match one person’s saving with another person’s investment

34
Q

what does the financial system do w the economy’s scarce resources

A

moves economy’s scarce resources from savers to borrowers!

35
Q

what are financial markets?

A

a place where savers can directly provide funds to borrowers

> they do so expecting some return on their ‘investment’

36
Q

what are the 2 financial institutions

A
  1. financial markets
  2. financial intermediaries
37
Q

what are the 2 important types of financial market that coordinate savers + borrowers?

A
  1. bond market
  2. stock market
38
Q

what are the 2 main types of financial intermediaries that coordinate savers + borrowers?

A
  1. Banks
  2. Mutual or Investment funds
39
Q

what are bonds?

A

Bonds are certificates of indebtedness.

When someone purchases a bond, they are loaning their money to the issuer in return for periodic interest payments and the return of the borrowed amount (principal) at the bond’s maturity date.

Bonds differ by their time to maturity (when the loan will be repaid) and their rate of interest - also known as the ‘coupon’ or yield, which is paid regularly

40
Q

What is principal?

A

the amount borrowed

41
Q

what does the rate of interest of a bond reflect?

A

credit risk (the probability of a default)

42
Q

what makes a bond interest rate higher?

A
  1. Higher Risk = higher expected return and thus a HIGHER INTEREST RATE

– that’s why corporate bonds are usually much higher than sovereign bonds

  1. Duration Risk: Long term bonds normally pay higher interest rate (the yield curve)
43
Q

what are sovereign + corporate bonds?

A

Sovereign Bonds: These are loans you give to a country. They promise to pay you back with interest.

Corporate Bonds: These are loans you give to companies. They promise to pay you back with interest.

44
Q

Imagine you want to start up a firm, what are ways you could obtain the funds to do so?

A
  1. issue bonds (selling bonds for investors to buy)

^ This is what most firms do! Wether they are start-ups or not

  1. Issue stocks
45
Q

What is a stock?

A

A claim to partial ownership in a firm + therefore a claim on its profits (DIVIDENDS)

46
Q

what r dividends?

A

Dividends are the money that a company shares with its owners (the shareholders) from its profits. It’s like a thank you gift for investing in the company.

47
Q

What does “the firm sells a claim on its future profits when it issues stocks” mean?

A

if it earns no money, the stockholder gets nothing

48
Q

Where can you trade stocks?

A

Organised stock exchanges

49
Q

what are stock prices determined by?

A

demand + supply

50
Q

what does the demand of a stock depend on?

A

depends on expected profitability as well as ‘how much money ppl have and are able to invest’

51
Q

what alters supply of stocks?

A

supply of stocks depends on firms’ financial requirements and their alternative means of obtaining credit e.g Bond Market

52
Q

Firms can raise money by either …?

A

issuing stocks (equity finance)
or
borrowing money through the issuance of corporate bonds (debt finance)

53
Q

what is the stock index?

A

Average of a group of stock prices; closely watched as indicators of future economic conditions

54
Q

What do banks do?

A
  1. Takes in deposits from savers, bank pays them interest
  2. Makes loans to borrowers, charges them interest (At a higher rate)
  3. **Facilitate purchasing **of goods and services - cheques, debit cards etc
55
Q

What are mutual/investment funds

A

Mutual funds or investment funds are like a big pool of money collected from many investors. This money is then managed by professional fund managers who invest it in various assets such as stocks, bonds, or real estate. Investors buy shares or units of the mutual fund, which represent their ownership in the fund’s overall portfolio. The value of these shares fluctuates based on the performance of the underlying investments. Mutual funds provide a way for individual investors to diversify their investments and access professional management without needing to directly buy and manage individual securities themselves.

56
Q

What is NX in a closed economy?

A

0 as it doesn’t interact with other economies

57
Q

What is the GDP formula in a closed economy?

A

Y = C + I + G

58
Q

what is National Saving S?

A

the total income in the economy remaining after deducing [paying] consumption + gov purchases

S = Y - C - G (=I)

59
Q

formula when we split savings into two?

A

Let T = taxes - transfer payments

S = Y - C - G
S = (Y - T - C) + (T - G)

60
Q

What are the 2 parts to national savings?

A
  1. PRIVATE SAVING
  2. PUBLIC SAVING
61
Q

what is private vs public saving?

A

private saving (Y - T - C) is income that households have left after paying for taxes + consumption

public saving (T - G) is tax revenue that gov has left after paying for its spending

62
Q

If T - G > 0?

A

The government saves - a budget SURPLUS!

63
Q

If T - G < 0?

A

Government borrows - budget deficit

64
Q

What is Supply in the market for loanable funds?

A

Savings (Private + Public Savings)

65
Q

What is Demand in the market for loanable funds?

A

Private saving Investments

(ONLY public investment included in G so ONLY private saving Investment)

66
Q

What is the price in the market for loanable funds?

A

Price is the REAL INTEREST RATE

  • what borrowers + investors pay for a loan
  • what lenders + savers receive
67
Q

As the real interest rate rises in the market for loanable funds?…

A

DEMAND (investors) declines

SUPPLY (savers) increases

68
Q

draw me market equilibrium for loan market

A
69
Q

Explain how the interest rate in economy adjusts in Mrket for Loanable funds

A

The interest rate in the economy adjusts to balance the supply and demand for loanable funds. The supply of loanable funds comes from national saving, including both private saving and public saving. The demand for loanable funds comes from firms and households that want to borrow for purposes of investment.

70
Q

Do governments intervene in Market for Loanable funds?

A

Governments can and do intervene in the market for loanable funds

71
Q

HOW do governments intervene in Market for Loanable funds?

A
  1. A policy intervention
  2. Indirect interference through a budget deficit or surplus
72
Q

How does the gov. intervene into the market for loanable funds using saving incentives ?

A

Replace income tax with a consumption tax, like VAT

→ Shelters saving from taxation

→ Will affect the supply of loanable funds

→ Causes an increase in supply (rightward shift)

→ New equilibrium w lower interest rate + higher quantity of loanable funds

   -- greater investment → higher GDP growth
73
Q

What is the downside for Saving Incentives policy in market for loanable funds?

A

possible distributional effects: would this policy be better for the rich than the poor?

74
Q

Diagram of savings incentive - increase in the supply of loanable funds

A

A change in the tax laws to encourage the UK to save more would shift the supply of loanable funds to the right from S1 to S2.

As a result, the equilibrium interest rate would fall, and the lower interest rate would stimulate investment.

Here the equilibrium interest rate falls from 5 percent to 4 percent, and the equilibrium quantity of loanable funds saved and invested rises from £1,200 billion to £1,600 billion.

75
Q

How does Budget deficit/surplus affect market for loanable funds?

A

Government:

  1. starts with balanced budget
  2. then starts running a budget deficit (Achieved by issuing bonds or gilts (UK))

→ this decreases the supply of loanable funds
→ supply curve shifts left

→ NEW EQUILIBRIUM w/ **Higher interest rate** (*crowding out* private investment)

→ less investment and lower GDP growth

76
Q

THE EFFECT Of A GOV BUDGET DEFICIT ON MARKET FOR LOANABLE FUNDS DIAGRAM

A

When the government spends more than it receives in tax revenue, the resulting budget deficit lowers national saving.

The supply of loanable funds decreases, and the equilibrium interest rate rises. Thus, when the government borrows to finance its budget deficit, it crowds out households and firms that otherwise would borrow to finance investment.

Here, when the supply shifts from S1 to S2, the equilibrium interest rate rises from 5 to 6 percent, and the equilibrium quantity of loanable funds saved and invested falls from £1,200 billion to £800 billion.

77
Q
A

macro UGH kms (10 decks)

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