Macroeconomic Problems Unemployment And Inflation The Unemployed People

Macroeconomic Problems Unemployment And Inflation

The Unemployed • People available for work (labor force) • People actively looking for work • People who work less than one hour for pay or profit in survey week • Unemployment Rate= # Unemployed • # Civilian Labor Force • Full employment = 4. 5% or less

Limitations of Unemployment Rate • Understates unemployment problem • Does not count “dropouts” who aren’t looking for a job (1 million + persons) • Does not count “underemployed” who are forced to work part-time but want full-time

Types of Unemployment • Frictional: Between Jobs – Short-term Unemployed • Structural: Fundamental change in economy reduces demand for worker – Outsourcing; factory closing • Cyclical: Related to recession – Lay-offs in auto industry • Seasonal: Changes in weather – Ski instructor during summer • Technological: Worker replaced by machine – Automated call service; robot on assembly line

Inflation • General increase in the level of prices – NOT all goods/services, NOT equal amounts • Price level: Relative magnitude of prices at one point and time • Consequences of Inflation – Purchasing power of dollar falls – Spending habits change – Interest rates go up

Measuring Inflation • Consumer Price Index (CPI) • CPI expressed in terms of “ 100” • Example: CPI = 111 year 2, 115 year 3 – Inflation Rate = change in price level X 100 – beginning price level – (115 -111) 4 X 100 = 3. 6% – 111

Inflation • Causes of Inflation: – Demand-Pull – where aggregate demand (AD) rises at a faster rate than aggregate supply (AS) – Cost-Push – increases in costs (labour, raw materials, imported costs, etc. ) that cause a leftward shift in AS – Quantity Theory- increases in amount of dollars (or lowering interest rates) by Federal Reserve cause inflation

Aggregate Supply and Demand PRICE LEVEL GROSS DOMESTIC PRODUCT

Shifts in Curves Change Prices

Deflation • • • General decline in price level Caused by drop in aggregate demand NOT great news for macroeconomy Businesses hate deflation Deflation leads to unemployment

Questions • Increase in unemployment decreases aggregate demand: Price level? • OPEC nations reduce their production of crude oil by 30%: Price level? • Federal Reserve lowers interest rates and creates $1 trillion: Price level? • Aggregate demand grows faster than aggregate supply: Price level?