question
Actual versus Natural (NRU)
answer
Is the percent of people currently unemployed, given that they are in the labor force. The natural rate of employment (NRU) is the minimum sustainable rate of employment. NRU is measured theoretically through a model while U is measurable by statistics. U is volatile and changes fast while NRU is relatively stable and changes slowly.
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Full Employment
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100% employment-NRU, Full employment is when the actual rate of unemployment = the natural rate of unemployment.
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DemoGraphics
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Lots of young people changing jobs frequently -> High NRU
Lots of people having children, temporarily leaving labor force -> High NRU
Lots of people having children, temporarily leaving labor force -> High NRU
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Public Policy
answer
Lots of young people changing jobs frequently -> High NRU
Lots of people having children, temporarily leaving labor force -> High NRU
Lots of people having children, temporarily leaving labor force -> High NRU
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Technology
answer
Can reduce NRU. e.g. the internet and job finding websites to reduce frictional unemployment
Can increase NRU. Technological advancements can throw people out of business and increase structural unemployment.
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Can increase NRU. Technological advancements can throw people out of business and increase structural unemployment.
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Labor Unions
answer
Same effect as minimum wage. Unions create structural unemployment and increase NRU.
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Potential Output
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Full-Employment Output, Potential GDP (QP, QFE, QF)s
QF: Maximum sustainable output or real GDP.
Q: Q=(Q/employment) * employment
QF: Maximum sustainable output or real GDP.
Q: Q=(Q/employment) * employment
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Determinants of Potential Output.
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i. Size of Labor Force
(I) Population
(II) Labor-Force Participation Rate
ii. Productivity of Labor
(I) How Hard Labor Works
(II) Other Inputs
(III) Technology
(IV) Institutional Factors (such as Legal System)
iii. Natural Rate of Unemployment
(I) Population
(II) Labor-Force Participation Rate
ii. Productivity of Labor
(I) How Hard Labor Works
(II) Other Inputs
(III) Technology
(IV) Institutional Factors (such as Legal System)
iii. Natural Rate of Unemployment
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GDP Gap
answer
100 * (Q-QF / QF)
U<NRU = Positive Gap, Expansion U>NRU = Negative Gap, Recession
U<NRU = Positive Gap, Expansion U>NRU = Negative Gap, Recession
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Okun's Law
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showed how GDP relates to unemployment. Shows how opportunity cost relates to the economy, if you lose output, you can never get it back.
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Inflation (equation)
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100 * ( PI(t) - PI(t-1) / PI(t-1))
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Inflation (measures what?)
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a. GDP Price Index
b. Consumer Price Index (CPI)
b. Consumer Price Index (CPI)
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Demand
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buyers, purchasers, consumers (if households—otherwise can be producers or government or foreigners)
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Quantity Demanded
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total amount of goods or services demanded
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Determinants of Demand
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I. Income
ii. Price of Substitutes
iii. Expectations
iv. Tastes
ii. Price of Substitutes
iii. Expectations
iv. Tastes
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Supply
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sellers, firms or producers or producing units (if business—otherwise can be households or government or foreigners)
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Quantity Supplied (Qs)
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the amount of a good or service that the producer (supplier) is willing and able to supply at a specific price
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per-unit production cost) or P/P
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determines profits determines QS
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Determines profits determines QS
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a. Supply Schedule and Supply Curve
b. Law of Supply versus Vertical Supply
b. Law of Supply versus Vertical Supply
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Other (non own-price) Determinatns of Supply
answer
a. "Movement along" versus "Shift" of Supply Curve
b Determinants
i. Prices of Inputs
ii. Technology
iii. Taxes and Subsidies
iv. Expectations
v. Shocks
b Determinants
i. Prices of Inputs
ii. Technology
iii. Taxes and Subsidies
iv. Expectations
v. Shocks
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Aggregate Demand (formula)
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Aggregate demand = C+I+G+NX
Private aggregate demand = C+I+NX
(X-M)
Private aggregate demand = C+I+NX
(X-M)
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Aggregate Demand
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Quantity of domestically produced goods and services (real GDP) that households, business firms, government, and foreigners (net exports) are willing and able to purchase over a give time period (AD = C + I + G + NX)
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Private Components
answer
1. Consumption (C)
a. Disposable Income (DI)
i. Definition
ii. Relationship to GDP
a. Disposable Income (DI)
i. Definition
ii. Relationship to GDP
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Dterminants of Private components
answer
(I) Household Wealth
(II) Household Borrowing
(III) Consumer Expectations
(IV) Real Interest Rate
(V) Personal Taxes
(II) Household Borrowing
(III) Consumer Expectations
(IV) Real Interest Rate
(V) Personal Taxes
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Determinant of Profitabilitty
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Expected rate of return verses real interest rate.
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Determinants of Expected Return
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(I) Capital Acquisition, Maintenance, Operating Costs
(II) Excess Capacity (Underutilized Capital Goods)
(III) Technology
(IV) Business Taxes
(VI) Business Expectations
(II) Excess Capacity (Underutilized Capital Goods)
(III) Technology
(IV) Business Taxes
(VI) Business Expectations
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Instability of Investment
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expectations, durability of capital goods, irregularity of innovation, profit volatility
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exchange rate
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The measure of how much one currency is worth in relation to another.
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Foreign Exchange Market
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a market in which currencies of different countries are bought and sold
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Aggregate Supply
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Quantity of goods and services (real GDP) that domestic firms want to supply and are able to produce over a given time period
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