Introduction to Macroeconomics Chapter 19. Contemporary Macroeconomics

Contemporary Macroeconomics 1. Employment - Unemployment 2. Business Cycle 3. Aggregate Supply/Demand Curves 4. Discretionary Government Policy

1. Employment - Unemployment Measurement Types of Unemployment Natural Rate of Unemployment Okun’s Law

Unemployment Rates U.S. Fairfax Co., VA recession recession recession Great Depression ( ) World War II ( )

Measurement Employed persons + Unemployed persons Total labor force + Not in labor force Civilian noninstitutional population (16 and over) Unempoyment Rate (percent) = Unemployed * 100 Total Labor Force

U.S. Labor Force Participation Rate Men Women

Types of Unemployment Frictional Unemployment - dynamic labor force in a stable economy (voluntary unemployment) Structural Unemployment - stable labor force in a dynamic economy (involuntary unemployment but probably unavoidable) Cyclical Unemployment - unstable economy (involuntary unemployment and possibly avoidable through gov’t policy)

“Natural Rate” of Unemployment Natural Rate of Unemployment - consistent with frictional and structural unemployment. Full Employment Output - total output of economy when unemployment is at the natural rate. During the business cycle total output fluctuates around the full employment level.

Okun’s Law Output fluctuates more than unemployment over the business cycle 1 % decline in output leads to 1/2% of workers becoming unemployed

Business Cycles Recurrent, systematic fluctuations in the level of business activity: - real GDP growth rate - inflation - unemployment

Real GDP Unemployment Rate (percent) Inflation Rate (percent) PeakTroughPeak ContractionExpansion (Recession)

Quarterly Changes in Real GDP

Index of Leading Economic Indicators Sources: The Conference Board: NBER: PTPTPTPTPTPT

2. Aggregate Supply and Demand Aggregate Demand - total spending in an economy at various “average” price levels Aggregate Supply - total production in an economy at various “avereage” price levels Equilibrium - aggregate demand equals aggregate supply

3. Discretionary Government Policy Fiscal Policy and Monetary Policy Demand-side and Supply-side Policy

Fiscal and Monetary Policy Fiscal Policy - U.S. Congress –Government spending –Taxes Monetary Policy - Federal Reserve –Discount (interest) rate –Money supply (T-Bill sales/purchases) –Required bank reserves –Stock market margin requirements

Supply-Side and Demand-Side Demand-Side Policy - intended to alter the overall level of spending (aggregate demand) Supply-Side Policy - intended to alter incentives to produce output (aggregate supply)