1. Unemployment, CPI, Foreign Exchange & Balance of Payments
Review Day #3: Friday May 6th
Unit- #2 & #5 Macro Review
Unemployment, CPI, Foreign Exchange & Balance of Payments

2. 4-Types of Unemployment
Structural
Skills do not match demand for labor
Cyclical
too low a level of GDP (recession)
Frictional
Temporarily between Jobs
Seasonal
Based on time of year
Natural Rate of
Employment
(also called
full employment)
About 4.5% in USA
Allows for some
Frictional & Structural
Natural Rate is where:
Cyclical unemployment is zero
Seasonal “factored out”

3. Measuring Inflation
GDP deflator – uses price of all goods/services included in GDP
Very Broad index but only has domestically produced goods
CPI index – uses prices of a consumer market basket of goods & services
Very narrow index but has international goods
What should
be in basket?
Inflation Index:
Substitution Bias
New goods
Quality changes
Base year always 100
Use to calculate inflation rates
COLA = cost of living adjustment

4. Determinants of Exchange Rates
Market for
Foreign
Exchange
1. Changes in Consumer Tastes
2. Relative Income Changes
3. Relative Inflation
4. Relative Real Interest Rates
5. Speculation & Investment
Where people go to “swap” currencies
U.S. Income
Rises
Demand
Imports
Demand
Foreign
Currency
Dollar Depreciates
Foreign Currency
Appreciates

5. If U.S. Price Level Falls =>
Market for
Foreign
Exchange
Graphing Exchange Rates
U.S. goods look “cheap” => Europeans ↑U.S. exports
=> Demand for dollars ↑ => Dollar appreciates
If U.S. Price Level Falls =>
Dollars
Euros
Euro Price
of a dollar
Qty of Dollars D1 S1
.75 Euro Q1
Dollar Price
of a Euro
Qty of Euros D1 S1
1.3 $ Q1 D2 S2

6. a Financial Account Surplus with China
Balance of Payments
Current Account
Considered the U.S. Trade Balance
(Exports – Imports) (NX) + Investment Income (bond interest, stock dividends)
Financial Account
Foreign purchase of US assets – U.S. purchase of foreign assets
Assets = Stocks, bonds, factories, land, etc…
Example: Financial Act. Surplus = Money flows into US
If one account is
positive the other
Must be negative.
They generally
sum to ZERO!
Example:
USA has a Current account deficit &
a Financial Account Surplus with China

7. China & Balance of Payments
China buys U.S. Bonds
Financial Account Surplus
Imports > Exports
Current Account Deficit
Official Reserves
Fed holds quantities of foreign currency called reserves
Used to offset discrepancy in current account vs. financial account
If both accounts do
Not sum to zero,
reserves are used to
Offset minor
difference

8. Phillips Curve: Inflation vs. Unemployment
Rate (percent)
Inflation
Rate
(percent
per year)
SHORT RUN Phillips Curve
Phillips curve
(output is
8,000) B 4 6
7,500) A 7 2
Natural rate of
unemployment
Long-run Phillips
curve
Unemployment
Rate
Inflation B A
and
increases the
inflation rate . . .
LONG RUN Phillips Curve
You may have to draw a Phillips Curve
Remember—Unemployment on x-axis

9. Economic Schools of Thought
NeoClassical Economics
| |
Classical Economics
| |
Keynesian Economics
| |
Great Depression?
Prices were not flexible!
What Now?
Keynesian Economics did not help here!

10. Practice Test