1. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010- 2011 8 CHAPTER Unemployment and Inflation Macro

2. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Unemployment  Unemployment  Personal cost  Cost on the economy  Measuring unemployment  Civilian non-institutional adult population  Labor force  Employed + Unemployed  Unemployment rate  Percentage of unemployed in the labor force

3. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1  Adult population  Employed  Working full time or part time  Not working  Unemployed (looking for work)  Not in labor force  Retired; students; don’t want to work  Discouraged workers Unemployment

4. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1  Labor force participation rate  Number in labor force / Adult population  Unemployment over time  Rise during contractions  Fall during expansions  Overall downward trend (1980s to 2000)  Growing economy  Fewer teenagers in workforce Unemployment

5. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 The U.S. Unemployment Rate Since 1900 Exhibit 2

6. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Unemployment Rates for Various Groups LO 1 Exhibit 3(a)

7. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Unemployment Rates for Various Groups LO 1 Exhibit 3(b)

8. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Unemployment Rates Differ Across U.S. Metropolitan Areas LO 1 Exhibit 4

9. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Sources of Unemployment  Frictional unemployment  Bring together employers and job seekers  Doesn’t last long  Better match workers and jobs  Seasonal unemployment  Seasonal changes

10. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Sources of Unemployment  Structural unemployment  Mismatch of skills or geographic location  Problem  Cyclical unemployment  Increases during recessions  Decreases during expansions

11. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Full Employment  Full employment  No cyclical unemployment  Some unemployment  Frictional  Structural  Seasonal  Estimates: 4-6%

12. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Unemployment Compensation  Unemployment benefits  Half of the unemployed  Criteria  Lost job  Looking for work  Time limit: 6 months  40% of wages  May reduce the incentive to find work

13. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Inflation LO 2  Inflation  Sustained increase in price level  Annual inflation rate  Percentage increase in price level  Hyperinflation  Extremely high inflation  Deflation  Sustained decrease in price level  Disinflation  Decrease in inflation

14. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Two Sources of Inflation LO 2  Increase in AD  Demand-pull inflation  Increased government spending  Social programs  Decrease in AS  Cost-push inflation  Increase cost of production  Push up the price level  Stagflation

15. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Inflation Caused by Shifts of Aggregate Demand and Aggregate Supply Curves Aggregate output0 Price level P’P’ P AS AD’ AD (a)Demand-pull inflation: inflation caused by an increase of aggregate demand An outward shift of the aggregate demand to AD’ “pulls” the price level up from P to P’. Aggregate output0 Price level P’P’ P AS AD (b) Cost-push inflation: inflation caused by a decrease of aggregate supply A decrease of aggregate supply to AS’ “pushes” the price level up from P to P’. AS’ LO 2 Exhibit 6

16. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Inflation Since 1913 LO 2 Exhibit 7(b)

17. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Average Annual Inflation from 2004 to 2008 Differed across U.S. Metropolitan Areas LO 2 Exhibit 8

18. Chapter 8Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Why is Inflation Unpopular? LO 2  Pay higher prices  Inflation = Penalty  Receive higher receipts  Higher income  ‘Well-deserved’ reward  Fixed nominal income  Unadjusted for inflation  Social Security  Adjusted for inflation (COLA)