UnemploymenUnemployment & Philips Curve & savings & investmentt & Philips Curve & Savings & Investment--Quiz 2

7/23/2019 UnemploymenUnemployment & Philips Curve & savings & investmentt & Philips Curve & Savings & Investment--Quiz 2

http://slidepdf.com/reader/full/unemploymenunemployment-philips-curve-savings-investmentt-philips-curve 1/39



Types of UnemploymentStructural Unemployment: Unemployment caused as result of the decline of industries and the inability oemployees to move into jobs being created in neindustries. Eample! "ntroduction of computer in o#ce wor

Frictional Unemployment: Unemployment caused whepeople move from job to job. % person can remaunemployed when he is loo$ing for a better job. "n such cashe might get a job but doesn&t wor$ there because he wanto get a better job.

Seasonal Unemployment: Unemployment caused becausof the seasonal nature of employment .Cyclical Unemployment! The unemployment that arise duto business cycle. Eample! 'uring recession many peoploss their jobs because of the fall of labour demand in theconomy.



(ecent Eample!



Copyright©2003 Southwestern/T

100

80

60

40

20

01950 1955 1960 1965 1970 1975 1980 1985 1990 200

Labor-Force

Participation

Rate in percent!

Women

Men

1995



)hy some people always

unemployed* +ob search,rictional unemployment

tructural unemployment

inimum wage

E#ciency wage

Unemployment rate never falls to /ero it 0uctuates aroatural rate of unemployment.



+23 E%(C4 Job searchthe process by which wor$ers nd appropriate jobs give

tastes and s$ills.

results from the fact that it ta$es time for 6ualied indibe matched with appropriate jobs.



+23 E%(C4 This unemployment is di7erent from the other types o

unemployment.

"t is not caused by a wage rate higher than e6uilibrium.

"t is caused by the time spent searching for the 8right9 j

:overnment programs can a7ect the time it ta$es un

wor$ers to nd new jobs. These programs include the following!

:overnment-run employment agencies

;ublic training programs

Unemployment insurance



;ublic ;olicy and +ob earch

Unemployment insurance is a government program tpartially protects wor$ers& incomes when they becomunemployed.

27ers wor$ers partial protection against job losses.

27ers partial payment of former wages for a limited tim

who are laid o7.



""U-)%:E <%))hen the minimum wage is set above the level that

supply and demand= it creates unemployment.


http://slidepdf.com/reader/full/unemploymenunemployment-philips-curve-savings-investmentt-philips-curve 10/39Copyright©2003 Southwestern/T

"uantity o#

Labor

0

Surplus of labor =Unemployment

Labor

supply

Labor

demand

$age

Mnmum

!a"e

LD

LS

W E

LE



U"2 %' C2<<ECT">E

3%(:%"":% union is a wor$er association that bargains with emover wages and wor$ing conditions.



U"2 %' C2<<ECT">E

3%(:%"": The process by which unions and rms agree on the employment is called collective bargaining.



U"2 %' C2<<ECT">E

3%(:%"":% strike will be organi/ed if the union and the rm careach an agreement.

% stri$e refers to when the union organi/es a withdralabor from the rm.

% stri$e ma$es some wor$ers better o7 and other wo

worse o7.)or$ers in unions ?insiders@ reap the benets of colle

bargaining= while wor$ers not in the union ?outsiderssome of the costs.



T4E T4E2(A 2, E,,"C"ECA

)%:EEfciency wages are above-e6uilibrium wages paid border to increase wor$er productivity.

The theory of e#ciency wages states that rms opere#ciently if wages are above the e6uilibrium level.



T4E T4E2(A 2, E,,"C"ECA

)%:E% rm may prefer higher than e6uilibrium wages for following reasons!

)or$er 4ealth! 3etter paid wor$ers eat a better diet anmore productive.

)or$er Turnover! % higher paid wor$er is less li$ely to lo

another job.)or$er E7ort! 4igher wages motivate wor$ers to put fo

best e7ort.

)or$er Buality! 4igher wages attract a better pool of wapply for jobs.



Unemployment and "n0ation The natural rate of unemployment depends on vario

features of the labor mar$et.

Eamples include minimum-wage laws= the mar$et punions= the role of e#ciency wages= and the e7ective job search.

The in0ation rate depends primarily on growth in theof money= controlled by the ,ed.



Unemployment and "n0ationociety faces a short-run tradeo7 between unemploy

in0ation.

"f policyma$ers epand aggregate demand= they canunemployment= but only at the cost of higher in0atio



T4E ;4"<<"; CU(>E The Phillips curve illustrates the short-run relationshi

between in0ation and unemployment.



%nem

Rate

0

'n#&ation

Rate

percentper year!

#$llps %ur&e

4

'6

7

(2

Cop



%ggregate 'emand %ggreg

upplyThe Aggregate Demand Curve The aggregate demand curve shows= at various price levels= thof goods and services produced domestically that consumers= governments are willing to purchase at the given period of tim

The Aggregate Supply Curve The aggregate supply curve shows the relationship between a

overall price level= and the 6uantity of goods and services prodthat nationDs suppliers. The curve is upward sloping in the shorvertical= or close to vertical= in the long run.



%ggregate 'emand= %ggregate upply= and t;hillips Curve

The greater the aggregate demand for goods and segreater is the economy&s output= and the higher is thprice level.

% higher level of output results in a lower level ofunemployment.



"uantity

o# )utput

0

S$ort)run

a""re"ate

supply

a! The *o+e& o# ,ggregate eman+ an+ ,ggregate Supp&y

0

'n#&ation

Rate

percent

per year!

Price

Le.e&

b! The Phi&&ips Cur.

Lo! a""re"ate

demand

*"$

a""re"ate demand

+output s

8,000-

'

4

6

+output

7,500

(

7

2

8,000

+unemployment

s 4.-

106 '

+unemployment

s 7.-

7,500

102 (

Cop



4",T " T4E ;4"<<"; CU(>E! (2<E 2, E;ECT%T"2 The ;hillips curve seems to o7er policyma$ers a men

possible in0ation and unemployment outcomes.



Th4",T " T4E ;4"<<"; CU(>E! T4E (2<E 2E;ECT%T"2 ;hillips Curve

"n the 1FGHs= ,riedman and ;helps concluded that inand unemployment are unrelated in the long run.

%s a result= the long-run ;hillips curve is vertical at therate o unemployment .

onetary policy could be e7ective in the short run but

long run.



%nem0 /atural rate of

unemployment

'n#&ation

Rate Lon")run

#$llps %ur&e

'*"$

nflaton

Lo!

nflaton

(2 but unemploymremans at ts natural

n t$e lon" run

1 W$en t$e

ed n%reases

t$e "ro!t$ rate

of t$e money

supply, t$e

rate of nflatonn%reases

Cop



"uantity

o# )utput

/atural rate

of output

/atural rate of

unemployment

0

Price

Le.e&

P

(""re"ate

demand, AD

Lon")run a""re"ate

supply

Lon")run #$llps

%ur&e


0

'n#&ation

Rate

b! The Phi&&ips Cur.

2 rases

t$e pr%e

le&el

1 (n n%rease n

t$e money supply

n%reases a""re"ate

demand

(

AD2

'

(

4 but lea&es output and unemployment

at t$er natural rates

and

n%reases t$e

nflaton rate

P 2'

Cop



4",T " T4E ;4"<<"; CU(>E! (2<E 2, U;;<A 42CI% supply shock is an event that directly alters the rm

and= as a result= the prices they charge.

This shifts the economy&s aggregate supply curve. . .

. . . and as a result= the ;hillips curve.



"uantity

o# )utput

0

Price

Le.e&

(""re"ate

demand


0

'n#&ation

Rate

b! The Phi&&ips C

and

rases

t$e pr%e

le&el

AS 2 (""re"ate

supply, AS

(

1 (n ad&erse

s$ft n a""re"ate

supply

4

a less

bet!e

and

'P 2

Y 2

P (

Y

#

2 lo!ers output

'

Cop



aving= "nvestment= and the ,inancia



The ,inancial ystem The nancial systemnancial system consists of the group of instituteconomy that help to match one person&s saving witperson&s investment.



,"%C"%< "T"TUT"2 " TU.. EC22A

The nancial system is made up of nancial institutiocoordinate the actions of savers and borrowers.

,inancial institutions can be grouped into two di7erecategories! nancial mar$ets and nancial intermedi



,"%C"%< "T"TUT"2 " TU.. EC22A

,inancial ar$etstoc$ ar$et

3ond ar$et

,inancial "ntermediaries

3an$s

utual ,unds



,"%C"%< "T"TUT"2 " TU.. EC22A

Financial markets are the institutions through which can directly provide funds to borrowers.

Financial intermediaries are nancial institutions throwhich savers can indirectly provide funds to borrowe



,inancial ar$ets

The 3ond ar$et% bond is a certicate of indebtedness that

species obligations of the borrower tothe holder of the bond.

')%



Characteristics of a 3ond

Term! The length of time until the bond matures. Ep- ,ewJH years. ;erpetuity is a special type of bond that has no m<ong term bond usually pay higher interest rate than short

redit !isk ! The probability that the borrower will fail to pathe interest or principal. uch a failure is $nown as default. has low default ris$= pay low interest where as jun$ bond hapaying higher interest. tandard ;oor provide bond rating

Ta" Treatment ! The way in which the ta laws treat the intbond.

unicipal bonds issued by state and local government ata eempt.



,inancial ar$ets

The toc$ ar$et#tock represents a claim to partial ownership in a rm

therefore= a claim to the prots that the rm ma$es.

The sale of stoc$ to raise money is called e$uity nanc Compared to bonds= stoc$s o7er both higher ris$ and potent

returns.

The most important stoc$ echanges in the United tatew Aor$ toc$ Echange= the %merican toc$ Echang%'%B.




Financial intermediaries are nancial institutions throwhich savers can indirectly provide funds to borrowe




3an$sta$e deposits from people who want to save and use th

to ma$e loans to people who want to borrow.

pay depositors interest on their deposits and charge boslightly higher interest on their loans.




3an$s3an$s help create a medium o e"change by allowing p

write chec$s against their deposits. % medium of echanges is an item that people can easily use

in transactions.

This facilitates the purchases of goods and services.

Documents

UnemploymenUnemployment & Philips Curve & savings & investmentt & Philips Curve & Savings & Investment--Quiz 2