CH6MEMO - Economics 3307 Main Points of Chapter 6...

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Economics 3307 Main Points of Chapter 6: Unemployment 1. Chapters 3-5 assumed that the real wage adjusts to equate labor supply and labor demand. When this happens, we say that the labor market clears . When the labor market clears, everyone who wants to work (labor supply) has a job (labor demand) at the prevailing real wage, so we sometimes say that the economy has full employment of labor. 2. The unemployment rate is not zero even if the labor market is clearing. The natural rate of unemployment is the rate of unemployment that occurs when the labor market clears. One purpose of this chapter is to explain why the natural rate of unemployment is positive. 3. Chapters 3-5 described the long-run behavior of the economy -- that is, how the economy (output, employment, the real wage, etc.) behaves on average over long periods of time such as 10 or more years. - As Chapters 3-5 note, the assumption of market-clearing is appropriate for long-run analysis -
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