macsg07 - 7 [22] Unemployment, Inflation, and Long-Run...

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161 7 [22] Unemployment, Inflation, and Long-Run Growth C hapter objectives: 1. Define the labor force and the unemployment rate and give the official definition of employment. Describe the limitations of the unemployment rate statistic, outlining the effects of “discouraged workers” on official unemployment statistics. 2. Distinguish among, and give examples of, frictional, structural, and cyclical unemployment. Define the natural rate of unemployment and describe the economic and social costs of unemployment. 3. Define inflation. Outline the problems of price indexes such as the Consumer Price Index. 4. Indicate who gains and who loses from inflation. Distinguish between anticipated and unanticipated inflation and indicate how their impacts on the economy differ. Describe the concept of the real interest rate and outline the effect of anticipated inflation on it. 5. Detail the factors influencing output growth. This chapter concludes the sequence of three largely definitional chapters, looking at two short-run concepts (unemployment and inflation) and two long-run concepts (output growth and productivity growth). A working knowledge of these concepts is essential when you study policy formulation in subsequent chapters. BRAIN TEASER: Probably, you don’t habitually play your car audio at maximum volume—there’s an ideal level that holds some additional capacity in reserve. The same principle is true for the economy. A normally functioning economy has some excess capacity and some rate of unemployment. This rate of unemployment is the natural rate of unemployment. In 1950, this natural rate was estimated to be 4%. Since then, the natural rate of unemployment has risen, with the President’s Council of Economic Advisers placing it at 6.5% in 1986. The expectation was that it would continue to increase. Why did the natural rate of unemployment increase in the latter part of the twentieth century? Is it still increasing?
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162 Study Guide to Principles of Macroeconomics OBJECTIVE 1: Define the labor force and the unemployment rate and give the official definition of employment. Describe the limitations of the unemployment rate statistic, outlining the effects of “discouraged workers” on official unemployment statistics. The labor force totals the employed and unemployed. The employed include any person 16 years of age or older who: a. works one hour or more per week for pay, or b. works fifteen or more hours a week without pay in a family enterprise, or c. has a job but is temporarily absent from work, with or without pay. The unemployed person must be available and looking for work during the previous four weeks. Otherwise, s/he is considered to be out of the labor force. Some workers, discouraged by their inability to find jobs, stop looking for work and drop out of the labor force. (page 123 [435]) The unemployment rate is the ratio of unemployed persons (who have no job and are actively seeking employment) to the labor force. An analysis of unemployment reveals large ethnic, gender, and
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This note was uploaded on 02/13/2010 for the course ECON 1102 taught by Professor Wissink during the Spring '09 term at Cornell University (Engineering School).

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macsg07 - 7 [22] Unemployment, Inflation, and Long-Run...

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