Lecture 25 Unemployment and Money in the classical model

Lecture 25 Unemployment and Money in the classical model -...

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Eco320L Spring 2010, Professor Beatrix Paal updated 10/22/2010 10:47 AM Lecture 23: Classical Business Cycle Theory 1 Lecture 25 Unemployment and money in the classical model Last time interest-elastic labor supply fiscal policy in the classical model ( Chapter 10.1 ) Today unemployment ( Chapter 3.5 and 10.1 ) money in the classical model ( Chapters 10.2 and 10.3 ) Next time start Keynesian business cycle theory ( Chapter 11 ) 1 Should fiscal policy be used to dampen the cycle? countercyclical fiscal policy could dampen business cycles e.g. increasing ܩ in a recession could increase ܻ – income effect of taxes on labor supply – interest rate effect on labor supply should the government dampen cycles caused by TFP shocks? criterion: welfare would households be better off? cost-benefit analysis – cost of extra G: loss in lifetime resources – benefit of extra G: public goods provided this cost benefit analysis should be applied in any phase of the cycle unless there is reason to believe that the benefit of public goods is greater in a recession, fiscal policy should not be used countercyclically 2
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/22/2010 10:47 AM Lecture 23: Classical Business Cycle Theory 2 Unemployment – definitions and measurement Categories of potential workers E : Employed U : Unemployed (actively searching) Labor force NLF : Not in labor force (no job, but not searching) Adult non-institutional population Commonly used measures: 3 unemployment rate U EU labor force participation rate EU EU N L F employment ratio E EU N L F The dynamics of unemployment Transitions between categories monthly transition rates (average from shows a lot of “churning” in the labor market 4 NLF 3% 2% 1% 22% 2% 13% U
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Lecture 25 Unemployment and Money in the classical model -...

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