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Lecture19_Econ100B

Lecture19_Econ100B - ECONOMICS 100B Professor Steven Wood...

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ECONOMICS 100B Professor Steven Wood 03/29/11 Lecture 19 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Today’s lecture focuses on the Macroeconomic Policy and Aggregate Demand and Supply Analysis. Midterm 2 will be next Tuesday, April 5. LECTURE STABILIZATION POLICIES: Macroeconomic policy has two main objectives, stabilizing output around potential output and stabilizing inflation at a low level. Policies used to achieve these objectives are stabilization policies, which typically involve: 1.) Fiscal policy: conducted by the government. 2.) Monetary policy: conducted by the central bank. Since fiscal policy does not move very quickly and is slower in taking effect, in most economies the principle responsibility for stabilization policy lies with the central bank and monetary policy. UNEMPLOYMENT: Stabilizing economic output means keeping actual unemployment, U, close to the natural rate of unemployment, U N . Unemployment will never equal zero because of: 1.) Frictional unemployment: caused by the movement of workers in between jobs . 2.) Structural unemployment: caused by a mismatch between workers’ s kills and job requirements. Unemployment is important because high unemployment results in substantial personal suffering (financial, health, and psychological costs) and leaves capital and labor resources unused, reducing economic output. A policy that keeps unemployment near the natural rate of unemployment will also stabilize economic output around potential output. Okun’s Law shows that when U = U N , then Y=Y P . The natural rate of unemployment, U N , is also known as maximum sustainable employment. Unfortunately, however, determining U N is: 1.) Neither simple nor straightforward. 2.) Subject to uncertainty. 3.) Can change over time for many reasons. This leads to much controversy and many policy challenges.
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