o Future economic growth may slow due to: Falling labor force participation Rising income inequality Innovation slowdown A lack of businesses entering the market Section 3 The Business Cycle and Unemployment Unemployed o Not working but actively searching Labor Force = Employed + unemployed
Unemployment Rate = Unemployed / Labor Force Labor Force Participation Rate = Labor Force / 16+ Population Types of Unemployment o Frictional Temporary Just graduated and looking for a job o Structural Change in the structure of an economy The skills a worker has are no longer needed o Cyclical Unemployment caused by an economic downturn Low at GDP peaks Natural Rate of Unemployment o Occurs when cyclical unemployment is at 0% o This is "Full employment" but the unemployment rate can be below this for a year or two Underemployment rate o Goes beyond the usual headline rate o (Unemployed + marginally attached + part time looking for full time)/ Labor force + Marginally attached o Marginally attached people who have looked for a job in the last 12 months but aren't currently looking Non-economic reasons or discouraged workers Okun's Law o Connection between real GDP and unemployment rate o Labor force grows as population grows so productivity grows over the years therefore, some economic growth is needed to create jobs to keep unemployment constant o %Change in Y= 3 – 2*% Change in U Y = Real GDP, U = Unemployment 3% growth keeps unemployment rate constant Recessions o Significant decline in economic activity across the economy that lasts more than 2 months o Real GDP declines during recessions o Most sever since cold war 2007-2009, Great Recession
o Causes A shock external to the economy monetary policy (to reduce inflation) oil shock (big oil price increase) fiscal (to quickly balance the budget) financial (lending falls) Section 4 Explaining the Economy's Movements in the Short Run Aggregate Demand (AD) o All spending in an economy for different levels of the price (P) o AD=C+I+G+NX o Consumption © Disposable Income Wealth increases, consumption increases Population increases, consumption increases o Investment (I) Interests rates decrease, investment increases Taxes on investment decrease, investment increases More firms, investment increases o Government Purchases (G) o Net Exports (NX) Exports – imports If foreign income rises, NX increases o Graphing AD
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