O future economic growth may slow due to falling

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
