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61 Cards in this Set
- Front
- Back
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natural rate of unemployement (full employment) |
rate of employment acceptable within a particular economy = structural + frictional unemployment -also equals the steady state of unemployment |
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frictional unemployment |
2-3% drops during recessions (people less willing to change jobs) unemployment caused by the time it takes workers to find jobs short term between jobs caused by: sectoral shift: change in the composition of demand among industries or regions when firms fail when a workers skills are no longer needed (tecnology) changes in careers or moves to different regions ex. if your employer goes bankrupt |
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structural unemployment |
laws that have made it difficult to find jobs ex. rural economy gets urbanized --> need to train people includes seasonal unemployment (because those workers skills not needed at least for part of year) |
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natural rate of unemployment in US unemployment rate in US |
5.5% 5.9% |
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policies to reduce frictional unemployment |
publicly funded retraining programs |
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policies that inadverdently increase frictional unemployment |
unemployment insurance |
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structural unemployment |
longer than frictional unemployment results from wage rigidity and and job rationing wage rigidity: when wages are temporarily stuck at higher level and so labor supplied exceeds labor demanded causing firms to fire those laborers it can't afford to keep (firms failed to reduce wages despite an excess supply of labor)
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causes of wage rigidity |
minimum wage laws monopoly power of unions efficiency wages |
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efficiency wages |
causes structural unemployment increases productivity/buys loyalty reduces shirking (supervisement) minimizes retraining cost reduces labor turnover |
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steady state formula |
same amt. of people find jobs as amt. of people lose jobs (unemployment rt. constant) FU = SE finding rate * #unemployed = separation rate * #employed |
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formula for natural rate of unemployemtn |
U/L = S/(F+S) x 100 |
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unemployment insurance in Europe |
is more generous than in the US so they have a lower F |
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obama care |
has or will raise natural rate of unemployment because you no longer have to find a job to get health insurance (whereas before if you didn't have a job, you didn't have health insurance) |
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how to manipulate savings rate in solow growth model |
tax policy (won't tax income from savings) change in interest rate (low interest rate, higher investment, higher savings rate) incentivize savings with 401K plans force savings with taxation |
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what if we're at steady state but less than at golden rule steady state (to the left of golden rule). What's larger MPk or d (depreciation rate)? How do you make them equal |
MPk>d you need to increase savings rate in other words you need to invest more because the benefits (MPk) of investment are greater than the costs (d) of investment -you need to reduce consumption now to maximize consumption in the future |
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if youre at steady state greater than golden rule, you need to... |
lower savings rate consume more and save less (decrease investment) |
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what effect does population growth have on standard of living? |
population growth, assuming all other things equal, reduces the standard of living in a country because capital per worker (K/L) decreases so output per worker decreases |
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malthus on population growth |
increase in population is not a good thing for standard of living because of an inadequate supply of subsistence; but he overlooked breakthroughs in technology |
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kremer on population growth |
found a correlation between large populations and technology breakthroughs: an increase in population makes in more likely for technological breakthroughs which will likely increase production and increase the standard of living |
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what is the total amt. of capital stock growth in US over time according to the SOlow growth model? |
3% k=K/EL K=k*E*L K = 0%+2%+1% = 3% |
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According to the solow model, which increases standard of living? (g, n, or k?) |
an increase in g, not n or k increases the standard of living -->technological innovation causes an economy to grow |
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what does the solow model predict |
a steady increase in Y over time |
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what does the solow growth model predict about rent and wages? |
rental rt. in solow model is constant (in us from 30-35%) Real wages growing at same rate as g |
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convergence hypothesis (Easterly) |
developed countries grow at slower rt. than underdeveloped countries underdeveloped countries will catch up to developed countries and converge because its easier to imitate than to innovate (in developed countries, you have to innovate to breakthrough technology) |
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which policies promote growth |
1. savings rate - IRAS, 401ks - taxes that increase savings rate 2. labor (increases in population help economy grow) - promote technology (technological growth due to growth in population) - education/skill level of workers 3. promote technology - patents -copyright protections 4. removing barriers to trade 5. property rights and legal institutions (if you don't have good laws, you don't have a system to incentivize people to innovate and acquire capital) |
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recession (technical definition) |
2 consecutive quarters of negative growth |
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recession (non-technical definition) |
when economy is not at its full potential; is not at full employment (we focus on this definition in class) |
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when did the last technical recession in the US end? |
2009 |
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trend of GDP growth rate |
3% |
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Over and above trend line (of GDP growth) is called... |
boom or inflationary gap (before great recession there was asset price inflation --> bubble --> bubble bursts --> strong recession follows) |
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The great moderation |
1982-2007 2 technical recessions (6 months each) -1990 -2001 25 year period: moderate growth leading up until great recession |
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okun's law |
ties growth rate of GDP in short run Change in GDP = 3% - 2 (change in unemployment rt.)
where 3% = long run trend |
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if in the solow growth model, the capital stock at steady state is higher than what the capital stock should be golden rule steady state, what should a policy maker do and what short term and long term effects will his action have on consumption, investment, and output |
decrease savings rate immediate changes: an increase in consumption and decrease in investment long run changes: capital stock will decrease, causing investment, output, and consumption to decrease too. |
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if in the solow growth model, the capital stock at steady state is lower than what the capital stock should be golden rule steady state, what should a policy maker do and what short term and long term effects will his action have on consumption, investment, and output |
increase savings rate immediate changes: decrease in consumption and increase in investment over time: capital stock increases causing output and consumption to increase and investment to decrease |
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in the solow model, what are the short term and long term effects of an increased rate of savings |
increasing rate of savings also levelly increases income per person. It causes a period of rapid growth, but eventually that growth slows as the new steady state is reached. SO although a high saving rate yields a high steady state level of output, saving itself cannot generate persistent economic growth |
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according to the solow growth model, which factor explains sustained growth and persistently rising living standards? |
Technological innovation. On the contrary, a high rate of savings only yields a high rate of growth until the steady state is reached. |
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international differences in income per person can be attributed to: |
1. differences in factors of production (labor and capital) 2. differences in the efficiency with which economies use their factors of production |
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what happens to growth in consumption and investment during a recession |
they decline |
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what causes an increase in consumption |
higher income wealth effect: higher amt. of wealth leads to higher C availability of credit expectations about future income |
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what causes an increase in investment |
lower interest rates animal spirits (optimistic future expectations of business people) |
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MPC equals |
change in C divided by change in Y |
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if AE>Y |
spending more than is produced --> ramp up production |
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if Y>AE |
producing more than is purchased --> slow down production |
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simple multiplier (for change in G & change in T)
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change in G: 1/(1-b) change in T: b/(1-b) |
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actual multiplier |
1/(1-b+bt+i) where: b= MPC t = income tax rt. i = marginal propensity to import y = actual mulitplier x (a +I+G+X-m) where: n = autonomous imports |
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total imports |
M = m + iY |
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consumption function in open economy |
C=a+b(Y-Yt) |
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disposable income |
= Y-Yt |
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IS curve plots the relationship between: |
interest rate and level of income that arises in the market for goods and services |
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keynes on great depression |
argued that low aggregate demand is responsible for low income and high unemployment, criticizing classical theory that assumes that aggregate supply (capital, labor and technology) determines national income alone (anti-keynesians would say that we got out of depression not b/c of increased spending but because of increased production) |
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what effects do tax cuts have on aggregate supply and aggregate demand |
tax cuts stimulate aggregate supply by improving workers' incentives and expand aggregate demand by raising household's disposable income |
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LM curve plots the relationship between... |
interest rate and level of income that arises in the market for money balances |
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The IS/LM curves together determine... |
interest rate and national income in the short run when prices are fixed |
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in regards to nominal interest rates tight monetary policy (reducing money supply)... |
higher nominal interest rates in the short and lower nominal interest rates in the long run |
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the demand for money is determined by |
interest rates and income |
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at the intersection between LM and IS curve... |
actual expenditure equals planned expenditure and demand for real money balances equals supply |
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the great depression duration |
began 1929 when the stock market crashed lasted until WWII |
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unemployment levels during the great depression |
1929: unemployment rt.: 3.2% 1933: uemployment rt.: 25% (but this didn't include discouraged workers so the actual rate is about 35% |
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what happened to income and aggregate expenditure during Great Depression (C, I, G) |
Real GDP falls consumption falls Investment falls by 90% (40.4%-->4-5%) Gov purchases rise (but they were always rising)
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what happened to nominal interest rate, money supply, and price level during the great depression |
nominal interest rt. goes down (6%-0.6%) price level goes down: deflation 1929-1933: money supply falls 1933 - WWII: money supply rises |
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Great Depression explained by Spending Hypothesis |
Fall in Animal Spirits
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