EC202 1nd Edition Lecture 23Outline of Last Lecture I. Gaps II. Types of unemploymentOutline of Current Lecture II. Natural rate of unemploymentIII. Cyclical unemploymentIV. Okun’s lawV. Short-run conclusionsCurrent Lecture-natural rate of unemployment [u*]-the fraction of the labor force that is unemployed due to frictional and structural unemployment-the unemployment rate that prevails when cyclical unemployment equals zero-the unemployment rate that exists when an economy has neither an expansionary gap nor a recessionary gap-cyclical unemployment: u - u*-actual unemployment rate: u-natural rate of unemployment: u*-recession-u – u* is positive (u > u*)-positive cyclical unemployment-expansion-u – u* is negative (u < u*)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-negative cyclical unemployment-labor is being used more intensively than normal-Okun’s Law: each one percentage point of cyclical unemployment is associated with an output gap equal to 2 percent of potential output-short-run conclusions1. some prices adjust slowly-firms “meet the demand” at a preset price in the short run by varying output2. economy-wide spending changes-determines output in the short run-government policies can influence spending3. firms change prices eventually-raise prices more rapidly in response to expansionary gaps resulting in higher inflation -raise prices less rapidly in response to recessionary gaps causing disinflation4. long-run output determined by Y* -short-run output determined by
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