STUDY GUIDE for SECOND EXAM ECO2013 03 FA2011 Martha Evans Instructor Note This study guide is intended to be used as a tool to help you prepare for the test It is an outline representing the topics that have been emphasized in lecture the book and the slides for each section chapter It is NOT an exact representation of the way that questions will be phrased on the test CHAPTER 8 ECONOMIC FLUCTUATIONS UNEMPLOYMENT and INFLATION Macroeconomic Goals What are the five macroeconomic goals that both 1 fiscal policy makers and monetary policy makers agree upon Full employment Price stability Exchange rate stability Stability in financial markets Economic growth Interest rate stability 2 3 5 Business Cycles Fluctuations around long run GDP are known as Business Cycles What exactly are business cycles How do they differ from long run growth Business cycles are characterized by expansions and contractions of varying duration and magnitude Phases of the Business Cycle There are four phases What are they and what are the conditions in the economy with respect to output and employment during these phases expansion peak contraction recessionary trough Recent Recessions Understand the factors that caused the recessions of 2001 and 4 the current Great Recession the factors that caused the current recession are overspending and too many loans were given The Labor Market We describe the labor market in very particular ways The government agency that gathers statistics on the labor market is the Bureau of Labor Statistics a b c Civilian Labor Force civilians 16 who are either employed or unemployed Employed person 16 who is working self employed or working with family enterprise for 15 hours a week Unemployed actively seeking or waiting to begin a job or on layoff waiting to return to a previous job 1 d Labor Force Participation Rate how is this calculated in labor force civilian population 16 7 6 Women in the Labor Force When and why did the labor force participation of women begin to change dramatically What is the trend 1960 s women were socially acceptable to work and men were socially acceptable to stay home with kids it depends on which is more economical Causes of Unemployment In a dynamic economy such as that of the U S is job loss usually the major cause of unemployment How does that differ from that of the Great Recession Which demographic group by gender and age displays the highest unemployment rate The different reasons why there may be unemployment demised from jobs and either new entrants or reentrants to the work force Types of Unemployment What is the difference between structural frictional and cyclical unemployment frictional Normal caused by imperfect information Occurs because employers are not aware of all available workers and their qualifications and workers are not fully aware of all the jobs being offered by employers Structural reflects imperfect match of employee skills to skill requirements of the available jobs as well as structural and demographic characteristics of the labor market Cyclical WORST reflects business cycle conditions when there is a downturn in business activity cyclical unemployment decreases 8 9 Unemployment and the Economy What is the difference between Actual and Potential GDP When the economy is performing at its potential what type of unemployment will be experienced What is meant by full employment Potential GDP maximum sustainable output level consistent with the economy s resource base given institutional arrangements how much we can produce Actual GDP what we actually produce actual and potential output will be equal when economy is at full employment 10 If the economy is in a recession will the unemployment rate be above or below the natural rate If the economy is in a boom will the unemployment rate be above or below the natural rate if in recession unemployment will be below natural rate and in boom unemployment will be above natural rate What might explain the relatively high rates of unemployment in 11 How can these high rates be explained by what you ve learned about the importance of Spain and Italy 2 incentives In spain and italy there are higher unemployment benefits less flexible collective bargaining and more regulated labor markets Incentives are what motivate people to work or not to work so it isn t a coincidence that these countries have high rates of unemployment 12 Inflation What are the two causes of inflation Countries with relatively low rates of inflation also experience smaller annual swings in their inflation rates Is the U S a high inflation or low inflation country 1 rapid expansion I money supply we have 7mil but purchase 14 mil each dollar is used at least twice 2 unexpected increases in aggregate demand 13 Which of the two will have more of an adverse effect on the economy Anticipated or Unanticipated Inflation Why What s the difference Unanticipated inflation will have more of an adverse effect on the economy because there is a surprise price increase versus expecting a change in price level Effects of Inflation What are the three main ways in which high and variable rates of inflation have an adverse effect on the economy 1 uncertainty is created 2 causes uneven distribution of wealth 3 hurts families on fixed incomes that are not indexed for recession this decreases standard of living Unemployment Rate Be able to calculate labor force employed unemployed unemployed in labor force Labor Force Participation Rate Be able to calculate in labor force civilian pop 16 14 15 16 17 Unemployment Duration Which type of unemployment is generally longer in duration Frictional or Structural CHAPTER 9 AN INTRODUCTION TO BASIC ECONOMIC MARKETS 1 Fiscal and Monetary Policy a What is Fiscal Policy and by whom is it administered 3 b What is Monetary Policy and by whom is it administered Use of govt taxation and expenditure policies for the purpose of achieving macroeconomic goals Conducted by congress Deliberate control of money supply and in some places credit conditions for the purpose of achieving macroeconomic goals Conducted by nation s central bank 2 Who are the three major participants in our market economy Understand their respective roles how do they participate in the flow of income in the macroeconomy and through which markets changes in govt expenditures taxes and the money supply 3 What are the four key macroeconomic markets Goods and services resource loanable funds foreign Loanable funds Foreign exchange exchange
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