PSU ECON 104 - Section 3: The Business Cycle and Unemployment

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Section 3 The Business Cycle and Unemployment Part A Measuring Unemployment and Employment Q For workers how does this economy compare to normal time Unemployment and Employment Q Consider the following A stay at home dad Someone laid off 6 months ago who just responded to a job and Someone laid off 3 months ago and traveling the U S full time on her savings How many of these people are officially counted as unemployed A 0 Def one is unemployed if you re not working and looked for a job in the last month Def the labor force is all those working all those looking the last month Def the unemployment rate unemployed labor force 100 Def participation rate labor force those aged 16 Ex U S 2 2015 from the BLS Unemployed 8 705 000 Labor force 157 002 000 Population 16 249 899 000 Unemployment rate 5 5 Participation rate 62 8 Q During and after the Great Recession i the unemployment rate rose by a amount than in other recessions and II it is taking time to return to pre recessions values A smaller more B smaller less C larger more D larger less The unemployment rate can behave oddly at times Consider the economy improves and people start to look for a job again this month after being out of the labor force Ex discouraged workers come back into the labor force The unemployment rate will rise Ex 10 million 100 million 11 million 101 million Unemployment rate 10 10 9 Q Say that the economy improves and people start to look for a job again this month after being out of the labor force ex discouraged workers come back into the labor force What would likely happen to the unemployment rate this month A Rise B Stay the same C Fall Ex 10 million 100 million 11 million 101 million unemployment rate 10 10 9 Q The economy starts to improve after a recession The unemployment rate A might rise or fall B C Ex is sure to fall is sure to rise 10 million unemployed 100 million 11 million 101 million labor force Unemployment rate 10 10 9 Or 10 million unemployed 11 million labor force Unemployment rate 10 9 Labor force employment Q The gap between the two lines is Also these lines cross the unemployment rate could the unemployment rate could not A B C unemployment could D unemployment could not layoffs due to poor growth little hiring due to poor growth A B C more discouraged workers D more retirements as boomers age Q The labor force has barely grown for the last 7 years Which of the following is the best reason for this End of Part A Measuring Unemployment and Employment Q For workers how does this economy compare to normal times A The current unemployment rate of 5 5 is fairly reasonable But the last few years have been rough and other measures in the labor market show continued pain Part B Other Labor Market Measures Q The current unemployment rate is 5 5 while the average since 1948 is 5 8 Why Other Measure of the Labor Markets Def the underemployment rate U 6 or broad measure goes beyond the usual unemployment rate Def marginally attached workers are those who ve looked in the past year but not the last month U 6unemployment rate unemployed marginally attached part time want full time labor force marginally attatched Q In your view which of the following shows the most pain in the labor market during and after the Great Recession A employment B unemployment rate C U 6 unemployment rate D unemployed 27 weeks E labor force participation rate Unemployment rate U 6 employment rate End of Part B Other Labor Market Measures Q The current unemployment rate is 5 5 while the average since 1948 is 5 8 Why A employment is barely above 2007 level U 6 unemployment rate is 11 0 1994 to 2008 values 31 of unemployment have been so 27 weeks not seen from 1948 2008 labor force participation rate is falling Part C Normal Rate of Unemployment Q The current unemployment rate is 5 5 Is it as good as we can reasonably expect Normal Rate of Unemployment Q From year to year which type of unemployment varies the most A Frictional straight out of college B Structural technology C Cyclical recession t otal unemployment rate cyclical unemployment rate frictionalunemployment rate structuralunemployment rate Please exclude seasonal which the book puts as part of frictional and occurs during a calendar year A B D C Q From this data when do you think that cyclical unemployment is near zero A point C 2005 2010 convex curve Cyclical unemployment will usually be at about zero at the end of an expansion Normal Rate of Unemployment Def the natural rate of unemployment as the rate of unemployment when cyclical unemployment is 0 then the unemployment rate is likely from 5 to 6 then at full employment Ex 2000 Can be below the natural rate for awhile Complication Implications End of Part C Normal Rate of Unemployment Q The current unemployment rate is 5 5 Is it as good as we can expect The natural rate of unemployment is a decent measure of the normal unemployment rate A more or less The natural rate of unemployment is a decent way to measure what the unemployment rate might reasonably be It is thought be between 5 and 6 Part D Connection Between GDP and Unemployment Q To reduce the unemployment rate and increase employment what needs to happen to real GDP Is it just More production More hiring Less unemployment GDP and Unemployment Def Potential GDP is real GDP when all firms are operating at capacity Factories and offices running normally not half staffed nor extra overtime capacity can be exceeded for a year or two with extra overtime and reduced maintenance of capital capacity maximum possible Q Potential GDP from year to year and in a recession it is than real GDP Is consistent more than Is constant less than A B C Grows less than D Grows more than Output gap real GDP potential GDP 2014 IV 327 billion 2 0 of potential GDP 7 2 in 2009 upper line potential GDP lower line real GDP Q Can real GDP be larger than potential GDP A Yes Potential GDP Real GDP Unemployment rate Q From what you know about rising labor productivity Y L over the years and a growing labor force to keep the unemployment stable real GDP Okun s Law A needs to be growing B can be constant C can be falling Q Are there times of growth with rising unemployment A no B yes real GDP Unemployment rate Okun s Law the connection between real GDP Y and the unemployment rate u idea since the labor force grows with population increases and since productivity rises some economic growth which creates jobs is needed to keep the unemployment rate constant over time formula Y 3 2 u Q


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PSU ECON 104 - Section 3: The Business Cycle and Unemployment

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