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Chapter 8:

Chapter 8:. Fiscal Policy: Coping with Inflation & Unemployment. 3/11/2014. AS. Price Level. P 2. P 3. AD 2. P 1. AD 3. AD 1. 0. Y 1. Y 2. Aggregate Output. Different Types of Unemployment:. Frictionally Unemployed Structurally Unemployed Cyclically Unemployed

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Chapter 8:

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  1. Chapter 8: Fiscal Policy: Coping with Inflation & Unemployment 3/11/2014

  2. AS Price Level P2 P3 AD2 P1 AD3 AD1 0 Y1 Y2 Aggregate Output

  3. Different Types of Unemployment: • Frictionally Unemployed • Structurally Unemployed • Cyclically Unemployed • Discouraged Workers • Underemployed Workers

  4. 1. Frictionally Unemployed: Relatively brief periods of unemployment caused by people deciding to voluntarily quit work in order to seek more attractive employment. 2. Structurally Unemployed: Unemployment that results from fundamental technological changes in production, or from the substitution of new goods for customary ones.

  5. 3. Cyclically Unemployed: Unemployment associated with the downturn and recession phases of the business cycle. 4. Discouraged Workers: Unemployed people who give up looking for work after experiencing persistent rejection in their attempts to find work.

  6. 5. Underemployed Worker: Workers employed in jobs that do not fully utilize their productive talents or experience.

  7. Number of Workers and Type of Unemployment: Total Unemployment = 150 + 200 + 500 + 250 + 300 = 1,400 True Unemployment Rate =

  8. The Bureau of Labor Statistics (BLS): Two Questions: Q1. Are you presently gainfully employed? Q2. Are you actively seeking employment?

  9. Number of Workers and Type of Unemployment: – 250 Labor Force = 10,250 = 10,000 Actual Unemployment Rate =

  10. BLS’s Rate of Unemployment Actual Unemployment Rate = 8.5% 150 + 200 Natural Rate of Unemployment = = 3.5% 10000 Actual Rate of Unemployment = Natural Rate of Unemployment + Cyclical Rate of Unemployment 8.5% = 3.5% + 5%

  11. AS Price Level P2 P3 AD2 P1 AD3 AD1 0 Y2 Y1 Aggregate Output

  12. Winners and Losers from Inflation: Who Loses from Inflation? • People on fixed income • Lenders • Savers

  13. Who Gains from Inflation? • Borrowers • Government Moderating the Wins and Losses: Variable Rate of Interest Cost of Living Index (COLA)

  14. AEa $ AE100 Recessionary Gap 0 800 1200 Y Price Level 105 100 AD 800 1200 Y

  15. Recessionary Gap: The amount by which aggregate expenditure falls short of the amount needed to generate full employment national output.

  16. AEb AEa $ Inflationary Gap 0 1200 1600 Y Price Level 133 105 AD 1200 1600 Y

  17. Recessionary Gap: The amount by which aggregate expenditure falls short of the amount needed to generate full employment national output. Inflationary Gap: The amount by which aggregate expenditure exceeds the level needed to generate full employment national output.

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