chapter 8- econ – Flashcards
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labor force=
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employed + unemployed all workers, employed or unemployed
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labor force participation rate =
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(unemployed + employed OR labor force / adult population) X 100
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what is labor force participation rate
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the percent of the adult (16+) non institutionalized civilian population who are working or actively looking for work percentage of adults in the labor force
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unemployment rate (%) =
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unemployed / (unemployed + employed OR labor force) x 100
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the unemployment rate is ___
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the percent of the labor force without a job the percent of the total number of people in the labor force who are unemployed
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if the unemployment rate is 4% then __. if 9% then __.
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jobs abundant jobs very hard to find
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can unemployment rate fall to 0?
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unemployment rate can never fall to 0 (because worker who is confident of finding a job, but not accepted position is unemployed. frequently ppl who would like to work but aren't working still don't get counted as unemployed)
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the unemployment rate is a good indicator of __
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how easy or difficult it is to find a job given the current state of the economy
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how can it overstate the true level of unemployment?
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even if the labor market is healthy, it takes time to find the right job (meanwhile, you're unemployed)
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how can it understate the true level of unemployment?
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you are not "unemployed" if you have given up looking for a job because there are no jobs available
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problems with unemployment statistics
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1. discouraged workers 2. marginally attached workers 3. underemployed workers
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discouraged workers
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nonworking people who have given up looking for work for the time being. not considered unemployed this may understate % of people who want to work but are unable to find jobs
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marginally attached workers
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those who were available and actively looked for work recently but are not currently looking (in the past 12 months but not in the past 4 weeks) are considered unemployed
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underemployed workers
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people who work part time because they cannot find full-time jobs aren't counted as unemployed
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the deeper the recession, the __ discouraged workers there are.
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more
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so how good an indicator is the unemployment rate? what doesn't it measure?
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not perfect doesn't measure the quality of jobs or how well people are matched to their jobs
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besides unemployment rate, economists also look at other indicators such as
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labor force participation rate number of full-time jobs average wages
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the prime age for employment is
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age 25-54
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unemployment and recession chart
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shaded areas are recessions
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during every recession the unemployment rate __
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rose
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during economic expansion unemployment rate __
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decrease economic expansions aren't always periods of falling unemployment (although economy is growing, not fast enough to reduce unemployment)
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jobless recovery also called
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"growth recession" a period in which the real GDP growth rate is positive but the unemployment rate is still rising (growing at a below-average rate)
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generally there is a __ relationship btw growth in the economy and the rate of unemployment
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negative
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graph with change in unemployment rate (vertical axis) and real GDP on horizontal axis strong negative relationship btw growth in econ and unemployment is shown by a __ in 2000 avg unemployment rate fell to 4% from 4.2%. this is shown as __ real GDP grew by 3.7%. this is shown__ points to right of green line are years points to left of green line are years low/neg growth in real GDP means that unemployment_ years of high growth in real GDP means that unemployment__
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downward trend shown as a value of -.2 along vertical axis shown along horizontal axis above average growth, unemployment decreased below-average growth, unemployment increased increased decreased
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times of high unemployment are especially hard on __
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new graduates
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many workers moved into and out of both employment and unemployment each month because jobs are constantly being ___ and ___
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created and destroyed
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over past half-century (50 years) national unemployment rate has never dropped below
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2.9%
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some unemployment is __
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natural
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there are 3 types of unemployment:
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1. frictional 2. structural 3. cyclical
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workers who spend time looking for employment are engaged in ___. if all workers and jobs were __ then this wouldn't be necessary
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job search alike
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reasons for job loss 1. 2.
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1. structural change in the economy (industries rise and fall as new technologies emerge and tastes change) 2. poor management performance/bad luck at companies
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frictional unemployment
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unemployment due to the time workers spend in job search
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__ creates frictional unemployment
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scarcity of information matching people to jobs takes time economy is more productive if workers find jobs that are well matched to skills
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when there is a low unemployment rate, periods of unemployment tend to be ___, suggesting that ___
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short much of the unemployment is frictional (opposite for high unemployment)
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frictional unemployment can be result of ___ frictional unemployment includes those __
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new people entering labor force includes those involved in search
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structural unemployment
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more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle
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structural unemployment occurs when the wage rate is __
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persistently above We (equilibrium wage rate)
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even at We (equilibrium wage rate), there will be ___
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some frictional unemployment but no structural
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some causes of structural unemployment
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labor unions efficiency wages side effects of government policies mismatches btw employees and employers - sufficiently high minimum wage
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labor unions sometimes
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increase wages above the equilibrium
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by bargaining collectively for all of a firm's workers, unions can often win ___ from employers than workers would have obtained by bargaining individually this is called__
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higher wages collective bargaining
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labor unions exercise bargaining power by __
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threatening firms with labor strike (refusal to work) (employers use lock-outs)
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unionized workers earn higher wages, unions push the wage that workers receive ___, consequently ___
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above the equilibrium wage consequently there are more people willing to work at the wage being paid than there are jobs available, and this leads to structural unemployment
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efficiency wages
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wages that employers set above the equilibrium rate as incentive for better employee performance
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when may firms pay efficiency wages, the result is__
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a pool of workers who want jobs but can't find them, so this leads to structural unemployment
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side effects of government policies such as
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unemployment insurance policies designed to help workers who lose their jobs replace small fraction of worker's income and expire after 26 weeks
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generosity ___ worker's incentive to quickly find a new job
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reduces
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mismatches btw employees and employers
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geography or skills adjusting to shifts in economy mismatch btw what employees have to offer and what they are looking for
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until mismatch is resolved through a big enough fall in wages of the surplus workers that induces re-training or relocation, there ___
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will be structural unemployment
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labor demand curve indicates that when the price of labor--the wage rate-- ___, employers demand __ when price of labor increases, more workers are willing to __ at the prevailing wage rate. these two forces coincide to lead to __
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increases less labor supply labor equilibrium wage rate
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America's minimum wage is __
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low
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minimum wage is
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gov't mandated floor on price of labor
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union
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an association of workers that bargains collectively with employers over wages, benefits, and working conditions unions take many forms: some acts to increase wages simply by restricting entry into a profession with licensing requirements
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since reunification in 1989, East Germany's economy__
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has remained depressed with productivity low and structural unemployment high
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structural unemployment on a wage rate vs. quantity of labor graph
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labor supply - labor demand where they intersect with minimum wage
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when minimum wage (Wf) is greater than equilibrium wage (We) then there is a __ when quantity of labor supplied is greater than quantity of demanded then ___
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surplus structural unemployment
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btw 1980 and 2000
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decrease in natural rate of unemployment because of internet communication, growth of temporary worker industry, aging baby generation at age when they keep existing jobs
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frictional and structural unemployment are always present, they are __
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natural
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natural rate of unemployment
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the unemployment rate that arises form the effects of frictional plus structural unemployment normal unemployment rate around which the actual unemployment rate fluctuates
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natural unemployment =
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frictional + structural
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actual unemployment =
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natural unemployment + cyclical unemployment
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cyclical unemployment
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unemployment correlated with the business cycle--the deviation form the natural rate the share of unemployment that arises from the downturns of the business cycle difference btw actual and natural rates of unemployment
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lower growth is usually correlated with higher unemployment for two 2 reasons:
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1. when GDP falls, firms lay off workers 2. idle labor and capital---economic growth not being maximized --- down ability of the economy to create more jobs
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we need ___ both to make forecasts and to conduct policy analyses
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estimates of the natural rate of unemployment
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what causes the natural rate of unemployment to change?
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changes in characteristics of the labor force changes in labor market institutions changes in government policies
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changes in characteristics of the labor force
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changing demographics unemployment rates lower for experienced than inexperienced--lower frictional unemployment
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changes in labor market institutions
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unions, temp employment agencies, and new technology (internet sites) agencies---reduced frictional unemployment
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changes in government policies
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job training programs
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if wages for unskilled workers can't go down then there is an ___ and higher rate of ___ would result
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increased structural unemployment unemployment would results
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in the 1970s: __
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women and baby boomers join the labor force in droves so natural rate of unemployment rose during this time
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if union membership decreases, unemployment __
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decreases
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inflation __ the economy
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hurts
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real wage
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is the wage rate divided by the price level
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real income
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is income divided by the price level
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inflation does not ___ because ___
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make everyone poorer incomes often rise with prices
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how inflation works
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would not be richer if we went to price level in 1962, becuase although prices would be lower, so would wages and incomes like replacing a dollar with a new dollar at an exchange rate of say 7 to 1, if you owed $140,000 on your home that debt would be $20000
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real income =
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nominal - inflation
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there is a difference between level or prices and inflation rate
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...
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inflation rate =
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price index in year 2 - price index in year 1 / price index in year 1
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from the 1900s to today __ has continually increased, and __ fluctuates.
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consumer price index inflation rate (negative rate)
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high rates of inflation impose the following economic costs
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shoe-leather menu unit of accounts
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shoe-leather costs
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the increased costs of transactions caused by inflation
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shoe-leather costs of inflation in Israel
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when the inflation rate hit 500% in 1985, people spent a lot of time in line at banks
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with shoe-leather costs, __ grows
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bank sector
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shoe-leather costs of inflation cause an allusion to the so people __
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wear/tear caused by running around trying to avoid holding money so people take money to bank to convert cash into something that would hold value, such as stable foreign currency
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high inflation rate discourages people from holding money because
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purchasing power of cash in your wallet and funds in your bank account steadily erode as overall level of prices increases
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menu costs
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the real cost of changing a listed price firms forced to change prices more often than if price level was stable--so this means increase costs for economy (they are also available in low inflation economies, but aren't severe) example: change in supermarket money
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menu costs are __ important now because
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less now it is easier because electronic (no stickers)
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with menu costs companies many use
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artificial unit or a more stable currency (such as US dollars)
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unit of account costs
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costs arising from the way inflation makes money as less reliable unit of measurement calculations are hard when inflation is high
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unit of accounts costs are important in __ because
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tax system inflation can distort the measures of income on which taxes are collected
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with unit of account costs the role of the dollar as a basis for contracts and calculations __
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can be degraded by inflation, which causes the purchasing power of a dollar to change over time
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example of unit of account costs
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assume inflation rate 10% so overall level of prices rises 10% each year. buys land $100,000, resells 1 year later for $110,000 in fundamental sense, business didn't make a profit, but US tax law would say that the business made a capital gain of $10,000 and it would have to pay taxes on it
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unit of account costs causes difficulty in __ and can reduce __
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firms/individuals financial planning quality of economic decisions
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if inflation is different from predictions, __
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some will lose and some will benefit
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interest rate
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the price (calculated as a percentage of the amount borrowed) that a lender charges for the use of his or her savings for one year return a lender receives for allowing borrowers the use of their savings for 1 yr
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nominal interest rate
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the interest rate expressed in dollar terms example: interest rate on student loan
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real interest rate
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the nominal interest rate minus the rate of inflation if loan carries interest rate of 8%, 5% inflation, real interest rate is 3%
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loan
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borrower receives a certain amount of funds at the beginning, and the loan contract specifies the interest rate on the loan and when it must be paid off
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contract is normally written in __
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dollar terms---nominal interest rate
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if the actual inflation rate is higher than expected,
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borrower gain at the expense of lenders borrowers will repay their loans with funds that have a higher real value than had been expected
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if the actual inflation rate is lower than expected,
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lenders gain borrowers must repay loans with funds that have a higher value than had been expected
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look at example of page 10
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...
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in modern America, __ are the most important sources of gains and losses from inflation
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home mortgages Americans who took out mortgages in the early 1970s quickly found their real payments reduced by higher-than-expected inflation by 19883, the purchasing power of a dollar was only 45% of what it had been in 1973
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unexpected deflation
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surprise fall in price level creates winners and losers too
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why do policy makers move forcefully to bring inflation back down when it creeps above 2% to 3%?
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because the policies needed to slow prices usually cause unemployment
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disinflation
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the process of bringing th inflation rate down
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disinflation is ___ once a higher rate of inflation has become well established
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difficult and costly
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in countries with high and uncertain inflation long term loans are __, which makes it hard to make __
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rare long-term investments
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uncertainty about the future inflation rate discourages people from entering into any form of __
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long-term contract
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in each episode, unemployment/inflation followed a sort of __
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clockwise spiral with high inflation gradually falling in the face of an extended period of high unemployment
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in the 1970s and early 1980s, bringing inflation down required a temporary but very large increase __
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the unemployment rate
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period of high unemployment that temporary depressed the economy were necessary to reduce inflation. to avoid this, __
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avoid have an inflation problem in the 1st place
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which of the following doesn't influence natural rate of unemployment a. recessions b. demand of labor c. gov't policy d. age distribution e. increase use of internet for job search
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...
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james- architect laid off due to slump in demand for property feels like he will have to wait until economy picks up
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cyclical
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sarah recent graduate, entering difficult labor market due to continued recession. continuing to look for work, but difficult
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cyclical
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experienced project manager, lost job because company's product failed to take off. confident he can get a new job. rejected lots of offers
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frictional
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craig lost job several months ago. reluctant to get new job as he feels that he can make almost as much $ on welfare
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structural
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hamid graduate as lawyer. confident of getting job, already refused a few lower paid jobs
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frictional
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unexpected inflation Joy borrowed $40000 to pay 4 college education
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loser
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unexpected inflation US federal gov't which had almost $15 trillion in debt in 2011
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loser
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unexpected inflation Herb keeps savings in piggy bank
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gain
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unexpected inflation bank loaned people money for home purchases
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gain
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unexpected inflation retired teacher relies upon her fixed pension to pay for her expenses
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gain
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