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What are the two categories of problems regarding unemployment?
- Long run problem
- Short run problem
What does the economy's natural rate of unemployment refer to?
The amount of unemployment the economy normally experiences
What is cyclical unemployment?
Year to year fluctuations in unemployment around the natural rate
What data is collected for the Labour Force Survey?
- Length of workweek
- Duration of unemployment
How is unemployment measured?
- From the Labour Force Survey
- Applicable for every adult 15 and older
- Employed: spent some time in the previous week working at a paid job
- Unemployed: On temporary layoff or is looking for work
- Not in the labour force: none of the above, full time student, retiree, homemaker etc.
Looking a the labour force, describe where each of the categories falls
- Employed is highest
- Not in labour force second highest
- Unemployed is last
What is the labour force?
- The total numbers of workers, including the employed and the unemployed
- LF = No. of employed + No. of unemployed
How is unemployment measured?
- Unemployment rate: the percentage of the labour force that is unemployed
- U = No. of unemployed/LF x 100
How is labour force participation rate measured?
LFPR = LF/Adult population x 100
How can statistics on unemployment can be difficult to interpret
Lots of people move into and out of the labour force
What is a discouraged searcher
Individuals who would like to work but have given up looking for a job
Natural rate of unemployment
6 and 8 percent
What are ways to explain unemployment in the long run?
- Frictional unemployment
- Structural unemployment
What is frictional unemployment?
Unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skils
What is structural unemployment?
- Unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one
- often occurs when wages are set above the level that brings supply and demand to equilibrium.
Describe job search
The process by which workers find appropriate jobs given their tastes and skills
Why is some frictional unemployment inevitable?
- Often the result of changes in demand for labour by firms
- Economy is always changing
- Mismatch between available jobs and people seeking employment
Describe Employment Insurance. What might be a disadvantage?
- A government program that partially protects workers' incomes when they become unemployed
- May reduce hardship of unemployment by influences workers' behaviour in ways that will increase the unemployment rate
What is a union
A worker association that bargains with employers over wages and working conditions
What is collective bargaining?
The process by which unions and firms agree on the terms of employment
What is a strike?
The organized withdrawal of labour from a firm by a union
Describe the economics of unions and the increase of wages?
- When the union raises the wage above the equilibrium level, it raises the quantity of labour supplied and reduced the quantity of labour demanded, resulting in unemployment
- Workers who remain employed are better of
- Workers who lose jobs are worse off
What is the concept of efficiency wages?
- Above-equilibrium wages paid by firms in order to increase worker productivity
- High wages may increase the efficiency of workers
What are possible efficiency-wage theories?
- Worker health
- Worker tunover
- Worker effort
- Worker quality
What is money?
The set of assets in the economy that people regularly use to buy goods and services from other people
What are the functions of money?
- Medium of exchange
- Unit of account
- Store of value
What is unit of account
The yardstick people use to post price and record debts
Store of value
An item that people can use to transfer purchasing power from the present to the future
What is wealth
The total of all stores of value, including both monetary and non-monetary assets
What is liquidity?
- Describes the ease with which an asset can be converted into a medium of exchange
- Money is the most liquid of assets
What is commodity money
Money that takes the form of a commodity with intrinsic value
What is fiat money
Money without intrinsic value that is accepted as money because of government decree
What is the quantity of money circulating in the economy?
The money stock
What is currency
These are the paper bills and coins in the hands of the public
These are the balances in the bank accounts that the depositors can access on demand by writing a cheque or using a debit card
What is BoC
Bank of Canada
An institution designed to regulate the quantity of money in the economy
What are the four main functions of the BoC
- Issue currency
- Banker to the commercial banks
- Banker to the Canadian government
- Control the money supply
What is money supply
The quantity of money available in the economy
What is the monetary policy
The setting of the money supply by policy makers in the central bank
What are the assumptions of 100 percent-reserve banking
- An economy with not banks
- Currency is the only form of money
- Initial supply of money is 100
Describe the simple case of 100 percent-reserve banking
- Suppose someone opens a bank: first national bank
- All deposits are held as reserves: 100 percent-reserve banking
- Reserves: deposits that banks have received but have not loaned out
- Using a T-account to show changes in the banks assets and liabilities
What fractional-reserve banking
A banking system in which bonks hold only a fraction of deposits as reserves
What is a reserve ration
- The fraction of deposits that banks hold as reserves
- Fractional-reserve banking
What is the money multiplier
- The amount of money the banking system generates with each dollar it receives
- The money multiplier is the reciprocal of the reserve ratio = 1/R
Describe bank capital
The resources the bank owners put into an institution from issuing equity
What are the three different parts that are related to the financial crisis of 2007 to 2009?
- Leverage ratio
- Capital requirement
The use of borrowed money to supplement existing funds for purposes of investments
What is leverage ratio
The ratio of assets to bank capital
A government regulation specifying a minimum amount of bank capital
Wat are the three main tools for monetary control
- Open-market operations
- Changes in reserve requirements
- Changes in the overnight rate
- The BoC uses changes in the overnight rate to control the money supply
What are the BoC's tools of monetary control changing the overnight rate
What is bank rate?
The interest rate charged by the Bank Canada on loans to the commercial banks
What is overnight rate?
The interest rate on very short-term loans between commercial banks
Describe open-market operations
- The purchase or sale of Government of Canada bonds by the bank of Canada
- To increase the money supploy, the BoC buys bonds from the public
- To reduce money supply the BoC sells bonds to the public
What is quantitative easing?
The purchase and sale by the central bank of nongovernment securities or government serurities with long maturity terms
What is sterilization
The process of offsetting foreign exchange market operations with open-market operations so that can effect on the money supply is cancelled
What are reserve requirements
Regulations on the minimum amount of reserves that banks must hold against deposits
What are two problems in controlling the money supply?
- The BoC does not control the amount of money households choose to hold as deposits in banks
- The BoC does not control the amount of money banks choose to lend
What is inflation
Increase in overall level of prices
What is deflation
Fall in overall level of prices
How can the economy's overall price level can be viewed in two ways?
- As the price of a basket of goods and servies
- As a measure of the value of money
What is another term for 'demand for money'
What is the most important variable that explains the demand for money in the economy?
The level of prices in the economy
What happens to money supply, demand and equilibrium in the long run?
The overall level of price adjusts to the level at which demand for money equals the supply
What are the effects of a monetary injection into the market?
- Lets imagine that the economy is in equilibrium and then suddenly the BoC doubles the supply of money printing dollars bills and dropping them around the county from helicopters.
- The demand for money would decrease because the supply would increase
- Quantity theory of money
What is the Quantity theory of money?
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
How does the economy adjust from an injection of money into the market, from equilibrium to equilibrium?
- Initial equilibrium
- Injection of money
- Excess supply of money at prevailing price level
- The demand for goods and services increases
- Upward pressure on prices
- Demand for money increases
- Eventually a new equilibrium is reached
Which two groups can economic variables be divided into?
- Nominal variables: Variables measured in monetary units
- Real variables: Variables measured in physical units
What is classical dichotomy?
The theoretical separation of nominal and real variables
What is monetary neutrality?
The proposition that changes in the money supply do not affect real variables
What is velocity of money?
- The rate at which money changes hands
- V = (P x Y)/M
- V: Velocity of money
- Y: Real GDP
- P: Price level
- M: Quantity of money
What is the quantity equation?
- The equation that relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
- M x V = P x Y
What are the elements for explaining the equilibrium price level
- 1. V is stable of time (velocity of money)
- 2. Because V is stable, when the central ank changes the quantity of money (M) it causes proportionate changes in the nominal value of output (P x Y)
- 3. The economy's output of goods and services (Y) is primarily determined by factor supplies and technology. In particular, because money is neutral, money does not affect output
- 4. With output (Y) determined by factors supplies and technology, when the central banks alters the money supply (M) and induces proportional changes in the nominal value of output (P x Y), these changes are reflected in changes in the price level
- 5. Therefore, when the central bank increases the money supply rapidly, the result i high rate of inflation
What is inflation tax
The revenue the government raises by creating money
What is the fisher effect?
- The one-for-one adjustment of the nominal interest rate to the inflation
- Real interest rate = Nominal interest rate - Inflation rate
- Nominal interest rate = Real interest rate + inflation rate
What is the inflation fallacy
- Inflation does not in itself reduce people's real purchasing power.
- If nominal incomes ten to keep pace with rising prices, inflation is not a problem
- There are costs associated with inflation
What are two types of costs with inflation?
- Shoeleather costs
- Menu costs
What are shoeleather costs
The resources wasted when inflation encourages people to reduce their money holdings
What are menu costs
The cost of changing prices
Describe confusion and inconvenience
- Money is the rule with which we measure economic transactions
- BoC ensures the reliability of a commonly used unit of measurement
- When the BoC increases the money supply and creates inflation, it erodes the real value of the unit of account
What might be worse than inflation
What are some of the signs of deflation?
- Some of the costs mirror those of inflation
- Menu costs
- Relative-price variability
- Redistribution of wealth toward creditors and away from debtors
- A sign of broader macroeconomic difficulties