Econ 102 MT 2

• Long run problem
• Short run problem

The amount of unemployment the economy normally experiences

Year to year fluctuations in unemployment around the natural rate

• Unemployment
• Employment
• Length of workweek
• Duration of unemployment

• 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.

• Employed is highest
• Not in labour force second highest
• Unemployed is last

• The total numbers of workers, including the employed and the unemployed
• LF = No. of employed + No. of unemployed

• Unemployment rate: the percentage of the labour force that is unemployed
• U = No. of unemployed/LF x 100

LFPR = LF/Adult population x 100

Lots of people move into and out of the labour force

Individuals who would like to work but have given up looking for a job

6 and 8 percent

• Frictional unemployment
• Structural unemployment

Unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skils

• 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.

The process by which workers find appropriate jobs given their tastes and skills

• Often the result of changes in demand for labour by firms
• Economy is always changing
• Mismatch between available jobs and people seeking employment

• 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

A worker association that bargains with employers over wages and working conditions

The process by which unions and firms agree on the terms of employment

The organized withdrawal of labour from a firm by a union

• 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

• Above-equilibrium wages paid by firms in order to increase worker productivity
• High wages may increase the efficiency of workers

• Worker health
• Worker tunover
• Worker effort
• Worker quality

The set of assets in the economy that people regularly use to buy goods and services from other people

• Medium of exchange
• Unit of account
• Store of value
• Liquidity

The yardstick people use to post price and record debts

An item that people can use to transfer purchasing power from the present to the future

The total of all stores of value, including both monetary and non-monetary assets

• Describes the ease with which an asset can be converted into a medium of exchange
• Money is the most liquid of assets

Money that takes the form of a commodity with intrinsic value

Money without intrinsic value that is accepted as money because of government decree

The money stock

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

Bank of Canada

An institution designed to regulate the quantity of money in the economy

• Issue currency
• Banker to the commercial banks
• Banker to the Canadian government
• Control the money supply

The quantity of money available in the economy

The setting of the money supply by policy makers in the central bank

• An economy with not banks
• Currency is the only form of money
• Initial supply of money is 100

• 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

A banking system in which bonks hold only a fraction of deposits as reserves

• The fraction of deposits that banks hold as reserves
• Fractional-reserve banking

• 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

The resources the bank owners put into an institution from issuing equity

• Leverage
• Leverage ratio
• Capital requirement

The use of borrowed money to supplement existing funds for purposes of investments

The ratio of assets to bank capital

A government regulation specifying a minimum amount of bank capital

• 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

• bank rate
• overnight rate

The interest rate charged by the Bank Canada on loans to the commercial banks

The interest rate on very short-term loans between commercial banks

• 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

The purchase and sale by the central bank of nongovernment securities or government serurities with long maturity terms

The process of offsetting foreign exchange market operations with open-market operations so that can effect on the money supply is cancelled

Regulations on the minimum amount of reserves that banks must hold against deposits

• 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

Increase in overall level of prices

Fall in overall level of prices

• As the price of a basket of goods and servies
• As a measure of the value of money

Liquidity preference

The level of prices in the economy

The overall level of price adjusts to the level at which demand for money equals the supply

• 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

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

• 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

• Nominal variables: Variables measured in monetary units
• Real variables: Variables measured in physical units

The theoretical separation of nominal and real variables

The proposition that changes in the money supply do not affect real variables

• 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

• 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

• 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

The revenue the government raises by creating money

• 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

• 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

• Shoeleather costs
• Menu costs

The resources wasted when inflation encourages people to reduce their money holdings

The cost of changing prices

• 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

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