Unemployment and Macro Stabilization Policies - Lecture 10

1. Changing composition of the labor force

2. Raising minimum wage

3. Advances in technology

4. Business cycle fluctuations

Economic - burdens more likely felt by women, minorities, blue-collar workers, teenagers, and less educated

Non-economic/social - personal depression, human suffering, political unrest rises with unemployment and can lead to additional economic costs

Scheduel that shows the quantities of real national output, or GDP, that consumers, businesses, and government wish to purchase at each price level

AD=C+I+G+(X-M) ; C - consumer expenditure, I - income; G - government expenditure; (X-M) - Exports - Imports

Factors that will shift the entire aggregate demand right (↑) or left (↓)

1. Consumer wealth - financial and physical assets; ↓in real value of weath will ↑ savings to replenish wealth and vice versa

2. Consumer expectations - if consumers expect future real income to ↑ then there will be an ↑ in C and ↓ savings. If they expect inflation, ↑ in C and vice versa

3. Consumer indebtedness - if high, ↓C to pay off debt and vice versa

4. Taxes - if personal taxes ↑ then ↓C and ↓savings

1. As interest rates ↑, I ↓ and AD also ↓ and vice versa.

2. Optimist expectations = ↑AD; pessimistic expectations = ↓AD

3. As business taxes ↑, profits ↓, income ↓ then AD will also ↓ and vice versa

4. New technology increases income so AD will ↑ and vice versa

5. ↑ in excess capacity (sign of recession) then income will ↓ in capital goods, leading AD to ↓ and vice versa

4

- National income abroad - ↑ in foreign national income will ↑AD domestically as X↑s and vice versa.

- Exchange rates - if the $ depreciates while a foreign currency appreciates, then foreigners will ↓X and ↑X for American goods and ↑AD.

Schedule which shows the quantity of real output, GDP, available at each possible price level

DIRECT relationship between the price level and GDP

3 ranges to AS

- Input prices

- Productivity

- Legal and institutional environment

AKA costs of production, resource prices

- Domestic resource availability - ↑ availability (cheaper) = ↓ in resource prices and ↑ in AS and vice versa

- Prices of imported resources - ↑available foreign resources = ↓ in input prices and ↑ in AS and vice versa; or if the $ price of imported resources depreciates, we get more foreign resources for our $ and vice versa

- Market power - OPEC and unions enable prices to be raised above competitive ones so ↑ input prices and ↓AS and vice versa

- Business taxes and subsidies - if taxes ↑ then input costs will ↑ and AS will ↓ and vice versa. The opposite is true for subsidies.

- Government regulation - typically ↑input costs and thus ↓AS and vice versa

- AD may be deficient; not enough AD; unable to take the economy to a full-employment equilibrium; due to weaknesses in any of the spending components (or "injections") of AD, like C, I, G, and X; due to "leakage" (taxes, savings, or imports) may have risen; deficiency is "recessionary gap - difference between AS and AD at Q_fe

- AS may be weak; not enough to take economy to full-employment equilibrium; occurs due to increases in resource prices like land and capital; "inflationary gap"

- Deficient AD; policies are¯designed to raise AD so that it can meet AS at Q_fe

- "Marginal propensity to consume" (MPC) and the spending multiplier

Propensity = tendency

ΔC/ΔY where C = consumption expenditure and Y = income

MPC is the additional consumption expenditure that is associated with additional income.

MPC + MPS always = 1

=K; measures the increase in GDP relative to an increase in some type of expenditure, like C, I, G

K= ΔGDP/ΔI or K=ΔGDP/ΔC or K=ΔGDP/ΔG

Can also be k=1/1-MPC or k=1/MPS

If MPC=1 MPS=0 k=∞

MPC=.90 MPS=.10 k=10

MPC=.75 MPS=.25 k=4

MPC=.50 MPS=.50 k=2

MPC=0 MPS=1.00 k=1

Higher MPC=higher multiplier