Unemployment

Measurement : Current Population Survey (60,000 Households)

Difference in unemployment rates by age, gender, occupation, location, experience, training

Problems in measurement

Part-time considered as fully employed

Discouraged workers considered unemployed

False information from respondents

Inflation and Deflation

Creeping, mild, galloping, hyper

Anticipated vs. unanticipated

Nominal vs. real income

Real income = (Nominal income/Price Index)

Theories of Inflation

Demand-pull inflation

Cost-push (wage-push) inflation

Demand and cost-push (wage-price spiral) inflation

Consequences of Inflation

Redistribution effects

Hits hard to fix income groups (pensioners, landowners, wage earners)

Savers ( real interest rate may be negative)

Debtors repay cheaply to creditors

Speculation and hoarding

Social tension and political chaos

Some evidences of Hyper inflation

During 1922 German price level went up 5470 percent.

In 1923 this price level rose 1,300,000,000,000 times.

In Hungary during 1946, 828 octillion (1 followed by 27 zeros) equaled value of

one pre-war pengos.

Aggregate Demand ( General price level vs. GDP)

Reasons for downward sloping AD

Wealth effect (real balance)

Interest rate effect

Foreign purchase effect

Determinants of aggregate demand: Shifters of AD

Changes in consumer spending (wealth, expectations, indebtedness, taxes)

Changes in investment spending (profit, interest rates. taxes, technology, excess capacity)

Changes in government spending

Changes in net export spending (exchange rates, National income abroad)

Aggregate Supply (Relation between price level and GDP)

Keynesian range

Intermediate range

Classical range

Determinants of AS

Change in inputs (land, labor, capital, entrepreneurial ability) and prices

Change in productivity

Change in institutional environment (subsidies and taxes, regulation)

Macro-economic equilibrium

Intersections on Keynesian, intermediate and classical range

Theory of output and Employment Determination

Classical theory: Say's Law (wage-price flexibility) and full employment

Say's Law of market: "Supply creates its own demand"

Saving = Investment always through flexible interest rates

Vertical supply curve

Laissez fair

Cannot explain persistent unemployment in capitalist system

Keynesian theory: Underemployment equilibrium (sticky prices)

Full-employment is exception

Lack of effective demand is major problem

Active role of government

Horizontal supply curve up to full employment

Unstable aggregate demand

Theory of aggregate demand

Consumption

Graphical representation of consumption and saving schedule

Marginal propensity to consume (MPC)

Marginal propensity to save (MPS)

Average propensity of consume and save

Determinants of consumption (wealth, price level, taxation, expectations, debt)

Investment

Investment demand curve

Induced vs. autonomous investment

Determinants of investment

Cost of physical capital : acquisition, maintenance, and operation

Business taxes

New technology

Existing capital stock

Expectations

Reasons for instability of investment demand

Durability of capital goods

Irregularity of innovation

Variability of profits

Variability of expectations