KEY POINTS:

The unemployment rate is the percentage of those who would like to work but do not have jobs. The Bureau of Labor Statistics calculates this statistic monthly based on a survey of thousands of households.

The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search and therefore are not counted as employed.

One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers’ incomes.

Another reason why our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded. The resulting surplus of labor represents unemployment.

　

I. Unemployment can be divided into two categories.

A. The economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.

B. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.

II. Identifying Unemployment

A. Know how Is Unemployment Measured?

Be able to define the labor force:

Be able to define the unemployment rate:

Be able to define of labor-force participation rate:

6. Example: data from 2007. In that year, there were 146.0 million employed people and 7.1 million unemployed people.

a. Labor Force = 146.0 + 7.1 = 153.1 million.

b. Unemployment Rate = (7.1/153.1) × 100% = 4.6%.

c. If the adult population was 231.8 million, the labor-force participation rate was:

Labor-Force Participation Rate = (153.1/231.8) × 100% = 66.0%.

　

Know the unemployment and labor-force participation rates for various sub-groups of the U.S. population.

a. Women ages 20 and older

b. Blacks ages 20 and older

c. Teenagers

What is  the natural rate of unemployment:

What is the cyclical unemployment:

 

Does the Unemployment Rate Measure What We Want It To?

What are discouraged workers:e short, and most unemployment observed at any given time is long term.

 

Why Are There Always Some People Unemployed?

What is frictional unemployment:

What is structural unemployment:

 

KEY POINTS:

    The term money refers to assets that people regularly use to buy goods and services.

    Money serves three functions. As a medium of exchange, it provides the item used to make transactions. As a unit of account, it provides the way in which prices and other economic values are recorded. As a store of value, it provides a way of transferring purchasing power from the present to the future.

    Commodity money, such as gold, is money that has intrinsic value: It would be valued even if it were not used as money. Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money.

    In the U.S. economy, money takes the form of currency and various types of bank deposits, such as checking accounts.

    The Federal Reserve, the central bank of the United States, is responsible for regulating the U.S. monetary system. The Fed chairman is appointed by the president and confirmed by Congress every four years. The chairman is the lead member of the Federal Open Market Committee, which meets about every six weeks to consider changes in monetary policy.

    The Fed controls the money supply primarily through open-market operations. The purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply. The Fed can also expand the money supply by lowering reserve requirements or decreasing the discount rate, and it can contract the money supply by raising reserve requirements or increasing the discount rate.

    When banks loan out some of their deposits, they increase the quantity of money in the economy. Because banks influence the money supply in this way, the Fed’s control of the money supply is imperfect.

     

    The Meaning of Money

    Know the definition of money:

    What are the Functions of Money

  • What is the definition of liquidity:

    • What are the kinds of Money

    commodity money:

    bank notes:

    fiat money:

    currency:

demand deposits:

II. The Federal Reserve System

A. Definition of Federal Reserve (Fed): the central bank of the United States.

B. Definition of central bank: An institution designed to oversee the banking system and regulate the quantity of money in the economy.

 

The Fed’s Organization

1. The Fed was created in 1913 after a series of bank failures.

2. The Fed is run by a Board of Governors with 7 members who serve 14-year terms.

a. The Board of Governors has a chairman who is appointed for a four-year term.

b. The current chairman is Ben Bernanke.

3. The Federal Reserve System is made up of 12 regional Federal Reserve Banks located in major cities around the country.

4. One job performed by the Fed is the regulation of banks to ensure the health of the nation’s banking system.

a. The Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks.

b. The Fed also makes loans to banks when they want (or need) to borrow.

5. The second job of the Fed is to control the quantity of money available in the economy.

a. Definition of money supply: the quantity of money available in the economy.

b. Definition of monetary policy: the setting of the money supply by policymakers in the central bank.

D. The Federal Open Market Committee

1. The Federal Open Market Committee (FOMC) consists of the 7 members of the Board of Governors and 5 of the 12 regional Federal Reserve District Bank presidents.

2. The primary way in which the Fed increases or decreases the supply of money is through open market operations (which involve the purchase or sale of U.S. government bonds).

a. If the Fed wants to increase the supply of money, it creates dollars and uses them to purchase government bonds from the public through the nation's bond markets.

b. If the Fed wants to lower the supply of money, it sells government bonds from its portfolio to the public. Money is then taken out of the hands of the public and the supply of money falls.

III. Banks and the Money Supply

A. The Simple Case of 100-Percent-Reserve Banking

1. Example: Suppose that currency is the only form of money and the total amount of currency is $100.

2. A bank is created as a safe place to store currency; all deposits are kept in the vault until the depositor withdraws them.

3. The financial position of the bank can be described with a T-account:

FIRST NATIONAL BANK

Assets

Liabilities

Reserves

$100.00

Deposits

$100.00

4. The money supply in this economy is unchanged by the creation of a bank.

a. Before the bank was created, the money supply consisted of $100 worth of currency.

b. Now, with the bank, the money supply consists of $100 worth of deposits.

5. This means that, if banks hold all deposits in reserve, banks do not influence the supply of money.

B. Money Creation with Fractional-Reserve Banking

1. Definition of fractional-reserve banking: a banking system in which banks hold only a fraction of deposits as reserves.

2. Definition of reserve ratio: the fraction of deposits that banks hold as reserves.

3. Example: Same as before, but First National decides to set its reserve ratio equal to 10% and lend the remainder of the deposits.

4. The bank’s T-account would look like this:

FIRST NATIONAL BANK

Assets

Liabilities

Reserves

$10.00

Deposits

$100.00

Loans

90.00

 　 　

5. When the bank makes these loans, the money supply changes.

a. Before the bank made any loans, the money supply was equal to the $100 worth of deposits.

b. Now, after the loans, deposits are still equal to $100, but borrowers now also hold $90 worth of currency from the loans.

c. Therefore, when banks hold only a fraction of deposits in reserve, banks create money.

6. Note that, while new money has been created, so has debt. There is no new wealth created by this process.

SECOND NATIONAL BANK

Assets

Liabilities

Reserves

$9.00

Deposits

$90.00

Loans

$81.00

 　 　

4. If the $81 in loans becomes redeposited in another bank, this process will go on and on.

5. Each time the money is deposited and a bank loan is created, more money is created.

D. The Fed’s Tools of Monetary Control

1. Definition of open market operations: the purchase and sale of U.S. government bonds by the Fed.

a. If the Fed wants to increase the supply of money, it creates dollars and uses them to purchase government bonds from the public in the nation's bond markets.

b. If the Fed wants to lower the supply of money, it sells government bonds from its portfolio to the public in the nation's bond markets. Money is then taken out of the hands of the public and the supply of money falls.

c. If the sale or purchase of government bonds affects the amount of deposits in the banking system, the effect will be made larger by the money multiplier.

d. Open market operations are easy for the Fed to conduct and are therefore the tool of monetary policy that the Fed uses most often.

　

2. Definition of reserve requirements: regulations on the minimum amount of reserves that banks must hold against deposits.

a. This can affect the size of the money supply through changes in the money multiplier.

b. The Fed rarely uses this tool because of the disruptions in the banking industry that would be caused by frequent alterations of reserve requirements.

3. Definition of discount rate: the interest rate on the loans that the Fed makes to banks.

a. When a bank cannot meet its reserve requirements, it may borrow reserves from the Fed.

b. A higher discount rate discourages banks from borrowing from the Fed and likely encourages banks to hold onto larger amounts of reserves. This in turn lowers the money supply.

c. A lower discount rate encourages banks to lend their reserves (and borrow from the Fed). This will increase the money supply.

d. The Fed also uses discount lending to help financial institutions that are in trouble.