UNEMPLOYMENT AND ITS NATURAL RATE
  1. 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.
  2. 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.
  3. In the U.S. economy, most people who become unemployed find work within a short period of time. Nonetheless, most unemployment observed at any given time is attributable to the few people who are unemployed for long periods of time.
  4. One reason for unemployment is the time it takes for workers to search for jobs that best suit their skills and tastes. Unemployment insurance is a government policy that, while protecting workers’ incomes, increases the amount of frictional unemployment.

 

Does the Unemployment Rate Measure What We Want It To?

1. Measuring the unemployment rate is not as straightforward as it may seem.

2. There is a tremendous amount of movement into and out of the labor force.

a. Many of the unemployed are new entrants or reentrants looking for work.

b. Some unemployment spells end with a person leaving the labor force as opposed to actually finding a job.

3. There may be individuals who are calling themselves unemployed to receive government assistance, yet they are not trying hard to find work. These individuals are more likely not a part of the true labor force, but they will be counted as unemployed.

4. Definition of Discouraged Workers: individuals who would like to work but have given up looking for a job.

a. These individuals will not be counted as part of the labor force.

b. Thus, while they are likely a part of the unemployed, they will not show up in the unemployment statistics.

Money, the FED, and MONEY CREATION

The Fed has a Board of Governors with seven members who serve 14-year terms.

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

b. Who is the current chairman?

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

One job that the Fed does is the regulation of banks to ensure the health of the nation’s banking system.

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.

The Federal Open Market Committee

a. 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 Banks.

b. The FOMC meets about every six weeks in order to discuss the condition of the economy and consider changes in monetary policy.

c.. 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 government bonds).

d.  The secondary way is by changing the discount rate.  The interest  rate charged on a load between the Fed and a member bank.

Money Creation and Controlling the Money Supply

When banks makes loans, the money supply changes.  Remember that M1 = currency + checkable (demand) deposits.

Start by depositing $100 in a bank

FIRST NATIONAL BANK

Assets

Liabilities

Reserves

$10.00

Deposits

$100.00

Loans

90.00

   

First National loans part of the money and creates and addition $90 that goes into 2nd National.

SECOND NATIONAL BANK

Assets

Liabilities

Reserves

$9.00

Deposits

$90.00

Loans

81.00

   

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

Main Tools of Monetary Policy

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.

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.

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. (See the Reserves in the T-account above.)

b. A higher discount rate discourages banks from borrowing at the Fed and likely encourages banks to hold onto larger amounts of their 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.

 

SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM

A.   Financial Markets

1.   What are financial markets?

2.   The Bond Market

a.   What is a bond?

b.    What are the characteristic that determines a bond’s value?

3.   The Stock Market
 
a.   What is a stock?

c.    What is a stock exchange?  Give an example.

 B.   Financial Intermediaries
         
1.   What is a financial intermediaries?

a.   What is the primary role of banks

B.   What is a mutual fund? 

c.   What is the primary advantage of a mutual fund? 

III. Saving and Investment in the National Income Accounts

A.   Some Important Identities

         1.   Remember that GDP can be divided up into four components: consumption, investment, government purchases, and net exports. 

 

2.   We started by assuming that we are dealing with a closed economy.  How did that affect our equation? 

 

3.   To isolate investment, we can subtract C and G from both sides:

 
 

 

 

4.   The left-hand side of this equation (YCG ) is the total income in the economy after paying for consumption and government purchases. This amount is called national saving.

 

5.   What is national saving (saving)?

 

9.   We can add taxes (T) and subtract taxes (T):

 
 

 

 

10.  The first part of this equation (YTC ) is called private saving; the second part (TG ) is called public saving.

 

a.   What is a budget surplus? 

b.   Definition of budget deficit? 

 

11.  What are some shortcomings of this model as Mankiw presented it in his book and as we started in class?