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Frictional unemployment
due to the time it takes to match workers with jobs
may be increased by unemployment insurance
Structural unemployment
results from wage rigidity - the real wage remains above the equilibrium
level
causes: minimum wage, unions, efficiency wages
Duration of unemployment
most spells are short term
but most weeks of unemployment are attributable to a small number of
long-term unemployed persons
Lecture 18
Lecture Outline
The greater the aggregate demand for goods and services, the greater is the
economys output, and the higher is the overall price level.
Unemployment Rate =
N a t u r a l r a t e o f u n e m p l o y m e n t - a Ai n cf lt au tai ol n Ei nx fp l ea ct itoe nd
When the Fed slows the rate of money growth, it contracts aggregate demand.
This reduces the quantity of goods and services that firms produce.
When the Fed combats inflation, the economy moves down the short-run
Phillips curve.
Summary
If policymakers expand aggregate demand, they can lower unemployment, but only at
the cost of higher inflation.
If they contract aggregate demand, they can lower inflation, but at the cost of
temporarily higher unemployment.
The Phillips curve illustrates the short-run relationship between inflation and
unemployment.
The greater the aggregate demand for goods and services, the greater is the
economys output, and the higher is the overall price level.
Summary