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ECON 1BB3 (535)


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Bridget O' Shaughnessy

• Employed: 17 357 thousand • Adult population: 28 156 thousand o For 2011, which of the following statements is true: a. The unemployment rate is higher for men and women. Formulas: • Unemployment rate= (# of unemployed/ labour force)*100 • LFPR= (labour force/adult population)*100 • Employment rate= (# employed/adult population)*100 • Tora had just finished school, but she is going to roam around the country awhile before she starts looking for work. As a result, the unemployment rate: a. Is unaffected and the labour force participation is unaffected. Do these figures reflect reality? 1. Discouraged searchers: a. If they want a job but gave up looking, they wont be in unemployed. 1. Underemployment a. People who are working part-time but they want full-time work, there still put under employed section. a. If they have a skilled job but there working below there skill level as a cashier for example, there still put in employed section. 1. People may lie a. They may say they were looking for work even though, they wont, so they can get unemployment insurance, because they think if there lying to one part of the gov't they may as well do so to everyone. Why is there unemployment? • There are three types of unemployment: 1. Frictional including seasonal unemployment a. Sectorial shifts, a. entering labour force. 1. Structural unemployment a. Wage is above equilibrium wage 1. Cyclical unemployment a. Business cycle. Employment Insurance (EI) International comparisons: 2004 Country Benefits R Benefit duration Unemplyment Rate (%) (%)eplacment (Years) (2005) France 75 1.92 9.9 Germany 69 1 9.4 Italy 54 0.5 7.7 Spain 67 1.75 9.2 UK 54 0.5 4.8 US 54 Between 2001 and 2002 the ocuntry of Aquilolio reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate. Which of the following would expalin the two reports? a. There was an increase in the si\e of the labour force between 2001 and 2002. Lecture Twelve: Ch. 9: Unemployment & Natural Rate Review: Why is there unemployment? • There are three types of unemployment 1. Frictional unemployment 1. Structural unemployment * 1. Cyclical unemployment -> business cycle *Natural rate of unemployment. 1. Minimum wage: economic theory • Price floor: Legal minimum binding • Sps min wage increases a. Increases in unemployment a. Employed decreases Minimum wage: real world • Types of workers effected by minimum wage are unskilled workers. • In addition McDonalds cant cut back on employees since they need a certain amount of people to manage the place (cook, cashier, etc. ) • • Minimum wage therefore does not effect lawyers since $10.25 is not binding as its well below 1. Unions • Considering a small town that has one factory and many small businesses. Why would you expect the wage to be the same in both industries? • Equilibrium will be the same. Now suppose workers in the factory form a union: What happens? 1. Efficiency wages • Firms operate more efficiently by increased worker productivity if wages are above equilibrium level a. Worker health a. Worker turnover a. Worker effort: decrease in shirking b. Worker quality • Henry ford: paid his workers 2x the wages, to encourage his workers to show up, because if one guy doesn’t show up then the assembly line is either shut down or slowed down considerably. Lecture Twelve: Ch. 10: The Monetary System • Is my mastercard an asset? o NO! Money: • Money- an asset regularly used to buy goods and services. • Money has 3 functions: 1. Medium of exchange 2. Unit of account 3. Store of value • Liquidity: the ease with which an asset can be converted into the economy's medium of exchange. • When prices rise, the value of money falls. • Which list ranks assets from most to least liquid: a. Currency, stocks, fine arts. Commodity vs. flat money • Commodity money: money that takes the form of a commodity with intrinsic value. o Ex: gold, etc. • Fiat money: established as money by government decree, with no intrinsic value. Money in the Canadian economy: M=C+D • Canada: C= 46 billion • Canada: D=162 billion • Canada: 18000/person • US: $23000/person-mostly because usa currency is used for most international biz. •Currency (c): paper bills and coins in the hands of the public. Money you actually have. •Demand deposits (D): the balance in bank accounts that depositors can access on demand by writing a cheque or using a debt card. The legal tender requirement means that a. People are more likely to accept the dollar as a medium of exchange. Lecture Seventeen: Ch. 11: Money Growth & Inflation Fractional-Reserve Banking: •Fractional reserve banking: banking system in which a bank holds only a fraction of deposits as reserves •One of the way banks make money is by offering loans, with interest rates higher then your savings account •Reserve ration: the fraction of total deposits that a bank holds as reserves. Demonstration: •This classroom is a closed economy. I have $50 000 in currency and there is no banking system. • What is the current money supply? •M=C+D o =50 000+0=$50 000 Demonstration 2: •This demonstration includes banking, you deposit 50 000 into a bank. The reserve ration is 50% •You gave out a loan of $25 000,they buy a car. •Car dealer now has $25 000, they deposit to the bank. •Bank loans $12 000 to someone, they pay their tuition •University gets $12 000 into its bank •Banker gives out a loan of $6 250; they buy an old car •Car dealer has $6250 in its bank •Person takes loan of 3250 •M=C+D = o $3 125 + 50 000 + 25000 + 12 500 + 6250 o $96 875 •Eventually we will end up with $100 000 (1/reserve ratio) o Money deposited/reserve ratio in decimal o 50 000/0.5 = 100 000 Money Creation using T-accounts •Balance sheet for a bank, assets on left, and liabilities on right, they must both equal each other. •Deposits $500 and 20% kept in vault • Question: Suppose someone deposits $100. What happens immediately? What happens after all adjustment have taken place? • • When the person first deposits the $100 its in reserves, after adjustments are made, its 20% reserves, and the rest as loans. Money Multiplier • Money multiplier: the amount of deposits the banking systems generates with each dollar of reserves. • Money multiplier = 1/reserve ration • M= C + D Example: • Suppose the reserve ratio is 5%. If $100 is deposited into the banking system, what happens to total deposits? • Money multiplier = 1/.05 = 20.0 If the reserve ratio is 5 percent and a bank receives a new deposit of $200, it a. Must increase requited reserves by $190 a. Will initially see reserves increase by $190 a. Will be able to make new loans up to a maximum of $190 a. None of the above is true. Bank of Canada • Established in 1935 • Bank of Canada is Canada's central bank o Bank of england o Bank of japan o Board of governors of the federal reserve system • USA central bank. • The bank of canada has four main areas of responsibility: 1. Monetary policy - controls the money supply 1. Currency - designs, produces, and issues currency 1. Financial System - facilitates cheque-clearing and acts as a "lender of last resort" i. Lender of last resort, to avoid banks going bankrupt. The bank can borrow from bank of Canada to stop the bank from going bankrupt. 1. Funds Management - acts as a banker for the Canadian government. Bank of Canada's tools of monetary control: • The bank of Canada controls the money supply by: 1. Open-market operations - buying and selling government bonds i. If the government buys bonds then money goes out to public from bank of canda, therefore money supply goes up. i. If the government sells bonds or anything at all really then money comes in to bank of canada and out of the public therefore money supply goes down. 1. Changing the overnight rate - the government can change the bank rate, which equally changes the overnight rate. i. "prime rate" is the interest that the bank will charge its very best customers a loan with the best interest rate. • If you withdraw money, the bank wont recall that money, if the bank does not have enough reserve at the end of day then it can borrow from another bank who has excess reserve, or from bank of Canada o When a bank borrows from a commercial bank then that’s called an 'overnight rate' since they only borrow it for 24 hours. o If they borrow from bank of Canada then its called "bank rate" • The bank of Canada sets the bank rate, if bank rate, overnight rate goes up, and vise-versa. Banks runs and the money supply • Depositors believe that a bank might go bankrupt • Problem for banks using the fractional-reserve banking system. • If all customers have this fear at the same time, then this actually causes the bank to go bankrupt. • Bank runs were a very big problem in the 1800 century but then CDIC came in • Banks have to buy insurance, CDIC insures depositors up to $100 000/bank. Lecture Eighteen: Ch. 11 Pt 2 Classical Theory of inflation • Price of a good - reflects value • Money - value falls as the price level rises. o Financial asset, we need it to buy stuff • Demand for money (households) - as prices rise we need more money to buy the same goods • The demand for money curve has a negative slope. d • M - shift out if Y rises or if households decide to increase their money holdings for some other reason • M vertical
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