MGEA06H3 Lecture Notes - Deficit Spending, Structural Unemployment, National Research Universal Reactor

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5 Feb 2013
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30 January 2013
CHAPTER 23: FISCAL POLICY AND AGGREGATED SUPPLY TO DEMAND MODEL SUPPLEMENTARY C
Full-Employment Level of Output and Output Gaps
Full-employment level of output (YFE) is when the economy
is operating at its full potential, when the economy is at its
full employment. Full Unemployment is when good and
productive workers are able to find jobs easily, young and
experienced workers find their first jobs easily, and old
workers are not forced out of the labour force if they lose
their jobs (no discouraged workers). It is also the level of
output that the economy will converge to in the long run.
The unemployment rate at YFE is called the non-accelerating inflation rate of unemployment (NAIRU) or
natural rate of unemployment (NRU). Full employment does not mean that everyone is working
because:
The labour market is dynamic (people constantly move in and out of the labour market)
Frictional Unemployment when there is unemployment that results from the turnover in the
labour market as workers move between jobs
Structural unemployment when there is a mismatch between the skills or locations of workers
and the skill or location requirements of job openings
There are “frictions” in the economy (some industries or regions expand while some industries
or regions contract)
Our economy is not always producing at full employment (at the long run equilibrium), and when we are
not producing at our long run equilibrium we experience either:
Recessionary or Deflationary Gap occurs when the equilibrium level
of output (Y*) is less than the full-employment level (IE: Y* < YFE, the
current rate of output), when the economy is producing less output
than is normally associated with full employment. The economy has
lots of unemployed workers and there will be pressure for prices to
fall.
Inflationary Gap occurs when the equilibrium level of output (Y*) is
greater than the full-employment level (IE: Y* > YFE), when the
economy is producing more output than is normally associated with
full employment. The economy overheats and jobs are relatively
easy to find. Also, there will be pressure for prices to rise.
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