● The importance of fiscal policy
○ Change G ot T to directly change/shift AD
● => Monetary Policy
○ Changing the MS to affect AD through the Transmission Mechanism
■ 1) closed economy
■ 2) open economy
● net exports
○ MS => i => ( C & I & NX) => AD
■ interest rate => exchange rate
● Signal that we are not in LR equilibrium and may need intervention
○ Most concerned: recession
■ G can be increased, or increase MS
■ But is 0% unemployment natural?
● Labour Force = Number of employed + Number of unemployment
○ doesn’t equal to the whole adult population
○ Unemployed people are people who want jobs but do not have them
■ People who do not work, and do not want to work, and NOT in the labour
● Participation Rate = [(Labour force)/(Adult Population)] * 100%
○ Europe: low participation rate, early retirement
○ can be greater than 100% when teenagers are working
● Unemployment Rate = [(Number of unemployed)/(Labour Force)]*100%
○ The unemployment rate may fall if unemployment workers leave the labour force
because they become discouraged and stop looking for work.
○ Decrease in the size of labour force and increases the unemployment rate
○ Can be greater than 100% if there is an inflationary gap and people are
○ Examining changes in the unemployment rate in 2012, a few years after the
“great recession”, this must be considered
■ declining because of new jobs and/or discouraged people?
● Question: Should the government make unemployment benefits more generous (easier
to qualify; long period of benefits) in regions where unemployment is high?
○ What incentives will this create?
■ Would increase unemployment by discouraging unemployed people from
leaving high unemployment regions
○ Depletion of natural Resources ■ Only a small window during the year are allowed to
○ The most generous unemployment benefits
○ People choose to stay at Newfoundland and do not adapt
to the market
● If the number of jobs = the number of workers in the labour force, would the
unemployment rate be 0%?
○ Some unemployment is natural
● 1. Frictional Unemployment: Normal labour turnover
○ Search unemployment as people and firms search for good matches
■ giving people/firms to look for the right job/employee
■ matches - much more efficient
● 2. Structural Unemployment: Mismatch in skill, occup