Price Level
Chapter 8:
Fiscal Policy: Coping with
Inflation & Unemployment
AS
P2
P3
AD2
P1
AD3
AD1
0
Y1
Different Types of Unemployment:
Ž Frictionally Unemployed
Ž Structurally Unemployed
Ž Cyclically Unemployed
Ž Discouraged Workers
Ž Underemployed Workers
3. Cyclically Unemployed:
Unemployment associated with the
downturn and recession phases of the
business cycle.
Y2
Aggregate
Output
8/25/2008
1. Frictionally Unemployed:
Relatively brief periods of unemployment
caused by people deciding to voluntarily
quit work in order to seek more attractive
employment.
2. Structurally Unemployed:
Unemployment that results from
fundamental technological changes in
production, or from the substitution of new
goods for customary ones.
5. Underemployed Worker:
Workers employed in jobs that do not fully
utilize their productive talents or
experience.
4. Discouraged Workers:
Unemployed people who give up looking
for work after experiencing persistent
rejection in their attempts to find work.
1
Number of Workers and Type of Unemployment:
Total Number of Workers
10,250
Frictional Unemployment
150
Structural Unemployment
200
Cyclical Unemployment
500
Discouraged Workers
250
Underemployed Workers
300
Total Unemployment = 150 + 200 + 500 + 250 + 300
= 1,400
The Bureau of Labor Statistics (BLS):
Two Questions:
Q1. Are you presently gainfully
employed?
Q2. Are you actively seeking
employment?
1400
= .137 = 13.7%
10250
True Unemployment Rate =
Number of Workers and Type of Unemployment:
T otal N u m b er of W ork ers
10,2 50
F riction al U n em p loym en t
1 50
S tru ctu ral U n em p loy m en t
2 00
Total Number of Workers
10,250
Frictional Unemployment
150
C yclical U n em p loym en t
5 00
Structural Unemployment
200
D iscou raged W ork ers
2 50
Cyclical Unemployment
500
U n d erem p loyed W ork ers
3 00
Discouraged Workers
250
Underemployed Workers
300
BLS’s Rate of Unemployment
Actual Unemployment Rate = 8.5%
Natural Rate of Unemployment =
Labor Force = 10,250 – 250 = 10,000
Price Level
Actual Unemployment Rate =
150 + 200
= 3.5%
10000
850
= .085 = 8.5%
10000
Actual Rate of Unemployment = Natural Rate of Unemployment +
Cyclical Rate of Unemployment
8.5% = 3.5% + 5%
Winners and Losers from Inflation:
AS
P2
Who Loses from Inflation?
P3
AD2
P1
AD3
Ž People on fixed income
Ž Lenders
Ž Savers
AD1
0
Y1
Y2
Aggregate
Output
2
AE a
0
A E 10
$
Who Gains from Inflation?
Ž Borrowers
Ž Government
Recessionary Gap
Moderating the Wins and Losses:
Variable Rate of Interest
800
Y
105
Cost of Living Index (COLA)
AD
100
800
Recessionary Gap:
1200
Price Level
0
1200
Y
AE b
AE a
$
Inflationary Gap
The amount by which aggregate expenditure
falls short of the amount needed to generate
full employment national output.
Price Level
0
1200 1600
Y
133
105
AD
1200 1600
Y
Recessionary Gap:
The amount by which aggregate expenditure
falls short of the amount needed to generate
full employment national output.
Inflationary Gap:
The amount by which aggregate
expenditure exceeds the level needed to
generate full employment national output.
3