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L2: Unemployment and Multiplier

6 important questions on L2: Unemployment and Multiplier

Each month the U.S. Bureau of Labour Statistics (BLS) announces the value of the unemployment rate for the previous month. For example, on January 4, 2013, it announced that the unemployment rate for December 2012 was 7,8%. The unemployment rate is a key measure of how the economy is doing. This announcement is widely watched, and if the announced unemployment rate is different from what the financial markets expect, there can be large movements in those markets.

Explain how the unemployment rate is calculated:

The unemployment rate is the percentage of the labour force that is unemployed.
(Number of people unemployed : labour force) x 100 = unemployment rate.

A person not looking for work because he or she does not want a job or has given up looking is classified as not in the labour force. People not in the labour force include full-time students, retirees, individuals in institutions, those staying home to take care of children, and discouraged job seekers.

Explain how the Labour force participation rate is calculated:

The Labour force participation rate is the percentage of the working-age population who are members of the labour force.
(Labour force : population) x 100 = Labour force participation rate.

The unemployment rate by itself conveys some but not all information about the unemployment picture. To get a better picture, it is useful to look at the unemployment rate across groups of people, regions, and industries.

Unemployment can be classified into three types. Define these three types:

Frictional unemployment.
Structural unemployment.
Cyclical unemployment.

Disposable income YD is spent on two things.

Define these things:

Consumption of goods and services (C).
Savings (S).

The relationship between consumption and income is called a consumption function. This relationship is central to Keynes's model of the economy. Keynes is telling us two things.

First, if you find your income going up you will spend more than you did before.

Second, Keynes is also saying something about how much more you will spend. He predicts that the rise in consumption will be less than the full rise in income.

Define the Marginal Propensity to Consume (MPC):

The MPC is the fraction of a change in disposable income spent on consumption.

Define the Marginal Propensity to Save (MPS):

The fraction of a change in income that is saved.

If 0,75 of a 1,000 increase in income goes to consumption, 0,25 must go to saving. If income decreased by 1,00, consumption will decrease by 0,75 and saving will decrease by 0,25.