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Principles of Macroeconomic
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Principles of Macroeconomic
Unemployment Rate
A person who is willing to work and cannot find work to earn a livelihood is called an unemployed person. The rate of unemployment can be defined as the percentage of unemployed persons in the total labor force. The overall unemployment rate in the US was 3.5% in December’2019. This overall unemployment rate is regardless of the differences in the unemployment rate in different population groups in the country and therefore, it cannot portray an accurate picture of the unemployment rate in the country ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"14lUG73Q","properties":{"formattedCitation":"(A. McEachern, 2016a)","plainCitation":"(A. McEachern, 2016a)","noteIndex":0},"citationItems":[{"id":1234,"uris":["http://zotero.org/users/local/s8f0QVnP/items/68B8TUW5"],"uri":["http://zotero.org/users/local/s8f0QVnP/items/68B8TUW5"],"itemData":{"id":1234,"type":"chapter","container-title":"Macroeconomics: A Contemporary Introduction","edition":"11th","event-place":"New York City, New York","publisher":"Cengage Learning","publisher-place":"New York City, New York","title":"Chapter 7: Unemployment and Inflation.","author":[{"family":"A. McEachern","given":"William"}],"issued":{"date-parts":[["2016",1,1]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (A. McEachern, 2016a). Although the overall unemployment rate was 3.5% in December 2019, the unemployment rate was significantly higher for different age groups. For instance, the unemployment rate was 8.6% for people aged 16-24 years. It was observed to be lower for people aged 25-29 years as they faced a 4.3% unemployment rate. However, this is still higher than the overall unemployment rate. The general trend in the unemployment rate is that it decreases as we move from younger to older population groups as the people belonging to the age groups of 45 and above have to face a 2.9% unemployment rate which is lower than the overall unemployment rate.
Actual and Anticipated Inflation
The most significant impact of any change in the actual inflation rate can be seen on the real interest rate as it is calculated as the nominal interest rate minus the inflation rate. An increase in the inflation rate means a decrease in the actual interest rate. Every lender and borrower of loanable funds makes anticipations about the future inflation rate at the time of lending or borrowing a loan. This anticipated inflation rate helps them realize the actual interest rate in the future and enables them to make decisions about their savings and investments.
If actual inflation exceeds the expected inflation, the real interest rate will decrease as compared to the expected interest rate which will be beneficial for the borrower as he will have to pay less interest on loans. The lender of loans, however, will have to face losses as he will get less interest. So, the purchasing power of a lender will decrease and for a borrower, it will increase.
Prices, Wages, and Interest Rate
Classical economists believe that prices, wages, and interest rates, all are fully flexible nominal variables and they work to restore equilibrium in their respective markets. The fully flexible prices ensure equilibrium in the goods market and there can be no overproduction. As any change in demand for supply will be absorbed through the adjustments in the prices, the flexibility of the wage rate makes it possible to achieve all-time equilibrium in the labor market. Labor demand and supply are functions of the real wage rate, while the nominal wage rate works like the stabilizer of the market. Classical economists hold the same view for the interest rate.
Keynes criticized the unrealistic assumptions of classical economists as they believe that every economic agent has full information about any change in the market and they adjust their behavior accordingly. Keynes argues that there cannot be full information and as a result, there can be disequilibrium in the markets.
The Financial Crisis of 2008
The Financial Crisis of 2008 was the most severe economic setback since the Great Depression. It hit almost all the developed economies of the world especially the economy of the US had to suffer a lot. Due to lower levels of investment and to boost the economy, the government of the US had to spend extra money. The government of the US adopted the expansionary fiscal policy to tackle the situation and as a result, it had to face huge budget deficits ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"SSNBBYus","properties":{"formattedCitation":"(A. McEachern, 2016b)","plainCitation":"(A. McEachern, 2016b)","noteIndex":0},"citationItems":[{"id":1235,"uris":["http://zotero.org/users/local/s8f0QVnP/items/KYWWZKJI"],"uri":["http://zotero.org/users/local/s8f0QVnP/items/KYWWZKJI"],"itemData":{"id":1235,"type":"chapter","container-title":"Macroeconomics: A Contemporary Introduction","edition":"11th","publisher":"Cengage Learning","title":"Chapter 12: Federal Budgets and Public Policy","author":[{"family":"A. McEachern","given":"William"}],"issued":{"date-parts":[["2016",1,1]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (A. McEachern, 2016b). The government budget deficit was 0.46 trillion USD in 2008 which rose to 1.41 trillion USD in the very next year. The budget deficit remained very high for the four years as it was observed to be 1.29, 1.30, 1.08, and 0.68 trillion USD in 2010, 2011, and 2012 respectively.
References
ADDIN ZOTERO_BIBL {"uncited":[],"omitted":[],"custom":[]} CSL_BIBLIOGRAPHY A. McEachern, W. (2016a). Chapter 7: Unemployment and Inflation. In Macroeconomics: A Contemporary Introduction (11th ed.). Cengage Learning.
A. McEachern, W. (2016b). Chapter 12: Federal Budgets and Public Policy. In Macroeconomics: A Contemporary Introduction (11th ed.). Cengage Learning.
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