Intermediate
Macroeconomics
Lecture 4
Topics
1,4 questions from before
2,HW #1
3,Unemployment
** Natural rate of unemployment
1) 2 reasons for unemployment
A,Frictional unemployment
B,Wait unemployment
2) Patterns of unemployment
Before We Start…
? Give our T.A.’s a big applause!!! ?
? Join our forum
http://forum.ccer.edu.cn/forum/area.
asp?areaid=133125
Inventories
Year Prod,Sold Price
2000 10 8 100
2001 0 0 200
2002 0 1 300
2003 0 0 broken 400
Year C I (investment is not stock,but flow) GDP
2000 800 200 1000
2001 0 0 0
2002 300 -300 0
2003 0 Inventories –400;Depreciation +400 0
Real v.s,Nominal
Profit = p * Y – w * L – r * K
Y = MPL * L + MPK * K
W ( r ):return to L (K) in terms of
money (nominal)
MPL (MPK):return to L (K) in terms of
products (real)
Increase income tax rate
? What are the effects on the loanable funds
market?
t↑ ?T↑ ?Y – T↓ ?private savings↓
However,
T↑ ?T – G↑ ?public savings↑
Therefore,the final result will be…
Depends… ?
Quantity Demanded v.s,
Demand
? r ↑ or↓ affects __I____
r1
r2
I2 I1
A
B
I( r )
Quantity Demanded v.s,
Demand
? ___I ( r )___↑ or↓ affects
S,I
r S
I( r )
E
E’
r*
r*’
I (r )’
Natural Rate of Unemployment
? Definitions
a) Misery index,the sum of inflation
and unemployment rates
b) Natural rate of unemployment,the
average rate of unemployment
around which the economy
fluctuates
Natural Rate of Unemployment
? In eq’m,natural rate of
unemployment is a constant
f * U=s * E
f,the rate of job finding
s,the rate of job separation
U,unemployed
E,employed
Natural Rate of Unemployment
? Use only s & f to express U/L
e.g,1% of the employed lose their job each
month,10% of the unemployed find a job
each month,Then…
fU sE?
()fU s L U??
( 1 )UUfsLL??
Us
L f s? ?
Natural Rate of Unemployment
s=1% --- every month,1% lose job
?For 1 person,after working for
_____ months,tend to lose job
F=10% --- every month,10% get job
?For 1 person,after being
unemployed for _____ months,tend
to get a job
Frictional Unemployment
(1st reason)
? It takes time to match workers and jobs
e.g,technology improvement
? new production processes or
new varieties of goods
different locations and sectors
Frictional Unemployment
(1st reason)
? Public policy implication
1,Unemployment insurance
? less pressure to search for new job
? More likely to turn down unattractive
offers
However
? Reduce uncertainty about income so
that economically and mentally…
? Better matching
Wait Unemployment
(2nd reason)
? Wage rigidity
--- the failure of the wage to adjust
until L.S.=L.D,
L
Real Wage
S
D
E W/P
SQDQ
a) Minimum-wage laws
Wait Unemployment
(2nd reason)
L
Real Wage
S
D
E
Min,w
SQDQ
W/P
Wait Unemployment
(2nd reason)
b) Unions and collective bargaining
The wages of workers in the union
are determined not by the eq’m of
S and D but by collective
bargaining between union leaders
and firm management (wages tend
to be higher than the eq’m level)
Wait Unemployment
(2nd reason)
? Wages for non-unionized workers
? ↑ due to union in other firms
? Insiders & outsiders
---outsiders bear part of the cost of
higher wages
Wait Unemployment
(2nd reason)
c) Efficiency wages
i,Nutrition
ii,Labor turnover rate
iii,Average quality of the work force
iv,Moral hazard problem
Patterns of Unemployment
? Just some additional facts about
unemployment that will help us to
evaluate our theories and assess
public policies
Patterns of Unemployment
? Variation in demographic groups
Unemployment rate by demographic groups
1997 U.S,(%)
Age White
male
White
female
Black
male
Black
female
16-19 14.3 12.8 36.5 28.7
19+ 3.6 3.7 8.5 8.8
Patterns of Unemployment
? Trend in unemployment
I,Changing composition of the labor
force (age,gender)
II,Sectoral shifts
Patterns of Unemployment
? Transitions into and out of the labor
force
A,Recently entered
B,Not active in searching for job
C,Withdrawal from the labor force
Ch,6 Summary
Unemployment is wasted resource
? Natural unemployment rate
? Reasons for unemployment
? Patterns of unemployment
? Policies
Money and Inflation
? Money
1,Evolution (types)
2,Functions
3,Measure
4,Theories
? Inflation
1,Interest rate
2,The Fisher effect
3,Inflation
4,Hyperinflation
Money
1,Evolution
Commodity
?gold/silver
?gold
?fiat money
Gresham’s law:,bad money chase out
good money”
Money
2,Functions
1) Medium of exchange
2) Measure of value
3) Store of value
4) Measure of deferred payment
(premium)
Money
3,Measure (China)
M0:流通中的现金（通货）
狭义货币 M1:M0+商业银行的活期存款 （货币）
广义货币 M2:M1+商业银行的定期存款
（货币和准货币）
广义货币 M3:M2+其他金融机构的存款
Money
年份 货币和准货币 ( M 2) 货币 ( M 1) 流通中现金 ( M 0)
1990 15293,4 6950.7 2644.4
1991 19349,9 8633.3 3177.8
1992 25402,2 1 1731,5 4336
1993 34879,8 16280,4 5864.7
1994 46923,5 20540,7 7288.6
1995 60750,5 23987,1 7885.3
1996 76094,9 28514,8 8802
1997 90995,3 34826,3 10177,6
1998 104498,5 38953,7 1 1204,2
1999 1 1989 7.9 45837,2 13455,5
2000 134610,3 53147,2 14652,7
2001 158301,9 59871,6 15688,8
Money
0
5
10
15
20
25
30
35
40
%
1990 1992 1994 1996 1998 2000
Year
% change in M2
% change in M2
Money
0
0.1
0.2
0.3
0.4
0.5
1990 1992 1994 1996 1998 2000
Year
货币流动性（M 1 / M 2 ）
M1/M2
Money
4,Monetary theories
1) The Quantity Theory of Money (1903)
(Irving Fisher,Yale,1867-1947)
I,Transactions and the quantity equation
Money * Velocity = Price * Transactions
M * V = P * T
V,# of times 1 $ bill changes hands in a given period of time
P,general price index
T,# of transactions (times in a year that any two individuals
exchange goods or services for money) --- hard to
measure ∴ use Y (real output) instead
Money
II,The money D fn & the quantity equation
Money D fn,
Real money demand is proportional to income
k,for 1more $ income,how much people would
want to hold in their hands
dM
kYP?? ???
??
M kY
P ?
1M P Y
k? ? ?
Money
? Use
? Assume V is a constant (or k is a constant)
? Output Y is fixed (ch,3)
Therefore,
% change in M = % change in P
“a normal effect of an increase in the quantity of
money is an exactly proportional increase in the
general level of prices.” --- Irvine Fisher
1 V
k ?
M V P Y??? ? ?
Money
? The quantity theory of money states
that the central bank,which controls
the money supply,has the ultimate
control over the rate of inflation,
? Increasing money supply has NO
effect on real output level,
Money
2) The Keynesian Chain (1930s)
(John Keynes,Cambridge,1883-1946)
Ms ↑
? i ↓ (r ↓ )
? I ↓
? Y ↑
Therefore,money supply DOES affect the
real output level
Money
3) Revised quantity theory of
money,the Monetarism (1930s)
(Univ,of Chicago &
Milton Friedman,Stanford,1912-)
? 1940s – 1960s,most glamorous
? Late 1960s and 1970s,stagflation
Money
,All inflations always and everywhere
are a monetary phenomenon.”
“Quantity theory equation,if correctly
interpreted,is not a bad equation
after all.”
Money
If V is stable in the long run,then any
increase in M can either increase the
general price level (P) or raise national
income (Y)
Relaxed the assumption that Y is fixed from
the classic model in Ch,3
M V P Y? ? ?
Money
Therefore,
If the economy is far away from full
employment,…
If the economy is close to full
employment,…
Macroeconomics
Lecture 4
Topics
1,4 questions from before
2,HW #1
3,Unemployment
** Natural rate of unemployment
1) 2 reasons for unemployment
A,Frictional unemployment
B,Wait unemployment
2) Patterns of unemployment
Before We Start…
? Give our T.A.’s a big applause!!! ?
? Join our forum
http://forum.ccer.edu.cn/forum/area.
asp?areaid=133125
Inventories
Year Prod,Sold Price
2000 10 8 100
2001 0 0 200
2002 0 1 300
2003 0 0 broken 400
Year C I (investment is not stock,but flow) GDP
2000 800 200 1000
2001 0 0 0
2002 300 -300 0
2003 0 Inventories –400;Depreciation +400 0
Real v.s,Nominal
Profit = p * Y – w * L – r * K
Y = MPL * L + MPK * K
W ( r ):return to L (K) in terms of
money (nominal)
MPL (MPK):return to L (K) in terms of
products (real)
Increase income tax rate
? What are the effects on the loanable funds
market?
t↑ ?T↑ ?Y – T↓ ?private savings↓
However,
T↑ ?T – G↑ ?public savings↑
Therefore,the final result will be…
Depends… ?
Quantity Demanded v.s,
Demand
? r ↑ or↓ affects __I____
r1
r2
I2 I1
A
B
I( r )
Quantity Demanded v.s,
Demand
? ___I ( r )___↑ or↓ affects
S,I
r S
I( r )
E
E’
r*
r*’
I (r )’
Natural Rate of Unemployment
? Definitions
a) Misery index,the sum of inflation
and unemployment rates
b) Natural rate of unemployment,the
average rate of unemployment
around which the economy
fluctuates
Natural Rate of Unemployment
? In eq’m,natural rate of
unemployment is a constant
f * U=s * E
f,the rate of job finding
s,the rate of job separation
U,unemployed
E,employed
Natural Rate of Unemployment
? Use only s & f to express U/L
e.g,1% of the employed lose their job each
month,10% of the unemployed find a job
each month,Then…
fU sE?
()fU s L U??
( 1 )UUfsLL??
Us
L f s? ?
Natural Rate of Unemployment
s=1% --- every month,1% lose job
?For 1 person,after working for
_____ months,tend to lose job
F=10% --- every month,10% get job
?For 1 person,after being
unemployed for _____ months,tend
to get a job
Frictional Unemployment
(1st reason)
? It takes time to match workers and jobs
e.g,technology improvement
? new production processes or
new varieties of goods
different locations and sectors
Frictional Unemployment
(1st reason)
? Public policy implication
1,Unemployment insurance
? less pressure to search for new job
? More likely to turn down unattractive
offers
However
? Reduce uncertainty about income so
that economically and mentally…
? Better matching
Wait Unemployment
(2nd reason)
? Wage rigidity
--- the failure of the wage to adjust
until L.S.=L.D,
L
Real Wage
S
D
E W/P
SQDQ
a) Minimum-wage laws
Wait Unemployment
(2nd reason)
L
Real Wage
S
D
E
Min,w
SQDQ
W/P
Wait Unemployment
(2nd reason)
b) Unions and collective bargaining
The wages of workers in the union
are determined not by the eq’m of
S and D but by collective
bargaining between union leaders
and firm management (wages tend
to be higher than the eq’m level)
Wait Unemployment
(2nd reason)
? Wages for non-unionized workers
? ↑ due to union in other firms
? Insiders & outsiders
---outsiders bear part of the cost of
higher wages
Wait Unemployment
(2nd reason)
c) Efficiency wages
i,Nutrition
ii,Labor turnover rate
iii,Average quality of the work force
iv,Moral hazard problem
Patterns of Unemployment
? Just some additional facts about
unemployment that will help us to
evaluate our theories and assess
public policies
Patterns of Unemployment
? Variation in demographic groups
Unemployment rate by demographic groups
1997 U.S,(%)
Age White
male
White
female
Black
male
Black
female
16-19 14.3 12.8 36.5 28.7
19+ 3.6 3.7 8.5 8.8
Patterns of Unemployment
? Trend in unemployment
I,Changing composition of the labor
force (age,gender)
II,Sectoral shifts
Patterns of Unemployment
? Transitions into and out of the labor
force
A,Recently entered
B,Not active in searching for job
C,Withdrawal from the labor force
Ch,6 Summary
Unemployment is wasted resource
? Natural unemployment rate
? Reasons for unemployment
? Patterns of unemployment
? Policies
Money and Inflation
? Money
1,Evolution (types)
2,Functions
3,Measure
4,Theories
? Inflation
1,Interest rate
2,The Fisher effect
3,Inflation
4,Hyperinflation
Money
1,Evolution
Commodity
?gold/silver
?gold
?fiat money
Gresham’s law:,bad money chase out
good money”
Money
2,Functions
1) Medium of exchange
2) Measure of value
3) Store of value
4) Measure of deferred payment
(premium)
Money
3,Measure (China)
M0:流通中的现金（通货）
狭义货币 M1:M0+商业银行的活期存款 （货币）
广义货币 M2:M1+商业银行的定期存款
（货币和准货币）
广义货币 M3:M2+其他金融机构的存款
Money
年份 货币和准货币 ( M 2) 货币 ( M 1) 流通中现金 ( M 0)
1990 15293,4 6950.7 2644.4
1991 19349,9 8633.3 3177.8
1992 25402,2 1 1731,5 4336
1993 34879,8 16280,4 5864.7
1994 46923,5 20540,7 7288.6
1995 60750,5 23987,1 7885.3
1996 76094,9 28514,8 8802
1997 90995,3 34826,3 10177,6
1998 104498,5 38953,7 1 1204,2
1999 1 1989 7.9 45837,2 13455,5
2000 134610,3 53147,2 14652,7
2001 158301,9 59871,6 15688,8
Money
0
5
10
15
20
25
30
35
40
%
1990 1992 1994 1996 1998 2000
Year
% change in M2
% change in M2
Money
0
0.1
0.2
0.3
0.4
0.5
1990 1992 1994 1996 1998 2000
Year
货币流动性（M 1 / M 2 ）
M1/M2
Money
4,Monetary theories
1) The Quantity Theory of Money (1903)
(Irving Fisher,Yale,1867-1947)
I,Transactions and the quantity equation
Money * Velocity = Price * Transactions
M * V = P * T
V,# of times 1 $ bill changes hands in a given period of time
P,general price index
T,# of transactions (times in a year that any two individuals
exchange goods or services for money) --- hard to
measure ∴ use Y (real output) instead
Money
II,The money D fn & the quantity equation
Money D fn,
Real money demand is proportional to income
k,for 1more $ income,how much people would
want to hold in their hands
dM
kYP?? ???
??
M kY
P ?
1M P Y
k? ? ?
Money
? Use
? Assume V is a constant (or k is a constant)
? Output Y is fixed (ch,3)
Therefore,
% change in M = % change in P
“a normal effect of an increase in the quantity of
money is an exactly proportional increase in the
general level of prices.” --- Irvine Fisher
1 V
k ?
M V P Y??? ? ?
Money
? The quantity theory of money states
that the central bank,which controls
the money supply,has the ultimate
control over the rate of inflation,
? Increasing money supply has NO
effect on real output level,
Money
2) The Keynesian Chain (1930s)
(John Keynes,Cambridge,1883-1946)
Ms ↑
? i ↓ (r ↓ )
? I ↓
? Y ↑
Therefore,money supply DOES affect the
real output level
Money
3) Revised quantity theory of
money,the Monetarism (1930s)
(Univ,of Chicago &
Milton Friedman,Stanford,1912-)
? 1940s – 1960s,most glamorous
? Late 1960s and 1970s,stagflation
Money
,All inflations always and everywhere
are a monetary phenomenon.”
“Quantity theory equation,if correctly
interpreted,is not a bad equation
after all.”
Money
If V is stable in the long run,then any
increase in M can either increase the
general price level (P) or raise national
income (Y)
Relaxed the assumption that Y is fixed from
the classic model in Ch,3
M V P Y? ? ?
Money
Therefore,
If the economy is far away from full
employment,…
If the economy is close to full
employment,…
