Unemployment and Inflation Rate

Real Interest Rate: percentage increase in purchasing power the borrower must pay the lender for a loan.

Formula = (Nominal Rate - Inflation)

Nominal Interest Rate: percentage in crease in money the borrower must pay the lender for a loan.

Formula = (Expected interest rate + inflation premium)

Who's hurt by inflation?

• savers
• lenders/creditors
• those on fixed income (elderly, welfare, social security, medicaid)
• Who gains from inflation?
• Borrowers
• Those locked into contracts
• COLA: cost of living adjustments, (gives automatic wage increases when inflation occurs)

Unemployment

Unemployment: failure to use available resources particularly labor, to produce desired goods and services.

Labor Force:

• Above 16 years old
• Able and willing to work

NOT in Labor Force:

• Military
• Mental Institutions
• In jail or prison
• Retired
• Students
• Homemakers
• Not looking for job
• Unemployment Rate: 4 to 5% = FULL EMPLOYMENT or NATURAL RATE OF UNEMPLOMENT (NRU)
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• Calculate Unemployment Rate: (# of unemployed / # of employed + # of unemployed) * 100

Types of Unemployment

Frictional:

1,searching for a job

• temporarily unemployed
• in between jobs
• transferable skills
• someone leaving job for a better job,

      2. Structural:

• changes in structure of the labor force make some skills obsolete
• workers don't have transferable skills

      3. Seasonal:

• due to the time of the year and nature of the job
• (lifeguards, school bus drivers, construction workers)

      4. Cyclical:

• unemployment that results from economic downturns (recession)
• as demand for goods and services fall, demand for labor falls and workers are laid