CHAPTER 11

Economic Challenges
SECTION 1: Unemployment SECTION 2: Inflation SECTION 3: Poverty and Income Distribution

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SECTION 1

Unemployment

Objectives:
 What is the unemployment rate?  What are the four major types of unemployment?  What are the main economic costs of high unemployment?

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SECTION 1

Unemployment

Unemployment rate
 a labor force statistic  the percentage of people in the nonmilitary labor force who are unemployed

3

SECTION 1

Unemployment

Four major types of unemployment:
 frictional  structural  seasonal  cyclical

4

SECTION 1

Unemployment

Economic costs of high unemployment:
 reduced production of goods and services  reduced business sales  increased need for federal support of the unemployed

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SECTION 2

Inflation

Objectives:
 What do economists look at when evaluating price changes over time?  What causes inflation?  What are the two main price indexes that economists use to measure inflation?  How does inflation affect the economy?
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SECTION 2

Inflation

What economists examine when evaluating price fluctuations:
 price levels  inflation  deflation

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SECTION 2

Inflation

Causes of inflation:
 demand-pull inflation—when demand surpasses production  cost-push inflation—when producers increase prices to cover higher resource costs  future price expectations
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SECTION 2

Inflation

Main price indexes that economists use to measure inflation:
 consumer price index  producer price index

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SECTION 2

Inflation

Effects of inflation:
 decreased purchasing power of the dollar  decreased value of real wages  decreased saving and investing  increased interest rates  increased production costs
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SECTION 3
Poverty and Income Distribution

Objectives:
 How do economists determine the number of poor people in the United States?  How do economists measure the distribution of income?  What policies does the U.S. government use to reduce the income gap and decrease poverty?
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SECTION 3
Poverty and Income Distribution

The poverty threshold—the lowest income that a household of a certain size or composition needs to maintain a basic standard of living—is used to determine the poverty rate in the United States.

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SECTION 3
Poverty and Income Distribution

How economists measure the distribution of income:
 Lorenz Curve  Gini Index

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SECTION 3
Poverty and Income Distribution

Federal policies to reduce the income gap and decrease poverty:
 increasing access to educational resources  providing training for low-skilled workers  redistributing income  raising minimum wage  setting wage levels  prohibiting companies from building in foreign countries where labor is cheaper
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CHAPTER 11

Wrap-Up
1. Which type of unemployment is most damaging to the U.S. economy? Explain your answer. 2. Explain the concept of full employment. 3. Identify the following as examples of demand-pull inflation or cost-push inflation:
a. an increase in the price of a popular toy at Christmas when the stores are sold out of the product b. an increase in the price of orange juice because of a drought in Florida c. an increase in the price of Chunky Chicken products because of a union-negotiated wage increase for production workers
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CHAPTER 11

Wrap-Up
4. Calculate the consumer price index using the following hypothetical information, and determine the percentage of change in the price level from 1998 to 2000: 1998 market basket ($7,000), 2000 market basket ($10,000). 5. What are some of the limitations of income distribution measurements? 6. What is the relationship between the Lorenz Curve and the Gini Index?

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