1. Chapter 13

2. Section 1

3.  Unemployment is caused by:
 People being between jobs for one reason or another
 A company or industry shutting down for a season
 Workers skills not matching those needed for the
jobs that are available
 Economic downturns

4.  Unemployment always exists, even in a
booming economy.
 Economists look at four categories of
unemployment: frictional, seasonal,
structural, and cyclical.
 Frictional unemployment occurs when people take
time to find a job.
 A person who is frictionally unemployed may be:
 Changing jobs to find more satisfying works
 Laid off and looking for a new job
 Just out of school and interviewing for a job
 Returning to the workforce after a voluntary absence

5.  When the structure of the economy changes, the
skills that workers need to succeed also change.
 Workers who lack necessary skills lose their jobs.
 Structural unemployment
occurs when workers’
skills do not match those
needed for the jobs that
are now available.

6.  There are five major of
structural
unemployment:
 The development of new
technology
 The discovery of new
resources
 Changes in consumer
demand
 Globalization
 Lack of education

7.  In the 1990s and 2000s, policymakers
developed training programs to help workers
gain new computer skills in light of the fact
that computer technology, globalization, and
other structural changes threatened the future
of many workers.
 Retraining takes time, however, and the new skills
do not ensure that the trainees will obtain high-wage
jobs.

8.  Seasonal unemployment occurs when
industries slow or shut down for a season or
make seasonal shifts in their production
schedules.
 Seasonal unemployment can also occur as a result of
harvest schedules or vacations.
 Economists expect to see seasonal unemployment
throughout the year.
 Government policymakers do not take steps to
prevent this kind of unemployment because it is a
normal part of a healthy economy.

9.  The lives of seasonally
unemployed workers can
be very difficult.
 Migrant farm workers, for
example, face seasonal
unemployment once the
harvest season is over.
Harvest schedules are often
unpredictable, making the
transition from one crop to
another hard to gauge.

10.  Unemployment that rises during economic
downturns and falls when the economy
improves is called cyclical unemployment.
 During a recession, many workers lose their jobs.
Many of these laid-off employees will be rehired
when the recession ends and the business cycle
resumes an upward trend.
 Today, unemployment insurance provides weekly
payments to workers who have lost their jobs. The
payments usually provide about half of a worker’s
lost wages each week for a limited amount of time.

11.  Sometimes, events outside the economy can
cause unemployment.
 Many jobs in travel and tourism were lost following
the 9/11 attacks.
 In 2005, the destruction by Hurricane Katrina caused
thousands of people to lose their jobs.

12.  The government keeps
track of how many
people are unemployed
and why.
 The Bureau of Labor
Statistics (BLS) computes
the unemployment rate
from a monthly
household survey of
60,000 families who
represent a cross-section
of the United States.

13.  The unemployment rate is adjusted for
seasonal unemployment.
 Taking this step allows economists to more
accurately compare unemployment rate from month
to month. This comparison helps them better detect
changing economic conditions.
 The unemployment rate is only an average for the
nation. It does not reflect regional differences.

14.  Economists generally agree that in an economy that is
working properly, an unemployment rate of around 4 to
6 percent is normal.
 Full employment is achieved when no cyclical
unemployment exists.
 Why does a high unemployment rate correspond with a
recession?

15.  Full employment means that nearly everyone
who wants a job has a job.
 However, some people remain underemployed,
which means they are working at a job for which
they are overqualified, or working part-time when
they desire full-time work.
 Other people simply give up hope of finding work.
These discouraged workers have stopped searching
for employment.
 Although they are without work, discouraged workers
do not appear in the unemployment rate determined by
the BLD because they are not actively looking for work.

16. Section 2

17.  Inflation is caused by:
 The growth of the money supply
 Changes in aggregate demand
 Changes in aggregate supply
 The effects of inflation include:
 Decrease in purchasing power
 Erodes income
 Decrease in interest rates

18.  Inflation is a general increase
in prices across an economy.
 Over the years, prices
generally go up. Inflation
shrinks the value, or
purchasing power of things.
 The effects of inflation over
the years can be seen in this
comparison of prices for
basic food items.

19.  To measure inflation, economists compare
price levels.
 To help them calculate price level, economists use a
price index, which is a measurement that shows how
the average price of a standard group of goods
changes over time.
 Price indexes help consumers and businesspeople
make economic decisions. The government also uses
indexes in making policy decisions.

20.  The best-known price index,
the Consumer Price Index
(CPI), focuses on consumers.
 The CPI is determined by
measuring the price of a
standard group meant to
represent the “market
basket” of a typical urban
consumer.
 The market basket (right) is
divided into eight categories
of goods and services.

21.  About every 10 years, the items in the market
basket are updated to account for shifting
consumer buying habits.
 Economists also find it useful to calculate the
inflation rate—the percentage rate of change in
price level over time.
 To determine the CPI, the BLS establishes a based
period to which it can compare prices.
 Currently the base period is 1982-1984.
 The BLS determines the CPI for a given year using
the following formula:
CPI = updated cost x 100
base period cost

22.  Inflation rates in the
United States have
changed greatly over time.
 When the inflation rate
exceeds 5 percent, it makes
economic planning
difficult.
 The worst kind of inflation
is hyperinflation in which
inflation rates can go as
high as 100 or even 500
percent per month.In what years was inflation so
high that it made economic
planning difficult?

23.  Growth of money supply—too much money in
the economy causes inflation
 Changes in aggregate demand—inflation can
occur when demand for goods and services
exceeds existing supplies
 Changes in aggregate supply—inflation can
occur when producers raise prices in order to
meet increased costs.
 Wage increases are the largest single production cost
for most companies.

24.  Increasing wages can lead to a spiral of ever-
higher price because one increase in costs leads
to an increase in prices, which leads to another
increase in costs, and on and on.
 This process is known as the wage-price spiral.

25.  High inflation is a
major economic
problem, affecting
purchasing power,
income, and interest
rates.
 Inflation can erode
purchasing power. If
the inflation rate is 10
percent, $1.00 will
buy the equivalent of
only $.90 world of
goods today.

26.  Inflation sometimes, by not always,
erodes income.
 If workers’ wages do not increase as much as
inflation does, they are in a worse economic
position than before.
 People living on a fixed income, like retired
people, are especially hard hit by inflation
because their money does not increase, even
when prices go up.

27.  People receive a given
amount of interest on
money in their savings
accounts, but their true
return depends on the
rate of inflation.
 If the inflation rate is
higher than the bank’s
interest rates, savers lose
money.

28.  Americans under age 30 have experienced
fairly low inflation rates for most of their
lifetimes.
 In the 2000s, the economy actually seemed to be
experiencing a period of deflation, or a sustained
drop in the price levels.
 However, by mid-2008, inflation was becoming a
worry. The CPI rose 1.1 percent in June. Higher
production costs, fueled by a 6.6 percent increase in
energy prices, helped push the annual inflation rate
to more than 4 percent.

29. Section 3

30.  According to the government, a poor family is one whose
total income is less than the amount required to satisfy
the family’s minimum needs.
 The Census Bureau
determines the poverty
threshold required to
meet those minimum
needs. The poverty
threshold often varies
with the size of the family.
 If a family’s total income
is below the poverty
threshold, everyone in the
family is counted as poor.

31.  The poverty rate is the
percentage of people
who live in households
with incomes below the
official poverty
threshold.
 In 2006, 12% of the
population equaled 36.5
million.
 What happened to the
poverty rate from 1994 to
2000?

32.  Race and ethnic origin
 Type of family
 Age
 Residence
 Education
 Growth of low-skill service jobs

33.  Poverty rates differ sharply by group,
according to several indicators:
 Race and ethnic origin—the poverty rate among
minorities is higher than among whites
 Type of family—single mother families have a
greater poverty rate
 Age—children are the largest age group living in
poverty
 Residence—inner cities have double the poverty rate
of those who live outside the inner city

34.  Households headed by
women, African
Americans, Hispanics,
and Native Americans
are more likely than
other groups to have
incomes below the
poverty threshold.
 Which population
group has the highest
poverty rate?

35.  The failure to earn adequate income is often the
result of unemployment. However, more than
half of poor households have someone who
works at least part-time, and one in five have a
full-time, year-round worker.
 For these “working poor,” the problem is usually
low wages or a limited work schedule.
 Shifts in the family structure, from a two-
parent family to a single-parent family, tend to
lead to an increase in the amount of families
living in poverty.

36.  People who live in the inner city earn less than
people living outside the inner city.
 White workers generally earn higher salaries
than minority workers, and men generally earn
more than women.
 Inequality results from differences in hours worked,
education, work experience, and discrimination.

37.  The growth of globalization has led to a
decrease in high-paying manufacturing jobs
forcing many less-educated people to work in
low-skill service jobs where wages are low.
 Lack of education also leads to poverty.

38.  To fully understand poverty in this country, you
also need to understand income distribution.
 The table (below left) shows family income ranked by
category. When plotted on a Lorenz curve (below
right), these data show the distribution of income in
the United States.

39.  As you can see from the chart and graph on the
previous slide, the wealthiest fifth of American
households earned more income than the bottom four
fifths combined.
 Factors that lead to
this income gap include:
 Differences in skills
and education
 Inheritances
 Field of work
 In the last two decades,
the distribution of income
has become less equal.

40.  The government spends billions of dollars on
programs designed to reduce poverty.
 Critics of such programs argue that the programs
themselves harm the very people they are intended
to help. Such criticisms have led to new policies.
 Earned Income Tax Credit (EITC) —a refundable tax
credit that low-income families with children receive
when they fill out their federal income tax return. EITC
offsets the impact of the Social Security payroll tax on
low-income families.
 In 2005, the EITC lifted more than four million people
above the poverty line.

41.  Enterprise zones—benefit businesses by
lowering their costs and help local people by
making it easier for them to find work.
 In recent decades, federal and state
governments have designed job training
programs to help workers who lack the skills to
earn an adequate income.
 The government has established a minimum wage
as well.
 The government also has programs to help
poor people obtain affordable housing.

42.  The welfare-reform plan of 1996 established
Temporary Assistance for Needy Families
(TANF), which provides block grants to the
states to help move poor adults from welfare
dependence to employment.
 It was hoped that this reform would reduce poverty
by providing poor Americans with labor skills and
access to steady, adequate income.