Labour markets + Credit markets Flashcards
(33 cards)
What is the labour force?
The sum of employed and unemployed individuals actively seeking work.
How is the labour-force participation rate calculated?
Labour-force participation rate = (Labour force / Potential workforce) × 100%.
How is the unemployment rate defined?
Unemployment rate = (Unemployed / Labour force) × 100%.
Who are considered ‘not in the labour force’?
Individuals neither working nor actively seeking work, like students, retirees, and discouraged workers.
What does the Beveridge curve illustrate?
The relationship between job vacancies and unemployment, showing labour-market matching efficiency.
What determines labour demand in competitive markets?
Firms hire until the value of the marginal product of labour equals the wage (VMP_L = wage).
What are substitution and income effects in labour supply?
Substitution: higher wage encourages work over leisure; income: higher wage allows more leisure.
What causes frictional unemployment?
Job search frictions: time and information costs in matching workers to jobs.
What is a reservation wage?
The minimum wage at which a worker is willing to accept a job offer.
How do unemployment benefits affect search unemployment?
Higher benefits raise the reservation wage, prolonging job search and increasing frictional unemployment.
What is structural unemployment?
Unemployment caused by wage rigidities and mismatches in skills or locations.
Name types of wage rigidity that cause unemployment.
Minimum wages, union contracts, efficiency wages, and downward nominal wage rigidity.
What is an efficiency wage model?
Firms pay above-market wages to reduce shirking, attract better workers, and lower turnover.
What is the natural rate of unemployment (NAIRU)?
The unemployment rate consistent with stable inflation, driven by frictional and structural factors.
What is cyclical unemployment?
Deviations of actual unemployment from the natural rate due to aggregate demand fluctuations.
What equilibrates the credit market?
The real interest rate where credit supply equals credit demand.
What is the Fisher equation?
r ≈ i − π^e, relating nominal rate i, expected inflation π^e, and real rate r.
How do firms decide how much to borrow for investment?
They borrow until the marginal product of capital equals the real interest rate (MP_K = r).
What shapes household consumption-saving decisions?
Intertemporal choice optimizing utility over present and future consumption subject to budget constraints.
What is the intertemporal budget constraint?
c1 + c2/(1+r) = y1 + y2/(1+r), linking present and future consumption and income.
What is the marginal rate of substitution (MRS) condition?
MRS(c1,c2) = 1 + r, equating utility trade-off to the real return on saving.
What causes shifts in the credit-demand curve?
Changes in business confidence, expected returns, or investment opportunities.
What causes shifts in the credit-supply curve?
Changes in saving motives, demographic shifts, and global capital flows.
Why is credit market access important for growth?
It allocates savings to productive investments, enabling capital accumulation.
