1.1

Overview The 1930s were marked by periods of chronically high unemployment in the United States. After World War II, Congress passed the Employment Act of 1946, which stated that it was the policy and responsibility of the federal government to use all practical means to promote maximum employment, production and purchasing power. The Employment Act of 1946 established three important goals for the economy: 1. Full employment (also called the natural level of employment) exists when most individuals who are willing to work at the prevailing wages in the economy are employed and the average price level is stable. Even under conditions of full employment, there will be some temporary unemployment as workers change jobs and as new workers seek their first jobs (frictional unemployment). In addition, there will be some structural unemployment. Structural unemployment exists because there is a mismatch between the skills of the people seeking jobs and the skills required for available jobs. 2. Price stability exists when the average level of prices in the economy is neither increasing nor decreasing. The goal of price stability does not imply that prices of individual items should not change only that the average level of prices should not. A sustained rise in the average level of prices is called inflation; a sustained decline is called deflation. 3. Economic growth exists when the economy produces increasing amounts of goods and services over the long term. If the increase is greater than the increase in population, the amount of goods and services available per person will rise, and thus the nation's standard of living will improve. In 1978, Congress passed the Full Employment and Balanced Growth (Humphrey-Hawkins) Act establishing two additional goals: an unemployment rate of 4 percent with a zero-percent inflation rate.

ANSWER CHOICES:

a. average prices do not increase or decrease rapidly.

b. workers change jobs, new workers seek their first job, and some workers lack the necessary skills to acquire jobs.

c. an unemployment rate of 4% with zero- percent inflation rate.

d. to deal with higher unemployment rates in the United States.

e. the nation's standard of living will improve.

QUESTIONS:

1. Why did Congress pass the Employment Act of 1946?

2. Why will full employment never equal 100%?

3. What is the goal of price stability?

4. What happens when an economy increases its goods and services faster than the increase in population?

5. What two goals were added when Congress passes the Full Employment and Balanced Growth (Humphrey-Hawkins) Act?

1.2

Measuring Employment The civilian unemployment rate measures how well we are achieving the goal of full employment. The unemployment rate is derived from a national survey of about 60,000 households. Each month the federal government asks these households about the employment status of household members aged 16 and older (adult population). The survey puts each person in one of three categories: employed, unemployed or not in the labor force. People who are at work (the employed) plus those who are actively looking for work (the unemployed) make up the labor force. The labor force is much smaller than the total adult population because many individuals are too old to work, some people are unable to work and some choose not to work.

The unemployment rate (UR) is defined as UR = number of unemployed/labor force x 100 The labor force participation rate (LFPR) is defined as:

LFPR = number in labor force/adult population x 100

ANSWER CHOICES:

a. Yes

b. Those who are employed and those who are not seeking employment.

c. No

d. Those employed and those who are actively seeking employment.

QUESTIONS:

1. Which two groups of individuals are included in the labor force?

2. If an individual chooses not to work, will he/she still be included in the labor force?

1.3

Directions: Use the formulaprovided tocalculatethe unemployment rate for each decade. All of the population and labor-force data are in millions.

The Unemployment rate (UR) is defined as:

UR = number of unemployed/labor force x 100

Civilian Employment 1960 to 2000

Year	Population (16 and Over)	Labor Force	Employed	Unemployed	Unemployment Rate
1960	117	70	66	4
1970	137	83	79	4
1980	168	107	99	8
1990	188	124	117	7
2000	209	141	135	6

ANSWER CHOICES:

a. 7.48%

b. 4.26%

c. 5.65%

d. 4.82%

e. 5.7%

QUESTIONS:

1. Calculate the unemployment rate for 1960.

2. Calculate the unemployment rate for 1970

3. Calculate the unemployment rate for 1980

4. Calculate the unemployment rate for 1990

5. Calculate the unemployment rate for 2000.

1.4

Inflation is defined as a sustained increase in the average price level of goods and services produced in an economy. The fundamental cause of inflation is that the rate of growth of the money supply is greater than the rate of growth of goods and services. In a period of inflation, money loses value as goodsand services become more expensive. Unanticipated inflation can have serious negative consequences for individuals and for the countries experiencing it. People lose the value of their savings and cannot plan for the future. Since interest rates do not keep up with price increases, lenders lose and borrowers gain, causing wealth transfers and disrupting financial markets.

Question: During periods of high inflation:

a. People want to hold on to money.

b. Money gains value.

c, The government has printed too little money.

d. Money loses value.