Chapter 27 Business Cycles, Unemployment, and Inflation

question

What is a business cycle
answer

Business cycles are alternating rises and declines in the level of economic activity
question

What are the four phases of a generalized business cycle?
answer

Peak Recession Trough Expansion
question

What is a peak in terms of the phases of a business cycle?
answer

It is when a business cycle has reached a temporary maximum and the economy is near or at full employment and the real output is at or near the economy’s capacity. THe price level is likely to rise during this phase
question

What is a recessionin terms to the business cycle
answer

a recession is a period of decline in total output income and employment ( 6 months about)GDP declines/Unemployment
question

What is a trough in regards to thebuisness cycle
answer

Lowest level of the business cycle, this phase can be short lived or quite long
question

What is the expansion in terms of a business cycle?
answer

Recession is followed by a recovery and expansion. This is where the real GDP , income, and employment rise until the economy is at full employment INFLATION occurs
question

What is another term for a business cycle that more accurately depicts the phases of a business cycle?
answer

Business fluctuations due to cycles depicting a set pattern
question

Why are business cycles/fluctuations drawn against a growth line?
answer

A growth line is needed to represent that U.S> is in an expansion and growth period
question

Why don’t business cycles grow smoothly versus fluctuating?
answer

Fluctuations are driven b shocks or unexpected events which cause difficulty in fluctuations especially if prices are sticky in the short run. In the short run if prices are sticky then the economy is forced to make changes in output and employment rather than through changes of prices
question

What are several general possible sources of shocks that can cause business cycles
answer

Irregular innovation-once the economy has absorbed a new innovation a slow period may develop Productivity changes-when productivity or output per unit increases, there is a boom, when productivity or output per unit decreases, the economy recedes Monetary factors-printing more money or less money via the central bank Political Events-like 9/11 Financial Instability-asset price increases, or asset pricec ecreases
question

What is the immediate cause of the large majority of cyclical changes in the levels of real output and employment>
answer

Unexpected changes in the level of total spending.
question

What happens if total spending unexpectedly sings ad firms can’t lower prices in time?
answer

Firms will find themselves selling fewer units of output which causes less production, GDP falls, fewer workers will need to be employed, economy will contract and enter a recession.
question

What is affected most in the terms of capital goods and consumer durables versus nondurable consumer goods?
answer

Capital goods and consumer durables are affected most.
question

Why are capital goods and consumer durables affected most during the different phases of a business cycle?
answer

Because these are the biggest ticket items. In times of recession, firms and households put off the major purchases, they also benefit from expansion, these are the first things that are purchased.
question

How are service and nondurable consumer goods industries affected by recession
answer

they are relatively insulated to recession due to people finding it difficult to cut back on needed medical and legal services. Food and clothing are also difficult to cut back.
question

What three groups is the us population divided into?
answer

People under 16/institutionalized Not in labor force (potential workers but aren’t employed or seeking work) Labor Force
question

What does the labor force consist of?
answer

People who are able and willing to work. Employed Unemployed and actively seeking work
question

How do you calculate the unemployment rate?
answer

Unemployed/labor force x 100
question

How has the data collection methods of the unemployment rate been criticized?
answer

The data lists all part time workers as fully employed Discouraged workers aren’t counted as unemployed. They are counted as not in labor force.
question

What is frictional unemployment?
answer

Frictional unemployment includes search unemployment and wait unemployment for workers who are either searching for jobs or waiting to take jobs in the near future. Frictional is inevitable and partly desirable.
question

What is structural unemployment?
answer

When demand for certain skills are in less demand. The composition of the labor force does not respond immediately or completely to the new structure of job opportunities. Geographically the demand for labor also changes (off shoring, moving from inner cities to suburbs)
question

In relation to structural and frictional unemployment how long do each last?
answer

Structural is more of a long term unemployment, fricitional is more temporary
question

Which unemployment is caused by a decline in total spending?
answer

Cyclical unemployment.
question

When does the cyclical unemployment typically begin in terms of the business cycle?
answer

Cyclical unemployment typically begins in the recession phase of the business cycle.
question

What does cyclical unemployment result from?
answer

Cyclical unemployment results from insufficient demand for goods and services.
question

What is full employment?
answer

The economy is fully employed when it is experiencing only frictional and structural unemployment (NOT CYCLICAL)
question

What is the unemployment rate that is consistent with full employment?
answer

Full employment rate of unemployment or Natural rate of unemployment (NRU)
question

What is the economy said to be producing at when the economy is operating at the full employment rate of unemployment?
answer

Its potential outputmy This is the real GDP that occurs when the economy is fully employed
question

What costs are developed with excessive unemployment?
answer

Economic and social costs
question

What is the basic economic cost of unemployment?
answer

Forgone output (society is operating at some point inside its production possibilities curve
question

In terms of GDP what is a sacrifice of output?
answer

GDP Gap (The difference between actual and potential GDP
question

What is the equation for GDP Gap
answer

GDP Gap= actual GDP-Potential GDP
question

Can the GDP Gap be positive and negative?
answer

Yes, If actual GDP Potential GDP than it is positive The higher the unemployment rate the larger the gap
question

What is Okun’s law
answer

Okun’s law indicates that for every 1 percent that the actual unemployment rate exceeds that of the natural rate of unemployment, the negative GDP gap of 2 percent occurs
question

Provide an example of how to calculate Okun’s law
answer

If unemployment rate was 9.6 percent the NRU was at 5.6 percent, the unemployment rate was 4 percentage points higher than the NRU. We multiply the 4 percentage points by 2 (8 percent) If the GDP was 15,000 billion in a year than the output sacrificed is 1200 billion
question

What is the burden of unemployment?
answer

That it’s costs aren’t equally distributed
question

What are the groups with the largest variances of unemployment?
answer

Occupation-lower skilled workers (manufacturing, construction, mining) Longer structural unemployment Age-Teenagers have much higher unemployment rates than adults (lower skill levels, quit frequently, less mobility) Race and Ethnicity-African Americans and Hispanics are higher than whites(discrimincation, lower rates of educational attainment) twice that of whites Gender-similar until recently where men had a higher unemployment rate than women Duration-number of people unemployed for long periods is lower than overall unemployment rate
question

What is the main measure of inflation in the US?
answer

Consumer price index
question

What is the CPI used for?
answer

government uses this index to report inflation rates each month and each year. It also used the CPI to adjust social security benefits and income tax brackets for inflation.
question

What does the CPI report?
answer

The market basket of some 300 consumer goods and services that are purchased by a typical consumer. Based on spending patterns of urban consumers.
question

What is the equation for CPI?
answer

(Price of the most recent market basket in the particular year/price estimate of the market basket in 1982-1984) x 100 CPI 2007= 207.3 CPI 2006= 201.6 Rate of Inflation= ((207.3-201.6)/201.6)x100=2.8%
question

What happens if the rate of deflation declines is negative?
answer

This is called deflation
question

What are the two types of inflation?
answer

Demand-Pull Cost-Push
question

What causes demand-pull inflation?
answer

Excess of total spending beyond the capacity to produce. When resourcs are already fully employed the business can’t keep up with the excess demand by the consumers. TOO MUCH SPENDING, TOO FEW GOODS
question

What causes cost push inflation?
answer

Rising per unit production costs. When price level increases even though total spending wasn’t excessive.
question

What is the equation for per unit production costs
answer

per unit production cost= total input cost/units of output
question

What s the major source of cost push inflation?
answer

Supply shocks, abrupt increases in the cost of raw materials or energy. Businesses have to raise product costs to cover per unit production costs
question

What are the differences in length of duration of cost push/demand pull inflation?
answer

Demand Pull can sustain for long periods Cost Push is self limiting, prices can’t stay high for long or else there will be no more demand
question

What does the term core inflation mean?
answer

By stripping away volatile product prices, economists are able to get a true sense of the consumer price index with using stable priced items.
question

What is the difference between nominal income and real income?
answer

Nominal income is the number of dollars received as wages rent and interest (profit) Real income is a measure of the amount of goods and services nominal income can by. (Purchasing power)
question

What is the equation for real income?
answer

Real income= nominal income/price index in hundredths
question

What is anticipated inflation?
answer

The ability to see inflation coming in advance
question

What is unanticipated inflation?
answer

The unexpected rise of inflation. This causes income redistribution
question

Who is hurt by inflation?
answer

Fixed income receivers Savers Creditors
question

Who is unaffected or hurt by inflation?
answer

Flexible income receivers Debtors
question

How does a bank protect itself from inflation?
answer

The lender charges an inflation premium the level of the anticipated inflation rate If a lender offers a borrower a 100 dollar loan at 5 percent interest than the borrower has to pay back the 5 dollars on top of the loan. If a 6 percent rise in inflation occurs, the lender is owed 99 (100 x 5 percent interest =105, 100 dollars x 6 percent inflation =105-6 (99 dollars) If the lender charges 11 percent interest on the loan and a 6 percent inflation occurs, he gets what he wanted 105
question

What is the difference between real interest rate and the nominal interest rate?
answer

The real interest rate is the percentage increase in purchasing power that the borrower pays the lender (the 5 percent charged for the loan) Nominal interest rate is the real interest rate plus the inflation premium
question

How does inflation affect output?
answer

Cost Push inflation reduces real output (prices rise, overall production costs rise, less output) Demand Pull Inflation-
question

What does hyperinflation cause?
answer

A state of barter and chaos

Get instant access to
all materials

Become a Member