Chapter 6: Business Cycles, Unemployment, and Inflation Essay

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Business Cycle
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is the irregular increase & decrease in the level of macroeconomic activity (GDP) that occur over the short run
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Phases of Business Cycle
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1.Expansionary 2.Peak 3.Recession(2 consecutive quarters, 6 months) 4.Trough
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Causes of Business Cycle
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cycle fluctuations -demand shocks- war -supply shocks- embargo -prices are “sticky” downwards -economic response entails decrease in output & employment
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Cause of Shock
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irregular innovation productivity changes monetary factors political events financial stability recession of 2007
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Cyclical Impact
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Durable goods most affected -capital goods -consumer goods Nondurable goods affected less -services -food & clothing
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Unemployment Rate
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Unemployed /unemployed + employed X 100
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Household Survey
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16+ non-institutionalized Reference week 12th of month employed > unemployed> Labor Force Not in Labor force
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Establishment Survey
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141,000 establishments 400,000 job sites Payroll info -employed -hours worked -compensation
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Frictional Unemployment
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-individuals searching for jobs or waiting to take jobs soon (TEMPORARY)
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Structural Unemployment
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-occurs due to changes in the structure of the demand for labor
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Cyclical Unemployment
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-caused by the recession phase of the business cycle
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Full employment
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Full employment is something less than 100 percent employment Believed to occur when unemployment rate is less than 5 % Potential Output
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Economic Cost of Unemployment
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GDP gap=actual gdp-potential gap Can be negative Loss of Income is unequal
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Relationship Between Unemployment & Output
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as unemployment increases output will decrease Okins Law -as unemployment increase 1% there will be a 2% decrease in output
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Inflation
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a persistant increase in the general level of prices -reduces ‘purchasing power’ of money
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Consumer Price Index(CPI)
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-calculated by Bureau of Labor Statistics -Basket of goods & services spent on a monthly basis in a typical family -bureau compare it from month to month Price at most recent market basket in particular year/price estimate of the mrkt basket in 1982-1984 X100
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Inflation Rate
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Price index2- Price index1/price index1
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CPI inflation rate
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CPI2-CPI1/CPI1
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GDP price deflation
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includes all goods in GDP used on a quarterly basis
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Producer Price Index(PPI)
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-intermediate goods -goods purchased by businesses to incorporate into their final product -predictor to FINAL PRODUCT PRICES PPI^=market price^
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Personal Consumption Expenditure Index(PCE)
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-this market basket isn’t fixed & will change -preferred measure of inflation by federal reserve
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Demand-Pull Inflation
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too much spending in economy pulls up prices -too much money chasing to few goods -typically occurs during expansion -excess spending relative to output employment to go down and BOOM in production
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Cost-Push Inflation
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too little supply due to a rise in per-unot input costs -input prices have risen “supply shorts” causes reduced output = employment ^
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Cost of Inflation
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redistribution effects of inflation
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Nominal income
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current prices (unadjusted for inflation)
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Real Income
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nominal income adjusted for inflation
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Anticipated VS Unanticipated Inflation
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protecting yourself by signing a contract to increase nominal income to match inflation & keep real income the same
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Who is hurt by inflation
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fixed income receivers -rise of inflation, real income down savers -value of accumulated savings depreciates creditors -leanders get paid back in “cheaper dollars”
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Anticipated Inflation
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Real interest rate -rates adjust for inflation Nominal Interest Rate -rates not adjusted for inflation 11%=5%=6% N I R
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Inflation Affect Output
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cost- push inflation -reduces output -redistributes a decreased level of real income demand-pull inflation -one view is that zero inflation is best
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Hyperinflation
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extraordinary rapid inflation devastates an economy business’s don’t know what to change

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