Chapter 9: Business Cycle, Unemployment, and Inflation – Flashcards
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business cycles
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alternating increases and decreases in the level of economic activity extending over several years: varying in length and intensity
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peak
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temporary maximum of economic output. economy is at or close to full employment: nearing or approaching full capacity: inflationary
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recession
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period of decline in total output, income, and employment. minimum: 6 months (2 consecutive quarters) negative GDP growth
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trough
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bottom of reduction in output; may be brief or prolonged: gradual/long to reach peak again. GDP stops declining
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expansion
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period at which real GDP, income, and employment increase
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Business cycle fluctuations are caused by
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1. demand and supply shocks 2. prices: "sticky" downward in short run--economy doesn't adjust quickly to shocks, but changes in output/employment 3. CHANGES IN TOTAL SPENDING: propel business cycles
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Causes of Shocks
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1. irregular innovation (unexpected- can be good or bad) 2. productivity changes: unexpected increase causes expansion (vice versa: bad causes recession) 3. monetary factors: when the money supply unexpectedly increases (vice versa) 4. financial instability: bubble/bursts 5. political events
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Cyclical impact
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Durable goods are most affected by cycles= capital and consumer durables than nondurable goods= services, food and clothing
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labor force
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persons 16 years of age and older who are not in institutions and who are employed or are unemployed/seeking work
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unemployment rate
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(# of unemployed/labor force) x 100
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discouraged workers
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employees who have left the labor force because they have not been able to find employment. not included in labor force=shortcoming of unemployment rate
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frictional unemployment
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"search employment": short term. individuals searching for jobs and waiting to take them soon
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structural unemployment
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long term. jobs are open, but individuals don't have the skills to go for those. their skills are no longer in demand
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cyclical unemployment
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"demand deficient": occurs during recession. producing less in recession, less people needed/more layoffs
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full-employment rate of unemployment
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AKA: NRU. the unemployment rate at which there is no cyclical unemployment of the labor force (USA equals 5-6%). structural/frictional unemployment are unavoidable.
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natural rate of unemployment (NRU)
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also known as the full-employment rate of unemployment. no cyclical unemployment. economy is achieving its potential output. # of job seekers=# of job vacancies. the unemployment rate at which actual inflation=expected inflation
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potential output
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the real output (GDP) an economy can produce when it fully employs its available resources
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GDP gap
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actual GDP-potential output may be either positive (actual>potential) or negative (potential>actual)
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Okun's law
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every 1% of cyclical unemployment creates a 2% GDP gap
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example of Okun's Law
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actual: 5.5%, potential: 5% 5.5-5=0.5 0.5 x 2= 1% that 1%: of GDP that we are foregoing because of cyclical unemployment. could be producing more.
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unequal burdens
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unemployment is not spread evenly across the population/ those affected most by unemployment: 1. lower-skilled workers 2. younger workers 3. duration: those unemployed for 15+ weeks 4. African Americans/Hispanics 5. men 6. less educated workers
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inflation
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increase in general level of prices. reduces the "purchasing power" of money. an increase in the economy's price level
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Disinflation
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prices increase at a decreasing rate
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deflation
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a decline in the general level of prices. a decline in an economy's price level ex: Japan
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Consumer Price Index (CPI)
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an index that measures the prices of a fixed "market basket" of some 300 goods/services bought by a typical customer
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CPI formula
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(price of most recent basket in the particular year/price estimate of market basket in 1982-1984) x 100 ex: (207.3-201.6/201.6) x 100= 2.8%
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extremely low
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in a recession, inflation is
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demand-pull inflation
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increases in the price level (inflation) resulting from increases in aggregate demand. excess spending (demand) relative to economy's capacity to produce: too much spending chasing too few goods
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cost-push inflation
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increases in the price level (inflation) resulting from an increase in resource cost and hence in per-unit production costs. caused by reductions in aggregate supply. (supply shocks)
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How do inflation types differ?
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sustainability. demand-pull: (just needs to maintain it) continues as long as the excess spending continues cost-push: (not much to do/can do) ends in a recession. decreases output, decreased unemployment, idle resources--prices no longer bid up
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no
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Is it easy to distinguish inflation types?
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per-unit production costs
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cost per unit of production
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core inflation
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inflation not including food and energy goods (too volatile). focuses on more stable prices
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nominal income
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dollars received by an individual group for its resources; unadjusted for inflation.
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real income
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amount of goods/services that can be purchased with nominal income; "purchasing power" (adjusted for inflation)
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real income formula
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nominal income/price index in hundredths
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percentage change in real income is about
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the percentage change in nominal income--percentage change in price level
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Who is hurt by inflation?
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1. fixed-income receivers (pensions) 2. savers 3. creditors/lenders
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Who is unaffected by inflation?
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1. flexible-income receivers (social security recipients, union members with COLAs) 2. debtors 3. business owners if product prices exceed faster than resource prices
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unanticipated inflation
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an increase of inflation at a rate greater than expected
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anticipated inflation
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percentage increase in inflation over a given period that is expected by participants in an economy
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cost-of-living adjustments (COLAs)
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automatic increase in the incomes of workers when inflation occurs. (included in collective bargaining agreements b/t firms and unions. guaranteed by law for social security benefits and certain other gov transfer payments)
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real interest rate
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the interest rate expressed in dollars of constant value. % increase in purchasing power borrower pays to lender. rates adjusted for inflation.
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real interest rate formula
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nominal interest rate-expected rate of inflation
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nominal interest rate
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interest rate expressed in terms of annual amounts currently charged for inflation. not adjusted
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hyperinflation
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a very rapid rise in inflation. devastating effect on output/employment. difficulty determining prices, money becomes worthless/ceases to be a medium of exchange. production falls.
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Does inflation affect output
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cost-push: abrupt increase in resource prices reduces real output demand-pull: mild is best
