Chapter 9 – Business Cycles, Unemployement, and Inflation

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Underlying cause of business cycle fluctuations?
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– Unexpected financial bubbles that eventually burst. – Shocks to the money supply by the nation’s central bank. – Supply shocks caused by major innovations.
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How can the annual rate of inflation be found?
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By subtracting last year’s price index from this year’s price index and dividing the difference by last year’s price index.
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According to the Bureau of Labor Statistics, to be officially unemployed a person must:
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be in the labor force
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Inflation means that:
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prices on average are rising, although some particular prices may be falling.
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Cost-push inflation:
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…reduces real output.
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Cyclical unemployment.
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Types of unemployment that is directly associated with insufficient overall demand for goods and services.
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For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of:
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Okun’s law.
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(Last Word) In response to the Great Recession, Congress extended the maximum period for drawing unemployment benefits from 26 to 99 weeks. While this was done to help workers financially and to help the economy by stimulating demand, it had what unintended consequence?
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It prompted inefficiently long searches that kept the unemployment rate higher.
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The natural rate of unemployment is the:
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full-employment unemployment rate.
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Which of the following would most likely occur during the expansionary phase of the business cycle?
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Demand-pull inflation.
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Real income is found by:
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dividing nominal income by the price index (in hundredths).
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If the unemployment rate is 9 percent and the natural rate of unemployment is 5.5 percent, then the:
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cyclical unemployment rate is 4 percent.
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(Consider This) Which of the following best explains why unemployment rises significantly during a recession?
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Wages are flexible upward but sticky downward.
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(Consider This) The main point of the Consider This box on clipping coins is that:
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inflation imposes a “hidden tax” on those who hold money.
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Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of:
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7 percent.
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The presence of discouraged workers:
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may cause the official unemployment rate to understate the true amount of unemployment.
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Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result:
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the official unemployment rate will remain unchanged. (because the BLS counts all part-time employees as full-time)
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The phrase “too much money chasing too few goods” best describes:
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demand-pull inflation.
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Unanticipated inflation:
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reduces the real burden of the public debt to the federal government.
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Which of the following statements is true about causes of business cycle fluctuations?
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There are a wide range of theories as to the underlying causes of business cycle movements.
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Recurring upswings and downswings in an economy’s real GDP over time are called:
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business cycles.
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(Consider This) Some economists believe that modest inflation, say 2-3 percent, might help reduce unemployment during recessions. What is the argument of economists who reject this idea?
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Wages and other costs would rise with the inflation, keeping firms from expanding employment.
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A college graduate using the summer following graduation to search for a job would best be classified as:
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a part of frictional unemployment.
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The type of unemployment associated with recessions is called:
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cyclical unemployment.
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Between 1980 and 2000 the price level approximately doubled. The average annual rate of inflation over this 20-year period was about:
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3.5 percent.
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The natural rate of unemployment is:
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that rate of unemployment occurring when the economy is at its potential output.
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During a severe recession, we would expect output to fall the most in:
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the construction industry.
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Which of the following would most likely move the economy into a recession in the short term?
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The central bank printing less money than was anticipated.
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Kara voluntarily quit her job as an insurance agent to return to school full time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kara presently is:
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frictionally unemployed.
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Answer the question on the basis of the following information about a hypothetical economy: ——————————————————— Full time employed = 80 Part time employed = 25 Unemployed = 15 Discouraged Workers = 5 Members of underground economy = 6 Consumer Price Index = 110 ———————————————————– Refer to the given information. The unemployment rate is:
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12.5% (80+25+15 = 120; 15/120 x 100 = 12.5)
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Innovations such as the microchip and the Internet lead to business cycle variations because:
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significant innovations occur irregularly and unexpectedly.
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Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would:
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decline
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The phase of the business cycle in which real GDP declines is called:
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a recession.
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An unexpected increase in total spending will cause an increase in GDP:
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if prices are sticky.
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The phase of the business cycle in which real GDP is at a minimum is called:
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the trough.
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What are the four phases of the Business Cycle?
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Peak Recession Through Expansion
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Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Kyle will be considered as:
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frictionally unemployed.
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Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun’s law, the negative GDP gap as a percent of potential GDP is:
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8 percent. (Per Okun’s law, for every 1% point by which the actual unemployment rate exceeds the natural rate, a negative GDP Gap of 2% occurs)
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A lender need not be penalized by inflation if the:
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lender correctly anticipates inflation and increases the nominal interest rate accordingly.
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Business Cycle
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A short-run alteration between economic upturns and downturns
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Inflation
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_______ redistributes total income
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According to McConnell, what are the reasons for teenagers having a much higher unemployment rate?
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– Less geographic mobility – Quit more frequently – More frequently “fired” – Lower skills level
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The labor force is the sum of what?
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The employed and unemployed
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Inflation exists when there is an increase in _____ over a sustained period of time
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Price
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Expansion Period:
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– Output rises – Price level may rise
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The long-run trend of the US economy is :
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Expansion and Growth
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what is the formula for the consumer price index?
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The price of the most recent market basket in a particular year divided by the price estimate of the market basket in 1982-1984 multiplied by 100
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who is hurt by anticipated inflation?
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– Creditors – people on fixed income – savers
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What is the rate of inflation?
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The percentage change of the consumer price index from one year to the next
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Structural unemployment
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The portion of unemployment that is due to the mismatch of skills and jobs
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What is nominal income?
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The number of dollars received as wages, rent, interest or profits in current dollars
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What are all of the consequences of unexpected lower total spending in the short-run when prices are sticky?
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– fewer items are purchased – GDP declines – Firms cut back on production – Firms sell fewer units of output – Unemployment rises

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