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Chapter 9 Terms Business Cycles Unemployment and Inflation

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Business cycles
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Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
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Peak
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The point in a business cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity.
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Recession
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A period of declining real GDP, accompanied by lower real income and higher unemployment.
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Trough
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The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion (recovery) begins.
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Expansion
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A phase of the business cycle in which real GDP, income, and employment rise.
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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 and seeking work.
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Unemployment rate
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The percentage of the labor force unemployed at any time.
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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.
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Frictional unemployment
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A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
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Structural unemployment
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Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
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Cyclical unemployment
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A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).
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Full-employment rate of unemployment
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The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.
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Natural rate of unemployment (NRU)
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The full-employment unemployment rate; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals 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 gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).
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Okun’s law
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The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment unemployment rate is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).
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Inflation
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Determining real gross domestic product by increasing the dollar value of the nominal gross domestic product produced in a year in which prices are lower than those in a base year.
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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 and services bought by a “typical” consumer.
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Demand-pull inflation
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Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand.
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Cost-push inflation
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Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.
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Per-unit production costs
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The average production cost of a particular level of output; total input cost divided by units of output.
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Nominal income
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The number of dollars received by an individual or group for its resources during some period of time.
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Real income
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The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
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Unanticipated inflation
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Increases in the price level (inflation) at a rate greater than expected.
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Anticipated inflation
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Increases in the price level (inflation) that occur at the expected rate.
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Cost-of-living adjustments (COLAs)
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An automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers.
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Real interest rate
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The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
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Nominal interest rate
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The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
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Deflation
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Finding the real gross domestic product by decreasing the dollar value of the GDP for a year in which prices were higher than in the base year.
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Hyperinflation
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A very rapid rise in the price level; an extremely high rate of inflation.
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Core Inflation
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Underlying increases in the price level after volatile food and energy prices are removed