Economics Chapter 12 The Business Cycle and Unemployment – Flashcards

Recurring fluctuations in economic activity consisting of recession and recovery and growth and decline; Fluctuations in economic activity, such as employment and production

the period of time during which economic activity is increasing, Where production is at high capacity, unemployment is low, retail sales are high, and prices or interest rates are low or falling. Under these conditions, consumers find it easier to buy homes, cars, an expensive goods on credit, and businesses are encouraged to borrow to expand production to meet the increased consumer demand.

Is the highest point of output during the cycle. The economy is operating above the long-term growth trend of real GDP, full employment, real GDP at or near capacity, price level is rising

that part of the business cycle in which consumer purchases decline and unemployment increases, is a general downturn in economic activity, so named because the aggregate economy is "recessing" back to a previous lower level of production

The lowest point of output during the cycle. There are large unemployment rates, declines in annual income and overproduction, real GDP stops declining and starts expanding, low prices, high unemployment rate, depressed incomes, can become a depression

A long-term economic state characterized by unemployment and low prices and low levels of trade and investment; , A period of prolonged recession

Number of civilians at least 16 years who have been trying to find a job within the prior four weeks., Measures the number of people who are able to work, but do not have a job during a period of time., As measured by the Bureau of Labor Statistics, the proportion of the labor force actively seeking work but unable to find jobs

Employed + Unemployed; , the total number of workers, including both the employed and the unemployed

People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them, Employees who have left the labor force because they have not been able to find employment.

A type caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs., Brief periods of unemployment experienced by people moving between jobs or into the labor market

results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one, Occurs when you have job skills that do not match the job requirements, People not having jobs due the change in structure of the industry or firm

occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season; Joblessness related to changes in weather, tourist patterns, or other seasonal factors.

caused by insufficient total spending (or by insufficient aggregate demand); , A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise

Production, income and employment are increasing, determining whether enough money is made to cover growth opportunities.

Cyclical Unemployment; turning point from prosperity to depression is termed as Recession Phase. During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

1) Prosperity phase or expansion phase 2) Recession phase 3) Depression phase 4) Recovery phase

When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase. The features of prosperity are :- 1.High level of output and trade. 2.High level of effective demand. 3.High level of income and employment. 4.Rising interest rates. 5.Inflation. 6.Large expansion of bank credit. 7.Overall business optimism. 8.A high level of MEC (Marginal efficiency of capital) and investment. Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in. The features of depression are :- 1.Fall in volume of output and trade. 2.Fall in income and rise in unemployment. 3.Decline in consumption and demand. 4.Fall in interest rate. 5.Deflation. 6.Contraction of bank credit. 7.Overall business pessimism. 8.Fall in MEC (Marginal efficiency of capital) and investment. In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point

The turning point from depression to expansion is termed as Recovery or Revival Phase. During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising, production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This increases investments. The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated. There is an increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands. Revival slowly emerges into prosperity, and the business cycle is repeated. Thus we see that, during the expansionary or prosperity phase, there is inflation and during the contraction or depression phase, there is a deflation

1) Sunspot Theory 2) Psychological Theory 3) Monetary Theory

refers to the related concept of extrinsic uncertainty, that is, economic uncertainty that does not come from variation in economic fundamentals. David Cass and Karl Shell coined the term as a suggestive and less technical way of saying "extrinsic random variable

a bourgeois theory that attempts to explain the alternation of phases in the capitalist business cycle in terms of subjective psychological factors - was widely held in the late 19th century. The English economist W. S. Jevons believed that cyclical economic crises were purely psychological phenomena. In his opinion, the development of the cycle depended on the alternation of moods of melancholy, optimism, agiotage (speculative fever), disillusionment, and panic. In the early 20th century the psychological theory of the business cycle was worked out in detail by the English economist A. Pigou, who believed that the changing assumptions of entrepreneurs regarding future market conditions play a key role in the cyclical fluctuations of capitalist reproduction. According to Pigou, a crisis of overproduction is the result of an accumulation of "errors of optimism" in the business world

the theory that relates the quantity of money and monetary policy to changes in aggregate economic activity and inflation; neochartalism, is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money; "governments with the power to issue their own currency are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints"

calling on free market economists to pay more attention to the "grave evil" of unemployment - three "free market" explanations for unemployment: 1) "Welfare benefits mean the unemployed have little incentive to get work." In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror. 2) "Big government and taxes deter job creation." But public spending in this time averaged only around 10% of GDP, and labor market regulation except for a few Factory Acts was nugatory by modern standards. 3) "Wages are too rigid". But wages fell in nominal terms in 13 of the 59 years here, and in real terms in 12 of these years. Average nominal wages fell by 9% between 1874 and 1879, which is consistent with some sectors seeing very large falls.

EXAMPLE: During times of recession or depression, fewer people have extra money necessary to buy new homes. As a result, people tend to stay in their current homes and make improvements rather than moving. This is why places such as HOME DEPOT may fair well during a recession. Some businesses (like housing) and regions (like parts of the industrial Midwest) are already in recession. Others may feel little or no impact from the current economic downturn, which may or may not turn out to have been a recession when all the economic data are collected in a few months. Some businesses are more vulnerable to recession than others. Carmakers, for example, often suffer badly because buying a car is usually a longer-term decision. When times get bad, people tend to put off buying a new car as long as they can. Other businesses are said to be "recession-proof" (though few really are.) Funeral home directors and accountants, for example, can safely assume a recession won't have much impact on death and taxes. But the list of reliably recession-proof businesses is pretty short. Since 70 percent of the U.S. economy relies on consumer spending — and consumers typically cut back when a recession hits — there are few consistently safe shelters from the storm of a serious downturn. One way to think about which businesses face the greatest risk is to ask: What products and services are people going to continue to buy even if there's a recession? Health care companies generally do well because people get sick just as much in a recession (sometimes more) as they do when times are good. Even in a recession, you can't dry clean your clothes at home, and people still need to buy car insurance

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