Macroeconomics Chapter 26 – Business Cycles, Unemployment, and Inflation – Flashcards

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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
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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 expansion 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 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 in sufficient total spending
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Full-Employment Rate of Unemployment
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The unemployment rate at which there is no cynical unemployment of the labor force; equal to between 4 to 5 percent in the USA because some frictional and structural unemployment is unavoidable
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Natural Rate of Unemployment
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The full employment unemployment rate occurring when there is no cynical 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 an economy can produce when it fully employs its available resources
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GDP Gap
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Actual GDP minus potential output' may either be a positive amount or a negative amount
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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
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Inflation
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A rise in the general level of prices in an economy
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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 resulting from an excess in 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 resulting from an increase in resource costs 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 at a rate greater than expected
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Anticipated Inflation
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Increases in the price level that occur at the expected rate
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Cost of Living Adjustments
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An automatic increase in the incomes 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 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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A decline in the company's price level
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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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