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Business Cycles, Unemployment, and Inflation Chapter 9

business cycles
recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
peak
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
recession
a period of declining real GDP, accompanied by lower real income and higher unemployment
trough
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
expansion
a phase of the business cycle in which real GDP, income, and employment rise.
labor force
persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.
unemployment rate
the percentage of the labor force unemployed at any time.
discouraged workers
employees who have the left the labor force because they have not been able to find employment
frictional unemployment
a type of unemployment caused by workers voluntarily changing jobs and by temporary lay-offs; unemployed workers between jobs.
structural employment
unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain ex: offshoring
cyclical unemployment
a type of unemployment caused by insufficient total spending (or by insufficient aggregate demand) ex: usually happens when the recession begins.
full-employment rate of unemployment
the unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4-5% in the United States because some frictional and structural unemployment is unavoidable
natural rate of unemployment
the full-employment rate of unemployment; 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.
potential output
the real output (GDP) an economy can produce when it fully employs its available resources
GDP gap
actual gross domesticate minus potential output; may be either a positive amount ( a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap)
Okun’s law
the generalization that any 1% point rise in the unemployment rate above the full-employment rate of unemployment is associated with the rise in the negative GDP gap by 2 % of potential output (potential GDP)
inflation
a rise in general level of prices in an economy; measured by the Consumer Price Index (CPI); each dollar of income will buy fewer goods and services than before
deflation
a decline in the economy’s price level
Consumer Pice Index (CPI)
an index that measures the prices of a fixed “market basket” of some 300 goods and services bought by a “typical” consumer
demand-pull inflation
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 deman
cost-push inflation
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; supply shocks push up per-unit production costs and ultimately raise the prices of consumer goods; reduces real output and employment
per-unit production costs
the average production cost of a particular level of output; total input cost divided by units output
core inflation
the underlying increases in the price level after volatile food and energy prices are removed
nominal income
number of dollars received by an individual or group for its resources during some period of time.
real income
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted
unanticipated inflation
increases in the price level (inflation) at a rate greater than expected; redistributes real income at the expense of fixed-income receivers, creditors, and savers.
anticipated inflation
increase in the price level (inflation) that occur at the expected rate; lenders add an inflation premium to the interest rate charged on loans. (the nominal interest rate thus reflects the real interest rate plus the inflation premium-the expected rate of inflation)
per-unit production costs
the average production cost of a particular level of output; total cost divided by units of output
cost-of-living adjustments (COLAs)
an automatic increase in the incomes (wages) of worker when inflation occurs; guaranteed by a collective bargaining contract between firms and workers
real interest rate
the interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest are less the expected rate of inflation
hyperinflation
a very rapid rise in the price level; an extremely high rate of inflation
What are the immediate causes of fluctuating real output and employment?
the level of total spending
What does the business cycle have greater effects on?
output and employment in the capital goods and durable consumer goods industries than in the services and nondurable goods and industries
The GDP gap can be seen as..
a positive or negative value; found by subtracting potential GDP from actual GDP
What is the economic cost of unemployment measured by?
the GDP gap which consists of the goods and services forgone by society when its resources are involuntarily idle.
What does Okun’s law suggests?
it suggests that every 1% point increase in unemployment above the natural rate causes an additional 2% negative GDP gap
What are the possible general sources of shocks that can cause business cycles?
1. irregular innovation
2. productivity changes
3. monetary factors
4. political events
5. financial instability
Who are affected the most by business cycles?
firms and industries producing capital and consumer goods
Who are protected the most from the most severe effects of the recession?
service industries that produce nondurable consumer goods
What are 2 problems that arise over the course of the business cycle?
1. unemployment
2. inflation
Who conducts a nationwide random survey of some 60,000 households each month to determine who and who isn’t employed?
The U.S. Bureau of Labor Statistics
The BLS divides the total U.S. pop into 3 groups..
1. those who are under 16
2. “not in the labor force”
3. those in the labor force
Who was the 1st to quantify the relationship between the unemployment rate and GDP gap?
Okun
Who is hurt by inflation?
1. fixed income receivers
2. creditors
3. savers
Who is unaffected or helped by Inflation?
1. flexible income receivers
2. debtors

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