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ECON- Chapter 10: The Business Cycle

Nominal Income
Is the amount of money income received in a given time period, measured in current dollars

-based on current prices today

-Not all prices rise at the same rate during an inflation
-Not everyone suffers equally from inflation
-The prices increases associated with inflation redistributed real income
Price Effects
Real Income
Is income in constant dollars, or nominal income adjusted for inflation

-adjusted to take out inflation when comparing last year and this year

Consumer Price Index (CPI)
A measure (index) of changes in the average price of consumer goods and services
Price Stability
Is the absence of significant changes in the average price level
Inflation Rate
The annual rate of increase in the average price level
Full Employment and balanced Growth Act of 1978
(Policy Goal)
Establishes a goal for economic policy to hold the rate of inflation at under 3%

-Congress weighs the tradeoff b/t inflation and full employment

Macroeconomics
is the study of aggregate economic behavior, of the economy as a whole.
Macroeconomics; Microeconomics
________________ focuses on the big picture; ________________ focuses on the small picture
GDP
is the total value of output (goods and services) produced in an economy during a given period of time.
potential
An economy’s __________ output is reflected in its production possibilities curve.
Macro policy
tries to control the business cycle: : the repeated ups and downs of the economy.
output (GDP) growth, unemployment, and inflation.
There are three basic measures of macro performance:

-These three things tell us how the economy is doing.

to explain the business cycle
A basic purpose of macroeconomic theory is:
production possibilities
Shows the alternative combinations of goods and services that could be produced in a given time period with all available resources and technology.

– curve shows the maximum or potential output the economy can achieve.
-When there is GDP growth, this curves shifts outward

Business cycle
is the alternating periods of economic growth and contraction experienced by the economy. It shows the rise and fall of the economy over time.
D) Caused real GDP to fall dramatically between 1929 and 1933.
The Great Depression in the United States:
a) Was marked by hyperinflation.
b) Was ended by World War I.
c) Ended with a higher real GDP per capita than when it began.
d) Caused real GDP to fall dramatically between 1929 and 1933.
A) recession

-It is a slump or downturn in the economy

A decline in real GDP for at least two consecutive quarters is referred to as:
a) A recession.
b) A depression.
c) Deflation.
d) Inflation
D) The production possibilities
The alternative combinations of goods and services that can be produced in a given time period with available resources and technology is referred to as:
a) The business cycle.
b) Real GDP.
c) Nominal GDP.
d) The production possibilitie
A) Seasonal unemployment
Which of the following types of unemployment would best characterize a tax accountant’s unemployment after tax returns are due?
a) Seasonal unemployment
b) Frictional unemployment
c) Underemployment
d) Cyclical unemploymen
d) Structurally unemployed.
An office worker who loses her job because she does not have the necessary computer skills is, ceteris paribus:
a) Frictionally unemployed.
b) Seasonally unemployed.
c) Cyclically unemployed.
d) Structurally unemployed.
a) Inflation.
If an increase in the price of some goods outweighs other prices that remain constant or decrease then there is:
a) Inflation.
d) Deflation.
c) Stagflation.
d) Reflation.
b) The labor force.
All persons over age 16 who are either working for pay or actively seeking paid employment refers to:
a) Per capita GDP.
b) The labor force.
c) The unemployment rate.
d) The CPI.
b) Cyclical unemployment should increase and real GDP should decline.
As the economy falls from the peak to the trough of the business cycle:
a) Inflationary pressures should increase as unemployment rises.
b) Cyclical unemployment should increase and real GDP should decline.
c) Frictional unemployment should fall because people find jobs more quickly.
d) Structural unemployment will be eliminated.
c) Stays the same but your real income falls.
If the number of dollars you receive every year is the same, but prices are rising, then your nominal income:
a) Rises but your real income falls.
b) Rises and your real income rises.
c) Stays the same but your real income falls.
d) Stays the same but your real income rises.
c) Public goods
Which of the following is not a basic measure of macroeconomic performance?
a) Output growth
b) Unemployment
c) Public goods
d) Inflation
a) Definitely falls.
When a person’s nominal income falls in a period of inflation then the person’s real income:
a) Definitely falls.
b) Definitely rises.
c) Depends upon relative price changes.
d) Can rise or fall.
b) Structural unemployment.
Automobile workers in Detroit are unemployed because robots are now being used on assembly lines but, at the same time, job vacancies exist for computer programmers. In this case, the automobile workers are an example of:
a) Cyclical unemployment.
b) Structural unemployment.
c) Frictional unemployment.
d) Seasonal unemployment.
b) 8.0 percent.
If the population of a country is 1,000,000 people, its labor force consists of 500,000, and 40,000 people are unemployed, the unemployment rate is:
a) 50.0 percent.
b) 8.0 percent.
c) 7.4 percent.
d) 4.0 percent.
b) You buy a lot of gasoline, and the price of gasoline rises more rapidly than the price level does.
Which of the following is an example of the price effect during a period of inflation?
a) Your income increases, but not as rapidly as the price level does.
b) You buy a lot of gasoline, and the price of gasoline rises more rapidly than the price level does.
c) You own a house, and its value rises more rapidly than the price level does.
d) You own municipal bonds that pay a low interest rate while the price level is rising.
True
The CPI is used to measure the change in the average price of consumer goods and services.
a) True
b) False
a) Explain the business cycle.
A basic purpose of macroeconomic theory is to:
a) Explain the business cycle.
b) Stop economic contractions from occurring.
c) Control the business cycle.
d) Cause GDP to grow.
a) Frictionally unemployed
A plumber quits his job in Dallas and moves to San Francisco where additional plumbers are needed, but it takes a couple of months for him to find a job. He is said to be:
a) Frictionally unemployed
b) Structurally unemployed
c) Cyclical unemployed
d) Underemployed
d) Find out what people buy and then survey how the prices of these items change.
To construct the Consumer Price Index, the Bureau of Labor Statistics must:
a) Convert nominal incomes into real GDP and then compute the percentage increase on an annual basis.
b) Interview people to determine their willingness and ability to work and their average income.
c) Construct an index of the growth rate of real income to measure the growth of the economy.
d) Find out what people buy and then survey how the prices of these items change.
True
Throughout the business cycle, unemployment and production typically move in opposite directions.
a) True
b) False
c) People who own assets that are appreciating faster than the inflation rate
Generally speaking, which of the following groups would tend to gain real income from the wealth effects of inflation?
a) People who purchase long-term bonds when interest rates are low
b) People who have passbook savings accounts
c) People who own assets that are appreciating faster than the inflation rate
d) People who hold all of their assets in the form of cash
a) Frictional unemployment will always exist.
One reason our full employment goal is not zero percent is because:
a) Frictional unemployment will always exist.
b) Cyclical unemployment will always exist.
c) Population growth makes such a goal impossible.
d) Discouraged workers make such a goal impossible.
d) market demand
All of the following are among the three basic measures of macro performance except:
a) output (GDP) growth
b) unemployment
c) inflation
d) market demand
a) Inflation
__________, a key measure of macro performance, is most directly affected by the following scenario: Businesses across a range of industries have noticed an general upward trend in prices..
a) Inflation
b) Output (GDP) growth
c) Unemployment
d) Market demand
a) True
Real GDP does not increase in consistent, smooth increments but in a pattern of steps, stumbles, and setbacks.
a) True
b) False
b) False

Should be 16 not 14

The labor force consists of everyone over the age of 14 who is actually working plus all those who are not working but are actively seeking employment.
a) True
b) False
d) 9.50%
In a given year, the number of workers unemployed is 21 million while the labor force consisted of 220 million people. The unemployment rate is _____.
a) -3.50%
b) 12.50%
c) -9.50%
d) 9.50%
a) Inflation
__________ is an increase in the average level of prices, not a change in any specific price.
a) Inflation
b) Deflation
c) An income expansion
d) A relative price increase
a) price
If during a given year a college student sees no change in nominal income yet the price of tuition increases, this best demonstrates the __________ effects of inflation.
a) price
b) income
c) wealth
d) policy
a) taking income or wealth from some people and giving it to others
Inflation acts like a tax, _________________.
a) taking income or wealth from some people and giving it to others
b) generating revenue for the government
c) lowering the incomes of all households
d) having no redistributive effect at all
a) made better off
In a given year, inflation is recorded at -2%. A investor whose portfolio earned a return of 0% will be __________.
a) made better off
b) made worse off
c) unaffected
d) possibly made worse off but may be better off
Unemployment
Is the inability of labor-force participants to find jobs

-when output declines, jobs are eliminated
-It is measured & monitored by the Bureau of Labor Statistics, an agency w/ in the Department of Labor

Seasonal Umemployment
This is caused by seasonal changes

ex: When school is out in the summer and teens are looking for summer jobs

The Labor Force
Consists of everyone over the age of 16 who is actually working, plus all those who are not working but are actively seeking employment
Uneployment Rate
= # of unemloyed / # in labor force
Is the proportion of the labor force that is unemployed:
Seasonal
Frictional
Structural
Cyclical
Multiple types of unemployment: 4
Full employment
is the lowest rate of unemployment compatible with price stability

-It doesn’t mean zero employment
-Estimated to be between 4 & 6 percent

Frictional Unemployment
This is a brief period of unemployment associated with a job search

-ex: Students with marketable skills entering the work force after graduation and workers in between jobs

Inflation
Is an increase in the average level of prices, not a change in any specific price

-The biggest fear as an economy reaches full employment
-It is measured by the Bureau of Labor Statistics, an agency w/ in the Department of Labor
-Not a specific product but average change in prices all together

Cyclical Unemployment
When there is not enough jobs to go around due to downturns in the business cycle
(This is unemployment due to a recession)

ex: The Great Depression is the most striking example of this type of unemployment

Deflation
Is the decrease in the average level of prices of goods and services

-Not a specific product but everything that is being manufactured

The Policy Goal
-To avoid as much cyclical (when there isn’t enough jobs to go around due to downturns in the business cycle) and structural (results from a mismatch b/t skills of labor force participants and the skills needed by employers) unemployment as possible

-To reach full employment

Relative Price
is the price of one good in comparison with the price of other goods.

Ex: Comparing shoes and costs and seeing how much shoes went up and what happened to coats

Structural Unemployment
This results from a mismatch between the skills of labor force participants and the skills needed by employers

-Skills no longer matches new technology
Ex: skilled craft workers in the 2006-08 housing contraction

Nominal GDP
is measured in current prices
Real GDP
Is the inflation-adjusted value of GDP or the value of output measure in constant prices

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