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Economics-Chapter 27

Business Cycle
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 reached a temporary maximum; the point at which an expansion ends and a recession begins. Here, the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity.
Trough
The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. Here, the economy experiences substantial unemployment and real GDP is less than potential output.
Recession
A period of declining real GDP, accompanied by lower real income and higher unemployment.
Expansion
The phase of the business cycle in which real GDP, income, and employment rises.
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 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 be temporary layoffs; unemployed workers between jobs.
Structural Unemployment
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.
Cyclical Unemployment
A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.
Full-Employment Rate of Unemployment
The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 5 and 6 percent in the United States because some frictional and structural unemployment are unavoidable.
Natural Rate of Unemployment (NRU)
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 GDP minus potential output; may be either a positive amount or a negative amount.
Okun’s Law
The generalization that any 1-percantage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output.
Inflation
A rise in the general level of prices in an economy; an increase in an economy’s price level.
Consumer Price Index (CPI)
An index that measures the prices of a fixed “market basket” of some 300 goods and services bought by a “typical” customer.
Deflation
A decline in the general level of prices in an economy; a decline in an economy’s price level.
Demand-Pull Inflation
Increases in the price level (inflation) resulting from increases in aggregate demand.
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.
Per-Unit Production Costs
The average production cost of a particular level of output; total input cost divided by units of output.
Core Inflation
The underlying increases in the price level after volatile food and energy prices are removed.
Nominal Income
The number of dollars received by an individual or group for its resources during some period of time.

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