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Macroeconomics Ch. 9

In sequential order, the four phases of the business cycle are
peak, recession, trough, and expansion
The length of a complete cycle
varies from about 2 to 3 years to as long as 15 years.
Seasonal variations and long-run trends complicate the measurement of the business cycle because
normal seasonal variation does not signal boom or recession.
The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing nondurables because capital goods and durable goods
last and these purchases can be postponed.
A financial crisis can lead to a recession because it can cause
wealth and income to fall, reducing spending and ultimately reducing employment.
A major new invention can lead to an expansion if there are
increases in investment, consumption, output, and employment
How is the labor force defined and who measures it?
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work.
The unemployment rate is the
number of unemployed persons divided by the labor force.
If the unemployment rate increases, the size of the labor force
could increase or decrease
A positive unemployment rate—one more than zero percent—is fully compatible with full employment because at full employment,
unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs
In general, unemployment rates are higher for
African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers
The average length of time people are unemployed rises during a recession because
businesses continue to lay-off workers as a result of the decrease in demand.
A difficult aspect of measuring the unemployment rate is
determining who is eligible and available to work.
Which of the following illustrates the difficulty of distinguishing between frictional, structural, and cyclical unemployment?
A person quits his job in search of a better one, but the former job is in a declining industry and disappears completely.
Unemployment is an economic problem because
a unit of labor resource that could be engaged in production is sitting idle
The consequence of a negative GDP gap is that
what is not produced is lost forever and future economic growth will be less.
The noneconomic effects of unemployment include
a sense of failure created in parents and in their children
The United States has an unemployment compensation program that provides income for those out of work.

Unemployment is

still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs.
The Consumer Price Index (CPI) is constructed by
comparing the value of a “market basket” of goods that consumers typically purchase to the value of the basket in a base year.
The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by
subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4
Inflation does what?
It reduces the purchasing power of the dollar
The nominal interest rate
minus the inflation rate is the real interest rate
True or false?

Deflation means that the price level is falling, whereas with inflation, overall prices are rising

Demand-pull inflation occurs when
prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
A negative GDP gap is associated with
cost-push inflation
A positive GDP gap is associated with
demand-pull inflation.
An increase in your nominal income and a decrease in your real income can occur simultaneously if your
nominal income increases less than the cost of living increases.
The losers from inflation are those with
fixed incomes in nominal terms
Those who lose the most from unemployment are
minority groups and those with the least skill
Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate.

Which of the following statements is true?

Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation
Hyperinflation might lead to a severe decline in total output if
everyone starts speculating and searching for ways to avoid inflation.
Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in:
The level of total spending
Suppose that an economy has 9 million people working full-time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this economy’s unemployment rate?
10 percent.
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.

a. Tim just graduated and is looking for a job

Frictional unemployment
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.

b. A recession causes a local factory to lay off 30 workers:

Cyclical unemployment
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.

c. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant:

Structural unemployment
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.

d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India:

Structural unemployment
The unemployment rate that is consistent with full employment is known as
The natural rate of unemployment
A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy’s negative GDP gap?
10 percent
Cost-push inflation occurs when there is
Rising per-unit production costs
Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be – 2 percent next year. By approximately how much will Jimmer’s real income change next year?
12 percent
Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?
7 percent
True or False: Lenders are helped by unanticipated inflation
Economists agree that ________________ inflation reduces real output.

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