Economics: Section Reviews for Chapter Thirteen

What are the four phases of the business cycle?

1. Expansion 2. Peak 3. Recession 4. Trough

What is the free-market solution to unemployment?

Allow wages to decline as the nation's economy spirals downward to minimize unemployment.

Describe the expansion and recession phases of the business cycle.

During the expansion phases, prices are rising, wages are rising, and unemployment is falling. During the recession phases, on the other hand, prices and wages are declining, and unemployment is rising.

Name the four kinds of unemployment.

Frictional, structural, seasonal, cyclical unemployment.

What has the government done to try to eliminate structural unemployment? What is the hidden cost of its efforts?

It has created training initiatives that provide training to those with skills that are no longer necessary to the economy. Obviously, someone has to fund these endeavors, however, and this funding is provided through taxes, which hurt both the unemployed and the employed.

Describe two characteristics of each of the four phases of the business cycle.

1. Expansion - The nation's GDP rises and the unemployment rate falls 2. Peak - Rise in prices of goods and in wages 3. Recession - Decline in purchases (especially of "big-ticket" consumer durable goods) and rise in unemployment 4. Trough - Low prices and high unemployment rate

When the economy reaches the peak of its business cycle, what three factors prevent further growth?

Limited raw materials, limited labor, and limited financial capital.

Is frictional unemployment undesirable in a nation's economy? Explain your answer.

Not necessarily. It's not really avoidable, as it's only natural for people to grow tired of their jobs and/or their current wages. As a result, people quit, and are unemployed for what is hopefully a brief period while they find another job. If the period of unemployment lasts for too long, however, it can obviously put great strain on the life of the unemployed person, and as such, we should try to minimize even frictional unemployment.

Briefly describe the five theories that attempt to explain the existence of business cycles.

Sunspot - This theory reasons that because sun spots affect agricultural productivity, they have the potential to create unemployment. Psychological - This theory reasons that when the economy is doing well, people believe it can only get worse, and as a result, they spend less. When the economy is doing terribly, on the other hand, they assume it can only get better, and begin to spend their money again. Monetary - This theory reasons that increases in the money supply fuel the expansion phase and decreases in the supply result in recession. Technological - This theory reasons that bursts of inventiveness give rise to greater investment spending, which leads to recovery, whereas lapses in inventiveness and subsequent investment spending lead to recession. Political - This theory reasons that liberal politicians tend to overspend, stimulating the economy into recovery and eventually into an inflationary peak, and that conservative politicians tend to reduce governmental spending, reducing economic stimulation and prompting a recessionary downturn.

How does the free market explain the existence of unemployment?

The free market holds that frictional, structural, and seasonal unemployment are related to a single cause--a difference between the price that sellers of labor are asking and the price that buyers of labor are willing to pay. Cyclical unemployment, on the other hand, of course occurs because of an abundance of laborers and a lack of the necessary funding to pay all of them.

What five theories attempt to explain the business cycle?

The sunspot, psychological, monetary, technological, and political theories.

When statisticians tabulate the unemployment rate, why are some people who are not working not counted as unemployed?

The unemployment rate does not take into account those who have been out of a job for more than six months. In addition, it the rate only covers individuals between the ages of 16 and 64 who are neither in the armed forces nor institutionalized.

What two major economic problems are associated with downturns and upswings in the business cycle?

Unemployment and inflation