Economics Ch. 14

Why do businesses cut back on their inventories when they think the economy is turning down?

because they fear sales will decline

ex. of a shock driving the economy up

britain discovered oil in the north sea in 1970s

explain the difference between a business cycle and a business flunctuation

business cycles are systematic increases and decreases in real gdp; unsystematic changes are business fluctuations

why is it important to predict business cycles?

businesses and gov. are better able to plan their actions if they know how the economy is likely to perform. A business that had planned to expand its plant, for ex,, might delay construction if it believed the economy was about to enter a recession

macroeconomic model that use algebraic equations to describe how the economy behaves.

econometric models

two popular tools used to predict business cycles

econometric models and index of leading indicators

What was the great depression caused by?

excessive global borrowing in the 1920s and global economic condition

the recovery from recession

expansion

ex. of shock being negative

high oil prices in mid-2003.

how can demands for higher wages by unions contribute to inflation

higher wages increase a company's production costs, forcing it to raise its prices

monthly statistical series that helps economists predict the direction of future economic activity

index of leading indicators

list the 5 main reasons for inequality of income

inequality of income exists because of education, wealth, discrimination, ability, and monopoly power.

a new product or a new way of performing a task

innovation

point where gdp stops going up

peak

why does inflation hurt people on fixed incomes more than other people

people who earn wages or salaries see their incomes rise when prices go up. In contrast, people on fixed incomes must pay more for the things they buy without an increase in their incomes

What happens during a depression?

production slows, output declines, unemployment rises, and the standard of living falls

what are the two phases of the business cycle?

recession and expansion

How can the economy be considered at full employment when some people are still unemployed?

some people are always unemployed because of frictional unemployment. When a two-income family moves, for example, both spouses do not always find jobs right away

What is a discouraged worker?

someone who has given up trying to find a job and is, therefore, not included in the unemployment rate.

Why is structural unemployment a more difficult problem for the economy and for individual workers than other types of unemployment?

structural unemployment causes long-term unemployment and the unemployed must learn new skills

describe how the gov. collects monthly data on unemployment

the census bureau surveys and turns data over to the bureau of labor statistics for analysis

identify four way inflation destabilizes the economy

the dollar buys less, spending habits change, speculation increases, and the distribution of income is altered.

explain the great depression compared to other recessionary periods

the great depression was more severe that the other recessionary periods. it was the worst economic decline in U.S. history

What happens after an innovation takes hold

there is no need for investments & economic activity may slow

What do businesses expect when the economy is expanding?

they expect future sales to be high and due to this they invest heavily in capital goods

if the periods of recession and expansion did not occur, the economy would follow a steady growth oath which is..

trend line

where gdp stops going down

trough

when businesses innovates it often gains an edge on its competitors, why?

-costs go down, or sales go up. -profits increase & business grows

"easy money" policies allow..

-interest rates to be lower -loans easy to get

What are some of the reasons why a person from a lower-income family might end up earning less than a person from a higher-income family?

The lower-income person might receive less education or they might face discrimination based on gender or ethnicity

five causes of the business cycle

capital expenditures, inventory adjustments, innovation and imitation, monetary factors, external shocks

What kinds of unemployment are likely to affect construction workers?

cyclical unemployment, because construction slows in an economic downturn, and seasonal unemployment, because construction slows in the winter

a very severe recession can turn into _____

depression

state of economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants.

depression