Chapter 9
general sources of shock in business cycles
- irregular innovation - productivity changes - monetary factors - political events - financial instability
BLS separates US population into three groups
1) under 16 and/or institutionalized (69.5 million as of 2015) 2) not in labor force (94.1 million as of 2015) 3) employed (149.9 million as of 2015) 4. Unemployed (7.9 million as of 2015) Total population = 321.4 million as of 2015
smooth
A key issue in macroeconomics is why the economy sees business cycle fluctuations rather than slow, _______ growth
expansion
A period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment. If spending then expands more rapidly than does production capacity, prices of nearly all goods and services will rise. In other words, inflation will occur.
recession
A period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur.
cyclical unemployment
A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand). Typically begins the recession phase of the business cycle
frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
labor
Both those who are employed and those who are unemployed but actively seeking work are counted as being in the _______ force.
peak
Business activity has reached a temporary maximum. 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. The price level is likely to rise during this phase.
rises; rise; increasing
By contrast, if the level of spending unexpectedly ________, output, employment, and incomes will _______. This is true because, with prices sticky, the increased spending will mean that consumers will be buying a larger volume of goods and services (since, with prices fixed, more spending means more items purchased). Firms will respond by ________ output. This will increase GDP. And because firms will need to hire more workers to produce the larger volume of output, employment also will increase.
fully employed
Economists say that the economy is __________________ when it is experiencing only frictional and structural unemployment. That is, full employment occurs when there is no cyclical unemployment
sinks; lower; fall; fall
If total spending unexpectedly _____ and firms cannot ______ prices, firms will find themselves selling fewer units of output (since with prices fixed, a decreased amount of spending implies fewer items purchased). Slower sales will cause firms to cut back on production. As they do, GDP will _______. And because fewer workers will be needed to produce less output, employment also will ______. The economy will contract and enter a recession.
4.6
In 2007, the economy achieved full employment, with a _____ percent unemployment rate.
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.
anticipated inflation
Increases in the price level (inflation) that occur at the expected rate.
business cycles
Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
irregular innovation
Significant new products or production methods, such as those associated with the railroad, automobile, computer, and Internet, can rapidly spread through the economy, sparking sizable increases in investment, consumption, output, and employment. After the economy has largely absorbed the new innovation, the economy may for a time slow down or possibly decline. Because such innovations occur irregularly and unexpectedly, they may contribute to the variability of economic activity.
monetary factors
Some economists see business cycles as purely monetary phenomena. When a nation's central bank shocks the economy by creating more money than people were expecting, an inflationary boom in output occurs. By contrast, printing less money than people were expecting triggers an output decline and, eventually, a price-level fall.
negative; positive
The GDP gap can be either _______ (actual GDP < potential GDP) or __________ (actual GDP > potential GDP). In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP.
real income
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
per-unit production costs
The average production cost of a particular level of output; total input cost divided by units of output.
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.
expansion; growth
The long-run trend of the U.S. economy is _____ and _______.
nominal income
The number of dollars received by an individual or group for its resources during some period of time.
trough
The point of the recession or depression where the output and employment "bottom out" at their lowest levels. The trough phase may be either short-lived or quite long.
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 is unavoidable.
Financial instability
Unexpected financial bubbles (rapid asset price increases) or bursts (abrupt asset price decreases) can spill over to the general economy by expanding or contracting lending, and boosting or eroding the confidence of consumers and businesses. Booms and busts in the rest of the economy may follow.
political events
Unexpected political events, such as peace treaties, new wars, or the 9/11 terrorist attacks, can create economic opportunities or strains. In adjusting to these shocks, the economy may experience upswings or downswings.
productivity changes
When productivity—output per unit of input—unexpectedly increases, the economy booms; when productivity unexpectedly decreases, the economy recedes. Such changes in productivity can result from unexpected changes in resource availability (of, say, oil or agricultural commodities) or from unexpected changes in the general rate of technological advance.
GDP gap=
actual GDP - potential GDP
unanticipated inflation
increases in the price level (inflation) at a rate greater than expected
demand-pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand Usually, increases in the price level are caused by an excess of total spending beyond the economy's capacity to produce.
real income =
nominal income / price index (in hundredths)
phases of business cycles
peak, recession, trough, expansion
nominal interest rate =
real interest rate + inflation premium(the expected rate of inflation)
potential output
the GDP an economy can produce when it fully employs its available resources
unemployment rate
the percentage of the labor force that is unemployed
core inflation
the underlying increases in the price level after volatile food and energy prices are removed
per-unit product cost =
total input cost/units of output
unemployment rate =
unemployed/labor force x 100
structural unemployment
unemployment that occurs when workers' skills do not match the jobs that are available; who cannot easily move to locations where jobs are available
Percentage change in real income
≅percentage change in nominal income − percentage change in price level