Eco Test 3 chapter 10

Cyclical unemployment rises sharply during recessions because

- Decrease in unemployment lags the recovery - Real wages grow more slowly for those employed - Promotions and bonuses are often deferred - New labor market entrants have difficulty finding work

Symptoms of Business Cycles

-Cyclical unemployment rises sharply during recessions - Production of durable goods is more volatile than services and non-durable goods - Inflation generally decreases during a business cycle

Policy makers consider stabilization policies when there are output gaps in each direction

-Recessionary gaps mean output and employment are less than their sustainable level -Expansionary gaps lead to inflation

depression

A depression is a particularly severe recession

peak

A peak is the beginning of a recession -High point of the business cycle

recession (or contraction)

A recession (or contraction) is a period in which the economy is growing at a rate significantly below normal -A period during which real GDP falls for two or more consecutive quarters -A period during which real GDP growth is well below normal, even if not negative -A variety of economic data are examined

trough

A trough is the end of a recession -Low point of the business cycle

expansion

An expansion is a period in which the economy is growing at a rate significantly above normal A boom is a strong and long lasting expansion

Business Cycles

Business Cycles are short-term fluctuations in GDP and other variables

Cyclical unemployment

Cyclical unemployment is the difference between total unemployment, u, and u*

What cause the 2007 recession

Four important monthly indicators used to date recessions: -Industrial production -Total sales in manufacturing, wholesale, and retail -Non-farm employment -Real after-tax household income

Short run Vs. Long Run Pricing

In the short run, producers meet demand at existing prices Total spending drives output levels Gather data and analyze business opportunities In the long-run, prices reach equilibrium levels Output is at its potential level

Okun's Law

Okun's law relates cyclic unemployment changes to changes in the output gap (One percentage point increase in cyclical unemployment means a 2 percentage point increase in the output gap)

Potential Output

Potential output, Y* , is the maximum sustainable amount of output that an economy can produce -Also called full-employment output and it uses capital and labor at greater than normal rates and exceed Y* - for a period of time

Output Gaps

Recessionary gap is a negative output gap; Y* > Y Expansionary gap is a positive output gap; Y* < Y

Short-Term Economic Fluctuations

Recessions and expansions are irregular in their length and severity Contractions and expansions affect the entire economy May have global impact -Great Depression of the 1930s was worldwide -US recessions of 1973 - 1975 and 1981 - 1982 -US recession that began in 2007

How do Output gaps have an impact on standards of living

The 1982 output gap was $402 billion US population was 230 million $402 billion/230 million = $1,748 for a family of four In 2000 dollars it equals $7,000 for a family of four

what is the Natural Rate of Unemployment

The natural rate of unemployment, u*, is the sum of frictional and structural unemployment - Unemployment rate when cyclical unemployment is 0 - Occurs when Y is at Y*

Output Gap

The output gap is the difference between the economy's actual output and its potential output, relative to potential output, at a point in time Output gap = [(Y - Y*)/Y*]x100