ECON 2010 Chapter 10

characteristics of short-term economic fluctuations

1. expansions and recession are irregular in length and severity 2. unemployment rises during recessions 3. durable-goods industries are more sensitive to short term fluctuations than severe and non durable industries 4. expansions and recessions are felt throughout the economy

explanations for decline in the natural rate of unemployment

1.changing age structure of US population 2. more efficient labor markets

expresses the relationship between cyclical unemployment and the output gap

Okun's law

extra percentage point of cyclical unemployment is associated with a 2 percentage point increase in the output gap

Okun's law

what determines output in the short run and in the long run

SR - total spending LR- potential output

what tends to follow a recession

a decline in the rate of inflation

is potential output is growing unusually slowly this is

a recession

the cyclical unemployment rate is zero when

actual GDP = potential GDP

contrary to the behavior that would be required to eliminate output gaps many firms in the economy

adjust their prices only periodically

particularly strong and protracted expansion

boom

two logical explanations for short-term economic fluctuations

changes in the growth rate of potential output deviations of actual output from potential output

indicators of economic activity that move at the same time as the overall movement of the economy

coincident indicators

industrial production, total sales, nonfarm employment, and after tax household income are examples of

coincident indicators of economic activity

who is most likely to lose their job during a recession

construction workers

increase in unemployment during a recession is associated with which type of unemployment

cyclical unemployment

according to Okun's law when the output gap is positive

cyclical unemployment is negative

according to Okun's law when the output gap is negative

cyclical unemployment is positive

particularly severe and protracted recession

depression

if firms maintain preset prices in the short run then the primary cause of outputs gaps is changes in

economy wide spending

period in which the economy is growing at a rate significantly above normal

expansion

smart vending machines which adjust prices automatically according to changes in demand factors

flexible price setting

younger workers change jobs more frequently and have few skills making them more prone to

frictional and structural unemployment

recessionary gaps are

inefficient

in the long run total spending only influences

inflation

short-term economic fluctuations are

irregular in length and severity and difficult to predict

varying the quantity of output produced and sold at preset prices

meeting demand

date of the official peaks and troughs of business cycles in the US are determined by the

national bureau of economic research

in expansion the cyclical rate of unemployment is most often

negative

in the SR total spending affects _____

output

difference between the economy's potential output and its actual output relative to its potential output at a point in time

output gap

if all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services

output gaps would not exist

beginning of a recession

peak

refers to the high point of economic activity prior to a downturn

peak

the duration of a recession is from

peak to trough

movement of economic activity

period of expansion to a peak to a period of recession until it reaches a trough then back to expansion

who is least likely to lose their job during a recession

police officer

maximum sustainable amount of output

potential output

in the long run output gaps are eliminated by

price changes

in the LR total spending affects _____ and output is determined by ______

prices inputs and productivity

how can the government respond to recessions as a result of slow growing potential output

promote saving and investment

period in which the economy is growing at a rate significantly below normal at least 2 consecutive quarters of declining real GDP

recession

unemployment ____ during a recession and ____ during an expansion

rises falls

in a recession the cyclical rate of unemployment is

rising

natural rate of unemployment is the unemployment rate when there is

structural and frictional unemployment

problem with an expansionary gap

tendency for inflation to develop

if actual GDP equals potential GDP then

the actual unemployment rate equals the natural rate of unemployment

if real GDP is less than potential GDP

the actual unemployment rate is greater than the natural unemployment rate

if real GDP is greater than potential GDP

the actual unemployment rate is lower than the natural unemployment rate

what does the NBER look for when determining the beginning of recessions

the entire economy

what is likely to occur in the labor market during a recesson

the growth rate of real wages declines

end of a recession

trough

refers to the low point of economic activity prior to a recovery

trough

duration of an expansion is from

trough to peak

t/f a country's actual output can temporarily exceed potential output

true

during a recession the change in real GDP is

usually negative but can be positive

problems with a recessionary gap

wasted resources

when can an expansion occur

when potential output grows rapidly or when the actual output rises above potential output

when can a recession occur

when potential output grows slowly or when actual output falls below potential output

what type of workers are more likely to lose their jobs during a recession

workers in durable-goods industries

unemployment rate is usually greater for

younger workers