Chapter 27 Business Cycles, Unemployment, and Inflation

What is the equation for CPI?

(Price of the most recent market basket in the particular year/price estimate of the market basket in 1982-1984) x 100 CPI 2007= 207.3 CPI 2006= 201.6 Rate of Inflation= ((207.3-201.6)/201.6)x100=2.8%

What causes demand-pull inflation?

Excess of total spending beyond the capacity to produce. When resourcs are already fully employed the business can't keep up with the excess demand by the consumers. TOO MUCH SPENDING, TOO FEW GOODS

Why are business cycles/fluctuations drawn against a growth line?

A growth line is needed to represent that U.S> is in an expansion and growth period

What does hyperinflation cause?

A state of barter and chaos

Why are capital goods and consumer durables affected most during the different phases of a business cycle?

Because these are the biggest ticket items. In times of recession, firms and households put off the major purchases, they also benefit from expansion, these are the first things that are purchased.

What is a business cycle

Business cycles are alternating rises and declines in the level of economic activity

What is affected most in the terms of capital goods and consumer durables versus nondurable consumer goods?

Capital goods and consumer durables are affected most.

What is the main measure of inflation in the US?

Consumer price index

How does inflation affect output?

Cost Push inflation reduces real output (prices rise, overall production costs rise, less output) Demand Pull Inflation-

What are the differences in length of duration of cost push/demand pull inflation?

Demand Pull can sustain for long periods Cost Push is self limiting, prices can't stay high for long or else there will be no more demand

What are the two types of inflation?

Demand-Pull Cost-Push

What costs are developed with excessive unemployment?

Economic and social costs

What happens if total spending unexpectedly sings ad firms can't lower prices in time?

Firms will find themselves selling fewer units of output which causes less production, GDP falls, fewer workers will need to be employed, economy will contract and enter a recession.

Who is hurt by inflation?

Fixed income receivers Savers Creditors

Who is unaffected or hurt by inflation?

Flexible income receivers Debtors

Why don't business cycles grow smoothly versus fluctuating?

Fluctuations are driven b shocks or unexpected events which cause difficulty in fluctuations especially if prices are sticky in the short run. In the short run if prices are sticky then the economy is forced to make changes in output and employment rather than through changes of prices

What are several general possible sources of shocks that can cause business cycles

Irregular innovation-once the economy has absorbed a new innovation a slow period may develop Productivity changes-when productivity or output per unit increases, there is a boom, when productivity or output per unit decreases, the economy recedes Monetary factors-printing more money or less money via the central bank Political Events-like 9/11 Financial Instability-asset price increases, or asset pricec ecreases

What does the labor force consist of?

People who are able and willing to work. Employed Unemployed and actively seeking work

What is the equation for real income?

Real income= nominal income/price index in hundredths

What s the major source of cost push inflation?

Supply shocks, abrupt increases in the cost of raw materials or energy. Businesses have to raise product costs to cover per unit production costs

What is the burden of unemployment?

That it's costs aren't equally distributed

What is anticipated inflation?

The ability to see inflation coming in advance

How has the data collection methods of the unemployment rate been criticized?

The data lists all part time workers as fully employed Discouraged workers aren't counted as unemployed. They are counted as not in labor force.

What is full employment?

The economy is fully employed when it is experiencing only frictional and structural unemployment (NOT CYCLICAL)

How does a bank protect itself from inflation?

The lender charges an inflation premium the level of the anticipated inflation rate If a lender offers a borrower a 100 dollar loan at 5 percent interest than the borrower has to pay back the 5 dollars on top of the loan. If a 6 percent rise in inflation occurs, the lender is owed 99 (100 x 5 percent interest =105, 100 dollars x 6 percent inflation =105-6 (99 dollars) If the lender charges 11 percent interest on the loan and a 6 percent inflation occurs, he gets what he wanted 105

What does the CPI report?

The market basket of some 300 consumer goods and services that are purchased by a typical consumer. Based on spending patterns of urban consumers.

What is the immediate cause of the large majority of cyclical changes in the levels of real output and employment>

Unexpected changes in the level of total spending.

What is structural unemployment?

When demand for certain skills are in less demand. The composition of the labor force does not respond immediately or completely to the new structure of job opportunities. Geographically the demand for labor also changes (off shoring, moving from inner cities to suburbs)

What is a recessionin terms to the business cycle

a recession is a period of decline in total output income and employment ( 6 months about)GDP declines/Unemployment

What is the CPI used for?

government uses this index to report inflation rates each month and each year. It also used the CPI to adjust social security benefits and income tax brackets for inflation.

What is the equation for per unit production costs

per unit production cost= total input cost/units of output

How are service and nondurable consumer goods industries affected by recession

they are relatively insulated to recession due to people finding it difficult to cut back on needed medical and legal services. Food and clothing are also difficult to cut back.

What is another term for a business cycle that more accurately depicts the phases of a business cycle?

Business fluctuations due to cycles depicting a set pattern

What does the term core inflation mean?

By stripping away volatile product prices, economists are able to get a true sense of the consumer price index with using stable priced items.

What does cyclical unemployment result from?

Cyclical unemployment results from insufficient demand for goods and services.

When does the cyclical unemployment typically begin in terms of the business cycle?

Cyclical unemployment typically begins in the recession phase of the business cycle.

Which unemployment is caused by a decline in total spending?

Cyclical unemployment.

What is the basic economic cost of unemployment?

Forgone output (society is operating at some point inside its production possibilities curve

What is frictional unemployment?

Frictional unemployment includes search unemployment and wait unemployment for workers who are either searching for jobs or waiting to take jobs in the near future. Frictional is inevitable and partly desirable.

What is the unemployment rate that is consistent with full employment?

Full employment rate of unemployment or Natural rate of unemployment (NRU)

In terms of GDP what is a sacrifice of output?

GDP Gap (The difference between actual and potential GDP

What is the equation for GDP Gap

GDP Gap= actual GDP-Potential GDP

Provide an example of how to calculate Okun's law

If unemployment rate was 9.6 percent the NRU was at 5.6 percent, the unemployment rate was 4 percentage points higher than the NRU. We multiply the 4 percentage points by 2 (8 percent) If the GDP was 15,000 billion in a year than the output sacrificed is 1200 billion

What is a peak in terms of the phases of a business cycle?

It is when a business cycle has reached a temporary maximum and the economy is near or at full employment and the real output is at or near the economy's capacity. THe price level is likely to rise during this phase

What is the economy said to be producing at when the economy is operating at the full employment rate of unemployment?

Its potential outputmy This is the real GDP that occurs when the economy is fully employed

What is a trough in regards to thebuisness cycle

Lowest level of the business cycle, this phase can be short lived or quite long

What is the difference between nominal income and real income?

Nominal income is the number of dollars received as wages rent and interest (profit) Real income is a measure of the amount of goods and services nominal income can by. (Purchasing power)

What are the groups with the largest variances of unemployment?

Occupation-lower skilled workers (manufacturing, construction, mining) Longer structural unemployment Age-Teenagers have much higher unemployment rates than adults (lower skill levels, quit frequently, less mobility) Race and Ethnicity-African Americans and Hispanics are higher than whites(discrimincation, lower rates of educational attainment) twice that of whites Gender-similar until recently where men had a higher unemployment rate than women Duration-number of people unemployed for long periods is lower than overall unemployment rate

What is Okun's law

Okun's law indicates that for every 1 percent that the actual unemployment rate exceeds that of the natural rate of unemployment, the negative GDP gap of 2 percent occurs

What are the four phases of a generalized business cycle?

Peak Recession Trough Expansion

What three groups is the us population divided into?

People under 16/institutionalized Not in labor force (potential workers but aren't employed or seeking work) Labor Force

What is the expansion in terms of a business cycle?

Recession is followed by a recovery and expansion. This is where the real GDP , income, and employment rise until the economy is at full employment INFLATION occurs

What causes cost push inflation?

Rising per unit production costs. When price level increases even though total spending wasn't excessive.

In relation to structural and frictional unemployment how long do each last?

Structural is more of a long term unemployment, fricitional is more temporary

What is the difference between real interest rate and the nominal interest rate?

The real interest rate is the percentage increase in purchasing power that the borrower pays the lender (the 5 percent charged for the loan) Nominal interest rate is the real interest rate plus the inflation premium

What is unanticipated inflation?

The unexpected rise of inflation. This causes income redistribution

What happens if the rate of deflation declines is negative?

This is called deflation

How do you calculate the unemployment rate?

Unemployed/labor force x 100

Can the GDP Gap be positive and negative?

Yes, If actual GDP < Potential GDP than it is negative If actual GDP > Potential GDP than it is positive The higher the unemployment rate the larger the gap