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