Ch. 9 AP Macroeconomics (Business Cycles, Unemployment, and Inflation)

Deflation

A decrease in the general level of prices, can also be very bad, reverse of the effects of inflation.

recession

A period of decline in total output, income, and employment, Lasts 6 months or more and is also marked by substantial business contraction

inflation premium

A premium that compensates for anticipated inflation, is equal to the price change expected to occur over the life of the bond or investment instrument.

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs. Also called search and wait unemployment, lasts less than structural unemployment. Implies that the labor market is not operating perfectly.

hyperinflation

A very rapid rise in the price level, an extremely high rate of inflation, VERY BAD. Happened in Germany following WW1, Japan following WW2, Zimbabwe now.

Bureau of Labor Statistics

Abbreviated BLS,, The government organization responsible for regularly gathering data about the economic status of the population, computes CPI and unemployment, calculated monthly

cost of living adjustments

Abbreviated COLA, , An automatic increase in the wages of workers or payments received to adjust for the impact of inflation as measured by the CPI. Examples are in Union contracts and in Social Security.

full unemployment rate of unemployment

Abbreviated NRU, , The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.

GDP gap

Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap). caused by society not matching its NRU.

cost push inflation

Also known as supply-push inflation. Increases in the price level resulting from an increase in resource costs and hence in per-unit production costs; inflation caused by reductions in aggregate supply. Caused by supply shocks. Unlike Demand Pull Inflation, this inflation will self limit and die out on its own by causing a recession.

Business Cycles

Although the long run trend of the US economy is one of growth, there are times of economic instability associated with __________ _______.

unanticipated inflation

An increase in the general level of prices that was not expected by most decision makers. Makes inflation more severe to certain groups: fixed income, savers, creditors.

Consumer Price Index

Aprice index determined by measuring the price of a standard group of goods meant to represent the "market basket" of a typical urban consumer compiled the the Bureau of Labor Statistics (BLS) every month. Acts to automatically adjust social security benefits.

unemployment rate

As measured by the Bureau of Labor Statistics, the proportion of the labor force actively seeking work but unable to find jobs. unemployed/ labor force * 100.

full unemployment

DOES not mean that there is truly 100% unemployment, just that the economy is producing at its potential output.

Hitler

German Nazi dictator during World War II (1889-1945), Nazi leader and founder; had over 6 million Jews assassinated during the Holocaust, extreme example of what occurs when a people care more about economic improvement than human lives.

savers

In the economy people that have money left over after paying for taxes and consumption. Are hurt by inflation because they are saving a fixed amount of money. The on;y way it doesn't hurt them is if the rate of interest is greater than rate of inflation.

fixed income

Income that stays the same from week to week or month to month. Usually refers to income from pensions or bonds. People on this suffer from inflation greatly.

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. This is consumer driven. Will continue until excess spending stops.

anticipated inflation

Increases in the price level (inflation) that occur at the expected rate. Usually this helps people as they can charge inflation premiums. Not as bad as anticipated

creditors

Individuals or businesses to whom a business owes money, also known as lenders. Unanticipated inflation hurts them because of changes in purchasing power.

Debtors

Individuals or organizations that owe money. They are helped by inflation. In fact the wealth is distributed from creditors to ________.

stock market bubbles

The U.S. value of U.S. stock rose artificially high which would have to drop eventually. Bad for economy.

part time employed

The _____ _____ _________ are included as full time workers by the BLS when they calculate the employment rate. People get mad because they feel it understates unemployment.

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, can calculate the percent change by taking [ percent change in nominal income - % change in inflation]

per unit production costs

The average production cost of a particular level of output; total input cost divided by units of output. Usually an increase in this as well as a decrease in supply(cost) will cause supply-push inflation. This squeezes profits and reduce the output firms are willing to supply at existing price level.

trough

The bottom point of a recession or depression can last for a very short time or long time.

Okun's law

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment unemployment rate(NRU) will increase the GDP gap by 2 percent of the potential output (GDP) of the economy.

real rate of interest

The nominal interest rate minus the rate of inflation expected over the coming year; measures the expected increase in purchasing power of a financial asset over the coming year

nominal rate of interest

The percentage increase in money that the borrower pays the lender and is equal to the real rate plus the expected inflation

Peak

The point where business activity has reached a maximum in the business cycle is called a _____.

Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Measured by CPI(by the BLS) and consists of two types cost-push and demand-pull.

potential output

The real output (GDP) an economy can produce when it fully employs its available resources. Occurs when NRU is matched.

wealth effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls

nondurable consumer goods

These service and nondurables are insulated from recession b/c difficult to give up food, medicine, bankruptcy services

expansion

Typically follows a recession, a period in which income, Real GDP, and employment rise and approach full employment. Inflation may occur.

structural unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available, last longer than frictional. Movement of business to Sun-Belt has caused some of this.

consumer durables

_______ _______ and capital investment suffer the most in times of recession ,and benefit the most in times of expansion.

unequal burdens

_______ ________ in terms of unemployment generally fall on workers with lower skilled occupations younger(teenagers) and older people, ethnic groups, females, and lowly educated people.

discouraged workers

________ _______ , Employees who have left the labor force because they have not been able to find employment are not included in BLS data when they calculated uneployment, makes people mad because they say it understates unemployment.

labor force

the TOTAL number of workers, including both the employed and the unemployed, Does NOT include total population but only those actively looking for work or that have work