Econ Chap 9

Real Income

A measure of the amount of goods and services nominal income can buy. It is he purchasing power of nominal income, or income adjusted for inflation. Real Income = (Nominal Income)/(Price Index (In hundreths))

Expansion

A period in which real GDDP, income, and employment rise. • If spending occurs more than production capacity prices of nearly all goods and services will rise

Recession

A period of decline in total output, income, and employment

Discouraged Workers

A person who is actively seeking work in order to be counted as unemployed. An underemployed individual who is not actively seeking employment is classified as "not in the labor force"

Business Cycles

Alternating rises and declines in the level of economic activity, sometime over several years

Unanticipated Inflation

Causes real income and wealth to be redistributed, harming some and benefitting others

Hyperinflation

Extraordinarily rapid inflation, that can have a devastating impact on real output and employment

Okun's Law

For every 1% point by which the actual unemployment rate exceeds the natural rate, a negative gap of about 2% occurs

Cost-of living adjustments

Increases in pay when CPI rises, although such increases rarely equal the full percentage rise in inflation.

Who does inflation harm the most?

Inflation harms those who receive relatively fixed nominal incomes and either leaves unaffected or helps those who receive flexible nominal incomes

Inflation

Inflation is a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before.

Anticipated inflation

People see inflation coming in advance. With the ability to plan ahead, people are able to avoid or lessen the redistribution effects associated with inflation.

Cost Push Inflation

Prices are rising even though output and employment are decreasing

Per Unit production Costs

The average cost of a particular level of output. The average cost is found by dividing the total cost of all resource inputs by the amount of output produced. Per-unit cost= (Total Input Cost)/(Units of Output)

GDP Gap

The difference between actual and potential GDP. • GDP Gap = Actual GDP- Potential GDP

Labor Force

The labor force consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force

Consumer Price Index

The main US measure of inflation. The government uses this to calculate inflation rates each month and each year. CPI= (Price of the most recent market basket in a particular year)/(Price estimate of the market basket 1982-1984)x 100

Nominal Income

The number of dollars received as wages, rent, interest, or profit

Nominal interest rate

The percentage increase in money that the borrower pays the lender, including the resulting from the built-in expectation of inflation, if any.

Real interest rate

The percentage increase in purchasing power that the borrower pays the lender

Unemployment Rate

The percentage of labor force unemployed. Unemployed/(Labor Force )x 100 = Unemployment Rate

Potential output

The real GDP that occurs when the economy is "fully employed"

Peak

The spot where business has reached a temporary maximum.

Trough

The trough is the section of the recession where output and employment are at their lowest levels.

Core Inflation

The underlying increases in the CPI after volatile food and energy prices are removed. If core inflation is low and stable, policymakers may be satisfied with current policy even though changes in the overall CPI index may be suggesting a rising rate of inflation.

Frictional Unemployment

This consists of people searching for a new job and people who are waiting for a new job in the future.

Natural Rate of Unemployment

This is where the country is producing its potential output.

Full-employment rate of unemployment

Unemployment rate that is consistent with full employment

Cyclical Unemployment

Unemployment that is called by a decline in total spending and sometimes begins when there is a recession phase in the business cycle.

Demand-Pull Inflation

When resources are already fully employed and excess demand drives up the price for a good.

Structural Unemployment

When the demand for certain skills decline or vanish because demand for other skills increase.

Deflation

When the rate of inflation declines and becomes a negative number

5 sources of shocks that cause inflation

i. Irregular innovation- When new technology comes about ii. Productivity changes- 1. Cost push inflation iii. Monetary factors- 1. Inflation 2. Deflation 3. Hyperinflation iv. Political events- v. Financial instability- Stock market bursts

positive GDP Gap

occurs when actual GDP exceeds potential GDP

Negative GDP Gap

occurs when actual GDP falls short of potential GDP

4 phases of business cycle

peak, recession, trough, and expansion

Unanticipated inflation hurts

savers and creditors while benefiting debtors

The nominal interest rate is equal to

the real interest rate plus the inflation premium (the expected rate of inflation)