Business Cycles, Unemployment, and Inflation chapter 9

What are the four phases of the business cycle?

Peak, recession, trough, and expansion.

What defines a recession?

A decline in total output, income, and employment lasting at least six months.

Which goods are most affected by business cycle fluctuations?

Capital goods and consumer durables.

What is frictional unemployment?

Unemployment of workers between jobs or searching for their first job.

What causes structural unemployment?

Workers' skills becoming outdated and not matching new job requirements.

What type of unemployment arises from a decline in total spending?

Cyclical unemployment.

What is the natural rate of unemployment (NRU)?

The unemployment rate consistent with full employment and potential output.

What does Okun's law state?

A 1% rise in unemployment causes, on average, a 2% GDP gap.

What does the Consumer Price Index (CPI) measure?

The prices of a fixed market basket of goods and services.

What causes demand-pull inflation?

Total spending exceeding the economy's production capacity.

What triggers cost-push inflation?

Supply shocks that raise per-unit production costs.

Who is hurt most by unanticipated inflation?

Fixed-income receivers, savers, and creditors.

How does inflation affect debtors?

It reduces their real debt burden as they repay with devalued money.

What is the inflation premium?

The expected inflation rate added to the real interest rate.

What defines hyperinflation?

An inflation rate exceeding 50 percent per month.