Chapter 26: Business Cycles, Unemployment, and Inflation

Business cycles

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

Increases poverty

________, heightens racial and ethnic tensions, and reduces hope for material advancement.

Peak

Business activity has reached a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity. The price level is likely to rise during this phase.

Recession

Period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur.

Trough

Output and employment “bottom out” at their lowest levels

Expansion

Period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment.

Labor force

People who are able and willing to work

Unemployment

Percent of labor force unemployed

Discouraged workers

Unemployed individual who is not actively seeking employment is classified as “not in the labor force”

Frictional unemployment

Workers who are either searching for jobs or waiting to take jobs in the near future

Structural unemployment

Workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating

Cyclical unemployment

Caused by decline in total spending + begins in recession phase of business cycle

Natural rate of unemployment (NRU)

Economists say that the economy is “fully employed” when it is experiencing only frictional and structural unemployment. That is, full employment occurs when there is no cyclical unemployment.

Potential output

Real GDP that occurs when the economy is “fully employed”

GDP gap

Difference between actual and potential GDP

Service industries

________ + non- durable consumer good industries insulated from effects of recession.

Okun's law

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

Inflation

Rise in the general level of prices

Consumer price index (CPI)

Main measure of inflation

Demand pull inflation

Excess of spending beyond economy’s capacity to produce

Cost push inflation

Output and employment were both declining (evidence that total spending was not excessive) while the general price level was rising

Per-unit production cost

Average cost of a particular level of output

Nominal income

Number of dollars received as wages, rent, interest, or profits

Real income

Measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation

Business cycles

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

Peak

Business activity has reached a temporary maximum

Recession

Period of decline in total output, income, and employment

Trough

Output and employment "bottom out" at their lowest levels

Expansion

Period in which real GDP, income, and employment rise

Causation

A first glance

Labor force

People who are able and willing to work

Unemployment

Percent of labor force unemployed

Discouraged workers

Unemployed individual who is not actively seeking employment is classified as "not in the labor force"

Frictional unemployment

Workers who are either searching for jobs or waiting to take jobs in the near future

Structural unemployment

Workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating

Cyclical unemployment

Caused by decline in total spending + begins in recession phase of business cycle

Natural rate of unemployment (NRU)

Economists say that the economy is "fully employed" when it is experiencing only frictional and structural unemployment

Potential output

Real GDP that occurs when the economy is "fully employed"

GDP gap

Difference between actual and potential GDP

Okuns law

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

Inflation

Rise in the general level of prices

Consumer Price Index (CPI)

Main measure of inflation

Demand-pull inflation

Excess of spending beyond economys capacity to produce

Cost-push inflation

Output and employment were both declining (evidence that total spending was not excessive) while the general price level was rising

Per-unit production cost

Average cost of a particular level of output

Nominal income

Number of dollars received as wages, rent, interest, or profits

Real income

Measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation

Unanticipated inflation

Unexpected inflation

Cost of living adjustments (COLAs)

Adjustments to pay when CPI rises

Real interest rate

Percentage increase in purchasing power that the borrower pays the lender

Nominal interest rate

Percentage increase in money that the borrower pays the lender

Deflation

Declines in price level

Hyperinflation

Extraordinarily rapid inflation

Unanticipated inflation

Unexpected inflation

Cost of living adjustments (COLAs)

Adjustments to pay when CPI rises

Real interest rate

Percentage increase in purchasing power that the borrower pays the lender

Nominal interest rate

Percentage increase in money that the borrower pays the lender

Deflation

Declines in price level

Hyperinflation

Extraordinarily rapid inflation