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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
Note 
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