Exam 3: Business Cycle

Business cycle

the short-term fluctuations experienced in the economy due to changes in levels of the economic activity

stages in a business cycle

peak, recession, trough, expansion

Expansion

a phrase of the business cycle characterized by increasing real GDP, income, and employment

Peak

a point in the business cycle where real GDP reaches a minimum which marks the end of an expansion

Recession

a decline in real output for at least two consecutive quarters

Depression

A long-lasting and severe recession

Trough

The lowest point of economic activity in the business cycle, where real GDP reaches a minimum which marks the end of a recession

Labor Force

Individuals 16 years of age and older who are not institutionalized and who either are employed or are unemployed but actively seeking employment

Employed

The number of people in the economy who hold a full- or part-time position

Unemployed

The number of people in the economy who have not had a job for at least a week but have actively searched for employment in the past 4 weeks

Labor Force Participation Rate Equation

Labor force/ population 16 years and older *100

Frictional Unemployment

1. Unemployment resulting from workers searching and waiting for jobs

2. Tends to be the shortest type of unemployment

Structural unemployment

1. Unemployment occurring when the skills that some workers have to offer do not match the skills needed by the firms in the economy

2. Usually the longest type of unemployment

Cyclical Unemployment

Unemployment resulting from fluctuations in the business cycle

Seasonal unemployment

A type of frictional unemployment resulting from workers searching and waiting for jobs due to seasonal fluctuations in demand for certain types of workers

Discouraged worker

Someone who wants to work but is not actively searching for a job

Unemployment Rate

The percentage of workers in the labor force who are unemployed; a good indicator of the overall health of the economy

Unemployment rate equation:

unemployed/ (unemployed + employed) *100

Full employment

The employment an economy experiences when it is operating at the natural rate of unemployment

Natural Rate of unemployment

1. The rate of unemployment equal to the sum of the frictional and structural unemployment rates. A fully employed economy operated at this rate

natural rate of unemployment equation

frictional unemployment + structural unemployment rate

Inflation

A general increase in the prices of goods and services

Consumer Price Index (CPI)

1. An economic indicator used to measure over time the average price of a market basket of goods and services purchased by the typical consumer

2. Calculated monthly by the U.S. bureau of labor statistics

Hyperinflation

A situation in which the inflation rate is positive and greater then 50% per month

Disinflation

A situation in which the inflation rate is positive but declining over time

Deflation

a situation in which the inflation rate is negative

Producer price index (PPI)

A price index that measures the average change over time in the selling prices received by producers of goods and services

Nominal Income

The actual number of dollars received in exchange for the different resources available in the economy

Real Income

1. The amount of goods and services that can be purchased with nominal income; the inflation-adjusted measure of income

real income equation

Nominal Income / Consumer price index * 100

National Bureau of Economic Research

determines when business cycles begin and end, and when recessions begin and end.

Real GDP graph

Real GDP = vertical axis, Time = horizontal axis

Bureau of Labor Statistics

estimates the size of the labor force each month

Information on national employment and unemployment is collected, analyzed, and reported

One example of government assistance designed to deal with frictional unemployment

the service provided by the career services offices located at public universities and colleges

Between 1960 and 2000, the labor force participation rate increased because

Women increasingly entered the workforce

Baby boomers had come of working age and entered the labor force

Effects of high unemployment rate in the U.S.

the higher the unemployment rate all else held the same the more unemployed people are looking for jobs and the longer someone is likely to be searching for a position.

Why does the natural rate of unemployment change over time?

frictional unemployment, structural unemployment, and the labor force change on a continuous basis.

In general, what does an increase in the money supply causes?

inflation

what does inflation represent?

a decrease in someone ability to buy goods and services

the order in which the U.S. Bureau of Labor Statistics calculates the CPI

1. Data on detailed consumption habits are collected through interviews and weekly diaries

2. The relative importance or weight of the purchased goods and services is determined

3. An index is computed for the average market basket purchased by the typical consumer

The number of dollars you receive for your labor is

Considered nominal income

The measure of the purchasing power of what you earn every month

known as real income

To determine your real wage, what should you divide your nominal wage by?

consumer price index