Ch. 8 Economic Fluctuations, Unemployment, and Inflation

What is the business cycle?

the ups and downs of the economy measured by changes in real GDP and unemployment.

Parts of a business Cycle?

• Expansion:

• Peak:

• Recession: .

• Trough:

Expansion

GDP grows, unemployment falls

Peak

Highest point before decline.

Recession

GDP falls, unemployment rises

Through

Lowest point before recovery

What is a recession?

a decline in real GDP and a rise in unemployment for at least two quarters

Who is in the civilian labor force?

People 16 or older who are working or actively looking for work

What is unemployment?

Not working and actively looking for work (or waiting to start/return).

How to calculate the unemployment rate

# unemployed / # in labor force x 100

What is labor force participation?

Share of adults (16+) working or looking for work.

Calculate labor force Participation rate

labor force / adult population x 100

Three types of unemployment

• Frictional:

• Structural: 

• Cyclical

Frictional

Short-term between jobs (e.g., recent grad job-hunting).

Structural

Skills don’t match jobs (e.g., industry changes/automation).

Cyclical 

Due to recession/low demand (layoffs in downturn)

What is full employment?

Employment level where only frictional + structural unemployment remain (no cyclical); aka the natural rate.

What is inflation?

A general rise in the price level (often measured by CPI)

How does inflation adversely impact the economy?

• Uncertainty → less investment.

• Distorted price signals → misallocation.

• Resource waste protecting wealth instead of producing