Macroeconomics McGraw Hill chapter 9

business cycles

recurring increases and decreases in the level of economic activity over period years; consist of peak, recession, trough and expansion phases

peak

The point in a business cycle in which business activity reaches a temporary maximum; economy is near or at full employment; level of real output is at or very close to economy's capacity

recession

A period of declining real GDP, accompanied by lower real income and higher unemployment.

trough

the point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion begins

expansion

A phase of the business cycle in which real GDP, income, and employment rise.

labor force

All persons over age 16 who are either working for pay or actively seeking paid employment

unemployment rate

the percentage of the work force that is unemployed at any given time

discouraged workers

Employees who have left the labor force because they have not been able to find employment.

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

structural unemployment

unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available

cyclical unemployment

A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand)

full-employment rate of unemployment

The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.

natural rate of unemployment (NRU)

The FULL-EMPLOYMENT RATE of UNEMPLOYMENT; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.

potential output

The real output (GDP) an economy can produce when it fully employs its available resources

GDP gap

Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).

Okun's law

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment unemployment rate will a rise in the negative GDP gap by 2 percent of the potential output (GDP) of the economy.

inflation

A rise in the general level of prices in an economy.

deflation

A decline in the price level

Consumer Price Index (CPI)

an index that measures the price of a fixed "market basket" of some 300 goods and services bought by a typical consumer

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

cost-push inflation

Increases in the price level resulting from an increase in resource costs and hence in per-unit production costs; inflation caused by reductions in aggregate supply

per-unit production costs

the average production cost of a particular level of output; total input cost divided by units of output

core inflation

the underlying increases in the price level after volatile food and energy prices are removed

nominal income

The number of dollars received by an individual or group for its resources during some period of time.

real income

The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.

unanticipated inflation

increases in the price level (inflation) at a rate greater than expected

anticipated inflation

Increases in the price level (inflation) that occur at the expected rate.

cost-of-living adjustments (COLAs)

an automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers.

real interest rate

Interest rate expressed in $'s of constant value and = to the nominal interest rate less the expected rate of inflation

nominal interest rate

the interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation

hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.