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Macro Chapter 8
Economic Fluctuations,
Unemployment, and Inflation
5 Learning Goals
1) Characterize fluctuations in economic growth.
2) Relate fluctuations in GDP to employment and
the demand for labor.
3) Classify unemployment into three categories.
4) Distinguish the difference between full
employment and the natural rate of
unemployment and correlate both to potential
GDP.
5) Determine inflation’s effect on the economy.
Class Activity: Identify at least two
products that are made in 2011 that you
don’t think will be made in 2021. Briefly
explain why you think they won’t be
produced any longer.
Swings in the Economic
Pendulum
The Business Cycle
See Exhibit 1 on p. 171 and Exhibit 2 on p.
172
Annual growth
rate of real GDP
8
Long-run growth rate
(approx. 3%)
6
4
2
0
-2
1960 1965 1970 1975 1980 1985 1990 1995 2000 20052009
Source: Economic Report of the President, various issues.
The Hypothetical Business Cycle
Real GDP
Business
Trend line
peak
Business
peak
Recessionary
trough
Recessionary
trough
Time
The four phases of the business cycle are
expansion, peak, contraction, and recessionary
trough.
Key Points:
1) The business cycle varies and is
unpredictable
2) The average annual growth rate is 3%
Economic Fluctuations
and the Labor Market
Q8.1 A person not working is considered
unemployed.
1) True
2) False
50%
50%
60
1)
2)
This section describes the
categories of people
Total population divided into two categories:
– (1) Under age 16 & institutionalized people
– (2) Over age 16
Over age 16 divided into two categories:
– (1) Not in labor force – students, retirees, disabled
– (2) In labor force
In labor force divided into two categories:
– (1) Employed
– (2) Unemployed, but want to be employed
Definition of unemployed:
A person not currently employed but (1)
actively seeking a job, or (2) waiting to
begin or return to a job
See BLS FAQs
U.S. Population, Employment,
and Unemployment
Civilian population
16 and over
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
Civilian labor force
Labor Force
Participation Rate
= Civilian population (16+)
Employment /
Population Ratio
Number employed
Civilian population (16+)
=
Number unemployed
Rate of
Unemployment = Civilian labor force
Civilian
labor force
Employed
• Employees
• Self-employed
workers
Unemployed
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
See Current Population Survey
Class Activity: Recall the two products
you predicted wouldn’t be produced in
2021. Is it “good” or “bad” that those
products won’t be made any longer?
Why?
Q8.2 Mary is a homemaker. Last week, she was
busy with her normal household chores. She is
1)
2)
3)
4)
a member of the civilian labor force who is employed.
a member of the civilian labor force who is unemployed.
a member of the civilian labor force who is underemployed.
a discouraged worker who is not a member of the labor
force.
5) not a member of the labor force.
20%
20%
20%
20%
20%
60
1)
2)
3)
4)
5)
Two calculations to know
1) Labor force participation rate = (employed
+ unemployed) / civilian pop. over age 16
2) Unemployment rate = unemployed /
(employed + unemployed) OR
unemployed / labor force
Q8.3 Which of the following would be officially
classified as unemployed?
1. a school administrator who has been working as a
substitute teacher one day per week while looking for a
full-time job in administration
2. a mathematician who returned to graduate school after
failing to find a job the last four months
3. a 60-year-old former steel worker who would like to work
but has given up actively seeking employment
4. a laid-off construction worker waiting to return to a
25%
25%
25%
25%
previous job
60
1
2
3
4
Three Types of
Unemployment
3 general reasons why people are
unemployed:
(1) Frictional – imperfect information
(2) Structural – workers don’t possess
desired skills
(3) Cyclical – result of business cycle
Watch video: Stossel Macro Clip 03unemployment and labor mobility
Employment
Fluctuations- The
Historical Record
Proposal to reduce unemployment:
Recall those two goods you predicted
wouldn’t be produced in 2021. I propose
we make it illegal to lay off those workers.
Keep them employed making those goods.
Class Activity: What do you think will
happen to the people who used to make
the two products you predicted wouldn’t be
produced in 2021? Will they ever work
again?
Watch video: Treycycle employs NASA
engineers
Q8.4 Which of the following is a positive effect of
job search and the unemployment that often
accompanies it?
1. It keeps wages and income levels low.
2. It permits individuals to better match their skills and
preferences with the requirements of a job.
3. It reduces the wage gap between high skill workers and
those with few skills.
4. It creates political pressure for an increase in the
minimum wage, which will reduce the rate of
unemployment in the long run.
25%
25%
25%
25%
60
1
2
3
4
Some unemployment is unavoidable and
arguably desirable
Natural rate of unemployment: “normal”
frictional and structural unemployment
The natural rate occurs when the economy
is operating at a sustainable rate
Full employment is when the natural rate
of unemployment exists
Natural rate equals about 5%
Q8.5 Full employment is the situation in which the
economy operates at an unemployment rate equal
to the sum of
1. structural and frictional unemployment.
2. cyclical and frictional unemployment.
3. structural and cyclical unemployment.
4. structural, frictional, and cyclical
unemployment.
25%
25%
25%
25%
60
1
2
3
4
Actual and Potential GDP
Potential output is the economy’s
maximum sustainable output; occurs when
the natural rate of unemployment exists;
occurs when full employment exists
Potential output is perhaps best thought of
as the 3% growth rate discussed earlier
Actual output can be greater than or less
than potential; again, think about the
actual growth rate
Real GDP
Business
peak
Trend line
Business
peak
Recessionary
trough
Recessionary
trough
Trend line = maximum sustainable rate
Business Cycle = actual output
Time
Another way to think about these:
When you read the BEA report about
quarterly GDP, if the reported (actual)
growth rate is near 3%, then the economy
is at it’s potential output.
At 3% actual growth, the unemployment
rate will likely be around 5% (i.e. full
employment is 95%)
The economy can never eliminate
frictional and structural unemployment for
an extended period.
Q8.6 Actual GDP will be below potential
GDP
1.
2.
3.
4.
when the economy is at full employment.
during an economic boom.
when resources are fully utilized.
during a recession.
25%
25%
25%
25%
60
1
2
3
4
The Effects of Inflation
See BLS CPI release
Q8.7 Suppose you received a 3 percent increase in
your nominal wage. Over the year, inflation ran about
6 percent. Which of the following is true?
1. Your real wage fell.
2. Your nominal wage fell.
3. Both your nominal and real wages decreased.
4. Although your nominal wage fell, your real wage
increased.
5. Both nominal and real wages increased.
20%
20%
20%
20%
20%
60
1
2
3
4
5
Inflation is a persistent increase in the
general level of prices
Case Study: Zimbabwe
In February, 2008 a loaf of bread was
200,000 Zimbabwe dollars
In August, 2008, that same loaf of bread
was 1.6 trillion dollars
That’s 11.2 million percent!
Watch video: Ducktales-inflation
Why is inflation “bad”?
1) It reduces investment: long-term projects are
more risky
2) It distorts information delivered by prices:
relative prices are skewed because some
prices adjust more quickly than others
3) It results in less productive use of resources:
people will spend more time trying to combat
the effects of inflation rather than engaging in
productive activity
Question Answers:
8.1 = 2
8.2 = 5
8.3 = 4
8.4 = 2
8.5 = 1
8.6 = 4
8.7 = 1