Download What is a business cycle?

Chapter 8
Unemployment, Inflation and
Economic Fluctuations
What do we call 2 or more
quarters of a decline in GDP?
1. Recession
2. Depression
3. Inflation
4. Stagflation
In business cycle theory, what
is a trend line?
1. A movement from recession to expansion
2. A movement from expansion to recession
3. The average growth rate of the business
cycle
4. The movement from one peak to the
next peak
Chapter 8 — Unemployment,
Economic Fluctuations and
Inflation
• On average, since 1900, our real GDP
has increased about 3 % per
year…but it’s not a stable growth
rate (it IS, however, an upward
trend).
• What is a business cycle?
(3.5%)
Phases of the business cycle
•
•
•
•
•
•
•
Peak
Contraction
Trough
Expansion
Trend line—generally an upward trend –
(AVERAGE growth rate of GDP)
Recession — 2 or more qtrs. of decline in
real GDP
Depression — a big recession! (prolonged &
severe)
What are some of the Economic
indicators that help determine the
business cycle?
1. Civilian Labor Force — no. of people, 16 and older who
are either employed or unemployed (looking for a job).
LF = U + E
2. Unemployed — person who does not have a job but
who is Actively seeking a job (but how do you
decide who is ACTIVELY SEEKING A JOB?) or
waiting to begin or return to a job.
3. Unemployment RATE – No. Unempl. X 100
No. in LF
4. Labor Force Participation Rate
(as a percent)
What are some of the Economic
indicators that help determine the
business cycle?
4. Labor Force Participation Rate – no. of people 16
yrs. of age or older who are employed or unemployed as
a percentage of the total civilian population, 16 yrs. or
older.
– More developed nations have higher LFPR.
– Countries with lower LFPR generally have a small no. of
married women in the LF
No. of 16+ in LF)
.
X 100
No. of 16+ (non-instit.) in population
(as a percent)
What are some of the Economic
indicators that help determine the
business cycle?
5. Employment/Population rate – no. of 16+
employed citizens as a percent of total 16+
population.
– Rises during an expansion, falls during a recession.
– More easily defined than “actively seeking a job” so
may be better measurement than unemployment rate.
No. of employed 16+ in LF
. X 100
No. of 16+ (non-instit.) in population
(as a percent)
Class Activity 8.2
• Do we want zero unemployment?
or
• Is some unemployment good for an
economy?
Please explain.
Types of Unemployment
1. Natural Rate of Unemployment – healthy rate of
unemployment (desired rate) generally: 4% -- 6%
a. Frictional — ”between jobs” unemployment -unemployment that results from a lack of information
in the labor market…..skills DO match jobs ….just
have not FOUND the right job yet.
b. Structural — unemployment caused by changes in the
structure of the economy (changes in S & D
conditions) (skills do NOT match jobs)
–
Ex. ↓ in D for Amer. Made cars but ↑in D for American made
computers (not trained yet for computer work)
Types of Unemployment
1. Natural Rate
a. Frictional unemployment
b. Structural unemployment — con’t
–
–
–
–
Changes in S & D conditions
Changes in technology (tech. unempl – creative destruction)
Seasonal unemployment (ski instruc. In summer, lifeguards
in winter, agricultural workers)
Public Sector Unemployment (Policy Induced Unempl.) –
changes in gov’t policy that lead to unemployment
 ↑ Space program = ↓ unemployment
 ↓ Space Program = ↑ unemployment
 ↑ Defense spending = ↓ unemployment
2. Cyclical Unemployment
Types of Unemployment
1. Natural Rate
a. Frictional
b. Structural
2. Cyclical unemployment — unemployment
that results when the entire economy is doing
poorly (recession)…AGGREGATE Demand has
decreased, not just ↓ in D in one
industry…unemployment will be
prolonged.
PRS
In the video from Ch. 17, when Shirley lost
her job at the Levi’s plant due to outsourcing
and had to retrain herself as a secretary, what
type of unemployment did she suffer from?
1. Cyclical
2. Frictional
3. Structural
4. Policy Induced
Which of the following people are
unemployed?
1. Yes
2. No
20 year old looking for 1st job
Which of the following people are
unemployed?
1. Yes
2. No
College student attending
school full time
Would you employ THIS GUY?
1. Yes
2. No
Which of the following people are
unemployed?
1. Yes
2. No
Stay at home mom
Which of the following people are
unemployed?
1. Yes
2. No
60 year old former steel
worker who wants to work
but has given up actively
seeking employment
Would you employ THIS GUY?
1. Yes
2. No
Which of the following people are
unemployed?
1. Yes
2. No
Economist who returned to
graduate school after failing
to find job
Which of the following people are
unemployed?
1. Yes
2. No
Laid off construction worker
waiting to return to previous
job
Which of the following people are
unemployed?
1.Yes
2.No
School administrator who
has been working as a
substitute teacher one day a
week while looking for a full
time job in administration
Which of the following people are
unemployed?
1.Yes
2.No
INFLATION — a continual increase in the
average price level which leads to a
decrease in purchasing power of money
• Why study about inflation? German
Hyperinflation of 1920s
What causes inflation?
• Aggregate D > Aggregate Supply—
but what causes THAT??
• Increase in the GR of our real money
supply over and above any increase
in real output
How to determine the RATE of Inflation
1. Inflation RATE (% Δ in CPI):
current CPI – previous CPI
previous CPI
Year
1980
1990
2000
2001
CPI
80
100
115
126.5
X 100
INFLATION RATE
--XX--
.
25%
(115 - 100) / 100 = .15 X 100 = 15%
(126.5 – 115) / 115 = .10 X 100 = 10%
(100 - 80) / 80 = .25 X 100 =
How to determine the RATE of Inflation
2. A second way (the way I showed you in
chapter 7):
To find the NEW CPI:
old CPI from the year desired X 100 =
old CPI from the new base year
Year
1980
1990
2000
2001
CPI
80
100
115
126.5
NEW CPI
100
(80/100)X100 = 125
(115/100)X 100 = 115
(126.5/115)X100= 110
.
Homework:
Year CPI
1995 153.5
1996 158.6
1997 161.3
1998 163.9
1999 168.3
Inflation Rate
--XX-_______
_______
_______
_______
Please show all work for complete credit
Do 2 per side…or divide card into 4ths, etc.
Types of Inflation
• Unanticipated Inflation — more
damaging….do not take steps to prepare
– Investment suffers (bank loans, too risky)
– Use resources to PREDICT inflation. Instead of to
produce things
• Anticipated Inflation — can prepare & plan
If waitresses and taxi drivers do not report all
of their income to the government, GDP will
be ______. Because the unreported income
1. Understated, involves the introduction of new
goods
2. Understated, is part of the underground economy
3. Overstated, involves the introduction of new
goods
4. Overstated, is part of the underground economy
5. Overstated, is an example of nonmarket
production
PMA: The natural rate of
unemployment is
1. The long run average rate of
unemployment
2. Structural unemployment + cyclical
unemployment
3. Structural unemployment –
frictional unemployment
4. The same as full employment
Compared to legal markets,
black markets have
1. Products of higher quality
2. Higher prices
3. Lower profit rates
4. less violence
Whenever a shortage occurs (for example, in
parking spaces), and the price does not rise or is not
permitted to rise, some method of non-price
rationing must occur (for example, driving around
looking for a parking space). Which of the following
is an advantage of price rationing relative to nonprice rationing methods?
1.
2.
3.
4.
Economic theory indicates that price rationing leads to a
less economically efficient allocation of goods
Non-price rationing techniques redistribute income from
consumers to producers; price rationing does not.
The demand for goods will be more elastic if price
rationing is used to allocate good
When higher prices are used to resolve shortages, the
higher prices will encourage suppliers to increase the
quantity available, thus helping to eliminate the shortage.
Suppose the market equilibrium price of
wheat is $5 per bushel, and the government
sets a price floor of $7 per bushel to aid
growers. What is the most likely result of
this action?
1. There will be a shortage of wheat
2. There will be a surplus of wheat
3. There will be an increase in the quantity
4.
demanded as the result of the price floor
There will be a decrease in the quantity
of wheat supplied as a result of the price
floor.
(1) A price ceiling on apples set below the
equilibrium price would lead to a
shortage of apples.
(2) A price floor on grapes set above the
equilibrium price would lead to a
surplus of grapes
1. 1 is true, 2 is false
2. 1 is false, 2 is true
3. Both 1 and 2 are true
4. Both 1 and 2 are false
After a natural disaster, such as a hurricane,
the increased demand for certain items (like
lumber, electric generators, and chainsaws)
causes their prices to rise. Without
government intervention, these higher prices
would tend to
1. Discourage the flow of these items into the area
2. Encourage consumers to purchase the items
even if they do not plan to use them
3. Help to direct the items toward people who are
willing to pay the true market value
4. Do all of the above
Who is hurt by outsourcing?
1. U. S. consumers who now have to
pay higher prices for more expensive
imported goods
2. U. S. workers who previously had
the jobs that are now outsourced
abroad
3. Both 1 & 2 above.
PMA--Who is helped by outsourcing?
1. Consumers who now have more choices of goods
for lower prices.
2. Foreign workers who get hired by U. S. companies
3. U. S. Parent companies because their costs are
lower.
4. Domestic workers because the parent co. can now
afford to hire more domestic workers and pay more
across the board.
Which of the following
would tend to increase the
price of lumber?
1. A technological advance that lowers the
2.
3.
4.
cost of cutting timber
An increase in the demand for newly
constructed homes
A decrease in the demand for wooden
rocking chairs
A decrease in the tax imposed on firms
who produce lumber
End of Chapter 8