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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