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Business Cycles, Unemployment, & Inflation

Business Cycles, Unemployment, & Inflation. Chapter 8. Business cycle. Alternating rises & declines in the level of economic activity Vary substantially in duration & intensity Phases Peak – business activity has reached a temporary maximum

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Business Cycles, Unemployment, & Inflation

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  1. Business Cycles, Unemployment, & Inflation Chapter 8

  2. Business cycle • Alternating rises & declines in the level of economic activity • Vary substantially in duration & intensity • Phases • Peak – business activity has reached a temporary maximum • Recession – period of decline in total output, income, & employment • Trough – output & employment “bottom out” at their lowest levels • Expansion – real GDP, income, & employment rise

  3. Cyclical Impact: Durables & Nondurables • Firms & industries producing capital goods & consumer durables are affected most • Firms can postpone purchase of capital goods during a recession • Producers can delay the purchase of new equipment • Business outlook does not warrant increase in capital goods

  4. Unemployment • Unemployment rate = unemployed (multiple fraction times 100) labor force • Criticisms of calculating unemployment • Part-time worker • Listed as fully employed even if they want “full-time” work • Discouraged workers • Many workers give up looking for work because they can’t find a job. These people drop out of the labor force because they’re not looking for work

  5. Types of unemployment • Frictional – any time workers are in between jobs • Inevitable…people are going to quit jobs • Structural- changes in consumer demand & in technology alter the structure & demand for labor both occupationally & geographically • Workers need to adapt, develop skills, or even be willing to move • Cyclical- caused by a decline in total spending…begins in a recession…”layoffs”

  6. Definition of full employment • Occurs when we don’t have cyclical unemployment • Natural rate of unemployment • Economy is said to be producing its potential output • Occurs when the # of job seekers equals the # of job vacancies • Today, the NRU is 4-5% • Economic cost of unemployment • Foregone output (inside prod. Poss. Curve) • GDP gap=actual GDP-potential GDP

  7. Unequal burdens • Occupation – low-skill vs. high skill • Age – teens have higher unemployment • Race & ethnicity – African-Americans & Hispanics are higher • Gender – Men & Women are similar • Education – Less educated are higher • Duration - # of people unemployed for long periods is lower than overall rate

  8. Noneconomic Costs • Unemployment means idleness • Idleness means: • Loss of skills, self-respect, plummeting morale, family disintegration, & sociopolitical unrest • Widespread joblessness increases poverty, heightens racial & ethnic tensions, & reduces hope for advancement

  9. Inflation • Rise in the general level of prices • When this occurs, our “purchasing power” declines • Does not mean that all prices are rising

  10. Consumer price index (cpi) • Main measure of inflation • Compiled by the Bureau of Labor Statistics (BLS) • Used by government to report the inflation rate on a monthly & annual basis • CPI = [(yr 2 – yr 1)/yr 1]*100 • Rule of 70 can be used to find out how long it takes for price level to double

  11. Types of Inflation • Demand-Pull Inflation • Increase in demand causes prices to rise • “too much spending chasing too few goods” • Cost-Push Inflation • Rising prices in terms of factors (resources) that raise production costs. • Prices to consumer must also rise to cover these costs

  12. Nominal & Real Income • Nominal - # of dollars received as wages, rent, interest, or profits • Real- measure of the amount of goods & services nominal income can buy • Reveals your purchasing power • Anticipated vs. Unanticipated inflation

  13. Who is Hurt by Inflation? • Fixed-income receivers (I.e. retirees) • Unanticipated inflation hurts these people…redistributes real income away from these people & toward others • Savers • Creditors (lenders) • Borrower pays back less valuable dollars than those received from the lender.

  14. Unaffected by Inflation • Flexible-income receivers • I.e. social security recipients who’s payments are indexed to the CPI. Benefits automatically increase when the CPI increases. • Cost-of-living adjustments • Debtors (borrowers) • When they pay back loans, the money is not worth as much as before

  15. Does inflation affect output? • Cost-push inflation & real output • Output decreases because it’s more expensive to produce…unemployment rises as well • Demand-pull inflation & real output • Output increases • Hyperinflation • Extremely high inflation…has a devastating impact on output & employment

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