question
The Federal Reserve
answer
wants to implement monetary policies so that the highs aren't too high and the lows aren't too low in the business cycle.
question
How much does GDP grow by, per year, on average in the US
answer
Real GDP in the U.S.A. grows by approximately 3% per year, on average
question
business cycle
answer
Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
question
4 phases of the Business Cycle:
answer
Peak
Recession
Trough
Expansion
Recession
Trough
Expansion
question
Peak
answer
business activity has reached a "temporary" maximum.
The level of real output is at or close to the economy's capacity.
The economy is near full employment (just about anyone who wants a job can get one)
Price level is likely to rise during this phase
The level of real output is at or close to the economy's capacity.
The economy is near full employment (just about anyone who wants a job can get one)
Price level is likely to rise during this phase
question
Recession
answer
period of decline in total output, income, and employment, that lasts at least 6 months.
Along with a decline in real GDP, unemployment increases
Along with a decline in real GDP, unemployment increases
question
Trough
answer
the bottoming out of output and employment during a recession/depression
Things aren't getting any worse, starting to level out
Things aren't getting any worse, starting to level out
question
Expansion
answer
precedes a recovery.
The period in which Real GDP, income, and employment rise.
The economy will approach full employment, however, if spending expands faster than production capacity, prices of goods and services will rise (inflation).
The period in which Real GDP, income, and employment rise.
The economy will approach full employment, however, if spending expands faster than production capacity, prices of goods and services will rise (inflation).
question
Sticky prices of goods make it difficult for firms to adjust after a demand/supply shock occurs. As a result,
answer
changes in output and employment take place rather than changes in prices.
question
Why do demand and supply shocks cause business cycles?
answer
Political events
Financial instability
Irregular innovation
Productivity changes
Monetary factors
Financial instability
Irregular innovation
Productivity changes
Monetary factors
question
Labor Force =
answer
employed + unemployed
(Anyone who has a job plus anyone who wants a job but does not currently have one.)
(Anyone who has a job plus anyone who wants a job but does not currently have one.)
question
Business cycle fluctuations are the result of
answer
sticky prices interacting with
economic shocks
economic shocks
question
how does the business cycle affect Capital Goods and Consumer Durables
answer
affected most by the business cycle (cars,
computers, refrigerators)
Firms that produce these products may repair their old equipment rather than replace them
As a result, investment in capital goods declines sharply
computers, refrigerators)
Firms that produce these products may repair their old equipment rather than replace them
As a result, investment in capital goods declines sharply
question
how does the business cycle affect Service Industries and Non-Durable Consumer Goods
answer
somewhat insulated from the
recession's most severe effects.
Ex) medical and legal services, food and clothing
The quantity and quality of the nondurable goods that are purchased will decline, but not as much as the quantity and quality of capital goods and consumer durables that are purchased.
recession's most severe effects.
Ex) medical and legal services, food and clothing
The quantity and quality of the nondurable goods that are purchased will decline, but not as much as the quantity and quality of capital goods and consumer durables that are purchased.
question
There are two problems that arise over the course of the business cycle:
answer
unemployment
inflation
inflation
question
The labor force consists of:
answer
Persons 16 years of age or older who are not in institutions and who are
a. Employed OR
b. Unemployed but seeking employment
a. Employed OR
b. Unemployed but seeking employment
question
The US Population is Divided into 4 Groups:
answer
Under 16 and/or institutionalized
Not in Labor Force
Employed
Unemployed
Not in Labor Force
Employed
Unemployed
question
Unemployment Rate
answer
the percentage of the labor force that is unemployed.
question
Unemployment Rate =
answer
(unemployed / labor force) x 100
question
Types of Unemployment
answer
frictional, structural, cyclical
question
Definition of Full Employment
answer
Full employment is something less than 100% of the labor force
The economy is fully employed when it is experiencing only frictional and structural unemployment
NO CYCLICAL UNEMPLOYMENT
The economy is fully employed when it is experiencing only frictional and structural unemployment
NO CYCLICAL UNEMPLOYMENT
question
Full-Employment Rate of Unemployment (Natural Rate of Unemployment, NRU)
answer
the unemployment rate that is consistent with full employment (5-6%)
question
The basic economic cost of unemployment is
answer
foregone output
question
The GDP Gap
answer
the difference between actual and potential GDP
The GDP gap can either be negative or positive:
The GDP gap can either be negative or positive:
question
negative gdp gap
answer
when unemployment is above the natural rate of
unemployment (actual GDP < potential GDP)
unemployment (actual GDP < potential GDP)
question
positive gdp gap
answer
when unemployment is below the natural rate (actual GDP > potential GDP)
question
the higher the unemployment rate, the ________ the GDP gap
answer
larger
question
GDP Gap =
answer
Actual GDP - Potential GDP
question
Okun's Law
answer
for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a GDP gap of about -2% will occur
question
Okun's Law Equation
answer
GDP gap = -2.0 x (actual unemployment rate - natural unemployment rate)
question
Inflation
answer
a rise in the general level of prices
Each dollar of income buys fewer goods and services than before
Reduces the purchasing power of money
Each dollar of income buys fewer goods and services than before
Reduces the purchasing power of money
question
Consumer Price Index (CPI)
answer
the main measure of inflation in the US
Reports the price of a "market basket" for some 300 consumer goods and services that are purchased by typical urban consumers
Reports the price of a "market basket" for some 300 consumer goods and services that are purchased by typical urban consumers
question
CPI =
answer
(price of the most recent market basket in the particular year / price estimate of the market basket in 1982-1984) x 100
question
We can use the _________ to find out how long it will take to double price level with a certain percent of inflation
answer
rule of 70
question
Demand-Pull Inflation
answer
increase in the price level (inflation) resulting from increases in aggregate demand
When resources are already fully employed
"too much spending chasing too few goods."
When resources are already fully employed
"too much spending chasing too few goods."
question
Cost-Push Inflation
answer
increases in the price level (inflation) resulting from an increase in resource costs (raw material prices) and per-unit production costs.
Supply shocks!
As a result, the economy's supply of goods and services declines, and the price level rises. Costs "push" the price level upward.
Supply shocks!
As a result, the economy's supply of goods and services declines, and the price level rises. Costs "push" the price level upward.
question
Per-Unit Production Cost
answer
the average production cost of a particular level of output
Total input costs divided by units of output
Total input costs divided by units of output
question
Per-Unit Production Cost =
answer
total input cost/units of output
question
Core Inflation
answer
the underlying increases in the price level after volatile food and energy prices are removed
o Energy and Food products, such as wheat, gasoline, corn, and natural gas, are removed because the rapid up and down price movements.
o Energy and Food products, such as wheat, gasoline, corn, and natural gas, are removed because the rapid up and down price movements.
question
The Federal Reserve targets a ________ inflation target rate
answer
2.0%
question
political events
answer
Unexpected political events, such as peace treaties, new wars, or terrorist attacks, can create economic opportunities or strains.
question
financial instability
answer
Unexpected financial bubbles (rapid asset price increases) or bursts (abrupt asset price decreases) can spill over to the general economy. They may expand or contract lending, and they may boost or erode the confidence of consumers and businesses.
question
Irregular innovation
answer
Significant new products or production methods, such as those associated with railroads, automobiles, computers, and the Internet, can rapidly spread through the economy, sparking sizable increases in investment, consumption, output, and employment.
After the economy has largely absorbed the new innovation, the economy may for a time slow down or even decline.
After the economy has largely absorbed the new innovation, the economy may for a time slow down or even decline.
question
Productivity changes
answer
When productivity—output per unit of input—unexpectedly increases, the economy booms; when productivity unexpectedly decreases, the economy recedes. These changes in productivity can result from unexpected changes in resource availability or from unexpected changes in the general rate of technological advancement.
question
Monetary factors
answer
When a nation's central bank shocks the economy by creating more money than people were expecting an inflationary boom in output occurs. (inflation)
By contrast, printing less money than people were expecting triggers an output decline and, eventually, a decrease in the price level (deflation).
By contrast, printing less money than people were expecting triggers an output decline and, eventually, a decrease in the price level (deflation).
question
Under 16 and/or institutionalized
answer
composed of people under 16 years of age as well as people who are institutionalized, for example, in psychological hospitals or correctional institutions.
These people are assumed to be unemployable either because of child labor laws or due to the circumstances that accompany institutionalization. (exception)
These people are assumed to be unemployable either because of child labor laws or due to the circumstances that accompany institutionalization. (exception)
question
Not in the labor force
answer
composed of noninstitutionalized people 16 years of age or older who are neither employed nor seeking work. Examples: stay-at-home parents, full-time students, and retirees. (exception)
question
Employed
answer
consists of noninstitutionalized people age 16 and older who have jobs. These are people who both want to work and have a job.
question
does being employed mean being fully employed?
answer
Just because someone is considered employed, does not mean they are FULLY employed. There is no distinction between part time and full time when being considered employed.
question
Unemployed
answer
consists of every noninstitutionalized person age 16 or older who is not employed but who wants to work and is actively seeking employment.
Please note that to be classified as unemployed, a person has to not only want a job but also be actively seeking employment. A person who claims to want a job but who isn't bothering to look for work is classified as "not in labor force"
Please note that to be classified as unemployed, a person has to not only want a job but also be actively seeking employment. A person who claims to want a job but who isn't bothering to look for work is classified as "not in labor force"
question
As a result of the inclusion of part-time workers in the unemployment rate, the unemployment rate is assumed to be
answer
understated
question
Frictional unemployment
answer
(likely to be short term) workers who are actively searching for a job.
These workers are often voluntarily looking for better jobs (pay, benefits, opportunity) and results in a more efficient allocation of the labor resource.
They have a valuable skill set
These workers are often voluntarily looking for better jobs (pay, benefits, opportunity) and results in a more efficient allocation of the labor resource.
They have a valuable skill set
question
Structural unemployment
answer
(likely to be long term) demand for certain skills may decline or disappear over time. Think of the many jobs that once existed that exist no more.
When an industry dies out, skill sets aren't needed (coal mining)
They have to go to school or more training to get more skills
When an industry dies out, skill sets aren't needed (coal mining)
They have to go to school or more training to get more skills
question
Cyclical unemployment
answer
results from insufficient demand for goods and services made worse by the downward stickiness of wages in the economy at the beginning of a recession phase of the business cycle.
More natural, due to business cycle and supply and demand shocks
More natural, due to business cycle and supply and demand shocks
question
Full employment
answer
occurs when there is no cyclical unemployment, although less than 100% of the labor force is employed.
Fully employed does not mean zero unemployment because frictionally unemployed workers are actively searching for better jobs and structurally unemployed workers are seeking further training/education to qualify for certain jobs.
Fully employed does not mean zero unemployment because frictionally unemployed workers are actively searching for better jobs and structurally unemployed workers are seeking further training/education to qualify for certain jobs.
question
Natural Rate of Unemployment
answer
the economy is producing its potential output.
question
Natural Rate of Unemployment (NRU) =
answer
structural unemployment + frictional unemployment
question
Actual Unemployment Rate =
answer
Natural Rate of Unemployment + cyclical unemployment
question
Example:
Actual unemployment rate = 8.6%
Natural unemployment rate = 3.5%
What is the GDP Gap?
Actual unemployment rate = 8.6%
Natural unemployment rate = 3.5%
What is the GDP Gap?
answer
Okun's Law:
8.6 - 3.5 = 5.1
-2 x 5.1 = -10.2% GDP gap (potential real GDP)
8.6 - 3.5 = 5.1
-2 x 5.1 = -10.2% GDP gap (potential real GDP)
question
Calculating Rate of Inflation Example:
2017: Rate of inflation = 245.1
2018: Rate of inflation = 251.1
Rate of inflation =
2017: Rate of inflation = 245.1
2018: Rate of inflation = 251.1
Rate of inflation =
answer
251.1-245.1/245.1 x100 = 2.4%
question
How long would it take to double the price level at 2.4% inflation rate?
answer
70/2.4 = approx. 29 years
question
Discouraged Workers
answer
individuals who would like to work but have given up looking for a job
they get reclassified as
"not in the labor force" which UNDERSTATES the unemployment problem
they get reclassified as
"not in the labor force" which UNDERSTATES the unemployment problem
question
how to calculate rate of inflation
answer
(Year 2 Inflation - Year 1 Inflation) / Year 1 Inflation x100
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
