Transcript Chapter_13

Business Cycles: Characteristics
and Causes (cont.)
• Phases of the business cycle
– Recession
• Begins when the economy reaches a peak
• Ends when the economy reaches a trough
Business Cycles
Business Cycles: Characteristics
and Causes (cont.)
– Expansion
• Begins after the declining real GDP
bottoms out
• Continues until economy reaches a new peak
Business Cycles: Characteristics
and Causes (cont.)
• The economy would follow a steady
growth path, trend line, if periods of
recession and expansion did not occur.
• Severe recessions can turn into a
depression.
Business Cycles: Characteristics
and Causes (cont.)
• Causes of business cycles
– Changes in capital expenditures
– Innovation and imitation
– Monetary policy decisions
– External shocks
Inflation
• Inflation—increase in the general level
of prices
• Deflation—decline in the general level
of prices
• Both are harmful to the economy and
should be avoided whenever possible.
Measuring Prices and Inflation (cont.)
• Inflationary changes
– Creeping inflation
– Hyperinflation
– Stagflation
Causes of Inflation (cont.)
• Causes for inflation
– Demand-pull inflation
– Cost-push inflation
– Wage-price spiral
– Excessive monetary growth
Profiles in Economics:
Milton Friedman
When the price level goes up, the
purchasing power of the dollar goes
A. Up
B. Down
0%
D
A
0%
C
D. Depends
A. A
B. B
C. 0%C
0%
D. D
B
C. Remains the same
Consequences of Inflation (cont.)
• Effects of inflation
– Reduced purchasing power
– Distorted spending patterns
The Purchasing Power of the Dollar
Consequences of Inflation (cont.)
– Encourages speculation
– Distorted distribution of income
• Creditors are hurt more than debtors
generally.
Which sector of the economy has
seen recent years of speculation?
A. Real estate
B. Gold
C. Oil
D. Alternative fuel
0%
A
A. A
B. B
C. 0%
C
0%
D. D
B
C
0%
D
When the government issues that latest
monthly unemployment statistic, is it
accounting for all individuals who are
unemployed?
A. Yes
A. A
B. B
A
0%
0%
B
B. No
Measuring Unemployment (cont.)
• The civilian labor force or labor force is
the sum of all persons aged 16 and above
who are either employed or actively
seeking employment.
• Unemployed—individuals who are willing,
able, and available to work and actively
seeking employment
Measuring Unemployment (cont.)
• The unemployment rate is equal to the
number of unemployed persons divided by
the civilian labor force.
The Unemployment Rate
Unemployment rate does not include
A. Labor force dropouts
B. Prisoners
C. Military
0%
D
C
A
0%
B
D. All of the above
A. A
B. B
C. 0%C
0%
D. D
Sources of Unemployment (cont.)
• Kinds of unemployment
– Frictional unemployment
– Structural unemployment
• Outsourcing
Sources of Unemployment (cont.)
– Technological unemployment
– Cyclical unemployment
– Seasonal unemployment
Which type of unemployment exists when
consumers change from buying tapes
and cassettes to DVDs and iPods?
A. Frictional
0%
D
0%
A
D. Seasonal
A
B
C
0%
D
C
C. Structural
A.
B.
C.
0%
D.
B
B. Technological
Costs of Instability (cont.)
• Recession, inflation, and unemployment
hinder economic growth and have
human costs.
• Cost of unemployment and economic
instability
– Opportunity cost like the GDP gap
Costs of Instability (cont.)
– Misery index or discomfort index
– Uncertainty leads to fewer consumer
purchases.
– Political instability
– Crime, poverty, and family instability
Measuring Consumer Discomfort
Business Cycles Economic growth is typically
marked by periods of recession followed by periods
of expansion. A business cycle is the period from
the beginning of one recession to the beginning of
the next.
Inflation The economy faces inflation when the
general level of prices increases. If excessive,
inflation can have a disruptive effect on the
economy.
Unemployment The unemployment rate includes
those individuals who are actively looking for a job
but work less than one hour a week for pay or profit.
It does not include people who are underemployed,
working part-time, or have given up the job search.