Ch. 29: The Business Cycle

Question 1

Business Cycle

Answer 1

Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

Question 2

Peak

Answer 2

The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At this point, the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity.

Question 3

Recession

Answer 3

A period of declining real GDP, accompanied by lower real income and higher unemployment (lasts at least six months).

Question 4

Trough

Answer 4

The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At this point, the economy experiences substantial unemployment and real GDP is less than potential output.

Question 5

Expansion

Answer 5

The phase of the business cycle in which real GDP, income, and employment rise.

Question 6

Labor Force

Answer 6

Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.

Question 7

Unemployment Rate

Answer 7

The percentage of the labor force unemployed at any time.

Question 8

Discouraged Workers

Answer 8

Employees who have left the labor force because they have not been able to find employment.

Question 9

Frictional Unemployment

Answer 9

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Question 10

Structural Unemployment

Answer 10

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

Question 11

Cyclical Unemployment

Answer 11

A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.

Question 12

Full-Employment Rate of Unemployment

Answer 12

The unemployment rate at which there is no cyclical unemployment of the labor force; equal to around 4 percent (rather than zero percent) in the United States because frictional and structural unemployment are unavoidable.

Question 13

Natural Rate of Unemployment

Answer 13

The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.

Question 14

Potential Output

Answer 14

The real output (GDP) an economy can produce when it fully employs its available resources.

Question 15

Okun’s Law

Answer 15

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).

Question 16

Consumer Price Index (CPI)

Answer 16

An index that measures the prices of a fixed “market basket” of some 300 goods and services bought by a “typical” consumer.

Question 17

Deflation

Answer 17

A decline in the general level of prices in an economy; a decline in an economy’s price level.

Question 18

Demand-Pull Inflation

Answer 18

Increases in the price level (inflation) resulting from increases in aggregate demand.

Question 19

Cost-Push Inflation

Answer 19

Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.

Question 20

Per-Unit Production Costs

Answer 20

The average production cost of a particular level of output; total input cost divided by units of output.

Question 21

Core Inflation

Answer 21

The underlying increases in the price level after volatile food and energy prices are removed.

Question 22

Nominal Income

Answer 22

The number of dollars received by an individual or group for its resources during some period of time.

Question 23

Real Income

Answer 23

The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.

Question 24

Unanticipated Inflation

Answer 24

An increase of the price level (inflation) at a rate greater than expected.

Question 25

Anticipated Inflation

Answer 25

Increases in the price level (inflation) that occur at the expected rate.

Question 26

Cost-of-Living Adjustment (COLA)

Answer 26

An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.

Question 27

Real Interest Rate

Answer 27

The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.

Question 28

Nominal Interest Rate

Answer 28

The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.

Question 29

Hyperinflation

Answer 29

An extremely high rate of inflation, usually defined as an inflation rate in excess of 50 percent per month.