Chapter 10 - Business Cycle Flashcards
What is macroeconomics?
The study of aggregate economic behavior, of the economy as a whole
Macroeconomics is a ____ view
Holistic
What is the basic purpose of macroeconomic theory?
To explain the business cycle. Identify the forces that cause the overall economy to expand or contract
What are the 3 basic measures of assessing macro performance?
- Output (GDP) growth
- Unemployment
- Inflation
What is GDP?
Total value of output (goods and services) produced in an economy during a given period of time
What is GDP growth?
An economy’s potential output is reflected in its production possibilities curve. When there is GDP GROWTH, the production possibilities curve shifts outward
What is the production possibilities curve?
The alternative combination of goods and services that could be produced in a given time period with all available resources and technology
What are business cycles?
Alternating periods of economic growth and contraction experienced by the economy. Shows the RISE and FALL of the economy over time
The business cycle graph is ___vs___
Real GDP vs time
What is the unit for real GDP?
UNITS PER TIME PERIOD
In the overall picture of the business cycle, real GDP (increases/decreases)
Increases
When the business cycle curve is going down, describe what is happening to the economy?
Economy is contracting and heading towards recession
What is nominal GDP?
GDP measured in current prices
What is real GDP?
Inflation adjusted value of GDP. Value of output measured in COMMON PRICES
REAL GDP removes the effects of …?
Inflation
Nominal GDP could increase/decrease due to ___ while Real GDP could increase/decrease due to ____
Nominal GDP - price and output
Real GDP - JUST output. More accurate
Business cycles are measure by changes in…
REAL GDP
Does real GDP increase in consistent, smooth increments?
NO - pattern of steps, stumbles, and setbacks
What is a recession?
Decline in total output (real GDP) for 2 or more consecutive quarters
When did the most severe recession occur? Why?
Immediately after ww2 ended - sudden cutbacks in defense production caused sharp declines in output
A year has ____ quarters consisting of ___ months each
4 quarters of 3 months each
Define unemployment
Inability of labor force participants to find jobs. A person must not only be jobless but ACTIVELY LOOKING for work
What does the “labor force” consist of?
Everyone over the age of 16 who is actively working PLUS all those who are NOT working but are actively seeking employment
output and unemployment are _____ related
Inversely
When output goes down, jobs go ____ and unemployment goes _____
When output goes down, jobs go DOWN and unemployment goes UP
Unemployed = people…..
Currently looking for work
Employed = people….
With paid jobs
Labor force =….
Employed + unemployed
What is unemployment rate?
Proportion of the labor force that is unemployed
Give the formula to calculate unemployment rate
Unemployment rate = number of unemployed/number in labor force
Is this formula to measure unemployment rate a perfect measure? Why?
NO - doesn’t account for people who give up looking for a job after searching for a while or for those getting hours cut
What are the 4 categories of unemployment?
- Seasonal unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
Describe and give an example of seasonal unemployment
Seasonal unemployment = unemployment caused by seasonal treatment
Example: lifeguards, weather-dependent construction
Describe and give an example of frictional unemployment
Frictional unemployment = brief period of unemployment associated with a job search
Example: someone changing jobs, students looking for a job right after graduation
Describe and give an example of structural unemployment
Structural unemployment = mismatch between the skills of the labor force and the skills needed by employers
Example: skilled craft workers in 2006-2008 housing contraction. Self checkout - clerks aren’t needed as much anymore (older people). Advancements in technology
Describe and give an example of cyclical unemployment
Cyclical unemployment = when there are not enough jobs to go around due to downturns in the business cycle. Unemployment due to recession.
Of the 4 categories of unemployment, which 3 are unavoidable and will always exist?
Seasonal
Fractional
Structural
Of the 4 categories of unemployment, which is avoidable and we want to avoid it?
Cyclical unemployment
In the graph of the business cycle, during times of cyclical unemployment the graph is sloping ____
Down
Do we want to have zero unemployment? What is the goal for unemployment rate?
We don’t want zero unemployment. We will always have some unemployment due to the 1st 3 categories of unemployment. Optimal unemployment rate is between 4% and 6%
Unemployment rate is connected to _____ rate
Inflation
The biggest fear as an economy reaches full employment is ____
Inflation
As an economy reaches its production possibilities, what happens to costs/prices?? What in turn does this cause?
Costs rise, pushing up prices ———> causing inflation
Contrast inflation, deflation, and relative price.
Inflation - increase in the AVERAGE LEVEL OF PRICES - not any specific price
Deflation - Decrease in the AVERAGE LEVEL OF PRICES of goods and services
Relative Price - the price of ONE GOOD in comparison with the price of other goods
For inflation to exist, does the price of every good have to increase?
NO
Mathematical contrast inflation with relative price change
Inflation - average price CHANGES when you add up all the prices and take the mean
Relative price - prices change year to year but mean of the 2 years remains THE SAME
When price increases, profits in turn increase which causes..
Entry into the market
Is it possible for prices to rise or fall continuously without changing the average price level?
YES
Changes in relative price are ___ ____ which help..
Changes in relative price are MARKET SIGNALS which help reallocate resources in the economy
Explain in detail why relative price changes are considered market signals
Businesses will be able to see which item is producing the most profit for them. They will put more RESOURCES into producing more of this item to make more profit
Inflation is a form of ____
Redistribution
Explain why inflation is a form of redistribution
Although inflation makes some people worse off, it makes others better off.inflation acts like a TAX - taking income from some people and giving it to others
When inflation exists, the consumer is ___ off
Worse
When inflation exists, the producer is most likely ____ off
Better
What is nominal income?
The amount of money income received in a given time period MEASURED IN CURRENT DOLLARS
What is real income?
Income in CONSTANT DOLLARS (nominal income adjusted for inflation)
Do all prices rise at the same rate during inflation? Is everyone affected equally?
NO
When real income DECREASES, the prices of goods and services have _____. Thus, purchasing power ______
When real income increases, the prices of goods and services have INCREASED.Thus, purchasing power decreases
When nominal income changes, is there a change in purchasing power?
NO
What looks like ____ to a buyer might look like ____ to a seller
What looks like price to a buyer might look like income to a seller
When prices rise, ___ rise too (for some)
Incomes
____ may reduce the value of your real saving
Inflation
What is the term to describe that inflation may reduce the value of your real savings?
Wealth effects
UNCERTAINTIES of inflation may cause people to change their ___,___, or ____behavior
Consumption, saving, or investment behavior
When consumers have a fear of rapidly increasing prices, how are their attitudes towards long term purchasing decisions affected? What about firms?
Consumers may deter from making long term purchasing decisions. Firms may also postpone construction or not finish new construction
Changes in prices may cause people to buy more _______ NOW. Why?
Goods and services for fear that prices will rise further. They may make foolish decisions on things they don’t really want or need
0% inflation might harm the goal of ___ _______
Full employment
Why do we want inflation to exist to some extent?
Producers will make more and hire more workers
We want inflation below __%
3%
What is PRICE STABILITY?
The absence of significant changes in average price levels. OFFICIALLY DEFINED as a rate of inflation under 3%
