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Pharmoeconomics Exam 2 > Chapter 10 - Business Cycle > Flashcards

Chapter 10 - Business Cycle Flashcards

1
Q

What is macroeconomics?

A

The study of aggregate economic behavior, of the economy as a whole

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2
Q

Macroeconomics is a ____ view

A

Holistic

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3
Q

What is the basic purpose of macroeconomic theory?

A

To explain the business cycle. Identify the forces that cause the overall economy to expand or contract

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4
Q

What are the 3 basic measures of assessing macro performance?

A
  1. Output (GDP) growth
  2. Unemployment
  3. Inflation
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5
Q

What is GDP?

A

Total value of output (goods and services) produced in an economy during a given period of time

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6
Q

What is GDP growth?

A

An economy’s potential output is reflected in its production possibilities curve. When there is GDP GROWTH, the production possibilities curve shifts outward

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7
Q

What is the production possibilities curve?

A

The alternative combination of goods and services that could be produced in a given time period with all available resources and technology

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8
Q

What are business cycles?

A

Alternating periods of economic growth and contraction experienced by the economy. Shows the RISE and FALL of the economy over time

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9
Q

The business cycle graph is ___vs___

A

Real GDP vs time

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10
Q

What is the unit for real GDP?

A

UNITS PER TIME PERIOD

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11
Q

In the overall picture of the business cycle, real GDP (increases/decreases)

A

Increases

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12
Q

When the business cycle curve is going down, describe what is happening to the economy?

A

Economy is contracting and heading towards recession

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13
Q

What is nominal GDP?

A

GDP measured in current prices

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14
Q

What is real GDP?

A

Inflation adjusted value of GDP. Value of output measured in COMMON PRICES

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15
Q

REAL GDP removes the effects of …?

A

Inflation

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16
Q

Nominal GDP could increase/decrease due to ___ while Real GDP could increase/decrease due to ____

A

Nominal GDP - price and output
Real GDP - JUST output. More accurate

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17
Q

Business cycles are measure by changes in…

A

REAL GDP

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18
Q

Does real GDP increase in consistent, smooth increments?

A

NO - pattern of steps, stumbles, and setbacks

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19
Q

What is a recession?

A

Decline in total output (real GDP) for 2 or more consecutive quarters

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20
Q

When did the most severe recession occur? Why?

A

Immediately after ww2 ended - sudden cutbacks in defense production caused sharp declines in output

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21
Q

A year has ____ quarters consisting of ___ months each

A

4 quarters of 3 months each

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22
Q

Define unemployment

A

Inability of labor force participants to find jobs. A person must not only be jobless but ACTIVELY LOOKING for work

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23
Q

What does the “labor force” consist of?

A

Everyone over the age of 16 who is actively working PLUS all those who are NOT working but are actively seeking employment

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24
Q

output and unemployment are _____ related

A

Inversely

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25
Q

When output goes down, jobs go ____ and unemployment goes _____

A

When output goes down, jobs go DOWN and unemployment goes UP

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26
Q

Unemployed = people…..

A

Currently looking for work

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27
Q

Employed = people….

A

With paid jobs

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28
Q

Labor force =….

A

Employed + unemployed

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29
Q

What is unemployment rate?

A

Proportion of the labor force that is unemployed

30
Q

Give the formula to calculate unemployment rate

A

Unemployment rate = number of unemployed/number in labor force

31
Q

Is this formula to measure unemployment rate a perfect measure? Why?

A

NO - doesn’t account for people who give up looking for a job after searching for a while or for those getting hours cut

32
Q

What are the 4 categories of unemployment?

A
  1. Seasonal unemployment
  2. Frictional unemployment
  3. Structural unemployment
  4. Cyclical unemployment
33
Q

Describe and give an example of seasonal unemployment

A

Seasonal unemployment = unemployment caused by seasonal treatment
Example: lifeguards, weather-dependent construction

34
Q

Describe and give an example of frictional unemployment

A

Frictional unemployment = brief period of unemployment associated with a job search
Example: someone changing jobs, students looking for a job right after graduation

35
Q

Describe and give an example of structural unemployment

A

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

36
Q

Describe and give an example of cyclical unemployment

A

Cyclical unemployment = when there are not enough jobs to go around due to downturns in the business cycle. Unemployment due to recession.

37
Q

Of the 4 categories of unemployment, which 3 are unavoidable and will always exist?

A

Seasonal
Fractional
Structural

38
Q

Of the 4 categories of unemployment, which is avoidable and we want to avoid it?

A

Cyclical unemployment

39
Q

In the graph of the business cycle, during times of cyclical unemployment the graph is sloping ____

A

Down

40
Q

Do we want to have zero unemployment? What is the goal for unemployment rate?

A

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%

41
Q

Unemployment rate is connected to _____ rate

A

Inflation

42
Q

The biggest fear as an economy reaches full employment is ____

A

Inflation

43
Q

As an economy reaches its production possibilities, what happens to costs/prices?? What in turn does this cause?

A

Costs rise, pushing up prices ———> causing inflation

44
Q

Contrast inflation, deflation, and relative price.

A

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

45
Q

For inflation to exist, does the price of every good have to increase?

A

NO

46
Q

Mathematical contrast inflation with relative price change

A

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

47
Q

When price increases, profits in turn increase which causes..

A

Entry into the market

48
Q

Is it possible for prices to rise or fall continuously without changing the average price level?

A

YES

49
Q

Changes in relative price are ___ ____ which help..

A

Changes in relative price are MARKET SIGNALS which help reallocate resources in the economy

50
Q

Explain in detail why relative price changes are considered market signals

A

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

51
Q

Inflation is a form of ____

A

Redistribution

52
Q

Explain why inflation is a form of redistribution

A

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

53
Q

When inflation exists, the consumer is ___ off

A

Worse

54
Q

When inflation exists, the producer is most likely ____ off

A

Better

55
Q

What is nominal income?

A

The amount of money income received in a given time period MEASURED IN CURRENT DOLLARS

56
Q

What is real income?

A

Income in CONSTANT DOLLARS (nominal income adjusted for inflation)

57
Q

Do all prices rise at the same rate during inflation? Is everyone affected equally?

A

NO

58
Q

When real income DECREASES, the prices of goods and services have _____. Thus, purchasing power ______

A

When real income increases, the prices of goods and services have INCREASED.Thus, purchasing power decreases

59
Q

When nominal income changes, is there a change in purchasing power?

A

NO

60
Q

What looks like ____ to a buyer might look like ____ to a seller

A

What looks like price to a buyer might look like income to a seller

61
Q

When prices rise, ___ rise too (for some)

A

Incomes

62
Q

____ may reduce the value of your real saving

A

Inflation

63
Q

What is the term to describe that inflation may reduce the value of your real savings?

A

Wealth effects

64
Q

UNCERTAINTIES of inflation may cause people to change their ___,___, or ____behavior

A

Consumption, saving, or investment behavior

65
Q

When consumers have a fear of rapidly increasing prices, how are their attitudes towards long term purchasing decisions affected? What about firms?

A

Consumers may deter from making long term purchasing decisions. Firms may also postpone construction or not finish new construction

66
Q

Changes in prices may cause people to buy more _______ NOW. Why?

A

Goods and services for fear that prices will rise further. They may make foolish decisions on things they don’t really want or need

67
Q

0% inflation might harm the goal of ___ _______

A

Full employment

68
Q

Why do we want inflation to exist to some extent?

A

Producers will make more and hire more workers

69
Q

We want inflation below __%

A

3%

70
Q

What is PRICE STABILITY?

A

The absence of significant changes in average price levels. OFFICIALLY DEFINED as a rate of inflation under 3%

Pharmoeconomics Exam 2 (5 decks)

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