Chapter 13 “Economic Instability” Test Review Flashcards
What is the difference between a business cycle and business fluctuations?
Business Cycle - the NATURAL ups and downs of an economy measured by the growth and decline of production of jobs.
Business Fluctuations - IRREGULAR ups and downs caused by UNEXPECTED disruptions
Explain the FOUR PHASES of a business cycle
Peak (boom) - Good, high investment, high profits and wages, high spending, low unemployment, and inflation
Recession (contraction) - Downturn, demand and consumer spending slows, output decreases, unemployment increases, inflation falls, and low/negative economic growth
Expansion (recovery) - Upturn, business invest, output increases, consumer spending rises, jobs created, low but increasing economic growth
Depression (trough) - slump, bad, low investment, low profits and wages, low spending, high unemployment, low/negative economic growth
What are some reasons that can turn expansion into a contraction? (Hint: there are 5)
- External shock - factors OUTSIDE the U.S economy (i.e. 9/11, COVID)
- Loss of confidence in economy - prompts consumers to stop buying and move into defensive mode
- Stock market crash - effects ENTIRE economy
- Manufacturing orders slow down - good predictors
- Deflation - PRICES FALLING overtime have a worse effect on economy than inflation - reduces value of goods and services sold on market
What was the worst downturn in the economy in the 20th century?
The Great Depression
Explain the economy DURING The Great Depression.
- “Black Tuesday” AKA Stock Market Crash, October 29, 1929
- 1933 - LOWEST POINT, consumer spending dropped causing steep decline in output and employment as companies laid off workers
- Unemployment rose nearly 800%
- Half the banks failed (FDIC didn’t exist)
- PROCLAMATION 2039 - signed by FDR in his first 36 hours in office that shut down banks for a whole week. “Bank Holiday”
Who was the president at the beginning of the Great Depression?
Herbert Hoover
Who was the president during most of the Great Depression?
Franklin D. Roosevelt
How long did the Great Depression last?
10 years (1929-1939)
What was the major event that ended the Great Depression?
World War 2 (Ended 1945)
What were the 5 reforms FDR signed?
- Social Security - Signed into law by FDR on August 14th, 1935. Designed to pay retired workers ages 65 or older. Lifetime money
- Fair Labor Standards Act (1938) - Started minimum wage which at the time was $.25/ hr and it has been raised 22 separate time (most recent: July 2009 $7.25)
- Unemployment programs - relieves stress from unemployed. Unemployment insurance designed to compensate only employable persons who are through NO FAULT OF THEIR OWN
- Securities and Exchange Commission (SEC) - signed1935 to regulate new companies that were looking for money from investors - make stock ownership safer
- Federal Deposit Insurance Corporation (FDIC) - signed 1933 to provide safety at banks and provided modest bank insurance to depositors
Explain how the economy has been since WW2?
- Shorter recessions and longer expansions
- Average length of a recession is about 10 months
- Average length of expansion is about 54 months (4+ years)
Post WW2 - greatest military + economic power (USSR)
What was the Great Recession? How long did it last?
- longest and deepest recession SINCE Great Depression
- % of unemployed doubled
- 8.2 million people lost their jobs
- foreclosures and repossessions
What is the difference between inflation and deflation?
Inflation - rise in prices
Deflation - decline in prices
Describe the 3 types of inflation.
- Creeping inflation - 3% or less
- Galloping inflation - 10% or more
- Hyperinflation - 50% or more
What are the FOUR EXPLANATIONS FOR THE CAUSES OF INFLATION?
- Demand-pull theory - strong consumer demand drives inflation - limited # of goods in market and large demand, prices rise
- Cost-push theory - overall price levels go up because of increase in cost of wages, raw materials, and anything else to make a product
- Wage-price spiral - self-perpetuating spiral of wages and prices
- Excessive money growth - money supply grows FASTER than goods causing increased spending
What are the THREE CONSEQUENCES OF INFLATION?
- Reduced purchasing power - dollar buys less whenever prices rise and money loses value over time - hurts retired people and ones with fixed incomes
- Changed spending habits - inflation changes how we buy things
- Effects creditors/debtors - during inflation, creditors are hurt more than debtors
What is the Civilian Labor Force?
Those who have a job or are seeking one, 16 yrs+, not serving in military and not institutionalized
What groups are excluded from the labor force?
- Military personnel
- Handicapped/mental health facilities
- Retirees
- Prison
- Rest homes
- Discouraged workers
What group of people are considered UNEMPLOYED?
Without a paid job but available to work
What is the unemployment rate?
of people unemployed as a % if Labor Force
How is unemployment rate calculated?
(Unemployed / Labor Force) x 100
# of people getting unemployment check
What is a discouraged worker?
Longer-term unemployed - given up hope of finding a job not counted in unemployment check
What is underemployed?
Workers who are very overqualified at their job. Part-time workers who want full time jobs. Considered employed
How does the unemployment rate go down?
When level of education goes up
Define fractional unemployment and give an EXAMPLE.
Temporarily occurs when people change jobs. Ex: going to a new job and taking 2 months off but job will be guaranteed
Define structural unemployment and give an EXAMPLE
Workers’ skills do not match the jobs that are available
Ex: younger people don’t have soft skills
List the FIVE major causes of structural unemployment
- Development of new tech
- Discovery of new resources
- Changes in consumer demand
- Globalization
- Lack of education
Define technological unemployment and give an EXAMPLE
When workers are replaced by machines and automation
Ex: ATMS put bank tellers out of a job
Define cyclical unemployment
Takes place over course of business cycle which may last years
Define seasonal unemployment
Resulting from seasonal changes in weather or in demand. Takes place regardless of health of economy
What is a fully employed economy?
3-5% due to only frictional and structural NOT cyclical
Why will the unemployment rate never be ZERO?
Very unrealistic because there will always be someone looking for a job
How does unemployment affect the economy?
- Affects ENTIRE family, your health and mental state
- Economy’s output goes down
- Unemployment creates crime
- Unemployment creates unemployment
