Chapter 8

Question 1

the four phases of the business cycle

Answer 1

expansion, peak (or boom), contraction, and recession

Question 2

who is in the labor force?

Answer 2

people 16+ who are employed or who are seeking employment

Question 3

problems with measured unemployment

Answer 3

1. doesn’t measure underemployment (working part time or below skill level)
2. discouragement effect: changes in the unemployment rate over time cause people to slip between unemployed and not a part of the labor force

Question 4

three types of unemployment

Answer 4

frictional, structural, cyclical

Question 5

frictional unemployment

Answer 5

occurs because (1) employers are not fully aware of all available workers and their qualifications and (2) available workers are not fully aware of the jobs being offered by employers; job search!

Question 6

structural unemployment

Answer 6

although job openings are available, they generally require skills many unemployed workers do not have

Question 7

cyclical unemployment

Answer 7

because fewer goods are being produced, fewer workers are needed to produce them, leading employers to lay off workers and cut back employment

Question 8

full employment

Answer 8

the level of employment that results when the rate of unemployment is “normal”, considering both frictional and structural factors

Question 9

the natural rate of unemployment

Answer 9

not a temporary high or low; it is a rate that is sustainable

Question 10

potential output

Answer 10

the maximum sustainable output level consistent with the economy’s resources and current institutional arrangements

Question 11

inflation (in terms of power of money)

Answer 11

a decline in the value (the purchasing power) of money

Question 12

why does inflation adversely affect the economy?

Answer 12

• high and variable inflation reduces investment (uncertainty comes along with unanticipated inflation; inflation distorts the information delivered by prices)
• inflation can distort decision making
• high and variable inflation results in less productive use of resources (when the inflation rate is high, people will spend more of their money and time trying to predict and cope with the future rate of inflation; these resources could have been used to produce goods/services in the market)