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Macro > Chapter 9: Business Cycles, Unemployment, and Inflation > Flashcards

Chapter 9: Business Cycles, Unemployment, and Inflation Flashcards

1
Q

What is the average annual growth rate of real GDP in the United States?

A

About 3 percent per year.

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2
Q

Name the four phases of the business cycle.

A

Peak, Recession, Trough, Expansion (Recovery).

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3
Q

What is the cyclical pattern of alternating rises and declines in economic activity known as?

A

The business cycle.

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4
Q

What occurs during the peak phase of the business cycle?

A

Business activity reaches a temporary maximum, and the economy is near full employment and capacity.

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5
Q

Define recession in the context of the business cycle.

A

A period of decline in total output, income, and employment lasting at least six months.

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6
Q

What happens in the trough phase?

A

Output and employment bottom out at their lowest levels.

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7
Q

What characterizes the expansion phase of the business cycle?

A

Real GDP, income, and employment rise, approaching full employment.

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8
Q

How many recessions did the U.S. experience between 1950 and 2020?

A

11

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9
Q

What is a significant characteristic of business cycles?

A

They vary greatly in duration and intensity.

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10
Q

What term do economists prefer to emphasize the irregularity of business cycles?

A

Business fluctuations.

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11
Q

List some sources of economic shocks that can cause business cycle fluctuations.

A

Political events, financial instability, irregular innovation, productivity changes, monetary factors.

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12
Q

How did the COVID-19 recession differ from typical recessions?

A

It was caused by a public health crisis rather than traditional economic shocks.

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13
Q

Which sectors are most affected during recessions?

A

Industries producing capital goods and consumer durables.

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14
Q

Which sectors are somewhat insulated from the severe effects of recessions?

A

Service industries and industries producing nondurable consumer goods.

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15
Q

What happens to spending and employment during a recession?

A

Total spending declines, leading firms to cut production and reduce employment.

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16
Q

What is the typical outcome when spending unexpectedly rises?

A

Output, employment, and incomes increase.

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17
Q

What are the two main problems that arise over the course of the business cycle?

A

Unemployment and inflation.

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18
Q

How does the U.S. Bureau of Labor Statistics (BLS) measure unemployment?

A

Through a nationwide survey of about 60,000 households each month, asking about employment status.

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19
Q

What is the unemployment rate formula?

A

Unemployment Rate = (Unemployed / Labor Force) × 100

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20
Q

What are the four groups the BLS divides the total U.S. population into?

A
  1. Under 16 and/or institutionalized
  2. Not in labor force
  3. Employed
  4. Unemployed
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21
Q

Who is classified as “employed”?

A

Noninstitutionalized people age 16 and older who have jobs.

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22
Q

What characterizes “unemployed” individuals?

A

Noninstitutionalized people age 16 and older who are not employed but are actively seeking work.

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23
Q

What is frictional unemployment?

A

Unemployment that occurs when workers are between jobs or searching for their first job.

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24
Q

What is structural unemployment?

A

Unemployment resulting from changes in consumer demand and technology that create a mismatch between skills and job opportunities.

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25
Q

What is cyclical unemployment?

A

Unemployment caused by a decline in total spending, typically beginning in a recession.

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26
Q

What is full employment?

A

An economic state where only frictional and structural unemployment exist, with no cyclical unemployment.

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27
Q

Define the natural rate of unemployment (NRU).

A

The unemployment rate consistent with full employment, where the economy produces its potential output.

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28
Q

What is the GDP gap?

A

The difference between actual GDP and potential GDP, indicating forgone output due to unemployment.

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29
Q

What is Okun’s Law?

A

A principle that quantifies the relationship between unemployment and the GDP gap, stating that a 1% increase in unemployment leads to a 2% negative GDP gap.

30
Q

How does unemployment affect different demographic groups?

A

Unemployment rates vary; lower-skilled workers, teenagers, and certain racial and ethnic groups often face higher unemployment.

31
Q

What are the economic costs of high unemployment?

A

Forgone output and a GDP gap, leading to potential production loss and economic inefficiency.

32
Q

What is inflation?

A

Inflation is a rise in the general level of prices, reducing the purchasing power of money.

33
Q

How does inflation affect purchasing power?

A

Inflation means that each dollar buys fewer goods and services than before.

34
Q

What is the Consumer Price Index (CPI)?

A

The CPI is the primary measure of inflation in the U.S., tracking a market basket of about 300 consumer goods and services.

35
Q

How is the CPI calculated?

A

CPI = (price of the most recent market basket/price estimate of the market basket in the years you want to calculate) * 100

36
Q

How do you calculate the inflation rate using CPI?

A

Rate of Inflation = (Current CPI - Previous CPI)/(Previous CPI) * 100

37
Q

What does a negative inflation rate indicate?

A

A negative inflation rate indicates deflation, or a decline in the price level.

38
Q

What historical periods in the U.S. experienced rapid inflation?

A

Major periods of rapid inflation occurred in the 1970s, early 1980s, and after the COVID-19 pandemic.

39
Q

What is demand-pull inflation?

A

Demand-pull inflation occurs when total spending exceeds the economy’s capacity to produce goods and services, leading to higher prices.

40
Q

What causes cost-push inflation?

A

Cost-push inflation arises from factors that raise production costs, such as supply shocks or rising prices of raw materials.

41
Q

What is core inflation?

A

Core inflation measures underlying inflation by excluding volatile food and energy prices, providing a clearer trend of price changes.

42
Q

What inflation rate does the Federal Reserve target?

A

The Federal Reserve targets a 2% inflation rate to maintain price stability.

43
Q

What is the difference between nominal income and real income?

A

Nominal income is the dollar amount received (wages, rent, etc.), while real income is the purchasing power of that nominal income, adjusted for inflation.

44
Q

How is real income calculated?

A

Real Income = Nominal Income / Price Index (in hundredths).

45
Q

What does it mean if real income remains unchanged?

A

Real income remains unchanged when nominal income rises at the same percentage rate as the price index.

46
Q

How is the percentage change in real income approximated?

A

Percentage change in real income ≈ Percentage change in nominal income - Percentage change in price level.

47
Q

Who is typically hurt by unanticipated inflation?

A

Fixed-income receivers, savers, and creditors.

48
Q

Why do fixed-income receivers suffer during inflation?

A

Their real income declines as inflation erodes the purchasing power of their fixed incomes.

49
Q

How does unanticipated inflation affect savers?

A

The purchasing power of accumulated savings decreases, particularly if inflation exceeds interest rates.

50
Q

Why are creditors harmed by unanticipated inflation?

A

They receive repayments in less valuable dollars, resulting in a loss of real income.

51
Q

Who benefits or remains unaffected by unanticipated inflation?

A

Flexible-income receivers, debtors, business owners, and property owners.

52
Q

How do flexible-income receivers maintain purchasing power during inflation?

A

Their incomes adjust to inflation, such as Social Security payments that increase with the CPI.

53
Q

How do debtors benefit from unanticipated inflation?

A

They repay loans with less valuable dollars, effectively reducing the real burden of their debt.

54
Q

What is the impact of anticipated inflation on income redistribution?

A

Anticipated inflation allows individuals to adjust nominal incomes, reducing adverse effects.

55
Q

What is the relationship between nominal interest rate and real interest rate?

A

Nominal Interest Rate = Real Interest Rate + Inflation Premium (the expected inflation rate).

56
Q

What are the effects of deflation compared to inflation?

A

Deflation benefits fixed-income receivers and creditors while harming debtors.

57
Q

What does it mean that inflation’s redistribution effects are arbitrary?

A

Inflation impacts individuals regardless of their socioeconomic status, taking from some and giving to others.

58
Q

What is cost-push inflation?

A

Inflation caused by sudden increases in the prices of key resources, raising overall production costs.

59
Q

What happens to demand and output during cost-push inflation?

A

As prices rise, the quantity demanded falls, firms produce less output, and unemployment increases.

60
Q

How did the 1970s oil crisis illustrate the effects of cost-push inflation?

A

OPEC’s oil price quadrupling led to inflation, rising unemployment from <5% to 8.5%, and income redistribution.

61
Q

What is the debate among economists regarding mild inflation (<3%)?

A

Some argue it reduces real output, while others see it as a by-product of necessary strong spending for growth.

62
Q

What are the arguments for zero inflation?

A

Low inflation diverts resources to hedge against it, leading to less production and lower economic growth.

63
Q

How does mild inflation support economic activity according to some economists?

A

It encourages strong spending, which boosts profits, labor demand, and allows firms to adjust real wages more flexibly.

64
Q

What defines hyperinflation?

A

Inflation exceeding 50% per month, resulting in extremely high annual rates (e.g., 13,000%).

65
Q

What are the adverse effects of hyperinflation?

A

Disruption of economic relationships, declines in production and investment, and a shift to barter systems

66
Q

What causes hyperinflation?

A

Governments expanding the money supply imprudently, leading to severe demand-pull inflation.

67
Q

Why do governments resort to printing money, leading to hyperinflation?

A

To cover spending needs when revenues from taxes or borrowing are insufficient, especially during or post-war.

68
Q

How do hyperinflations typically end?

A

By reducing government spending to align with available revenues from taxes and borrowing.

69
Q

What is a key difference between cost-push and demand-pull inflation in terms of real output?

A

Cost-push inflation reduces real output and employment, while demand-pull inflation has mixed opinions on its effects.

70
Q

What is the conclusion about mild inflation?

A

It may be a necessary by-product of high spending that promotes full employment and economic growth.

Macro (13 decks)

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