Chapter 9: Business Cycles, Unemployment, and Inflation

Question 1

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

Answer 1

About 3 percent per year.

Question 2

Name the four phases of the business cycle.

Answer 2

Peak, Recession, Trough, Expansion (Recovery).

Question 3

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

Answer 3

The business cycle.

Question 4

What occurs during the peak phase of the business cycle?

Answer 4

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

Question 5

Define recession in the context of the business cycle.

Answer 5

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

Question 6

What happens in the trough phase?

Answer 6

Output and employment bottom out at their lowest levels.

Question 7

What characterizes the expansion phase of the business cycle?

Answer 7

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

Question 8

What is a significant characteristic of business cycles?

Answer 8

They vary greatly in duration and intensity.

Question 9

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

Answer 9

Business fluctuations.

Question 10

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

Answer 10

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

Question 11

What is the unemployment rate formula?

Answer 11

Unemployment Rate = Unemployed / LaborForce × 100

Question 12

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

Answer 12

Under 16 and/or institutionalized
Not in labor force
Employed
Unemployed

Question 13

What characterizes “unemployed” individuals?

Answer 13

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

Question 14

What is frictional unemployment?

Answer 14

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

Question 15

What is structural unemployment?

Answer 15

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

Question 16

What is cyclical unemployment?

Answer 16

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

Question 17

What is full employment?

Answer 17

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

Question 18

What is the GDP gap?

Answer 18

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

Question 19

What is Okun’s Law?

Answer 19

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.

Question 20

What is inflation?

Answer 20

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

Question 21

How does inflation affect purchasing power?

Answer 21

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

Question 22

What is the Consumer Price Index (CPI)?

Answer 22

The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services, serving as an indicator of inflation or deflation.

Question 23

How is the CPI calculated?

Answer 23

CPI=Priceofthemostrecentmarketbasket / Priceestimateofthemarketbasketinthebaseyear

​×100

Question 24

How do you calculate the inflation rate using CPI?

Answer 24

RateofInflation= (CurrentCPI−PreviousCPI) / PreviousCPI

​
×100

Question 25

What does a negative inflation rate indicate?

Answer 25

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

Question 26

What is demand-pull inflation?

Answer 26

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

Question 27

What causes cost-push inflation?

Answer 27

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

Question 28

What is core inflation?

Answer 28

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

Question 29

What inflation rate does the Federal Reserve target?

Answer 29

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

Question 30

What is the difference between nominal income and real income?

Answer 30

Nominal income is the dollar amount received, while real income is the purchasing power of that nominal income, adjusted for inflation.

Question 31

How is real income calculated?

Answer 31

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

Question 32

Who is typically hurt by unanticipated inflation?

Answer 32

Fixed-income receivers, savers, and creditors.

Question 33

Why do fixed-income receivers suffer during inflation?

Answer 33

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

Question 34

How does unanticipated inflation affect savers?

Answer 34

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

Question 35

Why are creditors harmed by unanticipated inflation?

Answer 35

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

Question 36

Who benefits or remains unaffected by unanticipated inflation?

Answer 36

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

Question 37

What is the impact of deflation compared to inflation?

Answer 37

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

Question 38

What is hyperinflation?

Answer 38

Hyperinflation is when prices rise extremely quickly and out of control, making money lose its value so much that people might need huge amounts of cash just to buy basic items like bread or milk. It happens when a country prints too much money or loses trust in its economy.

Question 39

What causes hyperinflation?

Answer 39

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

Question 40

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

Answer 40

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

Question 41

How do hyperinflations typically end?

Answer 41

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

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

What is the conclusion about mild inflation?

Answer 44

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

Question 45

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

Answer 45

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