Economic Concepts and Analysis Flashcards
what are the four phases of a Business Cycle?
the four phases of the Business Cycle are:
(1) The “expansion” phase
(2) The “peak,”
(3) The “contraction
(4) The “trough,”
unemployment rate
the unemployment rate measures the percentage of the labor force that is not working. It is calculated as the number of unemployed workers divided by the number of workers in the labor force multiplied by 100.
The labor force
equals all U.S. residents 16 years of age or older who are not institutionalized, who are working, or who are unemployed and actively looking for work. Part-time workers are counted as being employed.
what are Types of unemployment?
a. Frictional unemployment occurs due to normal labor turnover. “Search unemployment” includes workers looking for jobs. “Wait unemployment” includes workers waiting to take jobs in the near future. Frictional unemployment is an inevitable and necessary part of well-functioning labor markets.
b. Seasonal unemployment occurs in regular and recurring patterns in some industries..
c. Cyclical unemployment is unemployment that is related to the general level of economic activity and tends to rise during the recession phase of the business cycle.
d. Structural unemployment arises when changes in technology and international competitiveness change the skills required to perform jobs and/or change the location of jobs.
What is Full employment?
Full employment is defined as the level of employment where the actual unemployment rate is equal to the natural rate of unemployment (NRU).
What is inflation?
Inflation is a sustained increase in the average level of prices and is measured by using a fixed-weight price index.
what are the types of inflation?
a. Demand-pull inflation
b. Cost-push inflation
c. Hyperinflation
d. Deflation
what is Demand-pull inflation?
Demand-pull inflation is caused by an excess in total spending relative to the economy’s current capacity to produce goods and services.
“too much money chasing too few goods”
what is Cost-push inflation?
Cost-push inflation occurs when rising prices result from an increase in resource costs and thus a rise in per-unit costs of production.
What is Hyperinflation?
Hyperinflation is an extremely rapid rate of inflation that usually has a devastating impact on real output and employment. money eventually becomes worthless.
What is deflation?
Deflation is a sustained decline in the general price level.
explain the Impact of inflation?
When inflation occurs, not everyone’s nominal income rises at the same rate and, therefore, there will be some redistribution of purchasing power as inflation persists. this is called the Redistribution effect.
A simple formula provides an approximation of how much real income will change:
% change in real income = % change in nominal income - % change in the price level
Who is hurt by inflation?
1- individuals who receive a fixed income.
2- Savers: As prices increase, the purchasing power of accumulated savings declines.
3- Creditors
Who is helped or unaffected by inflation?
- flexible income
- debtors
- Property Owners
what is the Impact of deflation?
recession, rising unemployment, and significant stress on financial institutions. Also, nominal interest rates decline close to zero.
what are Leading economic indicators?
Leading economic indicators are a set of variables that historically have demonstrated a high correlation with the level of economic activity. It is important to note, however, that these forecasts have not been infallible and, at times, have not provided sufficient advance warning for policymakers to be able to respond in a timely manner.
Lagging indicators?
Unemployment is a lagging indicator because the unemployment rate lags behind the phase of the business cycle. The rate does not begin to decline significantly until the economy is well into an economic recovery.
Inflation and the business cycle: what interaction?
Inflation is positively correlated to the business cycle.
Components of the money supply?
1-Money. 3 forms:
M1:The most narrowly defined component of the money supply. It consists of coins and currency in the hands of the public and the checkable deposits held in commercial banks and thrift institutions.
M2: M1 + noncheckable savings deposits, small-time deposits (less than $100,000), and individual money market mutual fund balances.
M3: M2 + time deposits in excess of $100,000. This includes the most illiquid components of the money supply.
real national income starts to rise but still below the potential national income. in what business cycle?
in the Recovery phase
in the Peak phase, the real national income will be as close as possible to the potential national income
Inflation and Borrowing, what relationship?
Inflation encourages borrowing since people prefer to borrow money and repay it with less purchasing power.
Leading indicators of an expansion?
favorable expectations about business and economic conditions.
Formula to calculate Consumer Price index (CPI)
(Price of the market basket, current year / Price of the market basket, base period) * 100
in what business cycle phase does the Real GDP stop declining and turn into growth?
TROUGH PHASE
Prices tend to rise in which phases of the business cycle?
Recession and Expansion
what drives the fluctuations in the business cycles?
Total spending (Aggregate Demand)
inflation and the unemployment- relationship?
As the unemployment rate falls, the inflation rate increases at an increasing rate.
Inflation, deflation, and borrowing?
deflation discourages borrowing and discourages business investment. It is undesirable to borrow money and then have to repay it with money that has more purchasing power.
Inflation encourages borrowing
what happens when potential GDP exceeds real GDP?
this means that there are underutilized resources in the economy, rather than a shortage of a resource such as labor.
demand-pull inflation
demand-pull inflation is associated with faster economic growth due to stimulating investment and expansion.
Which of the following statements is true when supply and demand move in opposite directions?
if supply and demand move in opposite directions the new equilibrium quantity cannot be predicted but the change in price will move in the same direction as the demand curve.
