Macroeconomics - Ch 9 Flashcards
Business cycles
alternating rises and declines in the level of economic activity, sometime over several years
peak
business activity has reached a temporary maximum; economy at near/full employment, level of real output is at or very close to economy’s capacity; price level likely to rise
recession
period of decline in total output, income, and employment; downturn lasts 6 months or more, widespread contraction of business activity; declines in GDP, significant increases in unemployment
trough
recession or depression; output and unemployment bottom out; short lived or long
expansion
follows a recession/recovery; real GDP, income, and employment rise; approaches full employment; prices of nearly all goods/services rise (inflation)
labor force
people who are able and willing to work (includes employed and those who are unemployed but actively seeking work)
unemployment rate
unemployed/labor force x 100
discouraged workers
workers who become discouraged and drop out of the labor force after a time of unsuccessfully seeking employment
frictional unemployment
search unemployment and wait unemployment; for workers who are either searching for jobs or waiting to take jobs in the near future
structural unemployment
changes over time in consumer demand and in technology alter the structure of the total demand for labor, both occupationally and geographically
cyclical unemployment
unemployment caused by a decline in total spending; typically begins n the recession phase of the business cycle
full employment rate of unemployment (natural rate of unemployment - NRU)
unemployment rate consistent with full employment (only frictional and structural unemployment, no cyclical unemployment)
potential output
real GDP occurs when the economy is fully employed (at NRU)
GDP Gap
difference between actual and potential GDP; can be negative or positive; unemployment above natural rate (society operating somewhere within its production possibility curve)
Okun’s Law
for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 % occurs
Inflation
rise in the general level of prices
Consumer Price Index (CPI)
main measure of inflation in the US; compiled by the Bureau of Labor Statistics
deflation
price level declines
demand-pull inflation
excess demand builds up the prices of the limited output; “too much spending chasing too few goods”
cost-push inflation
explains rising prices in terms of factors that raise per-unit production costs at each level of spending
per-unit production costs
average cost of a particular level of output; total input cost divided by units of output
core inflation
the underlying increase in the CPI after volatile food and energy prices are removed
nominal income
number of dollars received as wages, rent, interest, or profit
real income
measure of the amount of goods and services nominal income can buy; purchasing power of nominal income (income adjusted for inflation); nominal income divided by price index (in hundredths)
unanticipated inflation
cause real income and wealth to be redistributed
anticipated inflation
situations in which people see an inflation coming in advance
cost of living adjustments (COLAs)
automatic adjustments of income some union workers receive when the CPI rises; rarely equals the full percentage rise in inflation
real interest rate
percentage increase in purchasing power that the borrower pays the lender
nominal interest rate
percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectations of inflation (= real interest rate + inflation premium (the expected rate of inflation)
hyperinflation
extraordinarily rapid inflation
