Reading 17: Understanding Business Cycles

Question 1

Describe the Business Cycle and its phases.

Answer 1

Business cycle has 4 phases:

1. ) Expansion- ( increase GDP; Inventory-sales ratio–>sales high)
2. ) Peak (PEAK gdp) (highest GDP; inventory-sales ratio–> more inventory than sales)
3. ) Contraction- Inventory-sales ratio is large so they decide to contract (Decrease GDP)
4. ) Trough (real GDP stops and begins increase)

Question 2

Describe types of unemployment and compare measures of unemployment. (Frictional Unemployment, Structural Unemployment, and Cyclical Unemployment)

Answer 2

Frictional Unemployment- frictional unemployment is when employers are looking for employees, but they are not looking at the right places. There is a mismatch between employers searching vs. skilled employees.

Structural Unemployment- structural unemployment occurs when there’s just a mismatch between employees and employers because of the skillset.

Cyclical Unemployment- unemployment that results from contraction period of business cycle or “layoff.”

Question 3

Describe inflation, hyperinflation, disinflation, and deflation.

Answer 3

Inflation- there is more money in circulation and the dollar has lost value

Hyperinflation- the cause of the complete devaluation of a dollar; this occurs when there is social or political unrest.

Disinflation- which is the lowering of inflation; where the rate of inflation decreases over time

Deflation- a persistently decreasing inflation rate & even into negative inflation.

Question 4

Distinguish between cost-push inflation & demand-pull inflation.

Answer 4

Cost-push Inflation- cost by the rise in the cost of goods or the payout of workers causing less labor supply and increased unemployment

Demand-pull inflation- is the result of increased money supply to increase GDP artificially; can lead to hyperinflation and devaluation of dollar

Question 5

So what is the solution to naturally increasing nations GDP? We have to move the LRAS Curve.

Answer 5

LRAS curve moves through:

• labor supply specialization
• technological advances
• resource gain
• increasing labor supply

Question 6

Why is USA GDP #1? Why is our businesses the best?

Answer 6

• consumer confidence in products and services
• creativity and ingenuity of products
• low unemployment rate
• strong customer bases