Business Cycle and Unemployment Overview

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Questions and Answers

How is the output being forgone by the economy calculated according to Okun's law?

By multiplying the number of unemployed by the potential GDP

By the difference between potential and actual GDP (correct)

By calculating the total output divided by the number of employed workers

By subtracting the natural rate of unemployment from the actual rate

What is hyperinflation characterized by?

Inflation rates stabilizing after a peak

A period of very rapid inflation (correct)

A decrease in the overall price level

A steady increase in price levels

What does the Consumer Price Index (CPI) measure?

The total revenue of consumer goods producers

The inflation rate over a decade

The overall cost of a fixed basket of goods and services (correct)

The change in production cost over time

What is the formula used to calculate CPI?

CPI = (cost of current basket / cost of base basket) × 100 Signup and view all the answers

Which inflation type is caused by increased total spending exceeding production capabilities?

Demand-pull inflation Signup and view all the answers

What is the correct interpretation of the natural rate of unemployment?

The long-term rate of unemployment unaffected by economic cycles Signup and view all the answers

If the CPI in 2022 is calculated as 120 and in 2023 is 135, what is the inflation rate for 2023?

12.5% Signup and view all the answers

Which of the following describes deflation?

An overall decrease in price levels Signup and view all the answers

What characterizes a recession?

Decline in economic activities and rise in unemployment Signup and view all the answers

What is the period following the trough in the business cycle called?

Expansion Signup and view all the answers

Which term is used to describe a severe recession?

Depression Signup and view all the answers

During which phase does real GDP begin to increase?

Expansion Signup and view all the answers

What does the business cycle primarily fluctuate based on?

Total spending in the economy Signup and view all the answers

What occurs immediately after a peak in the business cycle?

Recession Signup and view all the answers

Which of the following is a characteristic of the expansion phase?

Declining unemployment Signup and view all the answers

What happens to unemployment during a severe recession?

It increases significantly Signup and view all the answers

What is frictional unemployment primarily associated with?

The search for new employment after leaving a job Signup and view all the answers

What characterizes structural unemployment?

It is linked to changes in economic structure that require new skills Signup and view all the answers

Which statement best defines full employment?

It encompasses both frictional and structural unemployment Signup and view all the answers

Which type of unemployment results from the normal turnover of employees?

Frictional unemployment Signup and view all the answers

What is a common misconception about full employment?

It necessarily means zero unemployment Signup and view all the answers

Which of the following is NOT a characteristic of frictional unemployment?

It lasts a long time Signup and view all the answers

What does structural unemployment often require from workers?

The ability to adapt to changes in job requirements Signup and view all the answers

What best represents the relationship between full employment and potential output?

Full employment indicates the economy can produce potential output Signup and view all the answers

What type of unemployment is primarily caused by insufficient demand for goods and services?

Cyclical unemployment Signup and view all the answers

What is the primary cost associated with unemployment?

Decrease in real GDP Signup and view all the answers

How is the GDP gap calculated?

Potential GDP - Actual GDP Signup and view all the answers

According to Okun's law, what is the negative impact on GDP for every 1% increase in unemployment?

2% decrease in GDP Signup and view all the answers

What is the formula for determining actual unemployment?

A = N + C Signup and view all the answers

Which factor does NOT affect the unequal burden of unemployment?

Economic policies Signup and view all the answers

What term describes the loss of output associated with unemployment?

GDP gap Signup and view all the answers

Which type of unemployment occurs naturally as people move between jobs?

Frictional unemployment Signup and view all the answers

What type of inflation is caused by rising per-unit production costs?

Cost-push inflation Signup and view all the answers

What is a characteristic of cost-push inflation?

Moves the economy inward from its production possibilities curve Signup and view all the answers

Which event is most likely to cause cost-push inflation?

Negative supply shock Signup and view all the answers

What is most likely to occur during the expansionary phase of the business cycle?

Demand-pull inflation Signup and view all the answers

Core inflation measures which of the following?

Underlying increases in CPI after removing volatile food and energy prices Signup and view all the answers

How is real income calculated?

Dividing nominal income by the price index in hundredths Signup and view all the answers

If a person's nominal income rises from $10,000 to $12,000 and the CPI rises from 100 to 105, what happens to their real income?

Falls by about 2 percent Signup and view all the answers

What do Cost-of-living adjustment clauses (COLAs) do?

Tie wage increases to changes in the price level Signup and view all the answers

Study Notes

Business Cycle

The business cycle is the fluctuation in economic activity, characterized by periods of upswings and downswings.
Changes in economic activity are driven by fluctuations in total spending (price x quantity).
The business cycle has four phases: recession, trough, expansion, and peak.
Recession is a period of economic decline, marked by decreasing economic activity, rising unemployment, and a decrease in real GDP.
A severe recession is called a depression.
The trough is the end of a recession, marking a transition to expansion.
Expansion is a period of increasing economic activity, resulting in rising real GDP. This phase is sometimes called a recovery.
Peak is the highest point of economic activity in the business cycle, followed by a downturn.

Unemployment

Unemployment is the state of being jobless and actively seeking employment.
The natural rate of unemployment is the sum of frictional and structural unemployment.
Frictional unemployment occurs due to the normal turnover of employees in the labor market, such as people searching for a first job or waiting for a new job.
Structural unemployment arises from changes in the economic structure. It occurs when workers find it difficult to secure new employment without acquiring new skills.
Cyclical unemployment is unemployment caused by recessions, resulting from insufficient demand for goods and services.

Inflation

Inflation is an increase in the general price level of goods and services in an economy.
Deflation is a decrease in the general price level of goods and services in an economy.
Hyperinflation is a very rapid increase in the overall price level.
Inflation reduces the purchasing power of money, meaning it takes more money to buy the same amount of goods and services.
The Consumer Price Index (CPI) measures the overall cost of goods and services purchased by consumers. It is calculated by multiplying the price of goods and services by their quantity.
Demand-pull inflation is caused by an increase in demand that exceeds the economy’s production capacity.
Cost-push inflation is initiated by increases in wages or other resource prices, leading to higher per-unit production costs.
Okun’s law suggests that for every 1% increase in unemployment, there is a 2% negative GDP gap.

Potential GDP

Potential GDP is the level of output an economy can produce when all resources are fully employed.
The GDP gap is the difference between actual GDP and potential GDP.
Okun's Law states that for every 1% increase in unemployment, there is a 2% decrease in the economy's GDP gap.
The unequal burden of unemployment can affect different demographic groups based on gender, skill levels, and education.
Unemployment, particularly cyclical unemployment, represents an economic cost due to the loss of potential output.

Cost of Inflation

The unequal burden of inflation impacts individuals and businesses differently, depending on their income, assets, and debts.

Additional Note

The study notes are based on the provided text, which includes some inconsistent formatting and notation. The notes aim to clarify and summarize the key concepts while maintaining consistency.

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Description

This quiz explores the business cycle's phases, including recession, trough, expansion, and peak, along with the concept of unemployment and its natural rate. Understand how economic activity fluctuates and the factors influencing these changes. Test your knowledge on key terms and concepts related to economic cycles and job market dynamics.