26 Questions
What is the primary characteristic of a trough in a business cycle?
Low output and employment
What is typically associated with the peak of a business cycle?
Maximum output and employment
What is the significance of the natural rate of unemployment in a business cycle?
It is the minimum rate of unemployment that can be achieved
What is the definition of a recession in terms of duration?
A decline in real GDP that lasts six months or longer
What is the duration range of U.S. recessions between 1950 and 2009?
6-24 months
What occurs during a peak in a business cycle?
Output and employment reach their highest levels
What is the primary indicator of a recession?
Decrease in real GDP
What is the typical pattern of economic activity during a business cycle?
Periods of rapid growth followed by periods of decline
What is the primary cause of cyclical changes in the level of real output according to most economists?
Unexpected changes in the level of total spending
How is the unemployment rate calculated?
[(unemployed)/(labor force)] × 100
What happens to discouraged workers in the calculation of the unemployment rate?
They are excluded from the labor force
What type of unemployment occurs when a worker loses their job due to a company moving operations to another country?
Structural unemployment
What is the term for the unemployment rate that exists when there are no job vacancies?
Full employment
What is the GDP gap?
The difference between actual GDP and potential GDP
If the natural rate of unemployment is 5% and the actual unemployment rate is 7%, what is the GDP gap?
2%
If the CPI increases from 180 to 190, what is the rate of inflation?
5.6%
What is the inflation rate measuring?
The percentage growth rate of the CPI
What is deflation?
A decrease in the price level
If the price level doubles in 20 years, how long will it take for the price level to quadruple?
40 years
What is the term for inflation that occurs when the economy's ability to produce output is exceeded by total spending?
Demand-pull inflation
What is the primary purpose of measuring core inflation?
To exclude volatile price components
If nominal income rises by 10% and the price level rises by 5%, what happens to real income?
It increases by 5%
What is the minimum rate of nominal income growth required to maintain a constant real income level if the inflation rate is 8%?
Greater than 8%
If the CPI is 120 in year 1 and 132 in year 2, what is the rate of inflation?
12%
What is the definition of a recession in terms of the average price level in the economy?
A decrease in the average price level
Who is classified as unemployed according to the Bureau of Labor Statistics data on the labor force?
Only those who are actively looking for work
Study Notes
Business Cycles
- A peak in the business cycle is a temporary maximum point, while a trough is a temporary minimum point
- A recession is a decline in real GDP that lasts six months or longer
- The range for the duration of U.S. recessions between 1950 and 2009 was 6 months to 18 months
Unemployment
- The unemployment rate is calculated as (unemployed/labor force) × 100
- Discouraged workers who are not actively seeking employment are excluded from the labor force
- Frictional unemployment refers to search and wait unemployment
- Structural unemployment is when a worker loses a job due to a change in the economy, such as a company moving operations to another country
- Cyclical unemployment is when a worker loses a job due to a downturn in the business cycle
- Full employment refers to the situation when there is no cyclical unemployment
- The full-employment unemployment rate for the United States economy is generally considered to be around 5-6%
GDP and Potential GDP
- Potential GDP is the output that would be produced if the economy was experiencing full employment
- If the GDP gap is positive, it means that actual GDP is greater than potential GDP
- If the GDP gap is negative, it means that actual GDP is less than potential GDP
- The higher the rate of unemployment, the larger is the GDP gap
Inflation
- The inflation rate measures the percentage growth rate of the Consumer Price Index (CPI) from one year to the next
- Deflation is when the CPI declines from one year to the next
- Demand-pull inflation occurs when total spending is greater than the economy's ability to produce output at the existing price level
- Core inflation refers to the inflation picture after stripping away food and energy prices
- If the CPI rises from 125 to 140 from one year to the next, the rate of inflation is approximately 12%
This quiz assesses understanding of business cycles, unemployment, and inflation concepts, as covered in Chapter 9 of an Econ 2013 course.
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