Business Cycles and Unemployment Rate PDF

### **Chapter 6 - Business Cycles and the Unemployment Rate** #### **1. How do we measure economic growth?** Economic growth is typically measured by the **percentage change in real GDP** (Gross Domestic Product). Real GDP is adjusted for inflation, so it reflects the true growth of an economy, ex...

### **Chapter 6 - Business Cycles and the Unemployment Rate** #### **1. How do we measure economic growth?** Economic growth is typically measured by the **percentage change in real GDP** (Gross Domestic Product). Real GDP is adjusted for inflation, so it reflects the true growth of an economy, excluding price increases. #### **2. What is a business cycle?** A **business cycle** refers to the recurring pattern of economic expansion and contraction in an economy over time. It represents the fluctuations in economic activity and is marked by periods of growth and decline. #### **3. What are the phases of the business cycle?** The business cycle consists of four main phases: - - - - #### **4. How are business cycles measured? What have been the average durations of recessions and expansions in the U.S.?** Business cycles are measured using key indicators such as **real GDP**, **unemployment rates**, and **inflation rates**. - - #### **5. What are leading, coincident, and lagging economic indicators?** - - - #### **6. What is considered full employment in the US?** Full employment is the condition where the economy is operating at its potential, and only **frictional** and **structural** unemployment exist. This typically corresponds to an **unemployment rate of around 4-5%**. This rate excludes cyclical unemployment caused by economic downturns. #### **7. Who measures unemployment rates? How is it measured?** The **Bureau of Labor Statistics (BLS)** measures unemployment in the U.S. through the **Current Population Survey (CPS)**. The official unemployment rate is calculated as: Where the **labor force** includes all individuals employed or actively seeking employment. #### **8. Who is in the Labor Force? Who is employed? Who is unemployed?** - - - #### **9. Know how the unemployment rate is measured officially.** The unemployment rate is the percentage of people in the labor force who are actively seeking work but are not currently employed. It is calculated as: Unemployment Rate=Number of UnemployedLabor Force×100\\text{Unemployment Rate} = \\frac{\\text{Number of Unemployed}}{\\text{Labor Force}} \\times 100Unemployment Rate=Labor ForceNumber of Unemployed​×100 #### **10. Who is underemployed? Who is discouraged?** - - #### **11. What are the demographics of the unemployed? Who bears higher or lower rates of unemployment?** - - #### **12. Who is underemployed?** **Underemployed** individuals are those who are employed in positions that do not fully utilize their skills, qualifications, or experience. This includes part-time workers who want full-time employment or individuals in jobs that do not require their level of education or training. #### **13. What is the natural rate of unemployment?** The **natural rate of unemployment** is the level of unemployment that exists even in a healthy economy. It includes **frictional** and **structural** unemployment but excludes **cyclical unemployment**. This rate is usually around **4-5%**. #### **14. What rate of unemployment is considered to be full employment in the U.S.?** Full employment in the U.S. is generally considered to be when the unemployment rate is around **4-5%**, which represents the natural rate of unemployment. This accounts for frictional and structural unemployment, but not cyclical unemployment. #### **15. What are the sources of Unemployment?** There are four main types of unemployment: - - - - #### **16. Reasons for the unemployment rate to be under-estimated or overestimated?** - - - - - - - ### **Chapter 7 - Inflation** #### **1. What is inflation? Hyperinflation? Deflation? Disinflation?** - - - - #### **2. What is the CPI? Who measures it? How is it measured?** - - - Formula for CPI: #### **3. Be able to calculate CPI, or Market Basket Value given information on other variables.** - Example: If the cost of a basket of goods in 2023 is \$500 and the cost of the same basket in the base year (2000) was \$250: This means the price level has doubled since 2000. #### **4. Be able to calculate the inflation rate.** The **inflation rate** is the percentage change in the CPI from one period to another. It measures how much prices have increased over a certain time. Formula for Inflation Rate:  Example: If the CPI in 2023 is 200 and the CPI in 2022 was 195, the inflation rate would be: #### **5. Has inflation been a problem in the U.S. for the last 30 years?** - #### **6. What is the relationship between nominal and real income?** - - Formula for **Real Income**:  Real income gives a more accurate picture of an individual\'s purchasing power since it accounts for inflation. #### **7. Be able to calculate real income given nominal.** To calculate real income, you need the nominal income and the CPI for the given year. Example: If a person earns **\$50,000** in 2023, and the CPI for 2023 is 200 (with 2000 as the base year), the real income would be: This means their purchasing power in 2023 is equivalent to \$25,000 in the base year. #### **8. Be able to calculate real income growth given inflation and income raise.** To calculate the **real income growth**, adjust the nominal income for inflation. Example: - - First, calculate the real income in both years: 1. 2. Now calculate the **real income growth**:  This means that real income grew by **9.97%** despite the 3% inflation. #### **9. How are interest rates affected by inflation?** - - #### **10. What is the relationship between nominal interest rate and real interest rate?** - - Formula for **Real Interest Rate**: Example: - This means the lender effectively earns 5% in **real terms** after accounting for inflation. #### **11. Who benefits or gets hurt by inflation?** - - - - - - - #### **12. What is hyperinflation?** Hyperinflation is a situation where the inflation rate exceeds **50% per month**, leading to a complete collapse of the currency's value. This often results from excessive money printing or loss of confidence in the economy. It can cause severe economic instability, as seen in **Zimbabwe**, **Venezuela**, and **Germany in the 1920s**. #### **13. What is demand-pull inflation?** - - Example: A booming economy with low unemployment may increase consumer demand, causing prices to rise. #### **14. What is cost-push inflation?** - ### **Chapter 10 - Aggregate Demand and Aggregate Supply** #### **1. What is the importance of the Great Depression in the context of economic theory?** - - #### **2. What are the main tenets of the Classical View?** The **Classical View** (also known as **Classical Economics**) emphasizes: - - - - #### **3. How do price and wages behave in the Classical View?** - - #### **4. What are the main tenets of the Keynesian View?** The **Keynesian View** (developed by John Maynard Keynes during the Great Depression) emphasizes: - - - - #### **5. How do price and wages behave in the Keynesian View?** - - - - #### **6. What does Aggregate Demand (AD) represent?** - - - - - The **AD curve** slopes downward because as the price level falls, the quantity of goods and services demanded increases. #### **7. What is the Real Balance Effect?** - - #### **8. What is the Interest Rate Effect?** - #### **9. What is the Net Exports Effect?** - #### **10. What are the non-price determinants that shift the AD to the right or left?** - - - - - - - - - - - - - - #### **11. What does Aggregate Supply (AS) represent?** - #### **12. What is the shape of the AS according to the Keynesian view?** - - - - #### **13. What is the shape of the AD according to the Classical view?** - - #### **14. What is the intermediate phase of the AS? What does it mean in terms of the price level and Real GDP?** - - - - #### **15. What are the implications about price and output of changes in AD in the Keynesian range of the AS?** - #### **16. What are the implications about price and output of changes in AD in the intermediate range of the AS?** -