Chapter 11: Business Cycles, Unemployment, and Inflation

Chapter 11Business Cycles, Unemployment, and InflationMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedThe Business CycleAlternating increases and decreases in economic activity over timePhases of the business cyclePeakRecessionTroughExpansion11-*The Business CycleLevel of real outputTimePeakPeakPeakRecessionRecessionExpansionExpansionTroughTroughGrowthTrendLO111-*The Business CycleU.S. Recessions since 1950PeriodDuration,MonthsDepth(Decline in Real Output)1953–5410 -2.6%1957–588-3.71960–6110-1.11969–7011-0.21973–7516-3.219806-2.21981–8216-2.91990–918-1.420018-0.42007–0918-3.7Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve Bank, www.minneapolisfed.org. Output data are in 2000 dollars.LO111-*Causes of Business CyclesBusiness cycle fluctuationsDemand shocksSupply shocksPrices are “sticky” downwardsEconomic response entails decreases in output and employmentLO111-*Cyclical ImpactDurable goods affected mostCapital goodsConsumer durablesNondurable consumer goods affected lessServicesFood and clothingLO111-*Causes of Business CyclesCauses of shocksIrregular innovationProductivity changesMonetary factorsPolitical eventsFinancial instabilityRecession of 2007LO111-*UnemploymentUnder 16and/or Institutionalized (70.9 million)Not inlaborforce (83.9 million)Employed(139.1 million)Unemployed(14.8 million)Total population (308.7 million)Labor force (153.9 million) Unemployment rate = 14,855,000 153,889,000× 100 = 9.6% Unemployment rate = # of unemployed Labor force× 100LO211-*Types of UnemploymentFrictional unemploymentIndividuals searching for jobs or waiting to take jobs soonStructural unemploymentOccurs due to changes in the structure of the demand for laborCyclical unemploymentCaused by the recession phase of the business cycleLO311-*Definition of Full EmploymentFull employment is something less than 100 percent employmentBelieved to occur when unemployment rate is less than 5 percentPotential outputLO311-*Economic Cost of UnemploymentGDP gapGDP gap = Actual GDP – Potential GDPCan be negative or positiveLoss of income is unequalLO311-*Unemployment RatesLO311-*InflationGeneral rise in the price levelInflation reduces the “purchasing power” of moneyConsumer Price Index (CPI)LO2CPIPrice of the most recent marketbasket in the particular yearPrice estimate of the marketbasket in 1982–1984=×100CPI218.1 - 214.5214.5=×100= 1.6%11-*InflationLO2Inflation Rates in Five Industrial Nations11-*InflationLO2Annual Inflation Rates in the United States, 1960-201011-*Types of InflationDemand-pull inflationExcess spending relative to outputCentral bank issues too much moneyCost-push inflationDue to a rise in per-unit input costsSupply shocksLO311-*Redistribution Effects of InflationNominal incomeUnadjusted for inflationReal incomeNominal income adjusted for inflationAnticipated versus unanticipated incomePercentagechange in real income=Percentage change in nominal incomePercentage change inprice levelLO311-*Who Is Hurt by Inflation?Fixed-income receiversReal incomes fallSaversValue of accumulated savings deterioratesCreditorsLenders get paid back in “cheaper dollars”LO311-*Who Is Unaffected by Inflation?Flexible-income receiversCOLAsSocial Security recipientsUnion membersDebtorsPay back the loan with “cheaper dollars”LO311-*Anticipated InflationReal interest rateRates adjusted for inflationNominal interest rateRates not adjusted for inflationLO311-*Anticipated InflationNominalinterestrateRealinterestrateInflationpremium11%5%6%=+LO311-*Does Inflation Affect Output?Cost-push inflationReduces real outputRedistributes a decreased level of real incomeDemand-pull inflationOne view is that zero inflation is bestAnother view is that mild inflation is bestLO311-*HyperinflationExtraordinarily rapid inflationDevastates an economyBusinesses don’t know what to chargeConsumers don’t know what to payMoney becomes worthlessZimbabwe’s 14.9 billion percent inflation in 2008LO311-*