AP MACROECONOMICS THE BUSINESS CYCLE, UNEMPLOYMENT & INFLATION.

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Presentation transcript:

AP MACROECONOMICS THE BUSINESS CYCLE, UNEMPLOYMENT & INFLATION

THE BUSINESS CYCLE A business cycle measures the ups and downs of economic activity over a period of years. Every business cycle consists of four phases. The peak (prosperity, upper turning point) Recession (Contraction, downswing, 2 consecutive quarters of declining GDP) Depression (trough, lower turning point) Recovery (expansion, upswing)

EMPLOYMENT Unemployment—without a job and actively seeking one. The unemployment rate is the number of unemployed people as a percentage of the labor force. Unemployment occurs when people who are willing and able to work cannot find jobs at satisfactory wage rates. Full employment is not when employment is 100% or the unemployment rate is 0%. There is some unemployment at full employment. Traditionally this number is an unemployment rate of 4-5%. Unemployment is classified into four categories: frictional, cyclical, structural and seasonal. Discouraged workers are workers no longer looking for jobs or receiving unemployment benefits and are not counted in the unemployment rate.

INFLATION Inflation is a sustained, substantial increase in the average level of prices. Deflation is a sustained, substantial decrease in the average level of prices. Stagflation refers to a period of time when both the unemployment and inflation rates are high. CPI (Cost of Living Index or the Consumer Price Index) measures the cost of living or the cost of a market basket of goods and services that a typical family would buy over a given period of time. COLA= cost of living adjustment. PPI (Producer Price Index) measures the costs of raw materials. There are two types of inflation. Cost-push inflation: “spiraling inflation”—the run-up in prices that results as sellers raise the prices because of increases in their costs. Graph: supply shifts. Demand-pull inflation: “too much money chasing too few goods”; demand exceeds supply. Graph: demand shifts. Real GDP is adjusted for price changes (inflation); nominal GDP is not adjusted for price changes. Savers, lenders, and people on fixed incomes are generally hurt by unanticipated inflation. Borrowers and people living on COLAs gain from unanticipated inflation.