6-1 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University Tutorial 4 Review question 1, p.184 Review question 5, p.184 Review question 7, p.184

Review question 1, p.184 Define contraction and expansion. What are the beginning and ending points of a recession called? In post-war Australia, which have been longer on average—contraction or expansion? 6-2 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

6-3 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

Contraction: A period in which the economy is moving from a peak to a trough. Expansion: A period in which the economy is moving from a trough to a peak. The beginning of a contraction is called the peak (the point at which economic activity reaches its highest point and begins to decline) The end point of a contraction (and the beginning of the expansion) is called a trough. In post-war Australia, expansions have been considerably longer than recessions on average. 6-4 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

6-5 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

6-6 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University 6-6 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University The Business Cycle in Australia,

Review question 5, p.184 Define potential output. Is it possible for an economy to produce an amount greater than potential output? Explain. 6-7 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

Potential output, or potential GDP, is the amount of output the economy can produce when it is using its inputs, such as capital and labour, at normal rates. Inputs can be used at greater than normal rates for a time (for example, workers can work overtime and machines can be used at night or on weekends), Therefore, it is possible for the economy to produce an amount exceeding potential output. 6-8 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

Review question 7, p.184 True or false: When output equals potential output, the unemployment rate is zero. Explain. 6-9 Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

False. When output = potential output, the unemployment rate = the natural unemployment rate. Cyclical unemployment is zero when output equals potential output, but frictional and structural unemployment still exist Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University

Natural unemployment rate = frictional plus structural unemployment. –Frictional unemployment related to job search –Structural unemployment related to mismatch Natural unemployment exists independently of whether the economy is in expansion or contraction. Cyclical unemployment is the extra unemployment that occurs during a recession Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 2e by Bernanke Olekalns and Frank Slides prepared by Anne Gleeson, Flinders University