1. Splash Screen

2. Section 1: Business Cycles and Fluctuations Section 2: Inflation
Chapter Introduction
Section 1: Business Cycles and Fluctuations
Section 2: Inflation
Section 3: Unemployment
Visual Summary
Chapter Menu

3. Do your grandparents talk about the “good old days” when gas was 25 cents per gallon and a loaf of bread cost 10 cents? Compile a list of things that you have been purchasing for several years. Note the prices you paid in the past and those you are currently paying. What do you think accounts for the price differences? Read Chapter 13 to find out what factors can lead to economic instability.
Chapter Intro 1

4. 1. Economists look at a variety of factors to assess the growth and performance of a nation’s economy.
2. The labor market, like other markets, is determined by supply and demand.
Chapter Intro 2

5. Section Preview
In this section, you will learn that business cycles are the alternating increases and decreases in the level of economic activity.
Section 1-Preview

6. B. Drives the economy down C. Economy stays the same.
External shocks like high oil prices have what kind of impact on the economy?
A. Drives the economy up
B. Drives the economy down
C. Economy stays the same. A B C
Section 1

7. Business Cycles and Fluctuations
Business cycles and business fluctuations can interrupt economic growth.
Economists predict where economy is headed so forecasting models and statistical tools are key to predicting these changes.
Section 1

8. Business Cycles: Characteristics and Causes
Business cycles are marked by alternating periods of expansion and recession.
Section 1

9. Business Cycles: Characteristics and Causes (cont.)
Phases of the business cycle
Recession
Begins when the economy reaches a peak
Ends when the economy reaches a trough
Business Cycles
Section 1

10. Business Cycles: Characteristics and Causes (cont.)
Expansion
Begins after the declining real GDP bottoms out
Continues until economy reaches a new peak
Section 1

11. Business Cycles: Characteristics and Causes (cont.)
The economy would follow a steady growth path, trend line, if periods of recession and expansion did not occur.
Severe recessions can turn into a depression.
Section 1

12. Business Cycles: Characteristics and Causes (cont.)
Causes of business cycles
Changes in capital expenditures
Innovation and imitation
Monetary policy decisions
External shocks
Section 1

13. Which may not be a cause of business cycles? A. New product developed
B. Rising price of flour
C. New method of production
D. Federal Reserve lowers the Federal Funds Rate. A B C D
Section 1

14. Business Cycles in the United States
Business cycles have become much more moderate since the Great Depression of the 1930s.
Section 1

15. Business Cycles in the United States (cont.)
“Black Tuesday,” October 29th, 1929, marked the beginning of the Great Depression.
Between 1929 and 1933, real GNP declined nearly 50%.
Unemployment rose nearly 800%.
Section 1

16. Business Cycles in the United States (cont.)
Average wage plunged from 55 cents/hour to 5 cents/hour.
One-quarter of all banks failed.
Depression scrip used because official paper currency was in short supply
Section 1

17. Business Cycles in the United States (cont.)
Causes of the Great Depression
Enormous gap in the distribution of income
Easy credit
Global economic conditions
Section 1

18. Business Cycles in the United States (cont.)
Real GNP returned to its 1929 high in 1939.
Increased government spending and World War II spending propelled the economy.
Section 1

19. Business Cycles in the United States (cont.)
Laws passed and government agencies were established to prevent another depression.
Social Security Act of 1935
Minimum Wage
Unemployment programs
Section 1

20. Business Cycles in the United States (cont.)
Securities and Exchange Commission
Federal Deposit Insurance Corporation
After World War II, business cycles had shorter recessions and longer periods of expansion.
Section 1

21. Forecasting Business Cycles
Economists use statistics and models to predict business cycles.
Section 1

22. Forecasting Business Cycles (cont.)
Methods used to predict business cycles
Statistical series
Leading economic indicator
Composite index of leading economic indicators (LEI)
The Index of Leading Economic Indicators
Section 1

23. Forecasting Business Cycles (cont.)
Macroeconomic modeling
What might be some reasons these models don’t work?
Econometric model
Unaccounted for events that alter predicted outcomes.
Changes in consumer and household behavior
Section 1

24. Section 1-End

25. Section Preview
In this section, you will find out that inflation is a rise in the general level of prices that disrupts the economy.
Section 2-Preview

26. Inflation Inflation—increase in the general level of prices
Deflation—decline in the general level of prices
Both are harmful to the economy and should be avoided whenever possible.
Section 2

27. Measuring Prices and Inflation
Several price indexes are used to measure inflation.
Section 2

28. Measuring Prices and Inflation (cont.)
Measuring inflation
Price index for a range of items is constructed
Consumer price index (CPI)
Select a market basket and add up prices to determine value
Base year is selected for comparison.
Constructing the Consumer Price Index
Section 2

29. Measuring Prices and Inflation (cont.)
Dollar cost of market basket is converted to a price index.
Percentage change of price index from one period to another is inflation.
Measuring Prices and Inflation
Section 2

30. Measuring Prices and Inflation (cont.)
Inflationary changes
Creeping inflation
Hyperinflation
Stagflation
Section 2

31. Measuring Prices and Inflation (cont.)
Price indexes are constructed for all categories of the economy.
Producer price index (PPI)
Implicit GDP price deflator
Section 2

32. Causes of Inflation
Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money.
Section 2

33. Causes of Inflation (cont.)
Causes for inflation
Demand-pull inflation
Cost-push inflation
Wage-price spiral
Excessive monetary growth
Profiles in Economics: Milton Friedman
Section 2

34. When the price level goes up, the purchasing power of the dollar goes
A. Up
B. Down
C. Remains the same
D. Depends A B C D
Section 2

35. Consequences of Inflation
Inflation can reduce purchasing power, distort spending, and affect the distribution of income.
Section 2

36. Consequences of Inflation (cont.)
Effects of inflation
Reduced purchasing power
Distorted spending patterns
The Purchasing Power of the Dollar
Section 2

37. Consequences of Inflation (cont.)
Encourages speculation
Distorted distribution of income
Creditors are hurt more than debtors generally.
Section 2

38. Section 2-End

39. Section Preview
In this section, you will find out how unemployment is measured as well as what causes it.
Section 3-Preview

40. When the government issues that latest monthly unemployment statistic, is it accounting for all individuals who are unemployed?
A. Yes
B. No A B
Section 3

41. Measuring Unemployment
The government takes monthly surveys to measure the unemployment rate.
Section 3

42. Measuring Unemployment (cont.)
The civilian labor force or labor force is the sum of all persons aged 16 and above who are either employed or actively seeking employment.
Unemployed—individuals who are willing, able, and available to work and actively seeking employment
Section 3

43. Measuring Unemployment (cont.)
The unemployment rate is equal to the number of unemployed persons divided by the civilian labor force.
The Unemployment Rate
Section 3

44. Sources of Unemployment
Unemployment is often caused by circumstances outside an individual’s control and is therefore very difficult to remedy.
Section 3

45. Sources of Unemployment (cont.)
Kinds of unemployment
Frictional unemployment
Structural unemployment
Outsourcing
Section 3

46. Sources of Unemployment (cont.)
Technological unemployment
Cyclical unemployment
Seasonal unemployment
Section 3

47. Costs of Instability
Unemployment can cause uncertainty, political instability, and social problems.
Section 3

48. Costs of Instability (cont.)
Recession, inflation, and unemployment hinder economic growth and have human costs.
Cost of unemployment and economic instability
Opportunity cost like the GDP gap
Section 3

49. Costs of Instability (cont.)
Misery index or discomfort index
Uncertainty leads to fewer consumer purchases.
Political instability
Crime, poverty, and family instability
Measuring Consumer Discomfort
Section 3

50. Which is not an official government statistic? A. Producer price index
B. Misery index
C. Implicit GDP price deflator A B C D
Section 3

51. Section 3-End

52. Business Cycles Economic growth is typically marked by periods of recession followed by periods of expansion. A business cycle is the period from the beginning of one recession to the beginning of the next.
VS 1

53. Inflation The economy faces inflation when the general level of prices increases. If excessive, inflation can have a disruptive effect on the economy.
VS 2

54. Unemployment The unemployment rate includes those individuals who are actively looking for a job but work less than one hour a week for pay or profit. It does not include people who are underemployed, working part-time, or have given up the job search.
VS 3

55. VS-End

56. Figure 1

57. Figure 2

58. Figure 3

59. Figure 4

60. Figure 5

61. Figure 6

62. Figure 7

63. Milton Friedman (1912–2006)
received the Nobel Prize for economics for his theories on economic stabilization policy
strong proponent of monetary policy
Profile

64. Concepts Trans

65. DFS Trans 1

66. DFS Trans 2

67. DFS Trans 3

68. business cycles
regular increases and decreases in real GDP
Vocab1

69. business fluctuation irregular increases and decreases in real GDP
Vocab2

70. recession
decline in real GDP lasting at least two quarters
Vocab3

71. peak point in time when real GDP stops expanding and begins to decline
Vocab4

72. trough
point in time when real GDP stops declining and begins to expand
Vocab5

73. expansion
period of uninterrupted growth of real GDP
Vocab6

74. trend line
growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery
Vocab7

75. depression
state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
Vocab8

76. depression scrip
currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s
Vocab9

77. leading economic indicator
statistical series that turns down before the economy turns down, or up before the economy turns up
Vocab10

78. composite index of leading economic indicators (LEI)
composite index of 10 economic series that move up and down in advance of changes in the overall economy; statistical series used to predict turning points in the business cycle
Vocab11

79. econometric model
mathematical expression used to describe how the economy is expected to perform in the future
Vocab12

80. innovation
the creation of something new or different
Vocab13

81. series
a group of related things or events
Vocab14

82. inflation
increase in the general level of prices of goods and services
Vocab15

83. deflation
decrease in the general level of prices for goods and services
Vocab16

84. price index
statistical series used to measure changes in the price level over time
Vocab17

85. consumer price index (CPI)
series used to measure price changes for a representative sample of frequently used consumer items
Vocab18

86. market basket
representative selection of goods and services used to compile a price index
Vocab19

87. base year
year serving as point of comparison for other years in a price index or other statistical measure
Vocab20

88. creeping inflation
relatively low rate of inflation, usually 1 to 3 percent annually
Vocab21

89. hyperinflation
inflation in excess of 500 percent per year
Vocab22

90. stagflation period of slow economic growth coupled with inflation
Vocab23

91. producer price index (PPI)
index used to measure prices received by domestic producers
Vocab24

92. implicit GDP price deflator
index used to measure price changes in GDP
Vocab25

93. demand-pull inflation
explanation that prices rise because all sectors of the economy try to buy more goods and services than the economy can produce
Vocab26

94. cost-push inflation
explanation that rising input costs, especially energy and organized labor, drive up the prices of products
Vocab27

95. creditor
person or institution to whom money is owed
Vocab28

96. debtor
person who borrows and therefore owes money
Vocab29

97. construction
creation by assembling individual parts
Vocab30

98. recover
to get back
Vocab31

99. civilian labor force
non-institutionalized part of the population, aged 16 and over, either working or looking for a job
Vocab32

100. labor force
non-institutionalized part of the population, aged 16 and over, either working or looking for a job
Vocab33

101. unemployed
working for less than one hour per week for pay or profit in a non-family-owned business, while being available and having made an effort to find a job during the past month
Vocab34

102. unemployment rate
percentage of people in the civilian labor force who are classified as unemployed
Vocab35

103. frictional unemployment
unemployment involving workers changing jobs or waiting to go to new ones
Vocab36

104. structural unemployment
unemployment caused by a fundamental change in the economy that reduces the demand for some workers
Vocab37

105. outsourcing
hiring outside firms to perform non-core operations to lower operating costs
Vocab38

106. technological unemployment
unemployment caused by technological developments or automation that makes some workers’ skills obsolete
Vocab39

107. cyclical unemployment
unemployment directly related to swings in the business cycle
Vocab40

108. seasonal unemployment
unemployment caused by annual changes in the weather or other conditions that reduce the demand for jobs
Vocab41

109. GDP gap difference between what the economy can and does produce
Vocab42

110. misery index
unofficial statistic that is the sum of the monthly inflation and unemployment rates
Vocab43

111. discomfort index
unofficial statistic that is the sum of the monthly inflation and unemployment rates
Vocab44

112. confined
kept within
Vocab45

113. fundamental
basic; an essential part of
Vocab46

114. unfounded
not based on fact
Vocab47

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