1. Chapter 8 Unemployment and Inflation

2. Business Cycles  Business Cycle: the pattern of real GDP rising and falling.  Recession (Contraction): two or more successive quarters of falling real GDP.  Depression: a severe, prolonged economic contraction. Usually involves unemployment rising to greater than 10% for years.

3. U.S. Real GDP (Recessions Shaded)

4. Changes in Real GDP Source: National Economic Trends Federal Reserve Bank of St. Louis Updated March 5, 2004

5. Figure 2: The Business Cycle

6. Are we in a recession? Source: National Economic Trends Federal Reserve Bank of St. Louis Updated March 5, 2004

7. Great Depression Year U.S. Unemployment Rate 19293.2% 19308.7% 193115.9% 193223.6% 193324.9%  193917.2%

8. Economic Indicators  Leading Indicators  A variable that fairly consistently changes before real GDP changes  Coincident Indicators  A variable that fairly consistently changes at the same time as real GDP changes  Lagging Indicators  A variable that fairly consistently changes after real GDP changes

9. The Indicators

10. Unemployment Rate of Unemployment = number unemployed number in the Labor Force The unemployment rate is the percentage of the labor force that is not working. The U.S. Labor Department defines the labor force as being equal to: All U.S. residents Over the age of 16 Who are not institutionalized Who are looking for work

11. Interpreting the Unemployment Rate  Discouraged Workers are workers who have looked for work in the past year, but who have stopped looking because they believe no one will offer them a job.  Underemployment is the employment of workers in jobs that do not utilize their productive skills.

12. Types of Unemployment n Seasonal Unemployment n A product of regular, recurring changes in the hiring needs of certain industries on a monthly or seasonal basis. n Frictional Unemployment n Occurs because workers and employers have to find one another. n A product of the short-term movement of workers between jobs, and of those just entering the labor force. n Structural Unemployment n Reflects an imperfect match-up of employee skills and the skill requirements of the available jobs. n A product of technological change and other changes in the structure of the economy. n Cyclical Unemployment n A product of business cycle fluctuations. n When there is a general downturn in business activity, cyclical unemployment increases.

13. Unemployment and Its Costs  Natural Rate of Unemployment The level of unemployment that results when the rate of unemployment is normal, considering both frictional and structural factors. Also called the NAIRU (Nonaccelerating Inflation Rate of Unemployment)  Potential Real GDP The level of output produced when nonlabor resources are fully utilized and unemployment is at its natural rate.  GDP gap = potential real GDP – actual GDP

14. Norms  In most years, the unemployment rate for women is higher than for men.  Teenagers have the highest unemployment rate.  Whites have lower unemployment rates than nonwhites.

15. Interest Rates  Nominal Interest Rate (i): the observed interest rate in the market.  Real Interest Rate (r): nominal rate adjusted for inflation (  ).  r = i - 

16. Types of Inflation  Demand-pull inflation: caused by increases in aggregate demand outpacing increases in aggregate supply.  Cost-push inflation: caused by increases in production costs cause firms to raise prices.  Hyperinflation: extremely high rate of inflation.

17. Recent Hyperinflations