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1 Business Cycles Business Cycle: the pattern of real GDP rising and falling: expansions and contractions. Recession (Contraction): two or more successive quarters of falling real GDP. Depression: a severe, prolonged economic contraction. –Prior to the 1930s, economic downturns were called “crises.” The term depression was introduced so people wouldn’t be scared. –The Great Depression gave “depression” a bad name. We now speak of “recessions.”
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2 The Great Depression YearU.S. Unemployment Rate 19293.2% 19308.7% 193115.9% 193223.6% 193324.9% 193917.2%
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3 U.S. Real GDP (Recessions Shaded)
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4 Annual Growth: Percent Changes in Real GDP
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5 The Business Cycle: Some Terminology
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6 Indicators of Economic Activity
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7 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 labor force is: All U.S. residents Over the age of 16 Who are not institutionalized Who are looking for work
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8 Understating Unemployment Discouraged Workers: workers who have looked for work in the past year, but have stopped because they believe no one will offer them a job. Underemployment: employment of workers in jobs that do not fully utilize their productive skills.
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10 Flavors of Unemployment n Seasonal Unemployment n Results from recurring changes in hiring needs of certain industries on a seasonal basis. n Frictional Unemployment: searching for jobs n Results from short-term movement of workers between jobs and job search by those entering the labor force. n Improved labor market information can reduce frictional unemployment n Structural Unemployment n Reflects imperfect match between employee skills and requirements of available jobs. n Results from technological change and other changes in the structure of the economy. n Cyclical Unemployment n Results from business cycle fluctuations. Business activity down cyclical unempl’mt up.
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11 Unemployment: Comparative Rates 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.
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12 Unemployment and Its Costs “Natural” Rate of Unemployment A normal rate, considering both frictional and structural factors. NAIRU –Also called the NAIRU (Nonaccelerating Inflation Rate of Unemployment) -- ~5% for US economy The “natural” rate can change Potential Real GDP The level of output when nonlabor resources are fully utilized and unemployment is at its natural rate. GDP gap = potential real GDP – actual GDP
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15 Flavors of Price Inflation Demand-pull inflation: –caused by increases in aggregate demand outpacing increases in aggregate supply. Cost-push inflation: –increased production costs cause firms to raise prices. Wage-push inflation Energy costs and inflation Hyperinflation: –extremely high rate of inflation. Printing money as last resort
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17 Rates of Inflation for Selected Countries, 1990-2001
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18 Recent Hyperinflations
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19 Interest Rates Nominal Interest Rate (i): the observed interest rate in the market. Real Interest Rate (r): nominal rate adjusted for inflation ( ). r = i -
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20 The Real Interest Rate on U.S. Treasury Bills (Short-Term Securities of US Gov’t)
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