1. ECONOMIC INSTABILITY Chevalier Spring 2015

2. Economic Instability  There are four (4) major causes of economic instability in the American economy.  Business Cycles and Fluctuations  Unemployment  Inflation  Poverty and distribution of income

3. I. BUSINESS CYCLES and FLUCTUATIONS  BUSINESS CYCLES- Systematic ups and downs of real GDP  BUSINESS FLUCTUATIONS- Non-systematic rise and fall of real GDP; this interrupts economic growth

4. Phases of the Business Cycle  RECESSION- GDP declines for 6 consecutive mos.  PEAK  TROUGH- where real GDP stops going down  EXPANSION- period of recovery from recession  TREND LINE

5. The Great Depression- severe recession  Causes:  1. disparity between rich and poor; poor couldn’t stimulate the economy (poor distribution of income)  2. stock speculation by rich  3. drop of American exports due to tariffs

6. The Business Cycle  Business cycles since WWII have been pretty regular  Avg. recession lasts 11 mos.  Avg. expansion lasts 43 mos.  Page 379 graph

7. Causes of Business cycles  1. Capital Expenditures  2. Inventory Adjustments  3. Innovation and Imitation  4. Monetary factors  Credit and loan policies Lower IR increase demand which pushes IR’s up  5. Increase in oil prices, war, WTC attacks

8. Can we predict business cycles?  Of course…  Econometric model-macroeconomic model that describes how economy behaves  Index of leading economic indicators (10 areas that closely resemble GDP)  Turns down before real GDP turns down  Turns up before real GDP turns up Avg. work week Order for durable goods

9. II. Unemployment  Unemployment rate- the number of unemployed individuals divided by the total number of persons in the civilian work force  Unemployed=people available for work who made an effort to find a job in the past month.  Goes up during recessions and down during expansions

10. Unemployment  Limitations-doesn’t account for people who haven’t tried to find a job in the last 4 weeks  Too discouraged during recession to do so  Employed doesn’t mean employed full-time  Could be part time

11. Kinds of Unemployment  Frictional unemployment-people between jobs(short term)  Structural unemployment-change in consumer tastes  Military base closures, mergers, technology changes  Happens when there is a fundamental change in an economy  Cyclical unemployment-related to swings in business cycle  Season unemployment  Weather related  Technological unemployment-automation

13. Concept of full employment  Some pros and cons  Numerically when U.R. drops below 4.5%  2000=3.9%  Healthy is 4-6%

14. III. Inflation  Measure by using the CPI  100K goods in over 400 categories; spits out a number  Inflation rate = change in price level/beginning price levelX100  Rate of inflation graph p. 390

15. Inflation  Deflation, and degrees of inflation  Creeping, galloping, and hyper  1-3%  100-300%  500% a year Hungary during WWII 828,000,000,000,000,000,000,000,000,000 pengos=1 prewar pengo

16. Causes of Inflation  1. demand-pull theory  2. blames inflation on federal gov’t deficit spending  3. rising input costs (costs of labor) tied to unemployment; could be non-labor too (oil)  4. spiral of prices and wages  5. excessive monetary growth  Money supply grows faster than GDP  Increases purchasing power

17. Consequences of inflation  Less purchasing power  Hard on retirees; people with fixed income  Causes people to change spending habits, disrupting the economy  Alters distribution of income(lenders and borrowers)  Hurts lenders

18. Poverty and Distribution of Income  The distribution of income p. 395

19. Reasons for income inequality  Education  Wealth- distribution of wealth  Top 5 th of Americans have 75% of the wealth in this country

20.  Discrimination-gender.72 to every dollar a man makes  Ability

21. The income gap in America  Some reasons-  Unequal distribution of income Structural change in economy-goods to service production Growing gap in education Shift of the family structure Poverty graph on page 397 Per capita graph per state on p. 399