1. Economic Growth & Instability
Chapter 8
Economic Growth & Instability

2. 3 economic goals of the U.S. economy
Low unemployment,
Price stability,
High, sustained economic growth.

3. Low unemployment (not zero Unemployment)

4. Price stability Prices in an economy don't change much over time.
Price stability would mean that an economy would not have inflation or deflation.

5. High, sustained economic growth
real GDP growth rates
The rate of economic growth is influenced by natural resources, human resources, capital resources, and technological development in the economy.

6. The 4 phases of the business cycle.
Contraction (A slowdown in the pace of economic activity) recession/depression
Trough (The lower turning point of a business cycle, where a contraction turns into an expansion)
Expansion (A speedup in the pace of economic activity)
Peak (The upper turning of a business cycle)

7. Recession vs Depression
Recession: A period of general economic decline; typically defined as a decline in real GDP for 2+ consecutive quarters.
A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market.
Depression: a sustained, long-term downturn in economic activity ( > 10%) for 2+ years. It is a more severe downturn than a recession, which is seen as part of a normal business cycle.

8. 3 theories that help to explain fluctuations in the business cycle
Innovations: (Industrial Revolution) change productivity
Monetary: caused by changes in the Money Supply
Over production & under consumption

10. Business cycle’s impact on durable goods vs. non-durable goods
Non Durable Goods market not as sensitive to changes in the Business Cycle (Doctors, food, clothes)
Durable Good Market sensitive to the changes in the Business Cycle (cars, houses etc)
With some Durable goods like cars & houses people fix rather than replace

11. four types of Unemployment
1. Frictional: “between Jobs” or between college & work. Planned, even desirable.
2. Structural: an absence of demand for the workers that are available. (causes: change in technology, tastes, job out sourced)

12. four types of Unemployment
3. Cyclical: (caused by business cycle) Recession depression
4. Seasonal: Job ends with season: farming, construction, ski slopes, life guards

13. Full Employment
all available labor resources are being used in the most economically efficient way. (no cyclical unemployment)
2-8% Unemployment
Frictional is normal, people will always leave college for work. Structural is normal, innovations will always happen.

14. Natural Rate of Unemployment
Is Full Employment
Includes Frictional And Structural Unemployment
2-8%

15. How do we determine the unemployment rate?
The Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country.
All citizens who are or are actively trying to be part of the Labor Force are counted as the Civilian Labor Force.
Unemployment Rate = Unemployed___
Civilian Labor Force

16. 3 criticisms of the statistics used to determine the unemployment rate.
1. It counts as employed all people who are working part time but who would like to work full time.
2. Discouraged workers (those who cannot find a job and gave up) are not counted
3. People who work in their home taking care of their children &/or elderly are not counted as employed or unemployed

17. Okun’s Law.
The relationship between increases in unemployment and decreases in GDP (gross domestic product).

18. The relationship between the GDP and Okun’s Law.
For every 1% increase in unemployment above a "natural" level, that GDP will decrease by anywhere from 2 - 4% from its potential.

19. composition of unemployment : Unemployment inequality
Unskilled workers
Teenagers
Race
Household Income Unemployment Level Level
under 12, % 12,500-20,
40,001-49, ,000-59, ,000-75,
100, , over 150,

20. the noneconomic costs associated with unemployment
Morale in the working population
Work satisfaction
Mental depression to the work force
People not so inclined to seek work after long periods of unemployment
More crime due more youths out of work and petty crime for money

21. Inflation:
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
deflation

22. how to measure inflation
Consumer Price Index(CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles.

23. Demand Pull inflation:
inflation that is a result of strong consumer demand that is in excess of supply.
Consumers pull (tug of war) prices up by demanding more.

24. Demand Pull inflation:
“A rising tide tends to lift all boats”.

25. Demand Pull inflation: Long term
AS = Aggregate
Supply
Horizontal
Range is Keynesian,
Vertical Range is
Classical
In Between is
Intermediate is actual
AD = Aggregate
demand
From AD1 to AD2 Prices Constant; Output Increases
From AD2 to AD3 Both Prices & Output Increase
Above AD4 Prices Increase, Output is constant

26. Supply Side (Cost Push) inflation:
Inflation is caused by increases in the cost of wages and raw materials.
Supply pushes inflation onto consumers

27. Supply Side (Cost Push) inflation
AS prices Increase, Demand decreases.
Firms respond to decrease Demand by lowering Supply.
Supply decreases.
production possibility curve
Shifts to the left (inward)

28. The difference between Nominal and Real income
Real Income = Nominal Income/ 1 + % Increase in Prices Since Base Year
Real means the effects of inflation have been factored in.
Nominal: the effects of inflation have not been accounted for.

29. unanticipated inflation hurts:
A) Fixed Income Groups: B) Savers: C) Creditors (Banks):

30. Who wants Inflation? Debtors
People whose income is flexible (no contracts)

31. Define Hyperinflation:
A sustained very high inflation. ( when the monthly inflation rate is greater than 50 percent)