business cycle and fluctuation presentation
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Business Cycles and Fluctuations. Chapter 14.
Phases of the Business Cycle.
Trough. Expansion. Peak. Contraction. Recession: Two back to back quarters declining
G.D.P Depression: Three consecutive declining quarters
in a row.
THE BUSINESS CYCLEPhases of the Business CyclePEAK
Le
vel o
f b
usi
ne
ss a
cti
vit
y
Time
RECESSIONTROUGH RECOVERY
GROWTH
TREND
Costs of Unemployment
Personal Cost Loss of paycheck Loss of self-esteem Increase in stress related psychological problems Increase in incidence of crime, suicide, and mental illness
Economic Cost Loss in output
4
Sources of Unemployment
FrictionalSeasonalStructuralCyclical
Frictional Unemployment
Caused by time required to bring together labor suppliers and labor demanders Employers need time to learn about the talent
available
Job seekers need time to learn about employment opportunities
Generally short-term and voluntary
Seasonal Unemployment
Caused by seasonal changes in labor demand during the year
To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted, which smoothes out these factors
Structural Unemployment
Exists because unemployed workers often Do not have the skills demanded by employers, or Do not live where their skills are in demand
Occurs because changes in tastes, technology, taxes, or competition reduce the demand for certain skills and increase the demand for other skills
Cyclical Unemployment
Fluctuates with the business cycle, increasing during contractions and decreasing during expansions
Government policies to stimulate aggregate demand recessions is aimed at reducing this type of unemployment
UNEMPLOYMENTMeasurement of Unemployment, 2002
Employed
Not inlaborforce
Under 16and/or
institutionalized
TotalPopulation288,600,000
Laborforce
142,500,000
74,700,000
71,400,000
Unemployed 8,300,000
134,200,000
Unemployment and the Business Cycle.
Exhibit 1: The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor Force
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Trend of Unemployment Rate
Decline in the unemployment rate over last 20 years Overall growth in the economy Relatively fewer teenagers in the work force
Unemployment rate says nothing about who is unemployed or for how long – differs across
Race
Gender
Age
Geographical area
Occupational group
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Unemployment Rates for Various Groups
The U.S. Unemployment Rate Since 1900
Unemployment Compensation
Cash transfers for those who lose their jobs and actively seek employment
Applies to unemployed workers who meet certain qualifications
Problems with unemployment compensation: Workers who receive benefits tend to search less actively than those who don’t
May reduce the urgency of finding work
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Full Employment
Occurs only if there is no cyclical unemployment Occurs when the only unemployment is frictional, structural, or seasonal
Does not mean zero unemployment
Frictional, seasonal, and structural unemployment can still occur
Occurs when from 4% to 6% of the labor force is unemployed
INFLATIONDefined and Measurement• A rising general level of prices• Rate of inflation calculated
using index numbers
Consumer Price Index
= Price of the same marketbasket in 1982-1984
x 100CPIPrice of most recent market
basket in the particular year
Inflation
Inflation: a sustained increase in the average price level
Hyperinflation: extremely high inflation
Deflation: a sustained decline in the average price level
Disinflation: a reduction in the rate of inflation
Causes of Inflation:
Demand-pull inflation is inflation initiated by an increase in aggregate demand.
• Cost-push, or supply-side, inflation is inflation caused by an increase in costs.
Demand pull :
Increase in AD can be due to a fiscal or monetary policy, thus increasing prices
Cost push:
Upward shift of the AS will be due to increase in costs due to increase in price of inputs.
Combination of both:
Exhibit 6a: Inflation Caused by Shifts of AD and AS Curves
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Increase in the AD curve pulls up the price level. To generate continuous demand-pull inflation, the AD curve must keep shifting outward along a given AS curve
Increase in costs of production push up the price level. To generate continuous cost-push inflation, the AS curve must keep shifting to the left along a given AD curve.
Stagflation:
Stagflation occurs when output is falling at the same time that prices are rising.
One possible cause of stagflation is an increase in costs.
Countering inflation:
Demand -pull Reduce demand by higher taxation, lower govt. expenditure, lower govt borrowing, higher interest rates
Cost push Take steps to reduce production costs by deregulating labour markets, encouraging greater productivity, apply control over wages and prices
Import factors
reduce quantity of imports or their prices via trade policies.
Controlling inflation (cont)
Excessive growth on money supply
Reduce money supply by cutting down on public sector borrowingFunding Govt borrowing from non bankReduce bank lendingMaintain interest rates
Expectations of inflation
Pursue policies which indicate Govt’s determination to reduce inflation
Anticipated versus Unanticipated Inflation
Unanticipated inflation creates more problems for the economy than does anticipated inflation
To the extent that inflation is higher or lower than anticipated, it arbitrarily creates winners and losers If it is higher than expected, the winners are all
those who had contracted to pay a price that anticipates lower inflation
The losers are all those who agreed to sell at that price
If inflation is lower is lower than expected, the situation is reversed
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Inflation Across Metropolitan Areas
Inflation rates differ across regions mostly because of differences in housing prices, which grow faster in some places than in others
Federal government tracks separate CPIs for each of 26 metropolitan areas.
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Exhibit 8: Average Annual Inflation from 1994 to 2004 Differed Across U.S. Metropolitan Areas
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Inflation and Interest Rates
Interest is the dollar amount paid by borrowers to lenders because lenders must be rewarded for forgoing present consumption
The interest rate is the interest per year as a percentage of the amount loaned
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Why is Inflation Unpopular?
Problems with unanticipated inflation
Hits those whose incomes are fixed in nominal terms
Arbitrarily redistributes income and wealth from one group to another
Reduces the ability to make long-term plans
Forces buyers and sellers to pay more attention to prices - less time for production - overall productivity of economy falls
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CREDICTS
Oroville High School on Oct 05, 2009
Kelly Giles, Contract Specialist at Microsoft on Apr 12, 2011
Kinnar Majithia, Management Trainee at Emerson Network Power on Jan 27, 2012
Baterdene Batchuluun, Teacher at I'm working as a teacher on Sep 02, 2013
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