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Chapter Menu
Chapter Introduction
Section 1: Business Cycles and Fluctuations
Section 2: Inflation
Section 3: Unemployment
Visual Summary
Chapter Intro 1
Do your grandparents talk about the “good old days” when gas was 25 cents per gallon and a loaf of bread cost 10 cents? Compile a list of things that you have been purchasing for several years. Note the prices you paid in the past and those you are currently paying. What do you think accounts for the price differences? Read Chapter 13 to find out what factors can lead to economic instability.
Chapter Intro 2
1. Economists look at a variety of factors to assess the growth and performance of a nation’s economy.
2. The labor market, like other markets, is determined by supply and demand.
Section 1-Preview
Section Preview
In this section, you will learn that business cycles are the alternating increases and decreases in the level of economic activity.
Section 1-Key Terms
Content Vocabulary
• business cycles
• business fluctuation
• recession
• peak
• trough
• expansion
• trend line
• depression
• depression scrip
Academic Vocabulary
• innovation • series
• leading economic indicator
• composite index of leading economic indicators
• econometric model
A. A
B. B
C. C
Section 1
External shocks like high oil prices have what kind of impact on the economy?
A. Drives the economy up
B. Drives the economy down
C. Economy stays the same. A B C
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Section 1
Business Cycles and Fluctuations
• Business cycles and business fluctuations can interrupt economic growth.
• Economists predict where economy is headed so forecasting models and statistical tools are key to predicting these changes.
Section 1
Business Cycles: Characteristics and Causes
Business cycles are marked by alternating periods of expansion and recession.
Section 1
Business Cycles: Characteristics and Causes (cont.)
• Phases of the business cycle
– Recession
• Begins when the economy reaches a peak
• Ends when the economy reaches a trough
Business Cycles
Section 1
Business Cycles: Characteristics and Causes (cont.)
– Expansion
• Begins after the declining real GDP bottoms out
• Continues until economy reaches a new peak
Section 1
Business Cycles: Characteristics and Causes (cont.)
• The economy would follow a steady growth path, trend line, if periods of recession and expansion did not occur.
• Severe recessions can turn into a depression.
Section 1
Business Cycles: Characteristics and Causes (cont.)
• Causes of business cycles
– Changes in capital expenditures
– Innovation and imitation
– Monetary policy decisions
– External shocks
A. A
B. B
C. C
D. D
Section 1
A B C D
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Which may not be a cause of business cycles?
A. New product developed
B. Rising price of flour
C. New method of production
D. Federal Reserve lowers the Federal Funds Rate.
Section 1
Business Cycles in the United States
Business cycles have become much more moderate since the Great Depression of the 1930s.
Section 1
• “Black Tuesday,” October 29th, 1929, marked the beginning of the Great Depression.
– Between 1929 and 1933, real GNP declined nearly 50%.
– Unemployment rose nearly 800%.
Business Cycles in the United States(cont.)
Section 1
– Average wage plunged from 55 cents/hour to 5 cents/hour.
– One-quarter of all banks failed.
– Depression scrip used because official paper currency was in short supply
Business Cycles in the United States(cont.)
Section 1
• Causes of the Great Depression
– Enormous gap in the distribution of income
– Easy credit
– Global economic conditions
Business Cycles in the United States(cont.)
Section 1
• Real GNP returned to its 1929 high in 1939.
• Increased government spending and World War II spending propelled the economy.
Business Cycles in the United States(cont.)
Section 1
• Laws passed and government agencies were established to prevent another depression.
– Social Security Act of 1935
– Minimum Wage
– Unemployment programs
Business Cycles in the United States(cont.)
Section 1
– Securities and Exchange Commission
– Federal Deposit Insurance Corporation
Business Cycles in the United States(cont.)
• After World War II, business cycles had shorter recessions and longer periods of expansion.
A. A
B. B
C. C
D. D
Section 1
A B C D
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Which form of legislation that resulted from the Great Depression do you find most appealing?
A. Minimum wage law
B. Creation of the Securitiesand Exchange Commission
C. Federal Deposit Insurance Corporation
D. Social Security Act
Section 1
Forecasting Business Cycles
Economists use statistics and models to predict business cycles.
Section 1
• Methods used to predict business cycles
– Statistical series
Forecasting Business Cycles (cont.)
• Leading economic indicator
• Composite index of leading economic indicators (LEI)
The Index of Leading Economic Indicators
Section 1
– Macroeconomic modeling
• Econometric model
Forecasting Business Cycles (cont.)
A. A
B. B
C. C
D. D
Section 1
A B C D
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How many leading economic indicators make up the composite index of leading economic indicators?
A. 8
B. 10
C. 12
D. 6
Section 2-Preview
Section Preview
In this section, you will find out that inflation is a rise in the general level of prices that disrupts the economy.
Section 2-Key Terms
Content Vocabulary
• inflation
• deflation
• price index
• consumer price index (CPI)
• market basket
• base year
• creeping inflation
• hyperinflation
• stagflation
• producer price index (PPI)
• implicit GDP price deflator
• demand-pull inflation
• cost-push inflation
• creditor
• debtor
A. A
B. B
C. C
Section 2
Inflation is
A. when the cost of stables becomes extremely inexpensive
B. an exceedingly high increase in prices
C. a general level increase in prices
A B C
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Section 2
Inflation
• Inflation—increase in the general level of prices
• Deflation—decline in the general level of prices
• Both are harmful to the economy and should be avoided whenever possible.
Section 2
Measuring Prices and Inflation
Several price indexes are used to measure inflation.
Section 2
Measuring Prices and Inflation (cont.)
• Measuring inflation
– Price index for a range of items is constructed
– Consumer price index (CPI)
• Select a market basket and add up prices to determine value
• Base year is selected forcomparison.
Constructing the Consumer Price Index
Section 2
Measuring Prices and Inflation (cont.)
• Dollar cost of market basket is converted to a price index.
• Percentage change of price index from one period to another is inflation.
Measuring Prices and Inflation
Section 2
Measuring Prices and Inflation (cont.)
• Inflationary changes
– Creeping inflation
– Hyperinflation
– Stagflation
Section 2
Measuring Prices and Inflation (cont.)
• Price indexes are constructed for all categories of the economy.
– Producer price index (PPI)
– Implicit GDP price deflator
A. A
B. B
C. C
D. D
Section 2
A B C D
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Which price index is used the most by economists to determine inflation?
A. PPI
B. CPI
C. CII
D. GDP price deflator
Section 2
Causes of Inflation
Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money.
Section 2
• Causes for inflation
– Demand-pull inflation
– Cost-push inflation
– Wage-price spiral
– Excessive monetary growth
Causes of Inflation (cont.)
Profiles in Economics:Milton Friedman
A. A
B. B
C. C
D. D
Section 2
A B C D
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When the price level goes up, the purchasing power of the dollar goes
A. Up
B. Down
C. Remains the same
D. Depends
Section 2
Consequences of Inflation
Inflation can reduce purchasing power, distort spending, and affect the distribution of income.
Section 2
• Effects of inflation
– Reduced purchasing power
– Distorted spending patterns
Consequences of Inflation (cont.)
The Purchasing Power of the Dollar
Section 2
– Encourages speculation
– Distorted distribution of income
Consequences of Inflation (cont.)
• Creditors are hurt more than debtors generally.
A. A
B. B
C. C
D. D
Section 2
A B C D
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Which sector of the economy has seen recent years of speculation?
A. Real estate
B. Gold
C. Oil
D. Alternative fuel
Section 3-Preview
Section Preview
In this section, you will find out how unemployment is measured as well as what causes it.
Section 3-Key Terms
Content Vocabulary
• civilian labor force
• labor force
• unemployed
• unemployment rate
• frictional unemployment
• structural unemployment
• outsourcing
• technological unemployment
• cyclical unemployment
• seasonal unemployment
• GDP gap
• misery index
• discomfort index
Section 3-Key Terms
Academic Vocabulary
• confined • fundamental • unfounded
A. A
B. B
Section 3
When the government issues that latest monthly unemployment statistic, is it accounting for all individuals who are unemployed?
A. Yes
B. No
A B
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Section 3
Measuring Unemployment
The government takes monthly surveys to measure the unemployment rate.
Section 3
Measuring Unemployment (cont.)
• The civilian labor force or labor force is the sum of all persons aged 16 and above who are either employed or actively seeking employment.
• Unemployed—individuals who are willing, able, and available to work and actively seeking employment
Section 3
Measuring Unemployment (cont.)
• The unemployment rate is equal to the number of unemployed persons divided by the civilian labor force.
The Unemployment Rate
A. A
B. B
C. C
D. D
Section 3
A B C D
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Unemployment rate does not include
A. Labor force dropouts
B. Prisoners
C. Military
D. All of the above
Section 3
Sources of Unemployment
Unemployment is often caused by circumstances outside an individual’s control and is therefore very difficult to remedy.
Section 3
Sources of Unemployment (cont.)
• Kinds of unemployment
– Frictional unemployment
– Structural unemployment
• Outsourcing
Section 3
Sources of Unemployment (cont.)
– Technological unemployment
– Cyclical unemployment
– Seasonal unemployment
A. A
B. B
C. C
D. D
Section 3
A B C D
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Which type of unemployment exists when consumers change from buying tapes and cassettes to DVDs and iPods?
A. Frictional
B. Technological
C. Structural
D. Seasonal
Section 3
Costs of Instability
Unemployment can cause uncertainty, political instability, and social problems.
Section 3
• Recession, inflation, and unemployment hinder economic growth and have human costs.
• Cost of unemployment and economic instability
Costs of Instability (cont.)
– Opportunity cost like the GDP gap
Section 3
– Misery index or discomfort index
– Uncertainty leads to fewer consumer purchases.
– Political instability
– Crime, poverty, and family instability
Costs of Instability (cont.)
Measuring Consumer Discomfort
A. A
B. B
C. C
D. D
Section 3
A B C D
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Which is not an official government statistic?
A. Producer price index
B. Misery index
C. Implicit GDP price deflator
Business Cycles Economic growth is typically marked by periods of recession followed by periods of expansion. A business cycle is the period from the beginning of one recession to the beginning of the next.
VS 1
VS 2
Inflation The economy faces inflation when the general level of prices increases. If excessive, inflation can have a disruptive effect on the economy.
VS 3
Unemployment The unemployment rate includes those individuals who are actively looking for a job but work less than one hour a week for pay or profit. It does not include people who are underemployed, working part-time, or have given up the job search.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
Profile
Milton Friedman (1912–2006)
• received the Nobel Prize for economics for his theories on economic stabilization policy
• strong proponent of monetary policy
Concepts Trans
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
business cycles
regular increases and decreases in real GDP
Vocab2
business fluctuation
irregular increases and decreases in real GDP
Vocab3
recession
decline in real GDP lasting at least two quarters
Vocab4
peak
point in time when real GDP stops expanding and begins to decline
Vocab5
trough
point in time when real GDP stops declining and begins to expand
Vocab6
expansion
period of uninterrupted growth of real GDP
Vocab7
trend line
growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery
Vocab8
depression
state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
Vocab9
depression scrip
currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s
Vocab10
leading economic indicator
statistical series that turns down before the economy turns down, or up before the economy turns up
Vocab11
composite index of leading economic indicators (LEI)
composite index of 10 economic series that move up and down in advance of changes in the overall economy; statistical series used to predict turning points in the business cycle
Vocab12
econometric model
mathematical expression used to describe how the economy is expected to perform in the future
Vocab13
innovation
the creation of something new or different
Vocab14
series
a group of related things or events
Vocab15
inflation
increase in the general level of prices of goods and services
Vocab16
deflation
decrease in the general level of prices for goods and services
Vocab17
price index
statistical series used to measure changes in the price level over time
Vocab18
consumer price index (CPI)
series used to measure price changes for a representative sample of frequently used consumer items
Vocab19
market basket
representative selection of goods and services used to compile a price index
Vocab20
base year
year serving as point of comparison for other years in a price index or other statistical measure
Vocab21
creeping inflation
relatively low rate of inflation, usually 1 to 3 percent annually
Vocab22
hyperinflation
inflation in excess of 500 percent per year
Vocab23
stagflation
period of slow economic growth coupled with inflation
Vocab24
producer price index (PPI)
index used to measure prices received by domestic producers
Vocab25
implicit GDP price deflator
index used to measure price changes in GDP
Vocab26
demand-pull inflation
explanation that prices rise because all sectors of the economy try to buy more goods and services than the economy can produce
Vocab27
cost-push inflation
explanation that rising input costs, especially energy and organized labor, drive up the prices of products
Vocab28
creditor
person or institution to whom money is owed
Vocab29
debtor
person who borrows and therefore owes money
Vocab30
construction
creation by assembling individual parts
Vocab31
recover
to get back
Vocab32
civilian labor force
non-institutionalized part of the population, aged 16 and over, either working or looking for a job
Vocab33
labor force
non-institutionalized part of the population, aged 16 and over, either working or looking for a job
Vocab34
unemployed
working for less than one hour per week for pay or profit in a non-family-owned business, while being available and having made an effort to find a job during the past month
Vocab35
unemployment rate
percentage of people in the civilian labor force who are classified as unemployed
Vocab36
frictional unemployment
unemployment involving workers changing jobs or waiting to go to new ones
Vocab37
structural unemployment
unemployment caused by a fundamental change in the economy that reduces the demand for some workers
Vocab38
outsourcing
hiring outside firms to perform non-core operations to lower operating costs
Vocab39
technological unemployment
unemployment caused by technological developments or automation that makes some workers’ skills obsolete
Vocab40
cyclical unemployment
unemployment directly related to swings in the business cycle
Vocab41
seasonal unemployment
unemployment caused by annual changes in the weather or other conditions that reduce the demand for jobs
Vocab42
GDP gap
difference between what the economy can and does produce
Vocab43
misery index
unofficial statistic that is the sum of the monthly inflation and unemployment rates
Vocab44
discomfort index
unofficial statistic that is the sum of the monthly inflation and unemployment rates
Vocab45
confined
kept within
Vocab46
fundamental
basic; an essential part of
Vocab47
unfounded
not based on fact
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