ECON CH.27 Lecture
ECON CH.27 Lecture ECO2013
Popular in Principles of Macroeconomics
Popular in Economics
This 4 page Class Notes was uploaded by itswingo on Thursday October 6, 2016. The Class Notes belongs to ECO2013 at Florida SouthWestern State College taught by Professor Sammie Young in Fall 2016. Since its upload, it has received 4 views. For similar materials see Principles of Macroeconomics in Economics at Florida SouthWestern State College.
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Date Created: 10/06/16
Macroeconomics Chapter 27 Lecture Business Cycles, Unemployment, & Inflation o Business Cycle: alternating increases and decreases in economic activity over time o Phases of business cycle: Peak: business activity reaches temporary maximum Recession: decline in total output, income, and trade lasting 6 months or more; “economic contraction” Trough: bottom of recession period Expansion: output and employment is recovering and expanding o National Bureau of Economic Research (NBER): nonprofit economic research organization Business Cycle Dating Committee: declare start and end of recessions in the U.S. o Business cycle fluctuations Economic shocks Prices are “sticky” downwards; results in slower sales; causes GDP to fall Economic response entails decrease in output and employment o Causation: A First Glance Causes of shocks Irregular innovation (computer, internet, etc.) Productivity changes (related cause; unexpected changes) Monetary factors (inflationary boom can occur) Political events (peace treaties, war, etc.); rapid assets, economic strains; price increases or decreases, etc. Financial instability o Recession of 2007: (excessive money, overvalue real estate, unsustainable mortgage debt) o Cyclical Impact Level of aggregate spending is important Durable goods affected most: Capital goods Consumer durables Nondurable consumer goods affected less: Services Food Clothing o Unemployment Bureau of Labor Statistics (BLS): agency w/in department of labor Unemployment rate = # of unemployed / labor force X 100 Population groups Group 1: institutionalized or under age 16 Group 2: not in labor force (I.E. fulltime college students, stay at home parents, retirees) Group 3: age 16 and over, willing and able to work, and seeking work o LABOR FORCE Criticisms of unemployment Involuntary parttime workers counted as fulltime Discouraged workers not counted as unemployed Frictional unemployment: Searching for jobs or waiting to take jobs soon; shortterm; mobility as people change and/or seek jobs Structural unemployment: Occurs due to changes in structure of demand for labor; longterm; certain skills become obsolete Cyclical unemployment: Caused by recession phase of business cycle o Full Employment Natural Rate of Unemployment (NRU): achieved when labor markets are in balance Full employment level of unemployment Cyclical unemployment = 0 Can vary over time… o Demographic changes o Changing job search methods o Public policy changes Actual unemployment can be above or fall below NRU o Economic Cost of Unemployment GDP gap = difference between actual and potential GDP and can be negative or positive Okun’s Law Every 1% of unemployment above natural rate = a negative GDP gap of 2% occurs o Country producing below what potentially could be produced o Unequal Burdens Occupation: white collar workers Age: teenager’s highest unemployment rates Race & ethnicity: African American’s have higher unemployment rates than whites Gender: males & females are comparable; females currently have lower unemployment Education: less educated have higher unemployment than higher educated Duration: 15 weeks or more unemployment rate is lower than overall rate o Noneconomic Costs Loss of skills & loss of selfrespect Plummeting morale Family disintegration Poverty and reduced hope Heightened racial and ethnic tensions Suicide, homicide, fatal heart attacks, mental illness Lead to violent social and political changes o Inflation General rise in price level Reduces “purchasing power” of money; each dollar of income will purchase less than before Difficult to distinguish inflation types Types differ in sustainability Consumer price index (CPI) – for all urban consumers CPI = price of most recent market basket in particular year / price estimate of market basket in 19821984 X 100 CPI = 207.3 – 201.6 / 201.6 X 100 = 2.8% o Types of Inflation Demandpull inflation 2 Excess spending relative to output Central bank issues too much money Continues as long as excess spending continues Costpush inflation Prices rise, output falls Due to rise in perunit input costs Major source is supply shocks Will die out in recession if spending does not rise Core inflation Without food and energy goods Focuses on more stable prices o Redistribution Effects of Inflation Nominal income # of dollars received as wages, rent, interest, or profit unadjusted for inflation Real Income Refers to purchasing power of your income nominal income adjusted for inflation Anticipated VS. Unanticipated Income Anticipated is much less harmful Percentage change in real income = percentage change in nominal income – percentage change in price level o Who is Hurt by Inflation Fixedincome receivers Real incomes fall Nominal income does not rise with prices Savers Interest rate returns may not cover cost of inflation Savings will lose purchasing power value of accumulated savings deteriorates Creditors Lenders get paid back in “cheaper dollars” Interest on payments receive may be less than inflation rate FlexibleIncome receivers COLAs Social security recipients Union members Debtors Pay back the loan with “cheaper dollars” o Anticipated Inflation If inflation is anticipated, individuals can plan ahead Inflation premium = amount interest rate is raised to cover anticipated inflation effects Real interest rate Rates adjusted for inflation Nominal interest rate Rates not adjusted for inflation o Other Redistribution Issues Deflation 3 Mixed effects Incomes may rise Fixed assets values may fall Real debt declines for fixedrate mortgages Arbitrariness o Does Inflation Affect Output? Costpush inflation Reduces real output Resource prices rise unexpectedly Redistributes a decreased level of real income Demandpull inflation One view is that zero inflation is best Another view is that mild inflation is best o Hyperinflation Can cause speculation, reckless spending, and more inflation Rapid inflation Devastation in economy Businesses doesn’t know what to charge Consumers don’t know what to pay Money worth EXAMPLE: Zimbabwe’s 14.9 billion % inflation in 2008 o Unemployment after Great Recession Slow recovery Higher federal minimum wage o Increase unemployment rate Longer unemployment benefits period Structural adjustments o Change basic structure of what is being produced and what workers are needed Higher labor costs 4
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