Notes Ch. 11
Notes Ch. 11 Econ 1051
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This 3 page Class Notes was uploaded by Lauren Pike on Sunday October 25, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 31 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 10/25/15
Business Cycles Unemployment and Inflation Business cycles 0 definition increasedecrease in level of econ activity over periods of time o 2 primary phases growth and recession I recession period of declining real GDP accompanied by lower income and higher unemployment period of 6 mos or greater I recession followed by expansion real GDP income and employment increase 0 if spending expands more rapidly than prod capacity prices of all goods and services increase inflation I National Bureau of Econ Research NBER declares start and end of recessions 0 causes of the business cycle 0 theories founded on idea that fluctuations are driven by shocks I shocks situations in which event don t meet expectations I demand shocks unexpected change in demand for goods and services I supply shocks unexpected change in supply of goods and services c shock doesn t necessarily mean good or bad I sticky prices prices of goods and services slow to respond to changes in supply and demand as response firms increase and decrease output and employment 0 possible theories for shocks I irregular innovation I productivity changes I monetary factors I political events I financial instability o cyclical impact durables and nondurables 0 firms producing capital and durable goods most impacted by business cycles bc businessesconsumers will cut spending 0 nondurables ex food and clothing and services are better protected Unemployment 0 measurement of unemployment 0 Bureau of Labor Statistics BLS conducts random survey of 60000 households each month 0 divides population into 3 groups I under16institutionalized I not in labor force I labor force people able and willing to work 0 unemployed but seeking job included unemployed labor force X I unemployment rate 0 types of unemployment o frictional ppl searching forjobswaiting to take jobs in near future I most workers not in unemployment pool for too long 0 structural mismatch between available jobs and skillslocation of those unemployed I when workers find their skills obsolete o cyclical associated with recessionary phase of business cycle 0 definition of full employment 0 bc structuralfrictional unemployment unavoidable full employment is lt 100 o no cyclical unemployment 0 occurs when unemployment rate lt 5 natural rate 0 potential output level of real GDP that would occur if there was full employment 0 econ cost of unemployment 0 GDP gap difference between actual and potential GDP 0 increase in unemployment increase in GDP gap 0 can be or o means below natural rate means above natural rate actual GDPlt potential GDP 0 natural rate of unemployment frictional structural Inflation 0 meaning of inflation 0 def rise in general level of prices in an econ 0 each dollar of income buys fewer goods than before 0 doesn t mean all prices are rising 0 measurement of inflation 0 consumer price index CPI compares price of a market basket of consumer goods and services in one period w price of samesimilar market basket in base period calculated by BLS 0 market basket based on spending patterns of urban consumers in specific time pe od price 0 most recent market basket in particular ear C P I y price of same market basket in 1982 84 0 deflation decrease in general price levels in econ 0 types of inflation o demandpull inflation increase in price level caused by excessive spending excess of total spending gt econ s capacity to produce I causes overissuance of by Fed Reserve I bids of price of limited output 0 costpush inflation increase in price level caused by sharp rises in cost of key resources I squeezes profits and reduces supply of goods and services I supply shocks are major source 0 Redistribution Effects of Inflation o nominal income of dollars received as wages rent interest and profit 0 real income measure of amounts of goods and services nominal income can buy purchasing power of nominal income nominal income real price index in hundredtlis O A real income A nominal income A price level 0 if change in nominal income is the same as change in price level nominal income is unchanged 0 who is hurt by inflation o fixedincome receivers o creditors 0 who is unaffectedhelped o flexible income receivers o debtors o anticipated inflation 0 real interest rate increase in purchasing power that borrower pays to lender o nominal interest rate increase in money that borrowers pays to lender I nominal interest rate real interest rate inflation premium Does Inflation Affect Output 0 costpush inflation and real output 0 as prices levels increase qty of goods and services demanded decreases 0 firms respond by producing less and unemployment increases 0 reduces real output and redistributed decreased level of real income 0 demandpull inflation and real output 0 economists don t fully agree perspectives I even low levels of inflation reduce real output bc inflation diverts time and effort toward activities designed to limit inflation I OR full employment and economic growth depends on strong levels of spending and is a small price to pay for fullemployment and econ growth
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