Section 1 Business Cycles: Characteristics and Causes (cont.) Phases of the business cycle –RecessionRecession Begins when the economy reaches a peakpeak.

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

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 (cont.)

• Inflationary changes

– Creeping inflation

– Hyperinflation

– Stagflation

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

0% 0%0%0%

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

• 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

0% 0%0%0%

Which sector of the economy has seen recent years of speculation?

A. Real estate

B. Gold

C. Oil

D. Alternative fuel

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

0%0%

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

0% 0%0%0%

Unemployment rate does not include

A. Labor force dropouts

B. Prisoners

C. Military

D. All of the above

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

0% 0%0%0%

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

• 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

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 4

Figure 5

Figure 6

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