2. Fluctuations in Economic Output, Unemployment, and Inflation

3. The Business Cycle The phases of the business cycle are: Recovery or Expansion, Peak or Boom (shaded green) Recession or Contraction trough or Depression (blue shaded areas). Time Real GDP Business peak Depression or trough Recession Recovery Business peak Depression or trough Trend line

5. Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Source: Economic Report of the President, various issues. Annual growth rate of real GDP 6 8 4 2 0 - 2 196019651970197519801985 1990 1995 20002005 Long-run growth rate (approx. 3%) 2009

6. Ups and downs characterize business activity. There has been an upward trend in real GDP in the United States and other industrial nations. The Business Cycle Cycles are irregular Share of labor force unemployed 10 8 6 4 2 196019651970197519801985199019952000 20052009 Natural rate of unemployment Actual rate of unemployment

7. Actual and Potential GDP Potential output : Maximum sustainable output level consistent with the economy’s resources, (on the production possibilities curve.) Actual and potential output will be equal when the economy is at full employment.

8. Note the gap (shaded area) between actual and potential GDP during periods of recession. Actual & Potential GDP, 1960 - 2009 Real GDP (billions of 2000 $) 1970 recession 1974-75 recession 1980 recession 1982 recession 1990-91 recession 2001 recession 1960 recession 8,000 6,000 4,000 2,000 196019651970197519801985199019952000 2005 10,000 Potential GDP 12,000 Actual GDP 2010 2008-09 recession

9. Economic Fluctuations and the Labor Market

10. 4 Labor Market Classifications 1. Employed – a person (16 years old or over) who is working for pay at least one hour per week, self employed, or, working 15 hours or more each week without pay in a family-operated enterprise. 2. Unemployed – a person not currently employed who is either actively seeking a job, or, waiting to begin or return to a job. 3. Civilian Labor force – civilians (16 years and older) who are either employed or unemployed. 4. Not in the labor force – persons (16 years and older) who are neither employed nor unemployed (like retirees, students, homemakers, or disabled persons).

11. Labor Force Participation Rate = # in the Labor Force Civilian population (16+) Economic Fluctuations and the Labor Market The non-institutional civilian adult population is grouped into two broad categories: Persons not in the labor force, and, persons in the labor force. Employed + Unemployed Recall the Labor Force = To be classified as unemployed, one must either be on layoff or actively seeking work. Rate of Unemployment = # Unemployed # in the Labor Force

12. The definition of unemployed involves some subjectivity. Some argue the employment/population ratio is a better indicator of job availability than the unemployment rate. Unemployment and Measurement Problems Employment / Population Ratio = # employed Civilian population (16+)

13. U.S. Population, Employment, and Unemployment: 2001 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% 141.8 million 135.1 million 70.1 million 211.9 million 6.7 million

14. U.S. Population, Employment, and Unemployment: 2004 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% 147.4 million 139.3 million 76.0 million 223.4 million 8.1 million 147.4 223.4 = 139.3 223.4 = 8.1 147.4 =

15. U.S. Population, Employment, and Unemployment: 2006 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% 151.8 million 144.4 million 77.4 million 228.6 million 7.0 million 151.8 228.6 = 144.4 228.6 = 7.0 151.8 =

16. Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.9% Employment / Population Ratio = Number employed Civilian population (16+) = 63.8% Rate of Unemployment = Number unemployed Civilian labor force = 4.8% Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% 147.4 223.4 = 139.3 223.4 = 8.1 147.4 = Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.4% Employment / Population Ratio = Number employed Civilian population (16+) = 63.2% Rate of Unemployment = Number unemployed Civilian labor force = 4.6% 151.8 228.6 = 144.4 228.6 = 7.0 151.8 = 141.8 211.9 = 135.1 211.9 = 6.7 141.8 = 2001 2003 2006

17. Source: www.bls.gov. Composition of the Unemployed by Reason There are various reasons why persons were unemployed in 2006. A little less than two-fifths (39.1%) of the unemployed were dismissed from their previous jobs. 43.6% of the unemployed were either new entrants or reentrants into the labor force. Dismissed from previous jobs 39.1% Job leavers 12.5 % New entrants 9.5% Reentrants 34.1% On layoff 13.3%

18. a. a person who is not working but applied for a job at Wal- Mart last week b. a person working part-time who is searching diligently for a full-time job c. an auto worker vacationing in Florida during a layoff at a General Motors plant who expects to be recalled in a couple of weeks d. a 17-year-old who works six hours per week as a route person for the local newspaper e. homemaker working 70 hours a week preparing meals and performing other household services f.a college student who spends between 50 and 60 hours per week attending classes and studying g.a retired Social Security recipient Classify each of the following as (a) employed, (b) unemployed, or (c) not in the labor force: a a b b b c c c

19. 2. The figures below (in millions) are for the U.S. during the year 2006. Population (age 16 and over) 299.8 Civilian pop. (age 16 and over) 228.6 Employed 144.4 Unemployed 7.0 c. Calculate the employment/ population ratio b.Calculate the labor force participation rate. a.Calculate the unemployment rate. 7.0 144.4 228.6

20. 1. Frictional 1. Frictional 2. Structural 2. Structural 3. Cyclical 3. Cyclical 4. Seasonal 4. Seasonal temporary job less business job replaced between jobs

21. 1. Frictional? 1. Frictional? 2. Structural? 2. Structural? 3. Cyclical? 3. Cyclical? Deals with which type? Deals with which type?

22. 1. A student who decides at mid- semester to devote the rest of the term to studying quits her part-time job 1. A student who decides at mid- semester to devote the rest of the term to studying quits her part-time job 2. A graphic artist who is out of work because a computer now does her job. 2. A graphic artist who is out of work because a computer now does her job. 3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better. 3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better.

23. 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory. 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory. 5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum. 5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum. 6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job 6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job

24. 1. Frictional 1. Frictional 2. Structural 2. Structural but no Cyclical but no Cyclical At full employment there will still be some: At full employment there will still be some:

25. actual unemployment may only get as low as actual unemployment may only get as low as 4 – 5 % 4 – 5 %

26. The Rate of Inflation is calculated as: Inflation rate = Last year’s price index This year’s price index Last year’s price index - * 100 Inflation is an increase in the general level of prices.

27. Between 1956 and 1965, the general price level increased at an average annual rate of only 1.3%. In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years. Since 1982, the average rate of inflation has been lower (3.1% from 1983-2009) and more stable. The Inflation Rate, 1956-2009 1983-2009 average inflation rate = 3.1 % Inflation rate 1956196019651970197519801985199020001995 10 5 0 15 2005 1956-1965 average inflation rate = 1.6 % 1973-1981 average inflation rate = 9.2 % 2010

28. There are 2 Kinds of Inflation 1. Anticipated inflation: A widely expected change in the price level. 2. Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals.

29. 1. Hyperinflation 1. Hyperinflation 2. Money loses value 2. Money loses value

30. 1. Savings 1. Savings 2. Loans 2. Loans 3. Wealth 3. Wealth May increase Are easier to repay Lose value

31. Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.

32. 1. Demand-Pull 1. Demand-Pull 2. Cost-Push 2. Cost-Push

33. 1. Demand-Pull 1. Demand-Pull buyers demands greater than producers supply Price Quantity P2P2 P1P1 Q1Q1 D1D1 S1S1 Q2Q2 New price and output D 2 (increase in demand) Orig. price and output

34. 2. Cost Push 2. Cost Push sellers’ costs are passed on to buyers Price Quantity/time P2P2 P 1 Q 1 D S 1 (initial equilibrium) Q2Q2 S 2 (new equilibrium)

35. a slowing of the inflation rate a slowing of the inflation rate the aim of policies the aim of policies usually phrased as “slowing inflation” usually phrased as “slowing inflation” http://abcnews.go.com/Video/playerIndex?id=6484348

36. 4. How would an unanticipated 5 percent jump in inflation impact the wealth of: a. Joe, who has a 30-year home mortgage at a fixed interest rate b. The McCoy's, who hold most of their wealth in long-term fixed yield bonds c. Hanna, a retiree drawing a pension of a fixed dollar amount d. Jose, a heavily indebted small-business owner. e. Mike, the owner of an apartment complex with substantial debt at a fixed interest rate f. Tina, a worker whose wages are determined by a 3-year union contract ratified three months ago

37. 1.During this century, the growth rate of real GDP in the United States has averaged approximately a.1 % b.3 % c.6 % d.10 % 2.Economists use the term “business cycle” to refer to a.the growth of small businesses into major corporations. b.changes in products that occur from improved technology. c.fluctuations in the level of real output and employment. d.periods of increases and decreases in the rate of inflation. 3.The labor force participation rate of women in the United States has been a.increasing for several decades. b.decreasing for the past several decades after increasing dramatically in the early 1900s. c.approximately constant during the last three decades. d.decreasing since the early 1900s.

38. 4.Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true? a.The employment population ratio is 87.5 percent. b.The labor force participation rate is 70 percent. c.The unemployment rate is 12.5 percent. d.There are 700 individuals in this country’s labor force. 5.The type of unemployment caused by changes in the business cycle is a. cyclical b. naturalc. frictional d. structural. 6.Frictional unemployment is the result of a.not enough jobs for everyone to be employed. b.unemployed workers’ skills not matching those needed for the available jobs. c.a decline in the demand for labor, such as during a recession. d.imperfect information and temporary periods of unemployment while workers are changing jobs.

39. 7.Which of the following individuals would be considered unemployed by the official government definition? a. George, who returned to graduate school after failing to find a job the last four months b. Gwen, a medical student, who is still in college and is not working c. Morgan, who is employed part-time but desires a full-time job d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant. 8.Suppose that the consumer price index at year-end 2004 was 140 and by year-end 2005 had risen to 150. What was the inflation rate during 2005? a.7.1 % b.10 % c.14.2 % d.50 % 9.Which of the following is true? a. Anticipated inflation is an increase in the price level that comes as a surprise, at least to most individuals b. Unanticipated inflation is a change in the price level that is widely expected. c. Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy. d. Inflation will increase the prices of goods and services that households purchase but not the wage rates of workers