1. # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Business Cycles, Unemployment, and Inflation 6

2. 6-2 The Business Cycle Alternating increases and decreases in economic activity over time Phases of the business cycle Peak Recession Trough Expansion LO1

3. 6-3 The Business Cycle Level of real output Time Peak Recession Expansion Trough Growth Trend LO1

4. 6-4 The Business Cycle U.S. Recessions since 1950 Period Duration, Months Depth (Decline in Real Output) 1953–5410 -2.6% 1957–588-3.7 1960–6110-1.1 1969–7011-0.2 1973–7516-3.2 19806-2.2 1981–8216-2.9 1990–918-1.4 20018-0.4 2007–0918-3.7 Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve Bank, www.minneapolisfed.gov. Output data are in 2000 dollars.www.nber.org www.minneapolisfed.gov LO1

5. 6-5 Causes of Business Cycles Business cycle fluctuations Demand shocks Supply shocks Prices are “sticky” downwards Economic response entails decreases in output and employment LO1

6. 6-6 Cyclical Impact Durable goods affected most Capital goods Consumer durables Nondurable consumer goods affected less Services Food and clothing LO1

7. 6-7 Causes of Business Cycles Causes of shocks Irregular innovation Productivity changes Monetary factors Political events Financial instability Recession of 2007 LO1

8. 6-8 Unemployment Under 16 and/or Institutionalized (70.9 million) Not in labor force (83.9 million) Employed (139.1 million) Unemployed (14.8 million) Total population (308.7 million) Labor force (153.9 million) Unemployment rate = 14,855,000 153,889,000 × 100 = 9.6% Unemployment rate = # of unemployed Labor force × 100 LO2

9. 6-9 Types of Unemployment Frictional unemployment Individuals searching for jobs or waiting to take jobs soon Structural unemployment Occurs due to changes in the structure of the demand for labor Cyclical unemployment Caused by the recession phase of the business cycle LO3

10. 6-10 Definition of Full Employment Full employment is something less than 100 percent employment Believed to occur when unemployment rate is less than 5 percent Potential output LO3

11. 6-11 Economic Cost of Unemployment GDP gap GDP gap = Actual GDP – Potential GDP Can be negative or positive Loss of income is unequal LO3

12. 6-12 Unemployment Rates LO3

13. 6-13 Inflation General rise in the price level Inflation reduces the “purchasing power” of money Consumer Price Index (CPI) LO2 CPI Price of the most recent market basket in the particular year Price estimate of the market basket in 1982–1984 = × 100 CPI 218.1 - 214.5 214.5 = × 100 = 1.6%

14. 6-14 Inflation LO2 Inflation Rates in Five Industrial Nations

15. 6-15 Inflation LO2 Annual Inflation Rates in the United States, 1960-2010

16. 6-16 Types of Inflation Demand-pull inflation Excess spending relative to output Central bank issues too much money Cost-push inflation Due to a rise in per-unit input costs Supply shocks LO3

17. 6-17 Redistribution Effects of Inflation Nominal income Unadjusted for inflation Real income Nominal income adjusted for inflation Anticipated versus unanticipated income Percentage change in real income = Percentage change in nominal income Percentage change in price level LO3 

18. 6-18 Who Is Hurt by Inflation? Fixed-income receivers Real incomes fall Savers Value of accumulated savings deteriorates Creditors Lenders get paid back in “cheaper dollars” LO3

19. 6-19 Who Is Unaffected by Inflation? Flexible-income receivers COLAs Social Security recipients Union members Debtors Pay back the loan with “cheaper dollars” LO3

20. 6-20 Anticipated Inflation Real interest rate Rates adjusted for inflation Nominal interest rate Rates not adjusted for inflation LO3

21. 6-21 Anticipated Inflation Nominal interest rate Real interest rate Inflation premium 11% 5% 6% =+ LO3

22. 6-22 Does Inflation Affect Output? Cost-push inflation Reduces real output Redistributes a decreased level of real income Demand-pull inflation One view is that zero inflation is best Another view is that mild inflation is best LO3

23. 6-23 Hyperinflation Extraordinarily rapid inflation Devastates an economy Businesses don’t know what to charge Consumers don’t know what to pay Money becomes worthless Zimbabwe’s 14.9 billion percent inflation in 2008 LO3