1 Business Cycles Business Cycle: the pattern of real GDP rising and falling: expansions and contractions. Recession (Contraction): two or more successive quarters of falling real GDP. Depression: a severe, prolonged economic contraction. –Prior to the 1930s, economic downturns were called “crises.” The term depression was introduced so people wouldn’t be scared. –The Great Depression gave “depression” a bad name. We now speak of “recessions.”

2 The Great Depression YearU.S. Unemployment Rate % % % % %  %

3 U.S. Real GDP (Recessions Shaded)

4 Annual Growth: Percent Changes in Real GDP

5 The Business Cycle: Some Terminology

6 Indicators of Economic Activity

7 Unemployment Rate of Unemployment = number unemployed number in the Labor Force The unemployment rate is the percentage of the labor force that is not working. The labor force is: All U.S. residents Over the age of 16 Who are not institutionalized Who are looking for work

8 Understating Unemployment Discouraged Workers: workers who have looked for work in the past year, but have stopped because they believe no one will offer them a job. Underemployment: employment of workers in jobs that do not fully utilize their productive skills.

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10 Flavors of Unemployment n Seasonal Unemployment n Results from recurring changes in hiring needs of certain industries on a seasonal basis. n Frictional Unemployment: searching for jobs n Results from short-term movement of workers between jobs and job search by those entering the labor force. n Improved labor market information can reduce frictional unemployment n Structural Unemployment n Reflects imperfect match between employee skills and requirements of available jobs. n Results from technological change and other changes in the structure of the economy. n Cyclical Unemployment n Results from business cycle fluctuations. Business activity down  cyclical unempl’mt up.

11 Unemployment: Comparative Rates In most years, the unemployment rate for women is higher than for men. Teenagers have the highest unemployment rate. Whites have lower unemployment rates than nonwhites.

12 Unemployment and Its Costs “Natural” Rate of Unemployment A normal rate, considering both frictional and structural factors. NAIRU –Also called the NAIRU (Nonaccelerating Inflation Rate of Unemployment) -- ~5% for US economy The “natural” rate can change Potential Real GDP The level of output when nonlabor resources are fully utilized and unemployment is at its natural rate. GDP gap = potential real GDP – actual GDP

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15 Flavors of Price Inflation Demand-pull inflation: –caused by increases in aggregate demand outpacing increases in aggregate supply. Cost-push inflation: –increased production costs cause firms to raise prices. Wage-push inflation Energy costs and inflation Hyperinflation: –extremely high rate of inflation. Printing money as last resort

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17 Rates of Inflation for Selected Countries,

18 Recent Hyperinflations

19 Interest Rates Nominal Interest Rate (i): the observed interest rate in the market. Real Interest Rate (r): nominal rate adjusted for inflation (  ). r = i - 

20 The Real Interest Rate on U.S. Treasury Bills (Short-Term Securities of US Gov’t)