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Chapter Menu Chapter Introduction Section 1:Section 1:Business Cycles and Fluctuations Section 2:Section 2:Inflation Section 3:Section 3:Unemployment Visual Summary

Chapter Intro 1 Do your grandparents talk about the “good old days” when gas was 25 cents per gallon and a loaf of bread cost 10 cents? Compile a list of things that you have been purchasing for several years. Note the prices you paid in the past and those you are currently paying. What do you think accounts for the price differences? Read Chapter 13 to find out what factors can lead to economic instability.

Chapter Intro 2 1.Economists look at a variety of factors to assess the growth and performance of a nation’s economy. 2.The labor market, like other markets, is determined by supply and demand.

Chapter Intro-End

Section 1-Preview Section Preview In this section, you will learn that business cycles are the alternating increases and decreases in the level of economic activity.

Section 1-Key Terms Content Vocabulary business cyclesbusiness cycles business fluctuationbusiness fluctuation recession peak trough expansion trend line depression depression scripdepression scrip Academic Vocabulary innovation series leading economic indicatorleading economic indicator composite index of leading economic indicatorscomposite index of leading economic indicators econometric modeleconometric model

A.A B.B C.C Section 1 External shocks like high oil prices have what kind of impact on the economy? A.Drives the economy up B.Drives the economy down C.Economy stays the same.

Section 1 Business Cycles and Fluctuations Business cycles and business fluctuations can interrupt economic growth.Business cyclesbusiness fluctuations Economists predict where economy is headed so forecasting models and statistical tools are key to predicting these changes.

Section 1 Business Cycles: Characteristics and Causes Business cycles are marked by alternating periods of expansion and recession.

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

Section 1 Business Cycles: Characteristics and Causes (cont.) –ExpansionExpansion 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.trend line Severe recessions can turn into a depression. 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

A.A B.B C.C D.D Section 1 Which may not be a cause of business cycles? A.New product developed B.Rising price of flour C.New method of production D.Federal Reserve lowers the Federal Funds Rate.

Section 1 Business Cycles in the United States Business cycles have become much more moderate since the Great Depression of the 1930s.

Section 1 “Black Tuesday,” October 29 th, 1929, marked the beginning of the Great Depression. –Between 1929 and 1933, real GNP declined nearly 50%. –Unemployment rose nearly 800%. Business Cycles in the United States (cont.)

Section 1 –Average wage plunged from 55 cents/hour to 5 cents/hour. –One-quarter of all banks failed. –Depression scrip used because official paper currency was in short supplyDepression scrip Business Cycles in the United States (cont.)

Section 1 Causes of the Great Depression –Enormous gap in the distribution of income –Easy credit –Global economic conditions Business Cycles in the United States (cont.)

Section 1 Real GNP returned to its 1929 high in Increased government spending and World War II spending propelled the economy. Business Cycles in the United States (cont.)

Section 1 Laws passed and government agencies were established to prevent another depression. –Social Security Act of 1935 –Minimum Wage –Unemployment programs Business Cycles in the United States (cont.)

Section 1 –Securities and Exchange Commission –Federal Deposit Insurance Corporation Business Cycles in the United States (cont.) After World War II, business cycles had shorter recessions and longer periods of expansion.

A.A B.B C.C D.D Section 1 Which form of legislation that resulted from the Great Depression do you find most appealing? A.Minimum wage law B.Creation of the Securities and Exchange Commission C.Federal Deposit Insurance Corporation D.Social Security Act

Section 1 Forecasting Business Cycles Economists use statistics and models to predict business cycles.

Section 1 Methods used to predict business cycles –Statistical series Forecasting Business Cycles (cont.) Leading economic indicator Composite index of leading economic indicators (LEI)Composite index of leading economic indicators (LEI) The Index of Leading Economic Indicators

Section 1 –Macroeconomic modeling Econometric model Forecasting Business Cycles (cont.)

A.A B.B C.C D.D Section 1 How many leading economic indicators make up the composite index of leading economic indicators? A.8 B.10 C.12 D.6

Section 1-End

Section 2-Preview Section Preview In this section, you will find out that inflation is a rise in the general level of prices that disrupts the economy.

Section 2-Key Terms Content Vocabulary inflation deflation price index consumer price index (CPI)consumer price index (CPI) market basketmarket basket base year creeping inflationcreeping inflation hyperinflation stagflation producer price index (PPI)producer price index (PPI) implicit GDP price deflatorimplicit GDP price deflator demand-pull inflationdemand-pull inflation cost-push inflationcost-push inflation creditor debtor

Section 2-Key Terms Academic Vocabulary construction recover

A.A B.B C.C Section 2 Inflation is A.when the cost of stables becomes extremely inexpensive B.an exceedingly high increase in prices C.a general level increase in prices

Section 2 Inflation Inflation—increase in the general level of pricesInflation Deflation—decline in the general level of pricesDeflation Both are harmful to the economy and should be avoided whenever possible.

Section 2 Measuring Prices and Inflation Several price indexes are used to measure inflation.

Section 2 Measuring Prices and Inflation (cont.) Measuring inflation –Price index for a range of items is constructedPrice index –Consumer price index (CPI)Consumer price index (CPI) Select a market basket and add up prices to determine valuemarket basket Base year is selected for comparison.Base year Constructing the Consumer Price Index

Section 2 Measuring Prices and Inflation (cont.) Dollar cost of market basket is converted to a price index. Percentage change of price index from one period to another is inflation. Measuring Prices and Inflation

Section 2 Measuring Prices and Inflation (cont.) Inflationary changes –Creeping inflationCreeping inflation –HyperinflationHyperinflation –StagflationStagflation

Section 2 Measuring Prices and Inflation (cont.) Price indexes are constructed for all categories of the economy. –Producer price index (PPI)Producer price index (PPI) –Implicit GDP price deflatorImplicit GDP price deflator

A.A B.B C.C D.D Section 2 Which price index is used the most by economists to determine inflation? A.PPI B.CPI C.CII D.GDP price deflator

Section 2 Causes of Inflation Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money.

Section 2 Causes for inflation –Demand-pull inflationDemand-pull inflation –Cost-push inflationCost-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 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 Consequences of Inflation Inflation can reduce purchasing power, distort spending, and affect the distribution of income.

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.Creditorsdebtors

A.A B.B C.C D.D Section 2 Which sector of the economy has seen recent years of speculation? A.Real estate B.Gold C.Oil D.Alternative fuel

Section 2-End

Section 3-Preview Section Preview In this section, you will find out how unemployment is measured as well as what causes it.

Section 3-Key Terms Content Vocabulary civilian labor forcecivilian labor force labor force unemployed unemployment rateunemployment rate frictional unemploymentfrictional unemployment structural unemploymentstructural unemployment outsourcing technological unemploymenttechnological unemployment cyclical unemploymentcyclical unemployment seasonal unemploymentseasonal unemployment GDP gap misery index discomfort index

Section 3-Key Terms Academic Vocabulary confined fundamental unfounded

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

Section 3 Measuring Unemployment The government takes monthly surveys to measure the unemployment rate.

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.civilian labor forcelabor force Unemployed—individuals who are willing, able, and available to work and actively seeking employmentUnemployed

Section 3 Measuring Unemployment (cont.) The unemployment rate is equal to the number of unemployed persons divided by the civilian labor force.unemployment rate The Unemployment Rate

A.A B.B C.C D.D Section 3 Unemployment rate does not include A.Labor force dropouts B.Prisoners C.Military D.All of the above

Section 3 Sources of Unemployment Unemployment is often caused by circumstances outside an individual’s control and is therefore very difficult to remedy.

Section 3 Sources of Unemployment (cont.) Kinds of unemployment –Frictional unemploymentFrictional unemployment –Structural unemploymentStructural unemployment Outsourcing

Section 3 Sources of Unemployment (cont.) –Technological unemploymentTechnological unemployment –Cyclical unemploymentCyclical unemployment –Seasonal unemploymentSeasonal unemployment

A.A B.B C.C D.D Section 3 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 Costs of Instability Unemployment can cause uncertainty, political instability, and social problems.

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 gapGDP gap

Section 3 –Misery index or discomfort indexMisery indexdiscomfort index –Uncertainty leads to fewer consumer purchases. –Political instability –Crime, poverty, and family instability Costs of Instability (cont.) Measuring Consumer Discomfort

A.A B.B C.C D.D Section 3 Which is not an official government statistic? A.Producer price index B.Misery index C.Implicit GDP price deflator

Section 3-End

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.

VS-End

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Profile Milton Friedman (1912–2006) received the Nobel Prize for economics for his theories on economic stabilization policy strong proponent of monetary policy

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Vocab1 business cycles regular increases and decreases in real GDP

Vocab2 business fluctuation irregular increases and decreases in real GDP

Vocab3 recession decline in real GDP lasting at least two quarters

Vocab4 peak point in time when real GDP stops expanding and begins to decline

Vocab5 trough point in time when real GDP stops declining and begins to expand

Vocab6 expansion period of uninterrupted growth of real GDP

Vocab7 trend line growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery

Vocab8 depression state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship

Vocab9 depression scrip currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s

Vocab10 leading economic indicator statistical series that turns down before the economy turns down, or up before the economy turns up

Vocab11 composite index of leading economic indicators (LEI) composite index of 10 economic series that move up and down in advance of changes in the overall economy; statistical series used to predict turning points in the business cycle

Vocab12 econometric model mathematical expression used to describe how the economy is expected to perform in the future

Vocab13 innovation the creation of something new or different

Vocab14 series a group of related things or events

Vocab15 inflation increase in the general level of prices of goods and services

Vocab16 deflation decrease in the general level of prices for goods and services

Vocab17 price index statistical series used to measure changes in the price level over time

Vocab18 consumer price index (CPI) series used to measure price changes for a representative sample of frequently used consumer items

Vocab19 market basket representative selection of goods and services used to compile a price index

Vocab20 base year year serving as point of comparison for other years in a price index or other statistical measure

Vocab21 creeping inflation relatively low rate of inflation, usually 1 to 3 percent annually

Vocab22 hyperinflation inflation in excess of 500 percent per year

Vocab23 stagflation period of slow economic growth coupled with inflation

Vocab24 producer price index (PPI) index used to measure prices received by domestic producers

Vocab25 implicit GDP price deflator index used to measure price changes in GDP

Vocab26 demand-pull inflation explanation that prices rise because all sectors of the economy try to buy more goods and services than the economy can produce

Vocab27 cost-push inflation explanation that rising input costs, especially energy and organized labor, drive up the prices of products

Vocab28 creditor person or institution to whom money is owed

Vocab29 debtor person who borrows and therefore owes money

Vocab30 construction creation by assembling individual parts

Vocab31 recover to get back

Vocab32 civilian labor force non-institutionalized part of the population, aged 16 and over, either working or looking for a job

Vocab33 labor force non-institutionalized part of the population, aged 16 and over, either working or looking for a job

Vocab34 unemployed working for less than one hour per week for pay or profit in a non-family- owned business, while being available and having made an effort to find a job during the past month

Vocab35 unemployment rate percentage of people in the civilian labor force who are classified as unemployed

Vocab36 frictional unemployment unemployment involving workers changing jobs or waiting to go to new ones

Vocab37 structural unemployment unemployment caused by a fundamental change in the economy that reduces the demand for some workers

Vocab38 outsourcing hiring outside firms to perform non- core operations to lower operating costs

Vocab39 technological unemployment unemployment caused by technological developments or automation that makes some workers’ skills obsolete

Vocab40 cyclical unemployment unemployment directly related to swings in the business cycle

Vocab41 seasonal unemployment unemployment caused by annual changes in the weather or other conditions that reduce the demand for jobs

Vocab42 GDP gap difference between what the economy can and does produce

Vocab43 misery index unofficial statistic that is the sum of the monthly inflation and unemployment rates

Vocab44 discomfort index unofficial statistic that is the sum of the monthly inflation and unemployment rates

Vocab45 confined kept within

Vocab46 fundamental basic; an essential part of

Vocab47 unfounded not based on fact

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