What is a business cycle? How do we measure employment, unemployment, and how it changes over the business cycle The Meaning of inflation/deflation Why.

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Presentation transcript:

What is a business cycle? How do we measure employment, unemployment, and how it changes over the business cycle The Meaning of inflation/deflation Why is price stability preferred? How does economic growth determine a country’s standard of living?

 A peak is when business activity reaches a temporary maximum with full employment and near capacity output.  The unemployment rate is at it’s lowest level.  A recession (Contraction) is a decline in these rates for a minimum of 6 months.  Trough (Depression) is the bottom of the business cycle.  Unemployment is at it’s highest. GDP is low.

 Recovery (Expansion) is when output and employment are expanding toward full- employment levels. Unemployment begins to fall.  We use a variety of measures to know where we are in the business cycle.

Where in the business cycle does a recession start? Where would we see employment levels the highest? Unemployment levels the highest? Where would we see inflation occurring? Where is GDP the highest? The lowest?

 A rise in the overall price level.  Easy definition: Too much money chasing too few goods.

 What happens in 1971 to change the curve?

 It reduces our ability to purchase goods and services.  Rapid inflation (Hyperinflation) causes wages to become useless. See Germany in late 20’s.

 A fall in the overall price level.  Sounds good but it hurts the economy as well.  Consumers wait for prices to fall. They demand fewer goods.  Producers sell fewer products and have to lay off workers. Wages fall as a result.  The only time that deflation is good is when it’s caused by increasing production or a reduction in F.O.P. costs.

 When studying models we need to assume certain things.  A model is a representation and does not contain every  All other things being equal  It holds everything at a constant while studying the effects of one variable while testing it in the real world.