MACROECONOMICS The Business Cycle

KEY TERMS  Macroeconomics Definition:  Business Cycle Definition:  Relationship The basic purpose of macro economics is ____________. Macro policy tries to __________.

THREE FUNDAMENTAL QUESTIONS OF THE BUSINESS CYCLE  What are business cycles?  What damage does unemployment cause?  Who is hurt by inflation?

ASSESSING MACRO PERFORMANCE  Three basic measures of macroeconomic performance: Output (GDP) Growth GDP definition: Unemployment Inflation

GDP GROWTH  Production Possibilities Curve Are we producing at or near the production frontier? Are we pushing the frontier outward?  Nominal GDP vs. real GDP Nominal GDP: Real GDP:

GROWTH IS ERRATIC  Real GDP increases inconsistently Pattern of steps, stumbles, and setbacks See Figures 10.1, 10.2  Recession: definition: Figure 10.2

UNEMPLOYMENT

TYPES OF UNEMPLOYMENT  Seasonal  Frictional  Structural  Cyclical  The first three (seasonal, frictional, structural) are acceptable to economists; cyclical unemployment is the enemy.  Full employment – lowest possible unemployment rate compatible with price stability (generally 4%-6%)

WORK WITH SEAT PARTNER  Page 231 Problem #1 (a-c)