Ch 14, 1-2 Economic Stability

Chapter 14 Economic Stability Section 1 p. Terms: Business cycle largely systematic ups and downs of real GDP. Interrupts economic growth Note: an economic law

Business fluctuations the rise and fall of real GDP over time and in a nonsystematic manner. Note: not as predictable as the business cycle.

recession A period during which real GDP declines for two or more quarters in a row. Or six consecutive months. Begins when economy reaches a…..

peak the point where real GDP stops going up. A recession ends when the economy reaches a….. Trough the turnaround point where real GDP stops going down.

Expansion a period of recovery from a recession. Expansion continues until the economy reaches a new peak.

Trend line the economy departs from and then returns to its trend line. Up and down The average direction of growth, with the peaks and troughs as the ups and downs.

Causes of the Business Cycle Capital expenditures: Businesses adjust their investments in capital goods Inventory adjustments: Reduced at first signs of a decline in the market Innovation and imitation: Competition reduces business for original businesses Monetary factors: Credit and loan policies of the Federal Reserve System

Depression a state of the economy with large numbers of the people out of work Acute shortages Excess capacity in manufacturing plants

Depression scrip during the Great Depression of the 1930s, various levels of government printed their own “currency”. Temporarily used to pay….. Teachers Firefighters Police officers Other municipal employees

Econometric model a macroeconomic formula that uses algebraic equations to describe how the economy behaves. GDP = C+I+G+(X-M) GDP = C+I+G+(F-S) C = A + .95 (DI) A variation that assumes that people spend .95 of their disposable income. GDP = A+.95(DI)+I+G+(F-S)

Index of leading indicators a monthly statistical series Usually turns down before real GDP turns down. Usually turns up before real GDP turns up. Used to determine future economic activity. Note: Average workweek (manufacturing) Initial unemployment claims New orders for consumer goods Vendor performance Plant and equipment orders Building permits Change in unfilled durable orders Sensitive material prices Stock prices (S&P 500) Real M2 Index of consumer expectations

Section 2: Unemployed people available for work who cannot find it. Are actively looking for a job during the past month Worked less than one hour for pay, in the past survey week. Worked in a family business less than 15 hours in a week with no pay.

Unemployment rate the number of individuals not working Divided by the total number of persons in the civilian work force Note: currently at 5.5 California at 6.7%

Frictional unemployment caused by workers who are between jobs for one reason or another. Short-term Will suffer little economic hardship while unemployed Usually leaving one job for another. Others have lost jobs, but have a good chance of getting another.

Structural unemployment caused by Changes in technology Changes in consumer taste

Cyclical unemployment caused by the business cycle Gets most intense at the trough

Seasonal unemployment changes in weather causes change in demand for a product Those workers will work or not depending on the change.

Technological unemployment workers with less skills, talent, education replaced by machines, automated. Automation Production with mechanical or other processes that reduces need for human labor.

Assessments: Section 1, Checking for Understanding 1 Explain the difference between a business cycle and a business fluctuation. Business cycles are systematic increases and decreases in real GDP. Business fluctuations are unsystematic increases or decreases in real GDP

3 Identify the two main phases of a business cycle Recession Expansion

4 Explain how the Great Depression compared to other recessionary periods? The Great Depression was more severe than the other recessionary periods. It was the worst economic decline in US history.

5 List five causes of the business cycle. Capital expenditures Inventory adjustments Innovation and imitation Monetary factors External shocks

Assessments: Section 2, Checking for Understanding 1 Why is structural unemployment a more difficult problem for the economy and for individual workers than other types of unemployment? Causes long-term unemployment, Unemployed must learn new skills

3 Describe how the government collects monthly data on employment. The Census Bureau surveys and turns data over to the Bureau of Labor Statistics for analysis

4 Differentiate between the five major kinds of unemployment Frictional Structural Cyclical Seasonal Technological

Image, p. 376 What does a trough indicate? The turnaround point where real GDP stops going down.

Image, p. 377 Questions 1 Which functions of money did the gas owned by Gazprom perform? Gas acted as payment for royalties 2 Are there any barter transactions that take place in the American economy? Why would anyone prefer barter to money transactions? Bartering is rarely done in the American economy Some cultures such as Native-Americans still use the system People prefer to barter when they lose faith in the money supply

Image, p. 379 How do economists use this index to predict recessions? By measuring the beginning and the end of a business cycle

Image, p. 383 How would you characterize the unemployment rate during the period from 1990 to 2002? It rose dramatically around 1993, then came down slowly, and started to rise in 2001

Image, p. 386 What causes technological unemployment? Machines that can do the jobs of workers with insufficient skills, talents, or education

Image, p. 387 Other than technology, in what fields are many of the fastest-growing jobs concentrated? Medical field Legal field