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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 1
Module 2

4. What You Will Learn in this Module
What a business cycle is and why policy makers seek to diminish the severity of business cycles
How employment and unemployment are measured and how they change over the business cycle
The definition of aggregate output and how it changes over the business cycle
The meaning of inflation and why price stability is preferred
How economic growth determines a country’s standard of living
Why models— simplified representations of reality—play a crucial role in economics
What You Will Learn in this Module
Section 1 | Module 2

5. The Business Cycle
The business cycle is the short-run alternation between economic downturns and economic upturns.
A depression is a very deep and prolonged downturn.
Recessions are periods of economic downturns when output and employment are falling.
Expansions, sometimes called recoveries, are periods of economic upturns when output and employment are rising.
The point at which the economy turns from expansion to recession is a business-cycle peak.
The point at which the economy turns from recession to expansion is a business-cycle trough.
Section 1 | Module 2

6. The U.S. Unemployment Rate and the Timing of Business Cycles, 1989-2013
Section 1 | Module 2

7. Employment, Unemployment, and the Business Cycle
Employment is the total number of people currently working for pay.
Unemployment is the total number of people who are actively looking for work but aren’t currently employed.
The labor force is the sum of employment and unemployment.
The unemployment rate is the percentage of the labor force that is unemployed.
Section 1 | Module 2

8. F Y I
Defining Recessions and Expansions
In many countries, economists adopt the rule that a recession is a period of at least 6 months, or two quarters, during which aggregate output falls.
sometimes too strict
In the U.S., the task of determining when a recession begins and ends is assigned to an independent panel of experts at the National Bureau of Economic Research (NBER).
They look at a number of economic indicators, with the main focus on employment and production, but ultimately the panel makes a judgment call.
sometimes controversial
Section 1 | Module 2

9. Aggregate Output and the Business Cycle
During a recession, the quantity of goods and services declines.
To measure the rise and fall of an economy’s output, we look at aggregate output.
Aggregate output is the economy’s total production of goods and services for a given time period.
Aggregate output normally falls during a recession and rises during an expansion.
Section 1 | Module 2

10. Inflation, Deflation, and Price Stability
A rising aggregate price level is inflation.
A falling aggregate price level is deflation.
The inflation rate is the annual percent change in the aggregate price level.
The economy has price stability when the aggregate price level is changing only slowly.
Section 1 | Module 2

11. Economic Growth
Americans have become able to afford many more material goods over time thanks to long-run economic growth.
Economic growth is an increase in the maximum possible output of an economy.
Section 1 | Module 2

12. Growth, the Long View
Section 1 | Module 2

13. Models in Economics
A model is a simplified representation of a real situation that is used to better understand real-life situations.
Create a real but simplified economy
Ex.: Cigarettes in World War II prison camps
Simulate an economy on a computer
Ex.: Tax models, money models…
The “other things equal” assumption means that all other relevant factors remain unchanged.
Section 1 | Module 2

14. Summary
The business cycle is the short-run alternation between recessions, periods of falling employment and output, and expansions, periods of rising employment and output.
When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation.
When the overall level of prices is going down, the economy is experiencing deflation.
Economists and policy makers generally aim for price stability.
Aggregate output us the economy’s total production of goods and services for a given time period.
Almost all economics is based on models.
Section 1 | Module 2