1. Business Cycles and Fluctuations. Chapter 14.

2. Phases of the Business Cycle.
Trough.
Expansion.
Peak.
Contraction.
Recession: Two back to back quarters declining G.D.P
Depression: Three consecutive declining quarters in a row.

3. THE BUSINESS CYCLE Phases of the Business Cycle GROWTH TREND Time PEAK
RECESSION
TROUGH
RECOVERY
GROWTH
TREND
Level of business activity
Time

4. Costs of Unemployment Personal Cost Economic Cost Loss of paycheck
Loss of self-esteem
Increase in stress related psychological problems
Increase in incidence of crime, suicide, and mental illness
Economic Cost
Loss in output

5. Sources of Unemployment
Frictional
Seasonal
Structural
Cyclical

6. Frictional Unemployment
Caused by time required to bring together labor suppliers and labor demanders
Employers need time to learn about the talent available
Job seekers need time to learn about employment opportunities
Generally short-term and voluntary

7. Seasonal Unemployment
Caused by seasonal changes in labor demand during the year
To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted, which smoothes out these factors

8. Structural Unemployment
Exists because unemployed workers often
Do not have the skills demanded by employers, or
Do not live where their skills are in demand
Occurs because changes in tastes, technology, taxes, or competition reduce the demand for certain skills and increase the demand for other skills

9. Cyclical Unemployment
Fluctuates with the business cycle, increasing during contractions and decreasing during expansions
Government policies to stimulate aggregate demand recessions is aimed at reducing this type of unemployment

10. UNEMPLOYMENT Measurement of Unemployment, 2002 Under 16 and/or
institutionalized
74,700,000
Not in
labor
force
71,400,000
Total
Population
288,600,000
Employed
134,200,000
Labor
force
142,500,000
Unemployed
8,300,000

11. Unemployment and the Business Cycle.

12. Exhibit 1: The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor Force

13. Trend of Unemployment Rate
Decline in the unemployment rate over last 20 years
Overall growth in the economy
Relatively fewer teenagers in the work force
Unemployment rate says nothing about who is unemployed or for how long – differs across
Race
Gender
Age
Geographical area
Occupational group

14. Unemployment Rates for Various Groups

15. The U.S. Unemployment Rate Since 1900

16. Unemployment Compensation
Cash transfers for those who lose their jobs and actively seek employment
Applies to unemployed workers who meet certain qualifications
Problems with unemployment compensation:
Workers who receive benefits tend to search less actively than those who don’t
May reduce the urgency of finding work

17. Full Employment Occurs only if there is no cyclical unemployment
Occurs when the only unemployment is frictional, structural, or seasonal
Does not mean zero unemployment
Frictional, seasonal, and structural unemployment can still occur
Occurs when from 4% to 6% of the labor force is unemployed

18. INFLATION = CPI x 100 Defined and Measurement Consumer Price Index
A rising general level of prices
Rate of inflation calculated using index numbers
Consumer Price Index =
Price of the same market
basket in
x 100
CPI
Price of most recent market basket in the particular year

19. Inflation Inflation: a sustained increase in the average price level
Hyperinflation: extremely high inflation
Deflation: a sustained decline in the average price level
Disinflation: a reduction in the rate of inflation

20. Causes of Inflation:
Demand-pull inflation is inflation initiated by an increase in aggregate demand.
Cost-push, or supply-side, inflation is inflation caused by an increase in costs.

21. Demand pull :
Increase in AD can be due to a fiscal or monetary policy, thus increasing prices

22. Cost push:
Upward shift of the AS will be due to increase in costs due to increase in price of inputs.

23. Combination of both:

24. Exhibit 6a: Inflation Caused by Shifts of AD and AS Curves
Increase in the AD curve pulls up the price level. To generate continuous demand-pull inflation, the AD curve must keep shifting outward along a given AS curve
Increase in costs of production push up the price level. To generate continuous cost-push inflation, the AS curve must keep shifting to the left along a given AD curve.

25. Stagflation:
Stagflation occurs when output is falling at the same time that prices are rising.
One possible cause of stagflation is an increase in costs.

26. Countering inflation:
Demand -pull
Reduce demand by higher taxation, lower govt. expenditure, lower govt borrowing, higher interest rates
Cost push
Take steps to reduce production costs by deregulating labour markets, encouraging greater productivity, apply control over wages and prices
Import factors
reduce quantity of imports or their prices via trade policies.

27. Controlling inflation (cont)
Excessive growth on money supply
Reduce money supply by cutting down on public sector borrowing
Funding Govt borrowing from non bank
Reduce bank lending
Maintain interest rates
Expectations of inflation
Pursue policies which indicate Govt’s determination to reduce inflation

28. Anticipated versus Unanticipated Inflation
Unanticipated inflation creates more problems for the economy than does anticipated inflation
To the extent that inflation is higher or lower than anticipated, it arbitrarily creates winners and losers
If it is higher than expected, the winners are all those who had contracted to pay a price that anticipates lower inflation
The losers are all those who agreed to sell at that price
If inflation is lower is lower than expected, the situation is reversed

29. Inflation Across Metropolitan Areas
Inflation rates differ across regions mostly because of differences in housing prices, which grow faster in some places than in others
Federal government tracks separate CPIs for each of 26 metropolitan areas.

30. Exhibit 8: Average Annual Inflation from 1994 to 2004 Differed Across U.S. Metropolitan Areas

31. Inflation and Interest Rates
Interest is the dollar amount paid by borrowers to lenders because lenders must be rewarded for forgoing present consumption
The interest rate is the interest per year as a percentage of the amount loaned

32. Why is Inflation Unpopular?
Problems with unanticipated inflation
Hits those whose incomes are fixed in nominal terms
Arbitrarily redistributes income and wealth from one group to another
Reduces the ability to make long-term plans
Forces buyers and sellers to pay more attention to prices - less time for production - overall productivity of economy falls

33. CREDICTS Oroville High School on Oct 05, 2009
 Kelly Giles, Contract Specialist at Microsoft on Apr 12, 2011
 Kinnar Majithia, Management Trainee at Emerson Network Power on Jan 27, 2012
Baterdene Batchuluun, Teacher at I'm working as a teacher on Sep 02, 2013