1. Chapter 13 Business Cycles, Unemployment, and Inflation
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Warm-up #7 Wed. 4/24
What kind of irresponsible lending practices were banks using during the Housing Bubble?
Do you think recessions are a normal part of the business cycle? Why or why not?
How does human behavior impact economic uncertainty? Make it better or worse? Why?

3. Instructions for Today
Watch the Study.com video posted on Google Classroom. Be sure to complete the quiz.
Use the documents at your table to help you fill in the Venn Diagram comparing the Great Depression & Great Recession
If you finish early, work on your study guide.
As a class we’ll review the Venn Diagram & we’ll discuss the Business Cycle

4. Great Depression
Great Recession
-Lasted from
-Lasted from
-Cause: Too many banks lending irresponsibly. Housing bubble.
-Cause: Too many consumers borrowing irresponsibly
-Economic Decline: -3.3%
-Economic Decline: -26%
-Bank failures: % of banks
-Bank failures: 9, % of banks
-Unemployment: 8.5%
-Unemployment: 25%
-Decline in Dow Jones Industrial
Average: -89.2%
-Decline in Dow Jones Industrial
Average: -53.8%
-Increase in money supply: 17%
-Increase in money supply: 125%
-Change in prices: +0.5%
-Change in prices: -25%
-States response: Fed stimulus
Plan gives fiscal relief to states
To lesson impact of tax
Increases.
-States response: Raise taxes &
Cut spending
-FDR used the New Deal to help
Create jobs
-Obama used stimulus package to help create jobs and increase spending.

5. -Cause: Too many banks lending irresponsibly. Housing bubble.
Great Depression
Great Recession
-Lasted from
-Lasted from
-Cause: Too many banks lending irresponsibly. Housing bubble.
-Cause: Too many consumers borrowing irresponsibly
-Economic Decline: -3.3%
-Economic Decline: -26%
-Bank failures: % of banks
-Bank failures: 9, % of banks
-High unemployment
Increased debt
Stock market decline
GDP decline
People lost faith in financial institutions
-Unemployment: 8.5%
-Unemployment: 25%
-Decline in Dow Jones Industrial
Average: -89.2%
-Decline in Dow Jones Industrial
Average: -53.8%
-Increase in money supply: 17%
-Increase in money supply: 125%
-Change in prices: +0.5%
-Change in prices: -25%
-States response: Fed stimulus
Plan gives fiscal relief to states
To lesson impact of tax
Increases.
-States response: Raise taxes &
Cut spending
-FDR used the New Deal to help
Create jobs
-Obama used stimulus package to help create jobs and increase spending.

6. The Business Cycle

7. The Business Cycle

8. Causes of Business Cycles
External shocks:
increase in oil prices, wars or other international conflicts.
Change in investment spending:
When the economy is doing well businesses often invest in more equipment or expand, which creates jobs & increases supply.
When doing poorly businesses cut back on spending & may result in layoffs & decreased supply.
Changes in monetary spending:
Fed- changing interest rates- lower interest rates encourages spending & investment.
Fiscal-policy shocks:
Changes in spending or taxes by the gov’t, gov’t shutdowns.
Speculation & “bubble”
Expectations about the future

9. Inflation CPI = X price Rise in general level of prices
Consumer price index (CPI)
Market basket
300 goods and services
Typical urban consumer
To figure out how much something costs you use the below formula to compare years
CPI
Price of the Most Recent Market
Basket in the Particular Year
Price estimate of the Market
Basket in =
X price

10. How much does it cost now?
On the worksheet you picked you need to calculate what the price of the items listed would be in later years.
Use the Consumer Price Index Data on your table.

11. Measuring Rate of Inflation
This year index – last year index
last year index

12. Using the Inflation rate
You’ve decided to save $5,000 over three years in order to buy a car. But you heard that the annual inflation rate was 2.9 percent. So you know that the car you like today that costs $5,000 will actually cost more in three years. About how much extra money, beyond the $5,000, should you also save in order to afford the car you want? 

13. Measuring Inflation
Creeping inflation (1 to 3 percent per year) is not a big problem, but hyperinflation (500 percent per year or more) and stagflation (stagnant economic growth and inflation) are bigger concerns

14. Causes of Inflation
Nearly every period of inflation is due to demand-pull, cost-push, wage-price spiral, and/or excessive monetary growth.
In demand-pull inflation, prices are driven up when all sectors of the economy try to buy more goods and services than the economy can produce.
Creates shortages, “pulling” prices up
Cost-pull inflation occurs when rising costs of production inputs—such as energy and labor—drive up the cost of products for manufacturers, thus causing inflation.
The rising costs of production “pushes” prices up
The wage-price spiral occurs when workers are paid higher wages, which producers try to recover by charging higher prices, which in turn forces workers to ask for higher wages, and so on.
Excessive monetary growth occurs when the money supply grows faster than the real GDP.

15. 4 Consequences Reduced purchase power Distorted spending patterns
$ buys less when prices rise, it loses value over time.
Difficult for people on a fixed income
Distorted spending patterns
Can cause interest rates to increase so people will borrow less & purchase less durable goods (cars, homes)
Encouraged speculation
Tempts people to speculate to take advantage of rising prices.
People bought homes when interest rates were low, but really couldn’t afford them, once they increased they defaulted.
Distorted distribution of income
During long periods of inflation, creditors (lend money) are hurt because earlier loans are repaid later with dollars that buy less.

16. Inflation Who is hurt by inflation?
Fixed-income receivers
Savers
Creditors
Who is unaffected or not hurt by inflation?
Flexible-income receivers
Cost-of-living adjustments (COLAs)
Demand-pull beneficiaries
Debtors

17. Inflation Annual Inflation Rates in the United States, 1960-2007
Inflation Rate (percent)
Source: Bureau of Labor Statistics

18. Inflation

19. Inflation Inflation Rates in Five Industrial Nations, 1995-2005
Source: Bureau of Labor Statistics

20. Unemployment Twin problems of the business cycle
Inflation
Measurement of unemployment
Who’s in the labor force
Problems with the unemployment rate
Part-time employment counts
Discouraged workers
Unemployment Rate
Unemployed
Labor Force = x
100

21. Unemployment 2007 data Under 16 And/or Institutionalized
(71.8 Million)
Not in
Labor Force
(78.7 Million)
Total
Population
(303.6 Million)
Employed
(146.0 Million)
Labor
Force
(153.1 Million)
Unemployed
(7.1 Million)
Source: Bureau of Labor Statistics

22. Unemployment Types of unemployment Full employment redefined
Frictional (search and wait)
I Quit! --- You’re Fired!
Structural (occupational
and geographical)
Cyclical
Full employment redefined
No cyclical unemployment
Natural rate of unemployment
Full employment rate

23. Unemployment Natural rate of unemployment
2000’s 4-5%
Today 5-6%
Changing structure of U.S. economy
Much Human Capital misaligned with industries with Labor demand

25. Cost of Unemployment Foregone output Potential output GDP gap
(Actual output – potential output)
Negative or positive
Okun’s Law
Each 1% above NRU creates negative 2% output gap

26. Unemployment GDP gap (positive) Potential GDP GDP gap (negative)
The GDP Gap
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
GDP (billions of 1996 dollars)
GDP gap
(positive)
Potential GDP
GDP gap
(negative)
Actual GDP
The Unemployment Rate 10 8 6 4 2
(percent of civilian
Unemployment
Labor force)
Source: Congressional Budget Office & Bureau of Economic Analysis

27. Unemployment Unequal burdens Noneconomic costs Occupation Age
Race and ethnicity
Gender
Education
Duration
Noneconomic costs
Psychological, social, political

28. Long-Term Unemployment

29. Long-Term Unemployment

30. Unemployment Unemployment Rates in Five Industrial Nations,1995-2005
Source: Bureau of Labor Statistics

31. How can we reduce unemployment?
Question…..
How can we reduce unemployment?

32. Key Terms Okun’s law business cycle inflation peak
Consumer Price Index (CPI)
demand-pull inflation
cost-push inflation
per-unit production costs
nominal income
real income
anticipated inflation
unanticipated inflation
cost-of-living adjustments (COLAs)
real interest rate
nominal interest rate
deflation
hyperinflation
business cycle
peak
recession
trough
expansion
labor force
unemployment rate
discouraged workers
frictional unemployment
structural unemployment
cyclical unemployment
full-employment rate of unemployment
natural rate of unemployment (NRU)
potential output
GDP gap

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Basic
Macroeconomic
Relationships