Business Cycles and Fluctuations. Chapter 14.

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.

THE BUSINESS CYCLEPhases of the Business CyclePEAK

Le

vel o

f b

usi

ne

ss a

cti

vit

y

Time

RECESSIONTROUGH RECOVERY

GROWTH

TREND

Costs of Unemployment

Personal 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

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Sources of Unemployment

FrictionalSeasonalStructuralCyclical

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

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

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

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

UNEMPLOYMENTMeasurement of Unemployment, 2002

Employed

Not inlaborforce

Under 16and/or

institutionalized

TotalPopulation288,600,000

Laborforce

142,500,000

74,700,000

71,400,000

Unemployed 8,300,000

134,200,000

Unemployment and the Business Cycle.

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

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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

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Unemployment Rates for Various Groups

The U.S. Unemployment Rate Since 1900

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

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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

INFLATIONDefined and Measurement• A rising general level of prices• Rate of inflation calculated

using index numbers

Consumer Price Index

= Price of the same marketbasket in 1982-1984

x 100CPIPrice of most recent market

basket in the particular year

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

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.

Demand pull :

Increase in AD can be due to a fiscal or monetary policy, thus increasing prices

Cost push:

Upward shift of the AS will be due to increase in costs due to increase in price of inputs.

Combination of both:

Exhibit 6a: Inflation Caused by Shifts of AD and AS Curves

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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.

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.

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.

Controlling inflation (cont)

Excessive growth on money supply

Reduce money supply by cutting down on public sector borrowingFunding Govt borrowing from non bankReduce bank lendingMaintain interest rates

Expectations of inflation

Pursue policies which indicate Govt’s determination to reduce inflation

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

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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.

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

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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

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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

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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