Q&A AP Econ Ch 7 Business Cycle/Unemployment/Inflation Questions
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Identify the business cycles between 1998 to 2006. -
Expansion: 1998-2000
Peak: 2000
Contraction: 2001-2002
Trough: 2002 - What is a business cycle?
- Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
- What are the four phases of a business cycle?
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Peak
Recession (Contractionary)
Trough
Recovery - What is the "old school" definition of a recession?
- A downturn in the business cycle during which real GDP declines
- How does the NEBR (National Economic Bureau of Research) define a recession?
- "A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and trade."
- What is economic growth?
- An expansion in national output measured by the annual percentage increase in a nation’s real GDP
- What are the three types of economic indicators?
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Leading
Coincident
Lagging - What is a leading indicator?
- Variables that change before real GDP changes
- What is a coincident indicator?
- Variables that change at the same time that real GDP changes
- What is alagging indicator?
- Variables that change after real GDP changes
- Who is considered unemployed?
- Anyone who is 16 years of age and above who is actively seeking employment
- Who is considered employed?
- Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business
- What is the unemployment rate?
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The percentage of people in the labor force who are without jobs and are actively seeking jobs.
# of person unemployed divided by the total labor market. - Who is a discouraged worker?
- A person who wants to work, but who has given up searching for work. He or she believes there will be no job offers
- What are the 3 criticisms of the unemployment rate calcualtion?
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Does not include discouraged workers
Includes part-time workers
Does not measure underemployment - What are the types of unemployment?
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Seasonal
Frictional
Structural
Cyclical - What is seasonal unemployment?
- Unemployment caused by recurring changes in hiring due to changes in weather conditions
- What is frictional unemployment?
- Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force
- What is structural unemployment?
- Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities
- What is cyclical unemployment?
- Unemployment caused by the lack of jobs during a recession
- What is full employment?
- The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates
- What is considered full employment?
- The natural rate of unemployment changes over time, but today it is considered to be about 5%
- What is the GDP gap?
- The GDP gap is the difference between full-employment real GDP and actual real GDP
- What is deflation?
- A decrease in the general (average) price level of goods and services in the economy
- What is inflation?
- An increase in the general (average) price level of goods and services in the economy
- What is the Consumer Price Index?
- The CPI is an index that measures changes in the average prices of consumer goods and services
- Who reports the CPI?
- The Bureau of Labor Statistics (BLS) of the Department of Labor
- Which goods and services are included in the CPI?
- The BLS records average prices for a “market basket†of different items purchased by the typical urban family
- What is disinflation?
- A reduction in the rate of inflation
- What are some criticisms of the CPI?
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It can overstate or understate the impact of inflation for certain groups
Does not measure quality
Substitutes are ignored - What is real income?
- The actual number of dollars received (nominal income) adjusted for changes in the CPI
- What is wealth?
- The value of the stock of assets owned at some point in time
- How is wealth affected by inflation?
- Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise
- What will cause your real income to decline?
- The rate of inflation is greater than your rate of income
- How does unanticipated inflation affect borrowers?
- They beneifit positively because they are paying back their loans in "cheaper" dollars.
- How does unanticipated inflation affect lenders?
- They negatively affected because they are being paid back in "cheaper" dollars.
- How does unanticipated inflation affect persons on a fixed income?
- Their "real" income diminishes and thus their purchasing power.
- What is the real interest rate?
- The nominal rate of interest minus the inflation rate
- What is hyperinflation?
- An extremely rapid rise in the general price level
- What are the two basic types of inflation?
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Demand-pull
Cost-push - What is demand-pull inflation?
- A rise in the general price level resulting from an excess of total spending (demand)
- When does demand-pull inflation occur?
- When the economy is operating at or near full employment
- What is cost-push inflation?
- A rise in the general price level resulting from an increase in the cost of production
- What can cause cost-push inflation?
- Cost increases for labor, raw materials, construction, equipment, borrowing etc.
- What is a wage-price spiral?
- A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wages and prices