Macroeconomics - Ch 9

Question 1

Business cycles

Answer 1

alternating rises and declines in the level of economic activity, sometime over several years

Question 2

peak

Answer 2

business activity has reached a temporary maximum; economy at near/full employment, level of real output is at or very close to economy’s capacity; price level likely to rise

Question 3

recession

Answer 3

period of decline in total output, income, and employment; downturn lasts 6 months or more, widespread contraction of business activity; declines in GDP, significant increases in unemployment

Question 4

trough

Answer 4

recession or depression; output and unemployment bottom out; short lived or long

Question 5

expansion

Answer 5

follows a recession/recovery; real GDP, income, and employment rise; approaches full employment; prices of nearly all goods/services rise (inflation)

Question 6

labor force

Answer 6

people who are able and willing to work (includes employed and those who are unemployed but actively seeking work)

Question 7

unemployment rate

Answer 7

unemployed/labor force x 100

Question 8

discouraged workers

Answer 8

workers who become discouraged and drop out of the labor force after a time of unsuccessfully seeking employment

Question 9

frictional unemployment

Answer 9

search unemployment and wait unemployment; for workers who are either searching for jobs or waiting to take jobs in the near future

Question 10

structural unemployment

Answer 10

changes over time in consumer demand and in technology alter the structure of the total demand for labor, both occupationally and geographically

Question 11

cyclical unemployment

Answer 11

unemployment caused by a decline in total spending; typically begins n the recession phase of the business cycle

Question 12

full employment rate of unemployment (natural rate of unemployment - NRU)

Answer 12

unemployment rate consistent with full employment (only frictional and structural unemployment, no cyclical unemployment)

Question 13

potential output

Answer 13

real GDP occurs when the economy is fully employed (at NRU)

Question 14

GDP Gap

Answer 14

difference between actual and potential GDP; can be negative or positive; unemployment above natural rate (society operating somewhere within its production possibility curve)

Question 15

Okun’s Law

Answer 15

for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 % occurs

Question 16

Inflation

Answer 16

rise in the general level of prices

Question 17

Consumer Price Index (CPI)

Answer 17

main measure of inflation in the US; compiled by the Bureau of Labor Statistics

Question 18

deflation

Answer 18

price level declines

Question 19

demand-pull inflation

Answer 19

excess demand builds up the prices of the limited output; “too much spending chasing too few goods”

Question 20

cost-push inflation

Answer 20

explains rising prices in terms of factors that raise per-unit production costs at each level of spending

Question 21

per-unit production costs

Answer 21

average cost of a particular level of output; total input cost divided by units of output

Question 22

core inflation

Answer 22

the underlying increase in the CPI after volatile food and energy prices are removed

Question 23

nominal income

Answer 23

number of dollars received as wages, rent, interest, or profit

Question 24

real income

Answer 24

measure of the amount of goods and services nominal income can buy; purchasing power of nominal income (income adjusted for inflation); nominal income divided by price index (in hundredths)

Question 25

unanticipated inflation

Answer 25

cause real income and wealth to be redistributed

Question 26

anticipated inflation

Answer 26

situations in which people see an inflation coming in advance

Question 27

cost of living adjustments (COLAs)

Answer 27

automatic adjustments of income some union workers receive when the CPI rises; rarely equals the full percentage rise in inflation

Question 28

real interest rate

Answer 28

percentage increase in purchasing power that the borrower pays the lender

Question 29

nominal interest rate

Answer 29

percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectations of inflation (= real interest rate + inflation premium (the expected rate of inflation)

Question 30

hyperinflation

Answer 30

extraordinarily rapid inflation