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FSU ECO 2013 - Chapter 8: Economic Fluctuations

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Chapter 8: Economic Fluctuations, Unemployment, and Inflation 5 Learning Goals:#1 - Characterize fluctuations in economic growth. Chapter heading: Swings in the Economic Pendulum Key terms: Business cycle- Fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes in real GDP Recession- a downturn in economic activity characterized by declining real GDP and rising unemployment; in an effort to be more precise, many economists define a recession as two consecutive quarters in which there is a decline in real GDPWhat happens to unemployment and real GDP during a recession? -Real GDP typically will decline and unemployment will tend to increaseWhat happens to unemployment and real GDP during an expansion? -GDP grows rapidly, and the rate of unemployment declines#2 - Relate fluctuations in GDP to employment and the demand for labor. Chapter heading: Economic Fluctuations and the Labor Market Key terms: Civilian labor force- the number of people 16 years of age and over who are either employed or unemployed; to be classified as unemployed a person must be looking for a job Labor force participation rate- the number of people in the civilian labor force 16 years of age orover who are either employed or actively seeking employment as a percentage of the total civilian population 16 years of age and overUnemployment rate- the percentage of people in the labor force who are unemployed; mathematically, it is equal to the number of people unemployed divided by the number of peoplein the labor force Employment/Population ratio- the number of people 16 years of age and over employed as civilians divided by the total civilian population 16 years of age and over. The ratio is expressed as a percentage.What’s the difference between the labor force participation rate and the unemployment rate? -The labor force participation rate is all of the people in the civilian labor force divided by the total civilian population 16 years of age and over; the unemployment rate in the number of people unemployed divided by the civilian labor force.Why will an economy always have some unemployment?-As new products are introduced and new technologies developed, some firms are expanding while others are contracting. This process results in the creation of jobs and the disappearance of old ones.#3 - Classify unemployment into three categories. Chapter heading: Three Types of Unemployment Key terms: Frictional unemployment- Unemployment due to constant changes in the economy that prevent qualified unemployed workers from being immediately matched up with existing job openings; itresults from imperfect information and search activities related to suitably matching employees with employers.Structural unemployment- Unemployment due to the structural characteristics of the economy that make it difficult for job seekers to find employment and for employers to hire workers; although job openings are available, they generally require skills many unemployed workers do not have. Cyclical unemployment- Unemployment due to recessionary business conditions and inadequate labor demandProvide an example of each kind of unemployment: 1) Frictional – an employer looking for a new worker seldom hires the first applicant who walks into the employment office. The employer wants to find the “best available” worker to fill the opening. Because it is costly to hire workers who perform poorly, employers search—they expend time and resources screening applicants in an effort to find the best-qualified workers who are willing to accept their wage and employment conditions.2) Structural – Someone who is highly skilled applies for a job and meets all the criteria necessary but lacks the computer skills needed to fill the position.3) Cyclical – Currently in the US, there is a lack of jobs being offered for those who are actively searching for jobs#4 - Distinguish the difference between full employment and the natural rate of unemployment and correlate both to potential GDP. Chapter headings: Employment Fluctuations- The Historical Record; Actual and Potential GDP Key terms: Full employment- the level of employment that results from the efficient use of the labor force taking into account the normal (natural) rate of unemployment due to information costs, dynamicchanges, and the structural conditions of the economy. For the US, full employment is thought toexist when approximately 95% of the labor force is employed. Natural rate of unemployment- the “normal” unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy isoperating at a sustainable rate of output. The current natural rate of unemployment in the US is thought to be approximately 5% Potential output- the level of output that can be achieved and sustained in the future, given the size of the labor force, its expected productivity, and the natural rate of unemployment consistentwith the efficient operation of the labor market; actual output can differ from the economy’s potential output. How is full employment related to the natural rate of unemployment? -Economists define full employment as the level of employment that results when the rate of unemployment is “normal”, considering both frictional and structural factors.-When unemployment is at its natural rate, full employment is present-Full employment = 100% - the natural rate of unemploymentWhy is the natural rate of unemployment not equal to zero? -because of frictional and structural factors-Job shopping and imperfect information creates some unemployment.Is potential output a real number or a hypothetical number? -Potential output is determined by three factors: the size of the labor force, the quality (productivity) of labor, and the natural rate of unemployment.-Because these factors cannot be estimated with certainty, some variation exists in the estimated values of the potential rate of output.#5 - Determine inflation’s effect on the economy. Chapter heading: The Effects of Inflation What is the difference between unanticipated and anticipated inflation? -Unanticipated inflation: an increase in the general level of prices that was not expected by most decision makers-Anticipated inflation: an increase in the general level of prices that was expected by most decision makers-When the inflation rate is high and variable, it will be virtually


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