Chapter 8 Economic Fluctuations Unemployment and Inflation potential GDP output the maximum sustainable level of output actual can be greater or less that potential full employment the normal rate of unemployment the amount due to job shopping and imperfect information actual employment can be higher or lower than full employment o o operating at potential GDP means the same as operating at full employment the economy is in neither a boom or bust no cyclical unemployment present business cycle phases o o during a recession unemployment is higher than the natural rate actual GDP is below potential GDP demand for resources is weak during a boom unemployment is below the natural rate actual GDP is above potential GDP demand for resources is strong labor force the number of people 16 who are employed or unemployed DOES NOT include those who have no job and aren t looking for work those who are neither employed nor unemployed o employment has a job unemployed actively seeking employment or waiting to begin a job labor for participation rate fraction of adult population that is in the labor force unemployment rate percentage of the labor force that is unemployed frictional unemployment caused by constant changes in the labor market workers have the skills to fill job openings imperfect information and search activities structural unemployment caused by changes in basic characteristics of the economy some jobs become obsolete new jobs are created workers do not have the skills to fill openings changes in public sector spending minimum wage laws and unemployment benefits cyclical unemployment due to recession and inadequate labor demand overall unemployment rate rises during recessions inflation decline in the purchasing power of money rising prices rising nominal wages o o unanticipated inflation surprise to most when inflation is high and variable it is impossible to predict accurately can lead to recession anticipated inflation expected by most when inflation is low and stable many can predict it accurately stable prices enhance economic growth o why is inflation bad reduces investment if we can t predict the future we can t make long term goals distorts information and relative prices less efficient allocation of resources some prices change quickly while others don t less productive use of resources people spend time and money to predict and respond to inflation rates less efficient allocation of resources
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