Business Cycles, Unemployment, and Inflation - Business Cycle o In the long-run the United States experiences economic growth o In the short-run there are fluctuations in the economyo Business Cycles: reoccurring increases and decreases in the level of economic activity over time  Phases include: Peak, Recession, Trough, Expansion - Peak: Business activity has reached its temporary maximum o Full employment - Recession: a period of decline in the economy lasting 6 months or moreo Decreases in real GDP o Increases in unemployment - Trough: the worst of the recession o May last a short or long period of time - Expansion: a period of increase in the economy o Increases in employment, income and real GDP  Economic Growth = long-run increases in Real GDP  Expansion= short run increases in Real GDP - Causation: A First Glance o Demand Shocks: Unexpected changes in the demand for goods and services o Supply Shocks: Unexpected changes in the supply for goods and services o Prices are “Sticky” Decreases in Output  Decreases in Employment o Causes of Shocks  Irregular innovation  Productivity changes Monetary factors  Political events Financial instability - Cyclical Impacto Different Industries are affected differently by a recession and boom o Durable goods are most affected  Capital goods (Houses, Plants, other new const.) Consumer durables (automobiles, appliances, etc.)o Nondurable goods are affected less  Services (Haircuts, Cell Phone Service, Cable/Internet) Food and Clothing (necessities) - The Great Recession o In December 2007 the U.S. economy entered into the “Great Recession” Official Duration was 18 months o Magnitude: GDP fell 3.4% It took 4 years to get back to prerecession levels  Unemployment reached 10% Unemployment stayed above 8% for nearly 5 years o What Happened? Financial Instability- trouble in financial markets  Broke down the market for loanable funds Peoples incomes fall- their wealth is lowered, Instability  Decrease in demand for many goods and services - Great Depression o Magnitude: Read GDP fell from $977 billion in 1929 to $716 billion in 1933- 30% less.  It took 7 years for the economy to get back to pre-depression levels  In 1929 unemployment was at 2.2%, by 1933 it was over 25% The unemployment rate stayed above 15% for most of the 1930s o What Happened? Decrease in demand and supply  Bad monetary policy- tightened money to control inflation - Stock market crashed in October 1929- fell by 90% between 1929 and 1932 - Changed consumer expectations and confidence - Bank panics- withdrawing money from the bank - Banks fail  Presidents Hoover and Roosevelt increase taxes- Further decreases demand  Increased tariffs on imported goods - Started a trade war- less demand for exported goods Unemployment - Unemploymento Produced by the Bureau of Labor Statistics (BLS) in the U.S. Labor Department o Survey 60,000 householdso Based on “adult population”  16 and over  Non-institutionalized- Jail- Psych ward ooo BLS divides the population into 3 groups: Employed- paid employees, self-employed, and unpaid workers in a family business  Unemployed- people not working who have been looking for word during the previous four weeks  Not in the labor force- young, institutionalized, those who are not looking for work o Labor Force- Total number of workers including the employed and unemployed - Labor Force Statistics o Unemployment rate 9”u-rate’): % of the labor force that is unemployed U-rate = 100x (# of unemployed/labor force) o Labor force participation rate: % of the adult population that is in the labor force  Labor force participation rate =100x (labor force/adult population)-o Unemployment rate= (9.5/155.7 million)x100= 6.1%o Labor force participation= (155.7 million/247.8)x100= 62.8%-o Labor force: 154.1 million o Unemployment rate: (7.1 million/146 million)x100=4.8%o Labor force participation rate: (154.1/154.1+77.5)=66.5%- Problems with the Unemployment Rateo Discouraged Workers: those who are not working, have looked for a job in the past 12 months, but have not sought employment in the past four weeks  as soon as someone stops looking for work, they are not part of the labor force o Underemployed workers: Those who have part-time jobs, but wish to work full time.  Not considered unemployed- Not All Unemployment is Equal!o 3 types of unemployment Frictional Unemployment is unemployment caused by delays in matching available jobs and workers - Information Availability- easier to find jobs now o Lowers the amount of frictional unemployment - Government Policies- unemployment compensation and government regulations o Lengthen the job-search process- changes incentives o Increase the amount of frictional unemployment- Exampleso Individuals searching for jobs or waiting to take jobs soono Individuals who are moving, lag after college  Structural Unemployment is caused by changes in the industrial makeup of the economy- Creative Destruction: when the introduction of new products and technology leads to the end of other industrieso as the economy changes demand for some jobs increase, while demand for others decreaseso in 1800 more than 90% of jobs in the US were in the agriculture industry o now that number is less than 5%- Examples:o Book stores, telephone operators, many factory jobs  Cyclical Unemployment is caused by the recession phase of the business cycle - Unemployment due to a change in demand during a recession o Causes business to cut back on output= people getting laid off - Greatest concern of policy makers and economists - Not enough jobs to meet the number of people who want to work- Exampleo An individual whose job is terminated or laid off due to a decreased demand for products - Definition of Full Employment o Frictional and structural unemployment are not bad! Consistent with a growing and healthy economy When an economy is healthy cyclical unemployment should go to zero!o Natural Unemployment: No cyclical unemployment  There will be frictional and structural unemploymento Full employment does not mean everyone is employed  Only natural (structural and frictional) unemployment The unemployment rate is not zero o Believed to occur when unemployment is about 5% (natural unemployment) - Economic Costs of Unemployment o When there is cyclical