The document discusses the business cycle and unemployment. It describes the phases of the business cycle as trough, expansion, peak, contraction, recession and depression. It also discusses the different types of unemployment such as frictional, seasonal, structural and cyclical unemployment. Finally, it examines the costs of unemployment and how unemployment is measured.

1. Business Cycles and Fluctuations.
Chapter 14.

2. Phases of the Business Cycle.
 Trough.
 Expansion.
 Peak.
 Contraction.
 Recession: Two back to back quarters declining G.D.P
 Depression: Three consecutive declining quarters in a
row.

3. THE BUSINESS CYCLE
Phases of the Business Cycle
PEAK
Levelofbusinessactivity
Time
RECESSION
TROUGH
RECOVERY
GROWTH
TREND

4. Costs of Unemployment
 Personal Cost
 Loss of paycheck
 Loss of self-esteem
 Increase in stress related psychological problems
 Increase in incidence of crime, suicide, and mental illness
 Economic Cost
 Loss in output
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5. Sources of Unemployment
Frictional
Seasonal
Structural
Cyclical

6. Frictional Unemployment
 Caused by time required to bring together
labor suppliers and labor demanders
 Employers need time to learn about the talent
available
 Job seekers need time to learn about employment
opportunities
 Generally short-term and voluntary

7. Seasonal Unemployment
 Caused by seasonal changes in labor demand
during the year
 To eliminate the impact of such changes,
monthly unemployment statistics are seasonally
adjusted, which smoothes out these factors

8. Structural Unemployment
 Exists because unemployed workers often
 Do not have the skills demanded by employers, or
 Do not live where their skills are in demand
 Occurs because changes in tastes, technology,
taxes, or competition reduce the demand for
certain skills and increase the demand for other
skills

9. Cyclical Unemployment
 Fluctuates with the business cycle, increasing during contractions and
decreasing during expansions
 Government policies to stimulate aggregate demand recessions is aimed at
reducing this type of unemployment

10. UNEMPLOYMENT
Measurement of Unemployment, 2002
Employed
Not in
labor
force
Under 16
and/or
institutionalized
Total
Population
288,600,000
Labor
force
142,500,000
74,700,000
71,400,000
Unemployed 8,300,000
134,200,000

11. Unemployment and the Business
Cycle.

12. Exhibit 1: The Adult Population Sums the
Employed, the Unemployed, and Those Not in the
Labor Force
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13. Trend of Unemployment Rate
 Decline in the unemployment rate over last 20
years
 Overall growth in the economy
 Relatively fewer teenagers in the work force
 Unemployment rate says nothing about who is
unemployed or for how long – differs across
 Race
 Gender
 Age
 Geographical area
 Occupational group
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14. Unemployment Rates for Various Groups

15. The U.S. Unemployment Rate Since 1900

16. Unemployment Compensation
 Cash transfers for those who lose their jobs and actively seek employment
 Applies to unemployed workers who meet certain qualifications
 Problems with unemployment compensation:
 Workers who receive benefits tend to search less actively than those who don’t
 May reduce the urgency of finding work
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17. Full Employment
 Occurs only if there is no cyclical unemployment
 Occurs when the only unemployment is frictional, structural, or seasonal
 Does not mean zero unemployment
 Frictional, seasonal, and structural unemployment can still occur
 Occurs when from 4% to 6% of the labor force is unemployed

18. INFLATION
Defined and Measurement
• A rising general level of prices
• Rate of inflation calculated
using index numbers
Consumer Price Index
= Price of the same market
basket in 1982-1984
x 100CPI
Price of most recent market
basket in the particular year

19. Inflation
 Inflation: a sustained increase in the average price level
 Hyperinflation: extremely high inflation
 Deflation: a sustained decline in the average price level
 Disinflation: a reduction in the rate of inflation

20. Causes of Inflation:
 Demand-pull inflation is inflation initiated by an
increase in aggregate demand.
• Cost-push, or supply-side, inflation is inflation caused
by an increase in costs.

21. Demand pull :
Increase in AD
can be due to
a fiscal or
monetary
policy, thus
increasing
prices

22. Cost push:
Upward shift of
the AS will be
due to increase
in costs due to
increase in price
of inputs.

23. Combination of both:

24. Exhibit 6a: Inflation Caused by Shifts of
AD and AS Curves
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Increase in the AD curve
pulls up the price level.
To generate continuous
demand-pull inflation, the
Increase in costs of
production push up the
price level. To generate
continuous cost-push

25. Stagflation:
 Stagflation occurs when output is falling at the same
time that prices are rising.
 One possible cause of stagflation is an increase in costs.

26. Countering inflation:
Demand -pull Reduce demand by higher taxation, lower govt.
expenditure, lower govt borrowing, higher interest rates
Cost push Take steps to reduce production costs by deregulating
labour markets, encouraging greater productivity, apply
control over wages and prices
Import factors reduce quantity of imports or their prices via trade
policies.

27. Controlling inflation (cont)
Excessive
growth on
money supply
Reduce money supply by cutting down on public
sector borrowing
Funding Govt borrowing from non bank
Reduce bank lending
Maintain interest rates
Expectations of
inflation
Pursue policies which indicate Govt’s determination to
reduce inflation

28. Anticipated versus Unanticipated Inflation
 Unanticipated inflation creates more problems
for the economy than does anticipated inflation
 To the extent that inflation is higher or lower
than anticipated, it arbitrarily creates winners
and losers
 If it is higher than expected, the winners are all
those who had contracted to pay a price that
anticipates lower inflation
 The losers are all those who agreed to sell at that
price
 If inflation is lower is lower than expected, the
situation is reversed
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29. Inflation Across Metropolitan Areas
 Inflation rates differ across regions mostly because of differences in
housing prices, which grow faster in some places than in others
 Federal government tracks separate CPIs for each of 26 metropolitan
areas.
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30. Exhibit 8: Average Annual Inflation from 1994 to
2004 Differed Across U.S. Metropolitan Areas
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31. Inflation and Interest Rates
 Interest is the dollar amount paid by borrowers
to lenders because lenders must be rewarded
for forgoing present consumption
 The interest rate is the interest per year as a
percentage of the amount loaned
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32. Why is Inflation Unpopular?
 Problems with unanticipated inflation
 Hits those whose incomes are fixed in nominal terms
 Arbitrarily redistributes income and wealth from one group to another
 Reduces the ability to make long-term plans
 Forces buyers and sellers to pay more attention to prices - less time for
production - overall productivity of economy falls
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33. CREDICTS
 Oroville High School on Oct 05, 2009
 Kelly Giles, Contract Specialist at Microsoft on Apr 12,
2011
 Kinnar Majithia, Management Trainee at Emerson
Network Power on Jan 27, 2012
 Baterdene Batchuluun, Teacher at I'm working as a
teacher on Sep 02, 2013