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Notes Part 2

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Rutgers University

PART 2 Business Cycle  - Used to refer to pattern we observe in economic activity over time 4 Phases of Business Cycle: Prosperity – full employment, high level of economic activity, growth and expansion, households optimistic Recession – business activity slows, orders are drying up and slowing down, unemployment emerges, people become nervous about layoffs, households leery Depression – high unemployment, low production, factories are closed, firms aren’t replacing machines, people spend as little as possible Recovery – orders flow back into firms, call people back to work, economic activity picks up, and unemployment lowers *Some people say it’d be more appropriate to call it business fluctuation Unemployment and Inflation  Labor Force:  Not entire population  All individuals 16 years or older who aren’t institutionalized and are currently employed or unemployed and seeking employment Voluntary Unemployment – exists when there are plenty of jobs at going wage, but individual refuses to work for going wage Involuntary Unemployment – a person is willing and able to work at going wage but they can’t find a job Types of Unemployment: Structural – economy no longer has need for someone with your set of skills Ex: blacksmith Seasonal – occurs when unable to pursue field because of season Ex: construction Frictional – occurs because of frictions in economy and as a result, you don’t know instantly where the jobs are Cyclical – result of recessionary and depressionary phases of business cycle Discouraged Worker Phenomenon – as your unemployed for long periods, individual becomes discouraged and stops looking (stops being part of labor forceAND stops being counted at unemployed) th September 24 2013 – INTRO TO MACROECONOMICS Cost of Unemployment  **Unemployment insurance payments are transfer Economic:  Goods and services that could be produced but aren’t produced bc of unemployment  Smaller capital cost in future and left w/smaller ability to produce goods and services  Loss of skills Social:  Human misery – as individual is unemployed, they lose feeling of self-worth as a human or individual (can result in psych problems for individual and family)  Individuals start to look to less legal means to get the goods and services they need  Political instability starts to sit in Inflation  - Acontinuing rise in the general price level Problems:  If you’re unable to anticipate what it’s going to be, it arbitrarily distributes income and wealth 1. Relationship between borrower and lender – with interest rates, if it inflates, it changes the value when borrower pays back because it arbitrarily redistributes wealth
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