Study Guide for Ch9 and test 2
Business Cycle, unemployment, and inflation
1. Business Cycle (BC): fluctuation of RGDP overtime, two key
components are inflation and deflation (recession).
2) Everything above the line is inflation; everything below the
line is deflation or recession.
3) As long as the economy starts to grow, the recession is over;
The only way to get out of recession is increase spending
2. Unemployment: the measurement of unemployment is
UR( unemployment rate) = Labor Force *100 (currently UR is 7%) 1) Three rules to decide a person is in labor force or not:16 years and
older; non-institutionalized: not in hospital, military, jail; has been
looking for a job for at least past 4 weeks
2) Three types of unemployment: Frictional, structural, and cyclical
unemployment. (need know what they are and the difference
3) Anywhere on the straight of the BC graph, the cyclical
unemployment is 0, since the line is full employment.
4) Shortcomings of unemployment: e.g. just a simple national level
average, and does not take into account for the discouraged
workers( who is tired of finding a job, is not in labor force
anymore), location difference, age, gender, race, education
background, and so force.
5) MUST KNOW: a slightly decrease (from 7% to 6.8%)in UR is not
necessary a good thing, it could be because the increase in
discouraged workers. ALSO, in the equation of UR, the same
amount change in both denominator and numerators, has greater
effect on numerator, so the total effect will follow the change of
3. Inflation: two definitions, increase in general price level; or decrease
in purchasing power of the currency (dollars)
1) Measurement of inflation:
current yeabase ∗100
Inflation Rate= CPIbase year