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Chapter 7

Chapter 7

6 Pages
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Department
Economics
Course Code
ECN 204
Professor
Amy Peng

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Chapter 7
The Business Cycle (fluctuations)
Business cycle: Recurring increase and decrease in the level of economic
activity over periods of years.
oPeak: A phase in the business cycle during which the economy is at full
employment and the level of real output is at or very close to the
economys capacity. (price level likely to rise)
oRecession: A period of decline in total output, income, and employment.
(declines in real GDP and increase in unemployment)
oTrough: the point during a recession or depression when output and
employment reach their lowest levels.
oExpansion: The phase of the business cycle during which output and
employment rise toward full capacity (inflation)
Boom: A particularly strong and protracted expansion
Unemployment
Unemployment: A failure of the economy to fully employ its labor force
Measurement of Unemployment
oLabour force: Persons 15 years of age and older who are not in
institutions and who are employed, or are unemployed and seeking
work
oUnemployment rate: the percentage of labour force that is unemployed
at any time
   
OR
   
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Types of unemployment
oFrictional unemployment: A type of unemployment caused by workers
voluntarily changing jobs and by temporary layoffs; unemployed
workers between jobs
oStructural unemployment: Unemployment of workers whose skills are
not demanded by employers, who lack sufficient skills to obtain
employment, or who cannot easily move to locations where jobs are
available
oCyclical unemployment: Unemployment caused by a decline in total
spending (or by insufficient aggregate demand)
    
 
Recession Positive Cyclical Unemployment (U > U*)
Expansion Negative Cyclical Unemployment (U < U*)
oSeasonal unemployment: Unemployed caused by seasonal factors.
Natural Rate of Unemployment (NRU U*): the unemployment rate that
occurs when no cyclical unemployment exists and the economy is achieving its
potential output (potential GDP)
oThe full-employment rate of unemployment
oFull employment occurs where there is no presence of cyclical
unemployment. Frictional structural and seasonal unemployment are
largely unavoidable.
Potential GDP (Y*): the real output an economy can produce when it fully
employs available resources.
GDP(output) gap: the amount by which actual GDP falls below potential GDP
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Description
Chapter 7 The Business Cycle (fluctuations) • Business cycle: Recurring increase and decrease in the level of economic activity over periods of years. o Peak: A phase in the business cycle during which the economy is at full employment and the level of real output is at or very close to the economy’s capacity. (price level likely to rise) o Recession: A period of decline in total output, income, and employment. (declines in real GDP and increase in unemployment) o Trough: the point during a recession or depression when output and employment reach their lowest levels. o Expansion: The phase of the business cycle during which output and employment rise toward full capacity (inflation) Boom: A particularly strong and protracted expansion Unemployment • Unemployment: A failure of the economy to fully employ it’s labor force • Measurement of Unemployment o Labour force: Persons 15 years of age and older who are not in institutions and who are employed, or are unemployed and seeking work o Unemployment rate: the percentage of labour force that is unemployed at any time OR www.notesolution.com • Types of unemployment o Frictional unemployment: A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs o Structural unemployment: Unemployment of workers whose skills are not demanded by employers, who lack sufficient skills to obtain employment, or who cannot easily move to locations where jobs are available o Cyclical unemployment: Unemployment caused by a decline in total spending (or by insufficient aggregate demand) Recession Positive Cyclical Unemployment (U > U*) Expansion Negative Cyclical Unemployment (U < U*) o Seasonal unemployment: Unemployed caused by seasonal factors. • Natural Rate of Unemployment (NRU U*): the unemployment rate that occurs when no cyclical unemployment exists and the economy is achieving its potential output (potential GDP) o The full-employment rate of unemployment o Full employment occurs where there is no presence of cyclical unemployment. Frictional structural and seasonal unemployment are largely unavoidable. • Potential GDP (Y*): the real output an economy can produce when it fully employs available resources. • GDP(output) gap: the amount by which actual GDP falls below potential GDP www.notesolution.com o Recessionary gap (Y < Y*) Capital and labor resources are not fully utilized Output is falling below
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