employment - Notes on Principles of Macroeconomics Vijaya...

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Notes on Principles of Macroeconomics Vijaya Raj Sharma, Ph.D. BUSINESS CYCLE AND UNEMPLOYMENT MACRO POLICY GOALS A government generally pursues four macro policy goals: Rapid but stable growth of output or per-capita real GDP for a sustained rate of economic growth Stable prices for maintaining purchasing power of money and for minimizing uncertainties associated with high rate of growth of prices or inflation Low rate of unemployment for minimizing economic hardships of households International stability for maintaining stable exchange rate and for smooth functioning of international trade But, rarely are prices, outputs, and unemployment stable. Economy generally experiences swings in economic activities, periods of growth of real output followed by periods of decline of output, again followed by periods of growth. The cycle continues. Figure 1 shows quarterly changes of U.S. real GDP for the period 1990-2001. If real GDP remained constant over time, the change would have been zero and the plot would have been a horizontal line at 0.0 in the graph. But, actual rate of growth has been high and low, even negative during certain quarters of 1990-1991. Figure 1 BUSINESS CYCLE Cyclical swings in economic activities are called business cycles. An idealized business cycle is plotted in Figure 2 to distinctly present different phases of the cycle, around a long-run upward trend of economic growth – the dotted line aa . There are periods of expansion of economic activities when real GDP generally rises over time (from Point B to C), real GDP reaches a peak (like Point A or C), from where the sliding down or
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contraction of economic activities begins (Point A to B) until real GDP reaches a trough (Point B). Then, the cycle of expansion again begins (Point B to C). Real GDP C a Expansion A Contraction Expansion B Contraction a 0 t a t b t c Time (quarters) Figure 2: Business Cycle and Phases When the economy is in the expansion path, it is called a period of boom and when it is the contraction path, it is called a period of bust. The period of contraction is identified with recession , which is generally defined as two or more quarters of consecutive decline of real GDP. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. A recession which is prolonged and severe is called depression ; length of period and intensity of recession have not been formally specified for depression. There is a saying, “If my neighbor loses job, it is a recession, but if I lose job, it is a depression.” The last depression observed in the USA was the Great Depression (1929-1932), when real GDP declined at an annual rate of 7.5 percent or more, unemployment rate reached almost 25 percent, and the international trade and borrowing and lending became almost non-existent. The National Bureau of Economic Research (NBER), a reputed private sector research
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This note was uploaded on 02/07/2011 for the course ECON 3461 taught by Professor Spencer during the Spring '10 term at Golden West College.

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employment - Notes on Principles of Macroeconomics Vijaya...

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