Economics 101Chapter03

Economics 101Chapter03 - 1 Objectives for Chapter 3: The...

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Objectives for Chapter 3: The Business Cycle in the Twentieth Century At the end of Chapter 3, you will be able to: 1. Define each of the phases of the business cycle: expansion, peak, recession, depression, trough, recovery. 2. Explain what the Index of Leading Indicators is and how it is used. 3. Explain how the official unemployment rate is calculated. 4. Name two reasons that the official unemployment rate might be understated and one reason that it might be overstated . 5. Explain what is meant by the term “discouraged worker” . 6. Define each of the four types of unemployment: frictional, seasonal, cyclical, and structural unemployment. 7. Explain how “full employment” (or “natural rate of unemployment” ) is defined. 8. Define the term “Potential Real Gross Domestic Product” . 9. Explain what is meant by a “recessionary gap” or an “inflationary gap” . 10. Name at least three of the problems that result for society as a whole when unemployment rates are high. 11. Name the groups in society that are likely to experience the highest unemployment rates? Explain why this would be so. 1
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Chapter 3 The Business Cycle in the Twentieth Century (latest revision May 2008) 1. The Business Cycle For many hundreds of years, production has gone through a cycle of increases followed by decreases followed by increases. This has come to be known as the business cycle . Remember from Chapter 2 that we use Real Gross Domestic Product (Real GDP) as our measure of total production . When Real Gross Domestic Product (Real GDP) is rising, we have a period called an expansion. Total production is rising, incomes are rising, there are more jobs, and there are fewer unemployed workers . An expansion is a good time. From March of 1991 to March of 2001, the United States experienced the longest expansion in its history. But expansions do not continue on and on. When Real Gross Domestic Product (Real GDP) stops rising, it has hit the peak. Occasionally, Real Gross Domestic (Real GDP) stagnates --- it does not rise or fall. This might be called a plateau (in the West, we might call it a butte or a mesa!). Most commonly, however, Real Gross Domestic Product (Real GDP) actually declines. When Real Gross Domestic Product (Real GDP) is actually declining, we are in a period of recession. Officially, a recession occurs if Real GDP declines for two consecutive quarters. If the decline is very large, the period is called a depression . Production is falling, incomes are falling, there are fewer jobs, and there are more unemployed workers . A recession is a bad time. (According to an old joke --- it is a recession if many people are unemployed. It is a depression if YOU are unemployed.) Since World War II, recessions have not lasted very long – less than one year on average. When Real Gross Domestic Product (Real GDP) stops falling, it has hit the trough . Then, Real Gross Domestic Product (Real GDP) begins to rise (another expansion). The period while Real
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Economics 101Chapter03 - 1 Objectives for Chapter 3: The...

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