Economic response entails decreases in output and employment.Causes of shocksIrregular innovationProductivity changesMonetary factorsPolitical eventsFinancial instability -Recession of 2007: led by excessive money, overvalued real estate and unsustainable mortgage debt.Durable goods affected most-Capital goods-Consumer durables Nondurable consumer goods affected less-Services-Food and clothing Labor force- persons 16 years of age and older who are not in institutions and who were employed or are unemployed and seeking work. Constituted slightly more than 50% of the total population in 2009.Unemployment rate- percentage of the labor force unemployedUnemployment rate= ¿of exployedlabor force×100Discouraged workers- employees who have left the labor force because they have not been able to find employment.Frictional unemployment- individuals searching for jobs or waiting to take jobs soon.Structural unemployment- occurs due to changes in the structure of the demand for the labor. Can be long-term type of unemployment.Cyclical unemployment- caused by the recession phase of the business cycle.As firms respond to insufficient demand for their goods and services, output and employment are reduced.National rate of unemployment (NRU) *5%Full employment level of unemployment Can vary over time-Demographic changes-Changing job search methods-Public policy changes Actual unemployment can be above or fall below the NRUPotential output-the real output (GDP) an economy can produce when it fullyemploys its available resources.
GDP GapGDP= actual GDP – potential GDPCan b positive or negativeOkun’s Law- every 1% of cyclical unemployment creates a 2% GDP gap.Inflation- general rise in the price levelInflation reduces the “purchasing power” of moneyChapter 9Consumer price index (CPI)CPI= priceof the most recent market basket¿a particular yearpriceestimate of the market basket¿1982−1984×100 or CPI= Current year−year compari ngyear comparing¿¿¿¿×100The rate of inflation is equal to the percentage growth of CPI Deflation- a decline in a economy’s price levelRule of 70- a method for determining the number of years it will take for some measure to double, given its annual percentage increase. To determine the number of years it will take for the price level to double, divide by 70 by the annual rate of inflation (CPI). Demand-pull inflationIncreases in price level (inflation) resulting from increases in aggregate (total) demand.Excess spending relative to outputCentral bank issues too much moneyOften described as “too much spending chasing too few goods”One view is that zero inflation is bestAnother view is that mild inflation is bestCost-push inflationIncreases in price level (inflation) resulting from an increase in resource costs (ex: raw material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.
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