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Business cycles

alternating rises and declines in the level of economic activity, sometime over several years.


when business activity has reached a temporary maximum.


is a period of decline in total output, income, and employment.


output and employment "bottom out" at their lowest levels.


a period in which real GDP, income, and employment rise.

Labor force

is the sum of all employed and unemployed adults.

Unemployment rate

is the percentage of the labor force unemployed.

Discouraged workers

have usually given up on searching for a job because they found no suitable employment.

Frictional unemployment

is caused by those transitioning between jobs or looking for a first job.

Structural unemployment

is joblessness caused not by lack of demand, but by changes in demand patterns or obsolescence of technology,

Cyclical unemployment

occurs when the unemployment rate moves in the opposite direction as the GDP growth rate.

Full-employment rate of unemployment

is currently between 4.5 and 5.0 because of frictional and structural unemployment.

Natural rate of unemployment (NRU)

The level of unemployment characterizing the economy in long-run equilibrium, determined by the levels of frictional, structural, and institutionally induced unemployment. At this rate of unemployment, inflation should be constant, so it is sometimes called the nonaccelerating inflation rate of unemployment, or NAIRU.

Potential output

refers to the highest level of real Gross Domestic Product output that can be sustained over the long term.

GDP gap

represents workers who want to work but can't find a job, businesses who are reluctant to hire new employees, land being put to sub-optimal use, and banks and credit institutions who accumulate money instead of lending it out.

Okun's law

The relationship between an economy's unemployment rate and its gross national product (GNP).


is a rise in the general level of prices of goods and services in an economy over a period of time.


is a decrease in the general price level of goods and services.

Consumer Price Index (CPI)

is a time series measure of the price level of consumer goods and services.

Demand-pull inflation

Price increases which result from an excess of demand over supply.

Cost-push inflation

A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

Per-unit production costs

is the cost you would physically spend to manufacture a item.

Core inflation

reports price changes without volatile food and energy prices.

Nominal income

Regular income that has not yet been adjusted down to correspond with decreasing purchasing power or up to correspond with inflation.

Real income

Income of an individual, organization, or country, after taking into consideration the effects of inflation on purchasing power.

Unanticipated inflation

Creditors lose and debtors gain if the lender does not anticipate inflation correctly.

Anticipated inflation

If the inflation rate corresponds to what the majority of people are expecting.

Cost-of-living adjustments (COLAs)

contract provisions that tie wages to changes in the cost of living.

Real interest rate

is the rate of interest an investor expects to receive after allowing for inflation.

Nominal interest rate

The interest rate unadjusted for inflation.


inflation growing at a very high rate in a very short time.

The recurrent ups and downs in the level of eocnomic activity extending over several years are a descritpion of:

a business cycle.

A trough in the business cycle occurs when:

Employment and output reach their lowest levels.

A recession is a decline in:

GDP that lasts six months or longer.

What has been the range for the duration in months of U.S. recessions since 1950?

6 months to 18 months.

Which statement is correct?

The production of nondurable consumer goods is more stable than the produciton of durable consumer goods over the business cycle.

Which industry or sector of the economy would least likely be affected by the business cycle?


Assuming the total population is 200 million, the labor foce is 100 million, and 92 million workers are employed, the unemployment rate is:

8 percent.

In calculating the unemployment rate, part-time workers are:

Counted as employed full-time because they are receiving payment for work.

Official unemployment rate statistics may:

Understate the amount of unemployment because of the presence of "discouraged" workers who are not actively seeking employment.

The headline reads: Steel industry suffers slump as import competiion increases; unemployment rises." This type of unemployment can best be characterized in economic terms as:


The best example of a "frictionally unemployed" worker is one who:

Is in the process of voluntarily switching jobs.

A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment?


The natural rate of unemployment

Is equal to the total of fricitonal and structural unemployment

Demand-pull inflation

occurs when total spending exceeds the economy's ability to provide output at the existing price level.

If the natural rate of unemployment was 6 percent, the current unemployment rate was 12 percent, and the nominal GDP was $4,000 billion, then according to Okun's law the economy would have sacrificed:

$480 billion in potential output.

Okun's law indicates that for:

Every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, a 2 percent GDP gap is generated.

Inflation is undesirable because it:

arbitrarily redistributes real income and wealth.

If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next was:


Over a ten-year period, the Consumer Price Index doubled. On the basis of this information we can say that the average annual rate of inflation over this period was approximately:

7 percent.

Which measures the changes in the prices of a "market basket" of some 300 goods and services purchased by typical urban consumers?

The Consumer Price Index

A statement that is often used to describe demand-pull inflation is:

"Too much money chasing too few goods"

Inflation caused by a rise in per unit production costs is referred to as:

Cost-push inflation.

Cost-push ifnlation may be caused by:

a negative supply shock.

European economists generally agree that:

high European unemployment rates have resulted from government policies and union contracts that increase the costs of hiring and reduce the individual's opportunity cost of being unemployed.

A burst stock market bubble must adversely affect the economy by:

causing a severe negative wealth effect and engendering pessimism about the economy's future.

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