Sean Faria

(Sean.faria001)

Chapter 7 Assignment

06/23/2010

1.

a. The four phases of a typical business cycle are trough, recovery, peak, and

recession.

b. The seasonal variations and long- term trends complicate measurements of the

business cycle by making a jump in production and sales when the season comes along.

Then after the season is over it production slows down this also does not signal a boom

or recession. A period of no GDP growth thus does not mean all is normal, but that the

economy is operating below its trend growth of output.

c. The business cycle affects output and employment in capital goods and

consumer durable goods industries more severely than in industries producing

nondurables because purchases could be deferred. Consumers cannot long push

back the buying of nondurables such as food or water.

2.

a. The factors make it difficult to determine the unemployment rate determining who is

eligible and available to work. This leads to the 3 groups of the total U.S. population.

They are (1) people less than 16 years of age and people who are institutionalized, (2)

not in labor force, (3) and Labor force.

b. It is difficult to distinguish between frictional, structural, and cyclical unemployment

because of the differences between the types of unemployment and there is no

 automatic label on the type of unemployment when someone is counted as

unemployed.

i. Frictional unemployment is the type of unemployment caused by workers

looking for their first job, voluntarily changing jobs, and by temporary layoffs. It

is unemployed workers between jobs. Frictional unemployment is "good"

unemployment because without it the economy could not be producing as

much as possible (i.e. achieving the potential level of output).

ii. Structural unemployment is unemployment of workers whose skills are not

demanded by employers. They are unemployed because they lack sufficient

skill to obtain employment, or they cannot easily move to locations where jobs

are available.

iii. Cyclical unemployment is a type of unemployment caused by insufficient total

spending (or by insufficient aggregate demand). It is unemployment caused by

the recession phase of the business cycle. If there is less aggregate demand

firms respond by producing less. Output and employment are reduced. The

extreme unemployment during the Great Depression (25 percent in 1933) was

cyclical unemployment.

c. Unemployment is an economic problem because of the concept of opportunity cost.

d. The consequence of a negative GDP gap is that what is not produced the amount

represented by the gap is lost forever.

e. The noneconomic effects of unemployment are loss of self-respect, loss of position in a

social community, loss of social and political unrest.

3.

a. Demand-pull inflation increases in the price level (inflation) resulting from an excess of

demand over output at the existing price level, caused by an increase in aggregate

demand. Cost-push inflation increases in the price level (inflation) resulting from an

increase in the resource costs and hence in per-unit production costs; inflation caused

by reductions in aggregate supply.

b. Cost-push inflation is most likely to be associated with a negative GDP gap, as the rising

production costs reduce spending and output.

c. Demand-pull inflation is more likely to occur with a positive GDP gap, because actual

GDP will exceed its potential only when aggregate spending is strong and rising.

4.

a. The Consumer Price Index (CPI) is an index that measures the prices of a fixed “market

basket” of some 300 goods and services bought by a “typical” consumer. Prices for

goods in the market basket are collected each month, weighted by the importance of

the good in the basket), and averaged to form the price level.

b. To calculate the rate of inflation for the current year, the BLS subtracts the CPI of the

previous year from the CPI of the current year, and then divides by the CPI of the

previous year.

c. Inflation reduces the purchasing power of the owners of the dollar (less stuff for your

money).

d. The nominal interest rate is the interest rate expressed in terms of annual amounts

currently charged for interest and not adjusted for inflation. The real interest rate is the

interest rate expressed in dollars of constant value and equal to the nominal interest

rate but less the expected rate of inflation.(real =nominal – inflation)

e. Deflation means that the price level is falling, whereas with inflation overall prices are

rising.