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Chapter 11:Business Cycles, Unemployment, and Inflation

3/19/15

The Business Cycle (look at graphic)
• Alternating increases and decreases in economic activity over time
• Phases of the business cycle
o Peak
o Recession
o Trough
o Expansion
• Business cycle fluctuates
o Demand shocks
o Supply shocks
o Prices are “sticky” (slow to change, almost inflexible)
Cyclical Impact
- firms and industries producing capital goods (housing, commercial
buildings) and consumer durables (automobiles, computers, refrigerators)
are affected by business cycle most
durable goods: capital goods & consumer durable are affected
nondurables are not affected as much by the economy
Banks are the providers of money
• If bank goes out of business, we would lose our money
• They found business
• Provider of credit – economy built on banks ability to lend money
The Credit Crunch à banks unable to lend money, then this affects everyone
else
In what industry or sector of economy is output least likely to be affected by
the business cycle?
• Agricultural commodities
Bureau of Labor Statistics
(survey people to find population of U
...
jobs, survey 60,000 people)
Unemployment Chart

Total population is 308
...
9 million)
Not in labor force (83
...
1 million)
Unemployed (14
...
9 million (employed + unemployed, but are looking
for a job)
# of unemployed
Unemployment rate = ______________________ x 100
Labor force

9
...
Frictional
2
...
Occurs due to changes in structure of the demand of labor
3
...
Can be long or short term
b
...
Happens when company contracts slow down production and have
to lay off employees
Worker who loses “call center” job because firm switch the call center to
another country is…?
Structural unemployment

How does the recesiion affect millennials
Article before this slide
Pdf on blackboard**

Inflation

6/4/15 12:22 AM

Types of Inflation
• Demand pull-inflation
o Excess spending relative to output
o People are willing to pay higher prices, so they are charged
more
o Central bank issues too much money (more money supply in
circulation
o Costs money to print money
• Cost-push inflation
o Firms forced to charge more to pay for increased price of
production
o Supply shock
o Ex: oil shock
*War in Iraq sent oil prices spiraling upwards, resulting in an increase in the
overall price level? Which type of inflation is this?
-Cost-Push inflation
Hyperinflation à very high inflation, exceeds 50% inflation
•
•
•
•
•
•

Extraordinarily rapid inflation
Devastates an economy
2% inflation is “healthy”
businesses don’t know what to charge and consumer don’t know
what to pay
money becomes worthless
Zimbabwe’s 14
...

(item for item)

Redistribution Effects of Inflation
• Nominal income (how much you get paid in dollars)
• Unadjusted for inflation
•

Real income is what can be bought with the income (purchasing
power, the actual value of money with price affects)
o Real income = nominal income / price index

Percentage change = percentage
in real income
change in
nominal income

-

percentage
change in
price level

*In 2003, Maxine’s nominal income increased by 3 percent, while the price
level rose by 1 percent
...
rose by 4%
b
...
rose by 2%
d
...
rose by 2% (3 – 1 = 2)
Who is hurt by inflation?
• Fixed-income receivers (unemployed, ex: $1000 a month paycheck)
o The “real income” falls with inflation
• Savers
o Purchasing power goes down
o Ex: 10,000 in bank is not worth as much
o Value of accumulated savings deteriorates
• Creditors (money lenders)
o Lenders get paid back in “cheaper dollars” because now
money is worth less
Who is unaffected by inflation?
• Flexible-income receivers (income is adjusted for inflation)
o Social security payments are indexed for inflation (paid more
if prices are more)
• Union members
o written in contracts that whatever the salary is, they will be
adjusted with the inflation
• Debtors gain (borrowers)
o Take on debt or borrow
o Pay back loan with “cheaper dollars”
Anticipated Inflation

•

•

•

Real interest rate
o Rates adjusted for inflation
o “interest rate” is the cost of borrowing and reward for lender
Nominal interest rate
o Rates not adjusted for inflation
o Nominal interest rate = interest rate + expected inflation rate
(inflation premium)
Why do people charge interest?
Interest represents a reward for…
o Opportunity cost (time value of money – of not having money
and giving it to someone)
o Default risk: Interest rate exists just incase the loan is not
paid back
o Inflation premium: To adjust for inflation, lender demands
extra compensation because by the time the debt is paid back
the inflation will be higher
o Interest rates: vary with inflation

Inflation
rise in general level of prices in an economy
To measure price without inflation through the years…
Most recent market price in that year
Consumer Price Index (CPI) = _________________________________
Market price in ( ) year
Rate of inflation for 2011…
CPI for 2010 à 218
...
9
224
...
1
218
...
0311 x 100
= 3

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