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Economic Instability
There are four (4) major causes of economic instability in the American economy.
Business Cycles and Fluctuations Unemployment Inflation Poverty and distribution of income
I. BUSINESS CYCLES and FLUCTUATIONS
BUSINESS CYCLES- Systematic ups and downs of real GDP
BUSINESS FLUCTUATIONS- Non-systematic rise and fall of real GDP; this interrupts economic growth
Phases of the Business Cycle RECESSION- GDP declines for 6
consecutive mos. PEAK TROUGH- where real GDP stops going
down EXPANSION- period of recovery from
recession TREND LINE
The Great Depression- severe recession
Causes:
1. disparity between rich and poor; poor couldn’t stimulate the economy (poor distribution of income)
2. stock speculation by rich
3. drop of American exports due to tariffs
The Business Cycle
Business cycles since WWII have been pretty regular Avg. recession lasts 11 mos. Avg. expansion lasts 43 mos. Page 379 graph
Causes of Business cycles
1. Capital Expenditures 2. Inventory Adjustments 3. Innovation and Imitation 4. Monetary factors
Credit and loan policies Lower IR increase demand which pushes IR’s up
5. Increase in oil prices, war, WTC attacks
Can we predict business cycles? Of course…
Econometric model-macroeconomic model that describes how economy behaves
Index of leading economic indicators (10 areas that closely resemble GDP) Turns down before real GDP turns down Turns up before real GDP turns up
Avg. work week Order for durable goods
II. Unemployment
Unemployment rate- the number of unemployed individuals divided by the total number of persons in the civilian work force Unemployed=people available for work
who made an effort to find a job in the past month.
Goes up during recessions and down during expansions
Unemployment
Limitations-doesn’t account for people who haven’t tried to find a job in the last 4 weeks Too discouraged during recession to do so
Employed doesn’t mean employed full-time Could be part time
Kinds of Unemployment
Frictional unemployment-people between jobs(short term)
Structural unemployment-change in consumer tastes Military base closures, mergers, technology changes Happens when there is a fundamental change in an economy
Cyclical unemployment-related to swings in business cycle
Season unemployment Weather related
Technological unemployment-automation
Concept of full employment
Some pros and cons
Numerically when U.R. drops below 4.5%
2000=3.9%
Healthy is 4-6%
III. Inflation
Measure by using the CPI 100K goods in over 400 categories; spits
out a number
Inflation rate = change in price level/beginning price levelX100
Rate of inflation graph p. 390
Inflation
Deflation, and degrees of inflation
Creeping, galloping, and hyper 1-3% 100-300% 500% a year
Hungary during WWII 828,000,000,000,000,000,000,000,000,000
pengos=1 prewar pengo
Causes of Inflation
1. demand-pull theory 2. blames inflation on federal gov’t
deficit spending 3. rising input costs (costs of labor) tied
to unemployment; could be non-labor too (oil)
4. spiral of prices and wages 5. excessive monetary growth
Money supply grows faster than GDP Increases purchasing power
Consequences of inflation
Less purchasing power Hard on retirees; people with fixed
income Causes people to change spending
habits, disrupting the economy
Alters distribution of income(lenders and borrowers) Hurts lenders
Reasons for income inequality Education Wealth- distribution of wealth
Top 5th of Americans have 75% of the wealth in this country