MACROECONOMICS

The Business Cycle

KEY TERMS

Macroeconomics• Definition:

Business Cycle• Definition:

Relationship• The basic purpose of macro economics is

____________.• Macro policy tries to __________.

THREE FUN DAMEN TAL QUEST IONS OF THE BUSIN ESS CYCLE

What are business cycles?

What damage does unemployment cause?

Who is hurt by inflation?

ASSESSING MACRO PERFORMANCE

Three basic measures of macroeconomic

performance:• Output (GDP) Growth

• GDP definition:

• Unemployment

• Inflation

GDP GROWTH

Production Possibilities Curve• Are we producing at or near the production frontier?• Are we pushing the frontier outward?

Nominal GDP vs. real GDP• Nominal GDP:• Real GDP:

GROWTH IS ERRATIC

Real GDP increases inconsistently• Pattern of steps, stumbles, and

setbacks• See Figures 10.1, 10.2

Recession:• definition:• Figure 10.2

UNEMPLOYMENT

Labor force:

Unemployment Rate

• Goal: Full Employment, not 0% unemployment

TYPES OF UNEMPLOYMENT

Seasonal

Frictional

Structural

Cyclical

The first three (seasonal, frictional, structural) are acceptable

to economists; cyclical unemployment is the enemy.

Full employment – lowest possible unemployment rate

compatible with price stability (generally 4%-6%)

WORK WITH SEAT PARTNER

Page 231•Problem #1 (a-c)