Deck 6: Economic Growth, Business Cycles, and Unemployment

Question 1

What is the formal definition of a recession?

Answer 1

A recession is a decline in real output that persists for more than two consecutive quarters of a year.

Question 2

Why are Keynesian economists likely to think the unemployment rate reported by the BLS understates true unemployment?

Answer 2

Keynesian economists feel that the reported unemployment rate understates the true unemployment rate because it does not take into account either discouraged workers or the underemployed.Discouraged workers are people who do not look for a job because they feel they don't have a chance of finding one.Underemployed people are people working part-time that would prefer to work full-time.Neither of these two groups is counted as unemployed by the BLS - Keynesians argue that they should be - and because they are not, the reported unemployment figures understate the true amount of unemployment.

Question 3

What is the business cycle? How is it linked to a secular trend? Describe the four phases of the business cycle.How are these phases linked to the concepts of a "boom", a "recession" and an "expansion"?

Answer 3

A business cycle is the upward or downward movement of economic activity, or real GDP, that occurs around a long-term secular trend.The four phases of a business cycle are: peak, downturn, trough, and upturn.The top of the cycle is called the peak.A downturn describes when economic activity is falling from the peak.If the decline persists for more than two consecutive quarters it is called a recession.The bottom of the recession is called a trough.An upturn is when economic activity picks up after the trough.

Question 4

Macroeconomists have defined three categories (types) of unemployment: cyclical, structural, and frictional.Briefly describe each type.

Question 5

Draw a diagram of the phases of a business cycle and the secular growth rate.Label each phase of the business cycle.What is the precise definition of a recession?

Question 6

How does the target rate of unemployment relate to potential income?

Question 7

Distinguish between Keynesian and Classical economists.

Question 8

What is the formal definition of the unemployment rate?

Question 9

Explain how the unemployment rate is calculated.

Question 10

What is the difference between the short-run framework and the long-run framework? How does each relate to supply and demand? Explain.

Question 11

What is the target rate of unemployment? What would happen if unemployment were below this rate?

Question 12

Distinguish a Keynesian from a Classical economist, and give your view of how they would respond to an economy falling into a recession

Question 13

What was the typical rate of growth of United States GDP during the twentieth century and how did the decades of the 1970s and 1980s differ from that general pattern? Approximately how long (in years) was the typical business cycle in the last half century?

Question 14

What is the target rate of unemployment and how does it relate to potential income?

Question 15

Why are Classical economists likely to think the unemployment rate reported by the BLS overstates true unemployment?

Question 16

How does structural stagnation challenge the standard Keynesian and Classical viewpoints?

Question 17

One of the prominent features of a modern market economy is the predominance of wage labor.Wage labor is paid a fixed wage, so that labor income during employment does not depend on the economic success of the firm.Prior to the Industrial Revolution, agricultural work was predominant, and agricultural workers did not work for fixed wages; their income was based on the net revenue of the farm.Explain why the change to wage labor is related to cyclical and structural unemployment.

Question 18

What is the formal definition of the unemployment rate and how is it calculated? Describe each of the three macroeconomic categories of unemployment: cyclical, structural, and frictional and give an example of each type of unemployment.

Question 19

What is the business cycle? List (in order of occurrence beginning when GDP is at its highest) the four phases of the business cycle.

Question 20

Define the concepts of discouraged workers and underemployment, and explain why, due to their presence, we need to handle the official unemployment figures published by the BLS with care.

Question 21

Classify each of the following cases as frictional, structural, or cyclical unemployment.
(a) John graduated from college and is currently looking for a job.
(b) A farmer lost his job because the area he lives in was transformed into a highly industrialized zone.
(c) Eliot works in the automobile industry in Detroit.He lost his job because cheaper imported cars have poured into America from Mexico.
(d) Mrs.Dunkin finished raising her children and decided to look for a job.
(e) Elizabeth lost her job because the company she used to work for merged with another company.
(f) David, who is a restaurant manager, lost his job because of a recession.

Question 22

Assuming that the number of working-age adults is 240 million, the labor force is 160 million, and the total number of employed is 150 million.What is the unemployment rate?