Chapter 8

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Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
8
C HAPTE R
Anticipated
Inflation
Effects of
Inflation on
Output
Introduction to Economic
Growth and Instability
Key Terms
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8-1
Copyright McGraw-Hill/Irwin, 2002
ECONOMIC GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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8-2
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An increase in real GDP over some time period
An increase in real GDP per capita over some
time period
•Growth as a Goal
•Arithmetic of Growth
•Rule of 70
•Main Sources of Growth
•Increases in Resources
•Increases in Productivity
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Effects of
Inflation on
Output
•Other Impacts
Key Terms
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8-3
•Improved Products and
Services
•Added Leisure
Anticipated
Inflation
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ECONOMIC GROWTH
Growth in the United States
Next
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•Relative International
Growth Rates
Copyright McGraw-Hill/Irwin, 2002
THE BUSINESS CYCLE
Economic Growth
The Business
Cycle
Phases of the Business Cycle
PEAK
Unemployment
RECESSION
TROUGH
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Level of business activity
Inflation
Time
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8-4
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RECOVERY
THE BUSINESS CYCLE
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Causation: A First Glance
•Many Causation Theories
•Cyclical Impact
•Capital Goods
•Consumer Durables
•Service Industries
•Nondurable Consumer
Goods
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
Measurement of Unemployment, 2000
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Total
Population
275,400,000
Effects of
Inflation on
Output
Under 16
and/or
institutionalized
65,800,000
Not in
labor
force
68,800,000
135,200,000
Key Terms
Employed
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Unemployed
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Labor
force
140,800,000
5,600,000
UNEMPLOYMENT
Economic Growth
Measurement of Unemployment, 2000
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Unemployment
rate
unemployed
=
labor force
x 100
Anticipated
Inflation
Effects of
Inflation on
Output
Part-Time Employment
Key Terms
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Discouraged Workers
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UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Full-Employment Rate of
Unemployment
Natural Rate of
Unemployment (NRU)
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
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8-9
GDP Gap and Okun’s Law
The amount by which actual GDP
falls short of potential GDP
For every 1% unemployment
exceeds the natural rate...
Key Terms
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Economic Costs of Unemployment
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Approximately a
2% GDP Gap occurs
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Unequal Burdens of Unemployment
• Occupation
• Age
• Race and Ethnicity
• Gender
• Education
• Duration
Noneconomic Costs
International Comparisons
Copyright McGraw-Hill/Irwin, 2002
GLOBAL PERSPECTIVE
Economic Growth
The Business
Cycle
Unemployment
Unemployment Rates in Five Industrial Nations
1990 - 2000
15
France
Inflation
Redistributive
Effects of
Inflation
U.K.
10
Germany
Anticipated
Inflation
U.S.
Effects of
Inflation on
Output
Japan
5
Key Terms
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0
1990
1995
2000
Source: Economic Report of the President
Copyright McGraw-Hill/Irwin, 2002
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Defined and Measurement
• A rising general level of
prices
• Rate of inflation calculated
using index numbers
• Rule of 70
•Shortcut to determine doubling
time
• Facts of Inflation
Copyright McGraw-Hill/Irwin, 2002
GLOBAL PERSPECTIVE
Inflation Rates in Five Industrial Nations
1990 - 2000
Economic Growth
The Business
Cycle
Unemployment
U.K.
10
Inflation
Redistributive
Effects of
Inflation
U.S.
Anticipated
Inflation
5
Effects of
Inflation on
Output
France
Japan
Key Terms
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0
1990
1995
Germany
2000
Source: Economic Report of the President
Copyright McGraw-Hill/Irwin, 2002
INFLATION
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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DEMAND-PULL INFLATION
P
Range 3
The Business
Cycle
Types of Inflation
Price level
Economic Growth
Increases in Total
Spending
Range 1
Fullemployment
output
Next
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Qf
Q
Real domestic output & employment
Copyright McGraw-Hill/Irwin, 2002
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Types of Inflation
DEMAND-PULL INFLATION
COST-PUSH INFLATION
•Rising Per-Unit
Production Costs
•Supply-Side Inflation
•Supply Shocks
•Complexities
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
REDISTRIBUTIVE EFFECTS
OF INFLATION
Nominal Income
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Anticipations
Effects of
Inflation on
Output
• Anticipated Inflation
Key Terms
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Real Income
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• Unanticipated Inflation
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Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
• Fixed-Income
• Savers
Key Terms
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Who is Hurt by Inflation?
Receivers
Effects of
Inflation on
Output
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REDISTRIBUTIVE EFFECTS
OF INFLATION
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• Creditors
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Unaffected or
Helped by Inflation?
• Flexible-Income
Receivers
•Cost of Living
Adjustments (COLAs)
• Debtors
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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REDISTRIBUTIVE EFFECTS
OF INFLATION
Addenda
•Deflation
•Mixed Effects
•Arbitrariness
Copyright McGraw-Hill/Irwin, 2002
ANTICIPATED INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
11%
=
Effects of
Inflation on
Output
+
5%
Key Terms
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Nominal
Interest
Rate
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Real
Interest
Rate
6%
Inflation
Premium
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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EFFECTS OF INFLATION
ON OUTPUT
•Cost-Push Inflation
and Real Output
•Demand-Pull Inflation
and Real Output
•Hyperinflation &
Breakdown
Chapter Conclusions
Copyright McGraw-Hill/Irwin, 2002
economic growth
rule of 70
productivity
business cycle
peak
recession
trough
recovery
labor force
unemployment rate
discouraged workers
frictional unemployment
structural unemployment
cyclical unemployment
full-employment rate of unemployment
natural rate of unemployment (NRU)
potential output
Copyright McGraw-Hill/Irwin, 2002
GDP gap
Okun’s Law
inflation
demand-pull inflation
cost-push inflation
per-unit production costs
nominal income
real income
anticipated inflation
unanticipated inflation
cost of living adjustments
COLAs
real interest rate
nominal interest rate
deflation
hyperinflation
BACK
END
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
BUILDING THE
AGGREGATE EXPENDITURES
MODEL
Key Terms
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Chapter 9
Copyright McGraw-Hill/Irwin, 2002
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