Unit 4 - Business Fluctuations Business Fluctuations

are ups and downs in economic activity as measured by increases and decreases in real GDP.

Macroeconomics

Unit 4 - Business Fluctuations Recessions and Expansions

A recession is a decrease in real GDP of at least two consecutive quarters (6 months).

An expansion is any period during which real GDP is increasing.

Macroeconomics

Using the official definition, when, of the following years, did the United States have a recession?

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1. 1998

2. 2001

3. 1991

4. 1943

5. We have never had a recession

Unit 4 - Business Fluctuations GDP fluctuations in the United States

For the latest GDP fluctuations in the United States, visit

http://www.bea.gov

Macroeconomics

Unit 4 - Business Fluctuations Recessions and Expansions

Historically, the average recession has lasted approximately one year.

The average expansion lasts more than 5 years.

Macroeconomics

Unit 4 - Business Fluctuations The Cause of Business Fluctuations

Why do business fluctuations occur?

Macroeconomics

Unit 4 - Business Fluctuations Possible Causes of a Recession:

High inflation and high interest rates National security problems Lack of confidence in the economy Government policies that discourage productivity Other productivity problems Natural disasters Poor decision-making by businesses (including fraud),

households, the government Problems with resources (shortages) Foreign competition or foreign countries not doing well

Macroeconomics

When was the Great Depression?

1. During the 1890s

2. During the 1930s

3. During the 1940s

4. During the 1980s

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Unit 4 - Business Fluctuations Great Depression Symptoms

Stock market crash Significant decline in GDP and incomes Very high unemployment (25%) Many business and bank failings Low confidence by businesses and households

Macroeconomics

Unit 4 - Business Fluctuations Events Leading Up to the Great Depression:

Stock prices rose rapidly during the 1920s. Was it speculation? Was it a stock bubble?

Bernstein disagrees (profits rose 387%). The market crashed in October, 1929. Many people borrowed a lot of money to buy

stocks; loans were not paid back; banks went bankrupt; individuals lost their life savings; people lost confidence in the economy; many jobs were lost.

Macroeconomics

Unit 4 - Business Fluctuations

The U.S. Government in the 1930s

In the early- and mid-1930s, the economy worsened partly because of flawed government policies. The government:

raised taxes in an attempt to balance the budget. raised interest rates in an attempt to stem the outflow of

gold to other countries. raised tariffs and quotas in an attempt to protect domestic

industries and employment.

Macroeconomics

Unit 4 - Business Fluctuations Recession and Depression Symptoms

High unemployment is a serious symptom of a stagnating economy.

The unemployment rate is the number of people who do not have a job and are actively looking for one, as a percentage of the labor force.

Macroeconomics

The unemployment rate in the U.S. is currently:

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1. Between 5 and 7%

2. Between 7 and 9%

3. Between 9 and 11%

4. Between 11 and 15%

5. More than 15%

In the U.S. the government measures the unemployment rate by:

1. Counting the number of people on unemployment compensation

2. Counting the number of people on welfare

3. Taking a survey of 66,000 representative households

4. Taking a survey of business leaders

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Unit 4 - Business Fluctuations

The Unemployment Rate The U.S. rate is determined by a survey of approximately 66,000 representative households.

A person is unemployed if (s)he is without a job and actively looking

for one.

Macroeconomics

Unit 4 - Business Fluctuations Unemployment Rates around the World

For United States and other countries’ unemployment rates, see our CD, Unit 4, Section 3.

Or visithttp://www.bls.gov

Macroeconomics

Unit 4 - Business Fluctuations

Types of Unemployment

Types of unemployment include: Seasonal (out of season) Cyclical (recession) Structural (technology, outsourcing) Frictional (in between jobs; finished study)

Macroeconomics

A teacher who is off during the summer and not looking for a job, is:

1. Seasonally unemployed

2. Frictionally unemployed

3. Cyclically unemployed

4. Structurally unemployed

5. None of the above

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Unit 4 - Business Fluctuations The Natural Rate of Unemployment

According to some government economists, when unemployment is at approximately 5 or 6 %, the economy is at “full employment”, or the natural rate of unemployment.

This is when cyclical and seasonal unemployment are zero.

Unit 4 - Business Fluctuations

Macroeconomics

The Natural Rate of Unemployment

Keynesian economists claim that when unemployment is around 5 or 6%, then

further growth in the economy causes inflation.

Unit 4 - Business Fluctuations The Natural Rate of Unemployment

Classical and Austrian-school economists disagree. They believe that

inflation is caused by a rising money supply. we can do better than 5 or 6% unemployment. in the past, unemployment has been below 5%

while the economy grew, without causing inflation.

Unit 4 - Business Fluctuations

Unemployment Rates by States and Groups

For unemployment rates by states and demographic groups, see the CD (Bouman), Unit 4, Section 5.