macroeconomic mcgrowhill macro ch 9 19e use this one

Business Cycles, Unemployment, and Inflation 09 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc.. Chapter Objectives• The Business Cycle and its Primary Phases • H

Business Cycles, Unemployment,

and Inflation

09

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved.

Chapter Objectives

• The Business Cycle and its

Primary Phases

• How Unemployment and

Inflation are Measured

• The Types of Unemployment and Inflation and their Various Economic Impacts

The Business Cycle

• Alternating increases and decreases

in economic activity over time

• Phases of the business cycle

• Recession

• Trough

• Expansion

The Business Cycle

Trough

Trough

Grow th

Trend

The Business Cycle

U.S Recessions since 1950

Period Duration, Months

Depth (Decline in Real

Causation: A First Glance

• Business cycle fluctuations

• Economic shocks

• Prices are “sticky” downwards

• Economic response entails decreases in output and

employment

Causation: A First Glance

Phillips Curve

Under 16 and/or Institutionalized (71.4 million)

Not in labor force (81.7 million)

Employed (139.9 million)

Unemployed (14.3 million)

Unemployment rate =

14,265,000 154,142,000

X 100 = 9.3%

Unemployment rate =

# of unemployed labor force

X 100

Types of Unemployment

• Frictional unemployment

• Individuals searching for jobs or waiting to

take jobs soon

Definition of Full Employment

unemployment

or fall below the NRU

Economic Cost of Unemployment

Economic Cost of Unemployment Economic Cost of Unemployment

Economic Cost of Unemployment

Managerial and professional

Construction and extraction 2.17.6 19.7 4.6

Race and ethnicity:

African American

Hispanic

White

8.3 14.85.6 12.14.1 8.5Gender:

Women

Men 4.54.7 10.38.1

Education:**

Less than high school diploma

High school diploma only

College degree or more

7.1 14.64.4 9.72.0 4.6

Noneconomic Costs

• Loss of skills and loss of self-respect

• Plummeting morale

• Family disintegration

• Poverty and reduced hope

• Heightened racial and ethnic tensions

• Suicide, homicide, fatal heart attacks, mental illness

• Can lead to violent social and political change

Global Perspective

• General rise in the price level

• Inflation reduces the “purchasing

Inflation Rates in Five Industrial Nations

Inflation

Types of Inflation

• Demand-Pull inflation

• Excess spending relative to output

• Central bank issues too much money

• Cost-Push inflation

• Due to a rise in per-unit input costs

• Supply shocks

Types of Inflation

• Difficult to distinguish inflation types

• Types differ in sustainability

• Demand-pull continues as long as the excess spending continues

• Cost-push ends in a recession

• Core inflation

• Without food and energy goods

• Focuses on more stable prices

Redistribution Effects of Inflation

Percentage change in nominal income

Percentage change in price level



Who is Hurt by Inflation?

Who is Unaffected by Inflation?

Anticipated Inflation

• Real interest rate

• Rates adjusted for inflation

• Nominal interest rate

• Rates not adjusted for inflation

Anticipated Inflation

Nominal Interest Rate

Real Interest Rate

Inflation Premium

11%

5%

6%

Other Redistribution Issues

• Deflation

• Mixed effects

• Incomes may rise

• Fixed assets values may fall

• For fixed-rate mortgages, real debt declines

• Arbitrariness

Does Inflation Affect Output?

real income

best

• Extraordinarily rapid inflation

• Devastates an economy

• Businesses don’t know what to charge

• Consumers don’t know what to pay

• Money becomes worthless

• Zimbabwe’s 14.9 billion percent

inflation in 2008

The Yugoslavian Hyperinflation

In the early 1990's the former country of Yugoslavia experienced a period of unrestrained monetray expansion Consistent with economic theory, this monetary expansion resulted in rampant inflation that reached unprecedented levels prior to the collapse of the entire Yugoslavian monetary authority (former Yugloslavia became Croatia, Bosnia, Serbia, Kosovo…….).

This presentation seeks to document this inflation in a manner that is easily accessible to students and other interested

people

The material for this presentation is based on the work of:

•Norman K Thurston - Assistant Professor of Economics - Brigham Young University

A Starting Place

We start in 1991 with the 50 Dinar note trading in international currency markets for US$1 for 50 Dinar

It is important to comment that inflation was already taking its toll, with four zeros having been removed from the currency in 1990

Thus:

=

The Beginning of the End

The hyperinflation that will last two years and will destroy the Yugoslavian monetary

authority has begun

By January of 1992 inflation has eroded the exchange rate such that the US Dollar is trading at one for 10000 Dinar even though another zero had been dropped from the currency

Building Speed

By early 1993 inflation had eroded the value of the orginal 50 Dinar note by a factor of one million Thus:

The Fall of 1993

By fall of 1993 it would take ONE TRILLION

of the original 50 Dinar notes to purchase one dollar.

Christmas Eve - December 1993

The 500 Billion Dinar Note is released

January 1994

In January 1994 the Dinar is abandoned and the

German Mark becomes the currency of

Yugoslavia By the end of the inflation, the printing house had reached its physical limit and was

incapable of printing money fast enough to keep pace with prices

Thus:

The Stock Market and the

Economy

• real interest rate

• nominal interest rate

• deflation

• hyperinflation