macroeconomic mcgrowhill macro ch 9 19e use this one

09 Business Cycles, Unemployment, and Inflation 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 • LO1 in economic activity over time Phases of the business cycle • Peak • Recession • Trough • Expansion 9-3 The Business Cycle Peak Rec ess io an si on h t w o Gr n Re ces sio n Ex pa Peak ns i on d Tren Trough Ex p Level of real output Peak Trough Time LO1 9-4 The Business Cycle U.S Recessions since 1950 Period Duration, Months Depth (Decline in Real Output) 1953-54 10 -2.6% 1957-58 -3.7 1960-61 10 -1.1 1969-70 11 -0.2 1973-75 16 -3.2 1980 -2.2 1981-82 16 -2.9 1990-91 -1.4 2001 -0.4 2007-09 18 -3.7 Source: National Bureau of Economic Research, http://www.nber.org and Minneapolis Federal Reserve Bank, http://www.minneapolisfed.org Output data are in 2000 dollars LO1 9-5 Causation: A First Glance • Business cycle fluctuations • Economic shocks • Prices are “sticky” downwards • Economic response entails decreases in output and employment LO1 9-6 Causation: A First Glance • Causes of shocks • Irregular innovation • Productivity changes • Monetary factors • Political events • Financial instability • Example: Recession of 2007 LO1 9-7 Cyclical Impact • Durable goods affected most • Capital goods • Consumer durables • Nondurable consumer goods affected less • Services • Food and clothing LO1 9-8 Unemployment • Twin Problems of the Business Cycle – Unemployment – Inflation • Measurement of Unemployment • Labor Force • Unemployment Rate – Part-Time Employment – Discouraged Workers Unemployment Rate = W 7.2 Unemployed Labor Force x 100 Phillips Curve Anticipated Inflation 6% 11% = + 5% Nominal Interest Rate LO3 Inflation Premium Real Interest Rate 9-32 Other Redistribution Issues • Deflation • Mixed effects • Incomes may rise • Fixed assets values may fall • For fixed-rate mortgages, real debt • LO3 declines Arbitrariness 9-33 Does Inflation Affect Output? • Cost-Push inflation • Reduces real output • Redistributes a decreased level of • LO3 real income Demand-Pull inflation • One view is that zero inflation is best • Another view is that mild inflation is best 9-34 Hyperinflation • 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 LO3 9-35 Unemployment • Twin Problems of the Business Cycle – Unemployment – Inflation • Measurement of Unemployment • Labor Force • Unemployment Rate – Part-Time Employment – Discouraged Workers Unemployment Rate = W 7.2 Unemployed Labor Force x 100 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 •www.banknoteworld.com - Images •Steve Hanke, Wall Street Journal, April 28, 1999                  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:                                                                   =                                                                    or, e = US$1/50 Dinar 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 Thus:                                                                    =                                                                    Building Speed By early 1993 inflation had eroded the value of the orginal 50 Dinar note by a factor of one million Thus:                                                                    =                                                                    or, e = US$1/(1,000,000) 50 Dinar                                                                   The Fall of 1993 By fall of 1993 it would take ONE TRILLION of the original 50 Dinar notes to purchase one dollar Thus:                                                                    =                                                                    or, e = US$1/(1,000,000,000,000) 50 Dinar                  Chanukah - December 1993 Monthly inflation reaches 300 Million Percent Nine zeros are removed form the currency Thus:                                                                    =                                                                    or, e = US$1/(1,000,000,000,000) 50 Dinar (Thats 50 Trillion Dinar) Christmas Eve - December 1993 The 500 Billion Dinar Note is released Thus:                                                                    =                                                                    or, e = US$1/(100,000,000,000,000,000,000,000,000) 50 Dinar (5000 Septillion Dinar)                                                                  Enough to cover the entire surface of the earth 1,988,116,573 times!!!! By lunchtime, the value of the 500 Billion Dinar Note has fallen by half By Christmas morning it is worthless                                                                                                                                                                                                                                                                              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 • Stock prices changing • Wealth effect • Investment effect • Typical changes lead to weak effects • Stock market bubbles • Huge unwarranted rises in stock prices • Excessive optimism and frenzied buying • Can be detrimental to an economy 9-45 Key Terms • • • • • • • • • • • • business cycle peak recession trough expansion labor force unemployment rate discouraged workers frictional unemployment structural unemployment cyclical unemployment full-employment rate of unemployment • natural rate of unemployment (NRU) • potential output • GDP gap • • • • • • • • • • • • • • • Okun’s law inflation Consumer Price Index (CPI) 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 ... Recessions since 195 0 Period Duration, Months Depth (Decline in Real Output) 195 3-54 10 -2.6% 195 7-58 -3.7 196 0-61 10 -1.1 196 9-70 11 -0.2 197 3-75 16 -3.2 198 0 -2.2 198 1-82 16 -2 .9 199 0 -91 -1.4 2001... weeks LO3 2007 20 09 4.6% 9. 3% 2.1 4.6 7.6 19. 7 15.7 24.3 29. 4 39. 5 13 .9 21.8 4.1 9. 6 4.0 7.5 8.3 14.8 5.6 12.1 4.1 8.5 4.5 8.1 4.7 10.3 7.1 14.6 4.4 9. 7 2.0 4.6 1.5 4.7 9- 19 Noneconomic Costs... • Can vary over time • Demographic changes • Changing job search methods • Public policy changes • Actual unemployment can be above or fall below the NRU LO3 9- 14 Economic Cost of Unemployment