(BQ) Part 1 book Economic the basic has contents: Introduction, demand and supply - The basics of the market economy; market equilibrium and shifts, how businesses work, competition and market power, government and the economy, the first step into macroeconomics, inflation, growth, business cycles, unemployment, and inflation.
www.downloadslide.com economics The Basics Michael Mandel 3rd Edition Succeed in this course! look inside for: + How it Works + Economic Milestones + Spotlights + Links to the Blog Is technological change raising living standards? save time study smarter is Motivation is Momentum WHAT DO YOU NEED TO KNOW ABOUT THE ECONOMICS of Healthcare? is Moving Forward is McGraw-Hill www.downloadslide.com www.downloadslide.com The McGraw-Hill Economics Series ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics: The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Economics First Edition Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition Frank, Bernanke, Antonovics, and Heffetz Streamlined Editions: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition ECONOMICS OF SOCIAL ISSUES Guell Issues in Economics Today Eighth Edition Register and Grimes Economics of Social Issues Twenty-First Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition MANAGERIAL ECONOMICS Baye and Prince Managerial Economics and Business Strategy Ninth Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition Thomas and Maurice Managerial Economics Twelfth Edition INTERMEDIATE ECONOMICS Bernheim and Whinston Microeconomics Second Edition Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition Frank Microeconomics and Behavior Ninth Edition ADVANCED ECONOMICS Romer Advanced Macroeconomics Fourth Edition MONEY AND BANKING Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition URBAN ECONOMICS O’Sullivan Urban Economics Eighth Edition LABOR ECONOMICS Borjas Labor Economics Seventh Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition PUBLIC FINANCE Rosen and Gayer Public Finance Tenth Edition ENVIRONMENTAL ECONOMICS Field and Field Environmental Economics: An Introduction Seventh Edition INTERNATIONAL ECONOMICS Appleyard and Field International Economics Eighth Edition Pugel International Economics Sixteenth Edition www.downloadslide.com Third Editon Michael Mandel Chief Economic Strategist, Progressive Policy Institute Senior Fellow, Mack Institute for Innovation Management at The Wharton School of the University of Pennsylvania Former Chief Economist, BusinessWeek www.downloadslide.com ECONOMICS: THE BASICS, THIRD EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2018 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2012 and 2009 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper RMN 21 20 19 18 17 ISBN 978-0-07-802179-4 MHID 0-07-802179-0 Chief Product Officer, SVP Products & Markets: G Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Betsy Whalen Managing Director: Susan Gouijnstook Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Product Developer: Jamie Koch Lead Product Developer: Michele Janicek Marketing Manager: Virgil Lloyd Marketing Coordinator: Brittany Bernholdt Director of Digital Content Development: Douglas Ruby Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Kathryn D Wright, Bruce Gin, and Karen Jozefowicz Buyer: Sandy Ludovissy Design: Matt Diamond Content Licensing Specialists: Lori Slattery and Melissa Homer Cover Image: © maxkrasnov/Getty Images Compositor: Aptara®, Inc Printer: LSC Communications All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Names: Mandel, Michael J., author Title: Economics : the basics / Michael Mandel, Chief Economist, Visible Economy LLC, Former Chief Economist, BusinessWeek, Senior Fellow, Mack Center for Technological Innovation at The Wharton School of the University of Pennsylvania Description: Third Edition | Dubuque : McGraw-Hill/Education, 2018 | Series: Mcgraw-Hill/Irwin series in economics | Revised edition of the author’s Economics, 2012 Identifiers: LCCN 2016044887| ISBN 9780078021794 (alk paper) | ISBN 0078021790 (alk paper) Subjects: LCSH: Economics Classification: LCC HB171.5 M262 2018 | DDC 330 dc23 LC record available at https://lccn.loc.gov/2016044887 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered www.downloadslide.com DEDICATION To Elliot and Laura v www.downloadslide.com ABOUT THE AUTHOR Michael Mandel Michael Mandel delights in translating complex economic concepts into understandable, relevant, and exciting examples for a broad audience He received his PhD in economics from Harvard University, where he studied the intricacies of game theory He is currently Senior Fellow at the Mack Institute for Innovation Management at The Wharton School of the University of Pennsylvania, as well as Chief Economic Strategist at the Progressive Policy Institute in Washington, DC He regularly testifies before Congress and writes about the policy implications of innovation, regulation, and growth, both domestically and internationally Previously, Mandel was Chief Economist of BusinessWeek (now Bloomberg Businessweek), where he regularly tackled such hot topics as the economics of immigration, the power of technological innovation to drive growth, the importance of foreign trade, and consequences of tax policy Mandel’s columns and cover stories have won numerous awards, including the Excellence in Economic Journalism Award from the Institute on Political Journalism, given to the writer “who has done the most to shape public opinion by giving the public a better understanding of economic theory and reality”; the Gerald Loeb Award, the most prestigious prize for economic and financial journalism; and the Economic Journalist of the Year Award from the World Leadership Forum He was also named one of the top 100 business journalists of the 20th century Mandel is the author of several books, including Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think and The High-Risk Society He also helped revise the 1995 edition of Paul Samuelson’s classic economics textbook His economics news blog, designed especially for intro-level economics students, can be found at economicsthebasics.com Mandel lives in Washington, DC, not far from the White House and the Capitol vi www.downloadslide.com PREFACE When I started developing the first edition of this textbook, I had two goals First, I wanted to clearly explain basic economic principles, using the tools that I learned during my years as an economist and as an economic journalist Second, I aimed to provide an introduction to the forces of globalization, technology, and financial markets that are driving the vibrant, but increasingly perplexing economy that we all live in This edition adds an additional goal—to help provide an economic context for the Great Recession and the recovery that followed This event, or rather series of events, has had an enormous impact on everyone. What you see here is the result of my effort to achieve these three goals The first half of the textbook, which includes the introduction and 11 core chapters, presents the essential economic concepts I designed this section to be accessible to people with a wide range of economic and mathematical backgrounds The second half of the textbook covers topics such as financial markets, globalization, technological change, health care, and environmental economics In this edition, I consistently use fresh examples from today’s global economy The textbook is intended to provide a window into what is happening in the economy right now, including globalization, innovation, and the aftermath of the financial crisis Fundamental Goals To summarize, I want to accomplish three goals with this textbook: • To help you acquire the basic tools of economics, enabling you to understand today’s world in a new way. • To give you better insights into the forces of globalization, technology, and financial markets that are so important for today and our future • To provide an economic context for the Great Recession, and how it affected the economy for years afterward Distinguishing Features and Organization This textbook emphasizes the main forces shaping today’s economy: technological change, globalization, and the evolution of financial markets The basic tools of economics are presented in the first 12 chapters to lay a foundation for understanding how the economy evolves and changes vii www.downloadslide.com viii Preface Current and Real Examples Economic concepts and ideas are illustrated in re- cent newsworthy events to help you see that economics is in action everywhere around you Each chapter starts with a brief vignette that applies the concept to be learned to real-world events so you can see how the chapter concept relates back to everyday life Clear and Simple Graphs This book’s simple, easy-to-follow graphs translate complex economic concepts into effective visual tools for the beginning student Historical Context Economic Milestone boxes sprinkled throughout each chapter provide interesting historical facts and references that relate to the material at hand Assurance of Learning Ready Many educational institutions today are focused on the notion of assurance of learning, an important element of many accreditation standards Economics: The Basics, 3/e is designed specifically to support your assurance of learning initiatives with a simple yet powerful solution Each chapter in the book begins with a list of numbered learning objectives, which appear throughout the chapter as well as in the end-of-chapter assignments Every Test Bank question for Economics: The Basics, 3/e maps to a specific chapter learning objective in the textbook as well as topic area, Bloom’s Taxonomy level, and AACSB skill area You can use our Test Bank software, TestGen, or Connect Economics to easily search for learning objectives that directly relate to the learning objectives for your course You can then use the reporting features of TestGen to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy AACSB Statement McGraw-Hill/Irwin is a proud corporate member of AACSB International Understanding the importance and value of AACSB accreditation, Economics: The Basics, 3/e recognizes the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the Test Bank and end-of-chapter material to the general knowledge and skill guidelines in the AACSB standards The statements contained in Economics: The Basics, 3/e are provided only as a guide for the users of this textbook The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty While Economics: The Basics, 3/e and the teaching package make no claim of any specific AACSB qualification or evaluation, we have, within Economics: The Basics, 3/e, labeled selected questions according to the six general knowledge and skills areas Changes in the Third Edition M Series Mandel’s 3rd edition is now part of the M Series at McGraw-Hill These products are unified through a magazine-like layout, succinct coverage, studentfriendly examples, and innovative digital support M: Economics, The Basics is written specifically for the one semester survey course, designed to convey core concepts and principles at a level that is approachable for the widest possible audience. www.downloadslide.com The narrative in all chapters has been completely evaluated and reworked where necessary Content and data updates to the figures, tables, and chapter narrative have been made throughout the book to reflect news events In addition, select Spotlight and How It Works boxes have been updated or replaced to provide scenarios from today’s economic landscape Additionally, all of the end-of-chapter problems are assignable through McGraw-Hill Connect, and select problems are available as algorithmic variations (for more information on Connect please refer to pages xiv–xv Chapter-by-chapter changes are as follows: Chapter Introduction was substantially revised to reflect the events of the Great Recession and the recovery that followed Figure 1.1 was updated, as were all of the figures and tables in the appendix (“The Basics of Graphs”) Problems were updated with new, real-world data. Chapter Demand and Supply: The Basics of the Market Economy now uses updated examples and boxes, including the Spotlight “The Great Ethanol Boom.” New examples were added to the section on “New Markets.” Chapter Market Equilibrium and Shifts contains an updated chapter-opening vignette that details several economically significant events of April 2016 A box on highway construction was replaced by one on Atlantic City and excess supply of casinos More material was added on the recent changes in the housing market Figure 3.2 was updated, as were several problems. Chapter How Businesses Work updates all the company examples in the text and in the boxes, such as the Spotlight boxes “Cut Your Tree, Mister?” and “Boeing’s Long-Term Decision.” Chapter Competition and Market Power features data updates to the Spotlight boxes on the furniture and auto industries Additionally, the How It Works boxes on well-known brand names and performers as monopolistic competitors have been updated Problems were updated to include current data. Chapter Government and the Economy was systematically updated, including boxes and problems Figures 6.1 and 6.2 were updated Coverage of government intervention in response to the Great Recession is now scattered throughout the chapter. Chapter The First Step into Macroeconomics was revised to reflect the economy since the Great Recession Table 7.1 and Figures 7.1, 7.2, 7.3, and 7.4 were updated to the most recent data Boxes such as “Tracking the Global Corporation” were updated Problems were updated to include the most recent data. Chapter Inflation has substantially revised data throughout to reflect changes in the economy Additionally, updates have been made to the How it Works boxes to accurately reflect changes in the economy to housing, air travel, and oil The Spotlight box “Which Movie Earned the Most Money” was updated to reflect 2015 hit movies such as Star Wars: The Force Awakens The problems were extensively revised to reflect new data. Preface ix www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation In this chapter, we will look at the ups and downs of economies We will show how an economy can deviate from a smooth upward path of potential gross domestic product (GDP) We will define unemployment, one of the key measures of an economy’s health, and examine the balance between unemployment and inflation And we will look at recessions: what they are, what kind of damage they can do, and what causes them Then in the two chapters that follow, we will show how a government can use the tools of fiscal and monetary policy to help moderate the swings of an economy POTENTIAL VERSUS REAL GDP LO10-1 FIGURE 10.1 The Path of Potential GDP As time goes on, potential GDP rises smoothly, reflecting the growth of productivity and the growth of the labor force B Output (more _ _ >) 168 A Potential GDP Time (more _ _ >) Imagine you’re driving along a smooth highway, moving at the same speed as the other cars on the road, so there’s no pressure to speed up or slow down You’re listening to music, talking with your friends in the car, and enjoying the ride Life is good Or you could be driving like a maniac— labor force and the long-term growth rate of speeding up to 90 miles per hour to pass other productivity: LO10-1 cars, then suddenly jamming on the brakes just Potential growth rate = Long-term labor before you crash into the back of a truck or run Compare and conforce growth rate + Long-term productivity into a pothole trast potential GDP An economy is not a car, but it is useful to growth rate and real GDP think about what it would mean for an economy So if the labor force is growing at percent to move along a smooth and sustainable path If per year, and productivity per worker is rising at percent an economy is not jarred by outside shocks, if workers are fully per year, then potential GDP (which is adjusted for inflation) employed but not overworked, if companies can sell everyis rising at percent per year thing they make without strain, and if there are no sudden stops Estimating potential GDP is like drawing a line on a and starts, then output will g enerally rise smoothly over time map to show where you are going Economists project poPotential GDP is the output of an econtential GDP into the future to forecast the sustainable omy along this smooth path of growth, POTENTIAL GDP growth path for an economy If we plot potential GDP on a which assumes no strains on production The output of the graph (see Figure 10.1), it generally looks like a smooth line or unused resources (a bit later in this economy along a smooth path of growth, chapter, we’ll explain more precisely The Output Gap assuming no strains what we mean by this) Potential GDP is But the real GDP of an economy need not follow the same on production or measured in inflation-adjusted dollars smooth path as potential GDP at all At any moment, real unused resources like real GDP, and the rate at which it GDP may be higher or lower than potential GDP, just as a POTENTIAL rises is the p otential growth rate car may be moving faster or slower than the flow of traffic GROWTH RATE on a road The output gap is the difference between real and The rate at which Potential Growth potential GDP potential GDP The output gap is negative when real GDP is increases; also the less than potential GDP, and it is positive when real GDP The potential growth rate is driven by combination of is greater than potential GDP (see Figure 10.2) the factors we saw in the preceding the long-term growth Real GDP can be lower than potential GDP if there are chapter: growth of the labor force, rate of the labor force unused resources in the economy, such as workers who don’t availability of better-educated and more plus the long-term have jobs, or workers who have jobs that don’t use their eduhighly skilled workers, investments in growth rate of cation (like a PhD flipping hamburgers) Other unused physical capital, availability of raw maproductivity resources include idle machines and empty office buildings terials, and increases in knowledge We OUTPUT GAP During the Great Recession year of 2009, the output gap can also think of the potential growth The difference was around percent of GDP This was a negative output rate over the long run as the combinabetween real and gap—that is, real GDP was less than potential GDP potential GDP tion of the long-term growth rate of the www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation FIGURE 10.2 Potential versus Real GDP The output gap measures the difference between potential and real GDP When real GDP is greater than potential GDP, the output gap is positive When real GDP is less than potential GDP, the output gap is negative Output (increasing _ _ >) Real GDP Negative output gap Potential GDP Positive output gap Time (increasing _ _ >) But it’s also possible for real output to exceed potential GDP How? Imagine an economy consisting of five students In theory, they can study at an even pace all semester That would be the path of potential GDP However, in reality, three of these students don’t work very hard—they wake up late and spend more time at parties than they studying In this economy, the actual output of work will fall short of potential, and the output gap will be negative Then comes the end of the semester Suddenly, the three slackers pump themselves full of caffeine and stay up around the clock to finish their assignments and study for exams The output gap is positive during this period because their output exceeds their potential As a result, their output is very high, but it’s not sustainable As we will see, there is a parallel between these students and the economy UNEMPLOYMENT LO10-2 When real GDP drops below potential GDP, it means economic activity has slowed Companies lay off workers or just don’t hire As a result, more workers become unemployed—that is, they don’t have jobs but are actively looking for work Unemployment is a key measure of the ups and downs of an economy The Bureau of Labor Statistics (BLS) e stimates the number of unemployed workers each month based on a nationwide survey of 60,000 people of 169 v arious demographic characteristics UNEMPLOYED The BLS also estimates the number of A description of indivi employed workers each month The duals who not have labor force is the sum of the emjobs but are actively ployed workers and the unemployed looking for work workers LABOR FORCE The unemployment rate is the perThe part of the adult centage of the labor force that is unempopulation that is ployed Note that the unemployment either working or rate doesn’t count people who are not actively looking for looking for jobs because they have a job become discouraged and given up Nor UNEMPLOYMENT RATE does it count people who are not workThe percentage of the ing because they are going to school, labor force that is taking care of children, or simply goofunemployed ing off Finally, the unemployment rate UNDEREMPLOYED does not count the underemployed— Individuals who take people who are working part-time jobs below their skill or education levels or because they can’t find a full-time job who are working partor people who take jobs below their time involuntarily skill or education levels while they look FRICTIONAL for something better UNEMPLOYMENT In April 2016, the unemployment Periods of temporary rate was 5.0 percent, meaning that unemployment that 5.0 percent of the labor force did not correspond to short have jobs. With almost 160 million gaps between jobs people in the U.S labor force (as of April 2016), a 5.0 percent unemployment rate translates into almost million unemployed Americans Figure 10.3 shows how the unemployment rate has varied since 1960 Over that stretch, the annual average unemployment rate has gone as high as 9.7 percent in 1982 and as low as 3.5 percent in 1969 Despite the severity of the Great Recession, the annual unemployment rate hit only 9.3 percent in 2009 and 9.6 percent in 2010 (These are the annual averages; in particular months, the unemployment rate may have been higher or lower.) Types of Unemployment As we saw in Chapter 3, markets typically tend toward an equilibrium in which the quantity supplied equals the quantity demanded If that were true in the labor market, everyone would have a job who wanted one But the unemployment rate never falls to zero in this way—not in the United States or in any other country Economists have long puzzled over this fact LO10-2 and have come up with a variety of explanations Define the One reason unemployment is never zero is that unemployment the unemployment rate includes frictional unemployment—periods of temporary unemrate, and distinguish ployment that correspond to short gaps between between the jobs Frictional unemployment arises because different types of there are usually at least a couple of weeks unemployment between the end of one job and the beginning of www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation FIGURE 10.3 This chart shows the percentage of the labor force that did not have jobs but was actively looking for work Source: Bureau of Labor Statistics, www.bls.gov Unemployment Rate, 1960–2015 12% Unemployment Rate (Percent) 170 10% 8% 6% 4% 2% 99 20 02 20 05 20 08 20 11 20 15 96 19 93 19 90 19 87 19 19 84 81 19 78 19 75 19 72 19 69 19 66 19 19 63 19 19 60 0% Year STRUCTURAL UNEMPLOYMENT A situation in which there is a mismatch between the skills of unemployed workers and the needs of employers with unfilled jobs CYCLICAL UNEMPLOYMENT Large jumps in the unemployment rate that are tied directly to business cycles STICKY WAGES Wages that don’t change much in the short term in response to economic conditions the next one or between graduating from school and finding your first job Even in the tightest labor market—or maybe especially in a tight labor market—people who are searching for work may actually turn some jobs down in hopes of getting a better one This type of unemployment is also considered frictional unemployment Another reason unemployment persists is structural unemployment Structural unemployment occurs when there is a mismatch between the skills of unemployed workers and the needs of employers with unfilled jobs For example, if a local factory is closing, the laid-off workers are probably not immediately qualified to take jobs as nurses even if the local hospital is hiring The faster the economy changes, the more structural unemployment there will be Economic Milestone JOB 2009 BIGGEST CUTBACKS But frictional and structural unemployment not fully explain some of the big swings we see in the unemployment rate Especially striking are the big jumps upward in some years, which we call cyclical unemployment—large jumps in unemployment tied directly to slowdowns in economic growth For example, in Figure 10.3 we see the annual unemployment rate remained above percent for six years, from 2009 to 2014. The Unemployment Puzzle In general, when the quantity supplied exceeds the quantity demanded in a market, the price falls In the labor market, the price is the wage So the unemployment p uzzle is really a wage puzzle: When the unemployment rate is high, why doesn’t the wage drop? One possible answer is sticky wages That is, wages are sticky when they don’t change much in the short-term in response to economic conditions For one thing, workers might not want to accept wage cuts in periods of high unemployment because they expect the labor market to quickly recover In Figure 10.3, we see that the Sometimes, a milestone is negative; the biggest one-year loss in private-sector jobs since the Great Depression came in 2009 In that year, private businesses reduced their employment by almost million jobs Roughly 1.6 million of those cuts came from manufacturing and another 1.1 million were in construction What’s more, these were not temporary layoffs: Many of those jobs were gone for good because companies permanently closed factories and moved production overseas The result was an increase in structural unemployment www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation 171 INFLATION TENDS TO RISE IF THE UNEMPLOYMENT RATE IS BELOW THE NAIRU INFLATION TENDS TO FALL IF THE UNEMPLOYMENT RATE IS ABOVE THE NAIRU HOW IT WORKS: LOCAL UNEMPLOYMENT The unemployment number that’s usually quoted is the unemployment rate for the entire country But the Bureau of Labor Statistics also publishes the unemployment rates for many local areas These give the percentages of the local labor force who are out of work and looking for a job Some areas have unemployment rates that are much lower than the national average For example, in October 2015, the unemployment rate in Bismarck, North Dakota, was only 1.7 percent Bismarck has a recession-resistant economy because it is the state capital of North Dakota and because of the oil boom In contrast, El Centro, California, a poor metropolitan area near the border with Mexico, had an unemployment rate in excess of 20 percent from 2008 through the beginning of 2016 El Centro didn’t lose that many jobs in the recession, but its labor force kept growing, sending unemployment higher To see the local unemployment rate for your area, go to the Bureau of Labor Statistics website (www.bls gov/news.release/pdf/metro.pdf) Source: Bureau of Labor Statistics Inflation and Potential GDP unemployment rate often goes up and then does, in fact, come down within a couple of years Another reason for sticky wages is that roughly 11 percent of the workforce belongs to unions, which are organized groups of workers that bargain collectively with employers The contracts set the wages for the workers, making them harder to cut if things turn down (We will further discuss labor markets in Chapter 16.) THE TRADE-OFF BETWEEN UNEMPLOYMENT AND INFLATION LO10-3 We just looked at the case in which actual GDP falls below potential GDP and more people end up without jobs But what about the opposite case? As actual GDP rises above potenUNION tial GDP, economic activity increases A group of workers and unemployment falls That’s good who bargain collecBut the problem with increased ecotively with employers nomic activity is that inflation can rise; for wages, benefits, that is, prices and wages can start and working increasing at a faster rate conditions Why should high GDP and low unemployment be linked to rising inflation? Here’s one way to think about this: If the number of unemployed workers is low, it’s harder for employers to find people to fill job openings As a result, workers feel they have more power to ask for wage increases Those wage increases drive up costs for companies and force them to raise prices The higher prices eat away at the value of wages, and workers have to demand even bigger wage increases to keep up with inflation The result is the sort of wage–price spiral described in Chapter In other words, if an economy runs too “hot”—that is, if GDP is too high relative to potential GDP—we get rising inflation If an economy runs too “cold”—if GDP is too low relative to potential GDP—we get unemployment As we will see in Chapters 11 and 12, one of the most important tasks for economic policymakers such as the chair of the Federal Reserve is to find the right balance between inflation and unemployment Earlier in this section, we gave a basic description of potential GDP Now that we have seen the link among inflation, GDP, and unemployment, here is a more precise definition: Potential GDP = The maximum economic output an economy can sustain without increasing the inflation rate When the economy is operating at potential, the rate of inflation is neither rising nor falling This level of potential GDP is the point at which the forces of supply and demand are well balanced, given the LO10-3 existing labor force, technology, and stock of capital That is why the potential growth rate Explain the tradeis sometimes called the speed limit of the off between economy If actual growth exceeds potential unemployment growth for too long, the economy overheats and inflation and inflation rises www.downloadslide.com 172 CH 10 Business Cycles, Unemployment, and Inflation NATURAL RATE OF UNEMPLOYMENT The Natural Rate of Unemployment We can watch the unemployment rate to see whether economic output is approaching a level that causes inflation to accelerate Milton Friedman, a University of Chicago economist who NONACCELERATING won the Nobel Prize in Economics in INFLATION RATE OF 1976, defined the natural rate of UNEMPLOYMENT (NAIRU) unemployment as the level at which Also called the natural inflation is more or less stable When rate of unemployment the unemployment rate is below the natural rate, inflation tends to increase, RECESSION A significant decline in and when the unemployment rate is economic activity above the natural rate, inflation tends spread across the to fall Another, rather long name for economy, lasting more the natural rate of unemployment is the than a few months nonaccelerating inflation rate of unPEAK employment, or NAIRU for short The date a recession The NAIRU, or natural rate, is a key starts—the high point indicator of how hot an economy can of an economy before run without pushing up inflation As of its decline late 2015, the NAIRU was 5.0 percent, TROUGH as estimated by the Congressional The date on which a Budget Office recession ends and For example, in 1983, the NAIRU the economy starts was about percent and the actual unheading up again employment rate was 9.6 percent With EXPANSION so many people out of work and cutting The period of time back on their spending, demand was from a recession weak and businesses found it difficult trough all the way to the next peak to raise prices In fact, the inflation rate fell sharply in 1983 BUSINESS CYCLE On the other hand, in 2000 the acThe recurring pattern tual unemployment rate was percent, of recession and expansion lower than the NAIRU, which was about percent With lots of people employed and spending their wages, demand was strong and businesses were able to raise prices As a result, the inflation rate rose in 2000 When the unemployment rate is at or near the NAIRU, then it is likely that the economy is operating at potential That’s one reason the unemployment rate is such a closely watched economic number The level of unemployment in the economy at which inflation is more or less stable Also called NAIRU RECESSIONS LO10-4 Small deviations of real GDP from potential GDP or of the unemployment rate from the NAIRU don’t matter much—just as you can drive slightly faster or slower than the flow of traffic on a highway without causing any big problems But large deviations from the potential growth path—especially deviations downward—are a HOW IT WORKS: CALLING THE RECESSION When is the U.S economy in recession? That is, when is a decline in the nation’s economic activity significant enough to qualify for this official designation? Oddly, government statisticians not make this decision Instead a private research group—the National Bureau of Economic Research (NBER)—decides the official dates on which a recession starts and ends The NBER is a Cambridge, Massachusetts–based organization that was founded in the 1920s to study the ups and downs of business cycles Today, whenever there is an economic downturn, the Business Cycle Dating Committee of the NBER—made up of several prominent economists—meets to decide the official beginning and end dates of a recession, based on key figures like employment and retail sales problem Think about what happens if your car stalls in the middle of a busy highway Similarly, if GDP is running below its potential, everything in the economy suffers It’s harder to find a job, profits aren’t as high, malls are empty, and tax revenues fall short of predictions The world is a gloomier place If a downward deviation from potential growth becomes bad enough, an economy can actually shrink A recession is defined as a significant decline in economic activity spread across an economy, lasting more than a few months (Who identifies the official date when a recession starts? See “How it Works: Calling the Recession.”) The Business Cycle Although all recessions are different, all display similar patterns The peak is the date on which a recession starts— that’s when the economy hits a high point and starts heading downward The date on which the recession ends and the economy starts heading up again is called the trough The expansion is the time from the trough, through recovery, and all the way to the next peak This pattern of recession and expansion is known as the business cycle; see Figure 10.4 for a closer look at a typical cycle Despite its unusual severity, the Great LO10-4 Recession shows the same basic pattern as past Define recession, downturns The Great Recession officially started in December 2007, even though housand discuss the ing prices started dropping as early as 2006 impact of recesThe recession officially ended in June 2009, 18 sions on workers months after it started, making it the longest, and businesses nastiest downturn since the Great Depression www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation FIGURE 10.4 A Typical Business Cycle The peak marks the start of the recession, and the trough marks its end A full business cycle runs from one peak to the next Output (increasing _ _ >) Peak Real GDP Peak Trough Expansion Business cycle Time (increasing _ _ >) Figure 10.5 tracks real GDP through the recession, with the peak in the fourth quarter of 2007 The graph shows us that the initial stages of the downturn were fairly mild But after Lehman Brothers went bankrupt in mid-September 2008, the U.S economy went into a steep plunge As we will see in the next two chapters, this was the period when the Federal Reserve, under Chairman Ben 17,000 16,700 16,400 16,100 15,800 15,500 15,200 Peak, December 2007 14,900 14,600 14,300 Trough, June 2009 14,000 06I 06II 06III 06IV 07I 07II 07III 07IV 08I 08II 08III 08IV 09I 09II 09III 09IV 10I 10II 10III 10IV 11I 11II 11III 11IV 12I 12II 12III 12IV 13I 13II 13III 13IV 14I 14II 14III 14IV 15I 15II 15III 15IV Source: Bureau of Economic Analysis, www.bea.gov Who suffers the most from a recession? Without question, unemployed workers and their families suffer the most pain, especially those who not have a savings cushion From economic, political, and human points of view, a lengthy and deep recession can be a major disaster for individuals who lose their jobs The reason is simple: During a recession, if you lose your job, it’s hard to find a new one As the economy shrinks, factories close and companies stop hiring And even after a recession is over, it can take months or years for the labor market to revive As a result, people who lose their jobs in recessions can find themselves unemployed for months or even years That’s long enough to outlast their savings and their ability to hold onto their homes (see Figure 10.6) The Great Recession: Real GDP Billions of 2009 Dollars The figure shows the peak and trough of the latest business cycle The line is real GDP in 2009 dollars ernanke, and the federal government, under President B George W Bush and President Barack Obama, took unprecedented monetary and fiscal policy measures to prop up the economy During this stretch, there was widespread concern that even enormous government intervention was not going to be enough However, Figure 10.5 shows us that the government actions eventually seemed to be effective in stopping the plunge The low point for real GDP came in the second quarter of 2009 We can see that real GDP, a measure of the output of the economy, did not exceed its previous peak until 2011 The Impact of Recession on Workers Recession FIGURE 10.5 173 Quarters www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation FIGURE 10.6 The figure shows the path of private-sector employment during the Great Recession and the recovery that followed Source: Bureau of Labor Statistics, www.bls.gov The Great Recession: Private-Sector Jobs 122,000 120,000 118,000 Private Sector Employment (Thousands of Jobs) 174 116,000 114,000 112,000 110,000 108,000 106,000 104,000 06I 06II 06III 06IV 07I 07II 07III 07IV 08I 08II 08III 08IV 09I 09II 09III 09IV 10I 10II 10III 10IV 11I 11II 11III 11IV 12I 12II 12III 12IV 13I 13II 13III 13IV 14I 14II 14III 14IV 15I 15II 15III 15IV 102,000 Quarters The Impact of Recession on Businesses Recessions hurt businesses as well as workers As an economy slows, the demand schedules of most businesses shift to the left For the same price, the quantity demanded falls, and therefore the quantity supplied also falls Figure 10.7 shows the supply and demand schedules for a typical market in an economy—say, for cars During a recession, consumers have less money to spend on new cars, and that causes the demand schedule to shift to the left As a result, production of cars falls from Q to Q′ The auto companies are SPOTLIGHT: RECESSION-RESISTANT INDUSTRIES In any recession, a few sectors usually avoid the general downturn and keep expanding For example, entertainment spending is somewhat recession-resistant because people want to have fun to take their minds off their economic problems Movie ticket sales held up well during the recession years of 2008 and 2009, spurred by the release of films such as The Dark Knight (though ticket sales did fall off in 2010, when the top-grossing film was the less-than-stellar Toy Story 3) Another recession-resistant industry is health care People keep getting sick whether the economy is up or down Moreover, much of health care spending is funded by the federal government, which can keep spending even in a downturn by borrowing money As a result, health care employment typically keeps increasing even when other parts of the economy are shrinking From December 2007 to December 2010, for example, hospitals, physicians’ offices, and other health care businesses added roughly 800,000 jobs, while the rest of the private sector lost 7.5 million jobs © Ryan McVay/Getty Images www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation FIGURE 10.7 The Effect of Recession on Car Companies In a recession, demand for cars falls, and the demand curve shifts left That reduces the quantity demanded and supplied for cars and typically causes car companies to offer customers better deals—that is, cheaper prices Price of Cars Supply curve for cars P P′ Demand curve for cars before the recession Demand curve for cars during the recession Q′ Q Quantity of Cars Demanded and Supplied forced to offer discounts and special deals, so the price falls from P to P′ In fact, this is exactly what happened in the Great Recession Motor vehicle sales collapsed to the point where General Motors and Chrysler were forced to declare bankruptcy and accept bailouts from the federal government TABLE 10.1 175 But companies don’t simply cut back on current production In fact, all sorts of businesses—big banks, the momand-pop store at the corner—also cut back sharply on expansion and their plans for upgrades in recessions Any spending they can postpone, they will That’s why recessions are usually accompanied by a rapid drop in purchases of capital equipment, such as machinery and computers, and an equally noticeable decline in the construction of commercial office buildings, factories, and other nonresidential structures In fact, an essential characteristic of a recession is that it is broad based, so that the slowdown is spread across most of the economy Table 10.1 lists some of the typical areas that are hit by recessions, including home construction and business profits True, some industries tend to hold up better than others in recessions (see “Spotlight: Recession- Resistant Industries”) Nevertheless, these are the exception, not the rule WHY DO RECESSIONS HAPPEN? LO10-5 If you see a car broken down by the side of the road, you don’t know what happened It could be that the driver was unlucky and hit a bad pothole Or perhaps the driver neglected essential maintenance and the vehicle overheated Or maybe the car simply LO10-5 ran out of gas We face the same uncertainty when it comes List the possible to recessions An economy may stall for a numcauses of ber of different reasons The question of what recession causes recessions is one of the longest-running What Typically Falls in Recessions A recession is a broad decline in economic activity In addition to the fall in real GDP, here are some other aspects of the economy that decline in most recessions Aspect of the Economy What Happens in a Recession Employment Businesses lay off workers and cut back on hiring Retail sales Many stores see falling sales, and some close Home construction Fewer homes are built Housing prices Home prices drop Household income, adjusted for inflation Many households see their real incomes drop Business profits Businesses make less money Business investment Businesses spend less on physical capital, such as trucks, computers, and buildings Industrial production (the output of factories) Factories produce less Tax revenues Governments collect less tax www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation debates among economists, going back to the Great Depression For our purposes here, we just need to realize that recessions can have different triggers, as Table 10.2 shows Let’s look at some of these: problems in financial markets, negative supply shifts, negative d emand shifts, and inflation fighting Problems in Financial Markets Recessions caused by a financial crisis are rare but challenging Financial markets let individuals and businesses borrow money to finance everything from homes and cars to college educations When financial markets stop working well, it becomes harder to borrow When it becomes harder to borrow, the economy slows The Great Recession was caused, in large part, by problems in financial markets As we’ll see in Chapter 13, many consumers borrowed more than they should have, especially to buy homes In particular, low-income homebuyers borrowed more than they could afford to pay back—the so-called subprime loans And many banks lent more than they should have, helping fuel the housing boom But, eventually, the boom came to an end and was followed by a bust Several big Wall Street firms either failed or were forced to sell themselves Many homebuyers could not pay their mortgages After the bust, most banks tightened up their lending standards As it became harder for consumers to borrow, there was less money available to buy homes and cars It became harder for small businesses to raise the money they needed to operate and expand The result was a sharp slowdown in the economy Negative Supply Shifts Another significant cause of recessions is an unexpected negative supply shift, which moves the supply curve to the left for a broad array of markets The classic example of such a negative shock is a sudden rise in the price of oil For TABLE 10.2 FIGURE 10.8 The Impact of a Negative Supply Shift A rise in the price of oil can increase transportation costs for groceries and cause a shift in the supply curve to the left That, in turn, reduces the quantity demanded and supplied If this affects enough markets, it can cause overall economic output to decline Supply curve with higher oil price Price of Groceries 176 Original supply curve P P′ Demand curve Q′ Q Quantity of Groceries Demanded and Supplied example, the 1973 oil price shock, described in Chapter 6, helped trigger the recession of 1973–1975 Similarly, Saddam Hussein’s invasion of Kuwait in 1990, which pushed oil prices up, was one of the main reasons the U.S economy slipped into recession that year And the oil price increase of 2007 and 2008 helped slow the U.S economy going into the early stages of the Great Recession An oil price increase is particularly harmful because it is a broad supply shift that affects most markets in an economy By making energy and transportation more costly, the Recent Recessions and Their Causes This table lists some of the causes of recent recessions Recession Start Date Type of Recession Main Cause November 1973 Negative supply shift January 1980 Negative supply shift, inflation fighting Sharp rise in oil prices combined with interest rate hikes by the Federal Reserve Sharp rise in oil prices July 1981 Inflation fighting Interest rate hikes by the Federal Reserve July 1990 Negative supply shift, inflation fighting Oil price hike caused by Iraqi invasion of Kuwait, combined with interest rate hikes by the Federal Reserve March 2001 Negative demand shift Decline in tech spending by business December 2007 Financial crisis Excess borrowing www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation SPOTLIGHT: DO HURRICANES CAUSE RECESSIONS? Can a natural disaster such as a hurricane or an earthquake cause a recession? Perhaps, but history suggests that it is not likely in the United States The worst recent natural disaster to hit the United States was Hurricane Katrina in 2005, which almost completely flooded New Orleans and much of the Mississippi coast The storm caused at least $40 billion in losses and perhaps a lot more At the same time, damage to the oil wells and refineries along the Gulf Coast drove gasoline prices up across the country But despite the devastation in New Orleans, GDP growth for the United States barely slowed in the third and fourth quarters of 2005 There are several reasons for the lack of overall economic impact First, New Orleans, although a major city, contributed only a relatively small share to the whole U.S economy Second, many businesses with operations in New Orleans were able to move their production to other parts of the country And third, the rebuilding effort, which included billions for repairing and upgrading dikes and levees, actually added to the level of economic activity in the United States higher price of oil causes the supply schedule in many individual markets to shift left Consider, for example, the market for grocery items These items are shipped to supermarkets from all over the country, so an increase in the cost of fuel translates directly into rising costs for supermarkets As Figure 10.8 shows, a negative supply shift in a market tends to decrease the quantity demanded and increase the price If the higher price of oil affected only the grocery market, that would not cause a recession by itself After all, grocery purchases, even though they account for billions of dollars of sales each year, are just a small part of the economy To cause a recession, a negative shift has to affect many markets simultaneously In that case, it can decrease the output of the whole economy and push up inflation That’s exactly what happened after the oil price shock of 1973: The economy went into a combination of recession and inflation called stagflation In every market where energy was an important cost, the supply curve shifted to the left—including the labor market because higher gasoline prices made commuting more expensive for most people Another example of a negative supply shift is a terrorist attack that forces businesses and governments to adopt tighter security measures For example, suppose every box and container imported into the United States had to be checked for bombs Such measures would make both shipping and transportation more expensive The result would 177 be a leftward shift in supply schedules over a broad range of markets, with the resulting fall in quantity and increase in prices that precipitate a recession (To see an example of a narrow supply shift, take a look at “Spotlight: Do Hurricanes Cause Recessions?”) Negative Demand Shifts A sudden and unexpected drop in demand can also cause a recession Possibly the best example of a recession driven by a negative demand shift was the recession of 2001, which was caused primarily by a decline in business spending on computers, communications equipment, and other information technology gear Until 2000, companies’ spending on computers and information technology had been soaring for several different reasons First, the dawning of the Internet age had created a surge of start-up dot-com companies, all of which had to spend heavily on computer equipment to get their operations up and running Second, businesses were scared of the “Y2K bug,” which was the threat that older computer systems and programs would crash when the clock turned to January 1, 2000 As a result, many companies spent large sums of money replacing their old computers and programs Third, telecom companies were spending billions laying down new fiber-optic cable to handle all the future online traffic they expected But these sources of demand evaporated Most dot-com companies failed January 1, 2000, came and went (without a major hitch, as it turned out), and the need to fix the Y2K problem was over And it turned out that the telecom companies had overspent because Internet traffic did not rise as fast as they expected (though Internet traffic did eventually soar). So businesses, which spent $225 billon on computers and communications equipment in 2000, cut back sharply in 2001 and kept cutting By 2003, their spending on information technology hardware was down to $160 billion This decline in demand helped trigger widespread layoffs The unemployment rate in the San Jose, California, area—where major Silicon Valley tech companies such as Sun and Cisco are based—jumped from 2.5 percent in 2000 to 8.5 percent just two years later Worldcom, a major telephone and Internet provider, went bankrupt in 2002, along with a host of smaller companies All told, the “tech bust,” as it was called, led to the 2001 recession It was not a lengthy recession—only eight months—but it took a long time for jobs to recover We can imagine other scenarios for a recession driven by a decline in demand For example, a deadly flu epidemic that kept people from shopping would reduce demand sharply, though it would probably also cut supply because many workplaces would close down as employees became ill Inflation Fighting Let’s come now to the final important cause of the recession: inflation fighting If you run too fast and get overheated, you have to slow down for a while to catch your www.downloadslide.com 178 CH 10 Business Cycles, Unemployment, and Inflation breath Sometimes, the economy gets into a similar situation: If output runs above potential for too long, the economy overheats and inflation rises, as discussed earlier When that happens, economic policymakers at the Federal Reserve—the country’s central bank—have to take inflationfighting steps to slow growth Sometimes, they slow growth so much that the result is a recession For example, in 1980 and 1981, the inflation rate was running at 13.5 percent and 10.3 percent, respectively That was way too high So Paul Volcker, who was chairman of the Federal Reserve at that point, applied the brakes To bring down inflation, he needed to get the unemployment rate above the NAIRU—which was about percent at the time That is, he had to intentionally force unemployment way up to reduce inflation That’s exactly what Volcker did He raised interest rates so high that businesses and consumers pulled back from borrowing Purchases of homes and cars plunged, and the unemployment rate skyrocketed He achieved his goal of reducing inflation—but the result was a deep recession that put millions of people out of work We have not had a recession caused by inflation fighting since 1981–1982 But if prices start to increase at a rapid rate, the Federal Reserve could very well raise interest rates to slow the economy CONCLUSION Market economies don’t always grow at a steady rate Sometimes, they grow too fast for a period, creating the conditions in which inflation can get out of control Other times, market economies shrink, turning into the unpleasant stretch that economists call a recession The ups and downs of economies described in this chapter will never go away But they can be made less harmful by appropriate policy responses, as we will see in the next two chapters 10 SUMMARY Potential GDP is the output of an economy along a smooth path of growth, which assumes no strains on the economy or unused resources Real GDP can be higher or lower than potential GDP The difference between the two is known as the output gap (LO10-1) When real GDP drops below potential GDP, businesses cut back on hiring The result is a rise in the unemployment rate—the percentage of the workforce that wants to work but cannot find jobs Three types of unemployment are frictional, structural, and cyclical (LO10-2) If the unemployment rate rises above the natural rate of unemployment—also called the NAIRU—the inflation rate falls If the unemployment rate drops below the NAIRU, the inflation rate rises (LO10-3) A recession is a significant decline in economic activity spread across an economy, lasting more than a few months The beginning of a recession is called the peak, and the end of a recession is the trough Recessions can hurt both workers and businesses (LO10-4) Recessions can have several different causes These include problems in financial markets, negative supply shifts, negative demand shifts, and inflation fighting (LO10-5) KEY TERMS AND CONCEPTS potential GDP frictional unemployment NAIRU potential growth rate structural unemployment recession output gap cyclical unemployment peak unemployed sticky wages trough labor force unions expansion unemployment rate natural rate of unemployment business cycle underemployed www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation 179 PROBLEMS Are the following situations more consistent with a positive output gap or a negative output gap? (LO10-1) a) b) c) d) Workers in a factory are putting in lots of overtime The shopping mall seems empty on a Saturday afternoon The roads are so crowded during rush hour that you have to leave early for work You apply for a new job, and there are plenty of other applicants Do the following events increase or decrease potential GDP? (LO10-1) a) b) c) d) A decline in the number of new immigrants entering the country A decrease in the purchases of new computers by businesses The discovery of a new oil field in Pennsylvania The discovery of a cheaper way of generating energy from sunlight The following table gives the potential GDP and real GDP for a very small economy, both measured in 2009 dollars (LO10-2) Year Real GDP (2009 Dollars) Potential GDP (2009 Dollars) Output Gap 2011 100 100 2012 107 105 2013 110 110 2014 113 115 a) Fill in the column for the output gap b) Would you expect the unemployment rate to be higher in 2012 or 2014? Explain c) In which year would you expect it to be easiest to find a job? (Assume that the NAIRU is the same each year.) A man used to work for pay, but he is currently attending community college in the evening to get a degree, while taking care of his children during the day We would count him in the category of (LO10-2) a) unemployed b) underemployed c) employed d) neither employed nor unemployed Say whether each of the following is more likely to be a case of frictional, structural, or cyclical unemployment (LO10-2) a) You graduate from college, and it takes you a month to find a job b) A furniture maker closes a factory in North Carolina and moves production to China The laid-off factory workers have trouble finding new jobs because other furniture companies are doing the same thing c) A slowdown in sales causes the local department store to lay off workers d) There are plenty of job advertisements for nurses but few for factory workers www.downloadslide.com 180 CH 10 Business Cycles, Unemployment, and Inflation Suppose the NAIRU is percent, and the current unemployment rate is 4.5 percent Are the following statements true or false? (LO10-3) a) The inflation rate is likely to fall in future months b) Real GDP is likely higher than potential GDP c) We can find jobs for more people without increasing inflation Some historic inflation and unemployment figures for the United States are presented here (LO10-3) Year Inflation Rate (%) Unemployment Rate (%) 1996 3.0 5.4 1997 2.3 4.9 1998 1.6 4.5 1999 2.2 4.2 2000 3.4 4.0 2001 2.8 4.7 a) In what years does the inflation rate rise compared to the previous year? b) What are the unemployment rates for the years when inflation rises? c) Based on these data, was the NAIRU greater or less than percent during this period? Explain The following table gives real GDP for a small economy going through a business cycle (LO10-4) Year Real GDP (2009 Dollars) 2010 100 2011 104 2012 103 2013 106 2014 109 2015 112 2016 111 2017 110 a) Which years are peaks? b) What are the starting and ending dates of the recession? c) How many years does the expansion last? Recessions affect many aspects of the economy For each of the following economic quantities, say whether it rises or falls during a typical recession (LO10-4) a) b) c) d) Construction of new hotels Tax revenues Airline workers Workers who are overqualified for their current jobs www.downloadslide.com CH 10 Business Cycles, Unemployment, and Inflation 10 Here are several economic events that could potentially help trigger a recession Say which category each one falls into: negative supply shift, negative demand shift, inflation fighting, or problems in financial markets (LO10-5) a) b) c) d) War in the Middle East destroys oil fields in Saudi Arabia China suddenly cuts off exports to the United States Inflation accelerates sharply to 10 percent a year Mortgages become much harder to get because banks become less willing to lend 181 www.downloadslide.com © Pixtal/AGE Fotostock ... CONCLUSION 11 4 CH 07 THE FIRST STEP INTO MACROECONOMICS 11 8 MEASURING THE ECONOMY 12 0 The Basics of Gross Domestic Product 12 1 The Components of GDP 12 1 No Double-Counting 12 1 UNDERSTANDING GDP 12 2... chapter-ending problems and the How It Works box on global catchup Table 17 .1 and Figures 17 .1, 17 .2, 17 .3, 17 .4, 17 .5, 17 .6, 17 .7, 17 .8, and 17 .9 have been updated as well. Chapter 18 Economics of Retirement... DISCRIMINATION 311 CONCLUSION 312 CH 18 ECONOMICS OF RETIREMENT AND HEALTH CARE 316 THE BASICS OF RETIREMENT 318 The Life Cycle Theory of Retirement 318 Problems with the Life Cycle Theory 318 Sources