Economic Growth The Business Cycle Unemployment Inflation Redistributive

Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation 8 CHAPTER Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide Introduction to Economic Growth and Instability End Show 8 -1 Copyright Mc. Graw-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 Previous Slide End Show 8 -2 Next Slide 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 Mc. Graw-Hill/Irwin, 2002

ECONOMIC GROWTH Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output End Show 8 -3 • Improved Products and Services • Added Leisure • Other Impacts Key Terms Previous Slide Growth in the United States Next Slide • Relative International Growth Rates Copyright Mc. Graw-Hill/Irwin, 2002

THE BUSINESS CYCLE Economic Growth The Business Cycle Phases of the Business Cycle PEAK Unemployment RECESSION Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide Time End Show 8 -4 Copyright Mc. Graw-Hill/Irwin, 2002 RECOVERY TH W GRO ND TRE Level of business activity Inflation TROUGH

THE BUSINESS CYCLE Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 -5 Next Slide Causation: A First Glance • Many Causation Theories • Cyclical Impact • Capital Goods • Consumer Durables • Service Industries • Nondurable Consumer Goods Copyright Mc. Graw-Hill/Irwin, 2002

UNEMPLOYMENT Economic Growth Measurement of Unemployment, 2000 The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Total Population 275, 400, 000 Under 16 and/or institutionalized 65, 800, 000 Not in labor force 68, 800, 000 135, 200, 000 Employed Previous Slide Next Slide End Show 8 -6 Unemployed Copyright Mc. Graw-Hill/Irwin, 2002 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 Key Terms Previous Slide Next Slide Part-Time Employment Discouraged Workers End Show 8 -7 Copyright Mc. Graw-Hill/Irwin, 2002

UNEMPLOYMENT Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 -8 Next Slide Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Full-Employment Rate of Unemployment Natural Rate of Unemployment (NRU) Copyright Mc. Graw-Hill/Irwin, 2002

UNEMPLOYMENT Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 -9 Next Slide Economic Costs of Unemployment 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. . . Approximately a 2% GDP Gap occurs Copyright Mc. Graw-Hill/Irwin, 2002

UNEMPLOYMENT Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 10 Next Slide Unequal Burdens of Unemployment • Occupation • Age • Race and Ethnicity • Gender • Education • Duration Noneconomic Costs International Comparisons Copyright Mc. Graw-Hill/Irwin, 2002

GLOBAL PERSPECTIVE Economic Growth The Business Cycle Unemployment Rates in Five Industrial Nations 1990 - 2000 15 France Inflation Redistributive Effects of Inflation Anticipated Inflation U. K. 10 Germany Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 11 U. S. Japan 5 Next Slide 0 1995 2000 Source: Economic Report of the President Copyright Mc. Graw-Hill/Irwin, 2002

INFLATION Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 12 Next Slide 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 Mc. Graw-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 Effects of Inflation on Output 5 France Key Terms Japan Previous Slide End Show 8 - 13 Next Slide 0 1995 Germany 2000 Source: Economic Report of the President Copyright Mc. Graw-Hill/Irwin, 2002

INFLATION Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 14 P Range 3 Redistributive Effects of Inflation 2 Inflation DEMAND-PULL INFLATION Range 1 an ge Unemployment Increases in Total Spending R The Business Cycle Types of Inflation Price level Economic Growth Fullemployment output Next Slide Qf Q Real domestic output & employment Copyright Mc. Graw-Hill/Irwin, 2002

INFLATION Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 15 Next Slide Types of Inflation DEMAND-PULL INFLATION COST-PUSH INFLATION • Rising Per-Unit Production Costs • Supply-Side Inflation • Supply Shocks • Complexities Copyright Mc. Graw-Hill/Irwin, 2002

Economic Growth The Business Cycle Unemployment REDISTRIBUTIVE EFFECTS OF INFLATION Nominal Income Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Real Income Anticipations Key Terms • Anticipated Inflation Previous Slide End Show 8 - 16 Next Slide • Unanticipated Inflation Copyright Mc. Graw-Hill/Irwin, 2002

Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 17 Next Slide REDISTRIBUTIVE EFFECTS OF INFLATION Who is Hurt by Inflation? • Fixed-Income Receivers • Savers • Creditors Copyright Mc. Graw-Hill/Irwin, 2002

Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 18 Next Slide REDISTRIBUTIVE EFFECTS OF INFLATION Who is Unaffected or Helped by Inflation? • Flexible-Income Receivers • Cost of Living Adjustments (COLAs) • Debtors Copyright Mc. Graw-Hill/Irwin, 2002

Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide End Show 8 - 19 Next Slide REDISTRIBUTIVE EFFECTS OF INFLATION Addenda • Deflation • Mixed Effects • Arbitrariness Copyright Mc. Graw-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 Previous Slide End Show 8 - 20 Next Slide + Nominal Interest Rate Copyright Mc. Graw-Hill/Irwin, 2002 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 Previous Slide End Show 8 - 21 Next Slide EFFECTS OF INFLATION ON OUTPUT • Cost-Push Inflation and Real Output • Demand-Pull Inflation and Real Output • Hyperinflation & Breakdown Chapter Conclusions Copyright Mc. Graw-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 Mc. Graw-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 Key Terms Previous Slide End Show 8 - 23 BUILDING THE AGGREGATE EXPENDITURES MODEL Next Slide Chapter 9 Copyright Mc. Graw-Hill/Irwin, 2002