Principles of Macroeconomics
February 26, 2014
Mariana Rangel Celis
NU ID 001189394
TA Carlos Casso
Homework 5: The Business Cycle, Unemployment, and Inflation
1. What is the definition of the business cycle? Draw the business cycle model. Identify the 4 phases of the business cycle, label the points of interest, and show the US economy where it is today. What is the definition of full employment RGDP? (AKA the natural rate of unemployment). What must be true before it can be stated that a country is in a recession?
The business cycle shows the alternating rises and declines in the level of economic activity, sometimes over several years.
The Natural Rate of Unemployment takes into account structural and frictional unemployment, and ignores cyclical unemployment. It represents the hypothetical unemployment rate consistent with the Real GDP in the long-run. Before stating that a country is in a recession, it must be true that there is a high unemployment rate, there are high wages, land and capital goods aren’t being fully used and there is a great demand for education.
2. What must be true to be counted as unemployed? What are the 3 types of unemployment and why does it matter? What is true about the full employment level of RGDP (the natural rate of unemployment) in terms of unemployment?
In order to be counted as unemployed, an individual must be 16 years or older, not institutionalized and he or she must be looking for a job. There are 3 types of unemployment:
Cyclical: employees are laid off because there are no employment opportunities.
Frictional: caused by frictions in the economy. It occurs when an employee decides to switch from one job to another one. It is short-term and voluntary.
Structural: specific skills and knowledge are no longer required in the labor market. Therefore, there are no job opportunities in those sectors.
3. If the unemployment rate goes up, is it necessarily bad news for the economy?
Mariana Rangel Celis
NU ID 001189394
TA Carlos Casso
Homework 5: The Business Cycle, Unemployment, and Inflation
1. What is the definition of the business cycle? Draw the business cycle model. Identify the 4 phases of the business cycle, label the points of interest, and show the US economy where it is today. What is the definition of full employment RGDP? (AKA the natural rate of unemployment). What must be true before it can be stated that a country is in a recession?
The business cycle shows the alternating rises and declines in the level of economic activity, sometimes over several years.
The Natural Rate of Unemployment takes into account structural and frictional unemployment, and ignores cyclical unemployment. It represents the hypothetical unemployment rate consistent with the Real GDP in the long-run. Before stating that a country is in a recession, it must be true that there is a high unemployment rate, there are high wages, land and capital goods aren’t being fully used and there is a great demand for education.
2. What must be true to be counted as unemployed? What are the 3 types of unemployment and why does it matter? What is true about the full employment level of RGDP (the natural rate of unemployment) in terms of unemployment?
In order to be counted as unemployed, an individual must be 16 years or older, not institutionalized and he or she must be looking for a job. There are 3 types of unemployment:
Cyclical: employees are laid off because there are no employment opportunities.
Frictional: caused by frictions in the economy. It occurs when an employee decides to switch from one job to another one. It is short-term and voluntary.
Structural: specific skills and knowledge are no longer required in the labor market. Therefore, there are no job opportunities in those sectors.
3. If the unemployment rate goes up, is it necessarily bad news for the economy?