Week 4 Notes and Study Guide
2. Although economists explain the business cycle in terms of underlying causal factors such as major innovations, productivity shocks, money creation, and fi nancial crises, they generally agree that changes in the level of total spending are the immediate causes of fl uctuating real output and employment.
3. The business cycle affects all sectors of the economy, though in varying ways and degrees. The cycle has greater effects on output and employment in the capital goods and durable consumer goods industries than in the services and nondurable goods industries.
4. Economists distinguish between frictional, structural, and cyclical unemployment. The full-employment or natural rate of unemployment, which is made up of frictional and structural unemployment, is currently between 4 and
5 percent. The presence of part-time and discouraged workers makes it diffi cult to measure unemployment accurately.
5. The GDP gap, which can be either a positive or a negative value, is found by subtracting potential GDP from actual
GDP. The economic cost of unemployment, as measured by the GDP gap, consists of the goods and services forgone by society when its resources are involuntarily idle. Okun’s law suggests that every 1-percentage-point increase in unemployment above the natural rate causes an additional
2 percent negative GDP gap.
6. Infl ation is a rise in the general price level and is measured in the United States by the Consumer Price Index (CPI).
When infl ation occurs, each dollar of income will buy fewer goods and services than before. That is, infl ation reduces the purchasing power of money.
7. Unemployment rates and infl ation rates vary widely