Economic Instability

1. Economic Instability Chapter 14

2. Chapter Essential Questions 14.1:What is a business cycle? Why is it important? 14.2: What are the different types of unemployment? 14.3: What is inflation? 14.4: What are the reasons for income inequality?

3. 14.1 Business Cycles and Fluctuations

4. I. Business Cycles A. Economic growth can be interrupted by business cycles i. The ups and downs of the real GDP B. Economists use indexes to check for the inevitable ups and downs of our economy.

5. II. Phases in the Business Cycle A. 1st phase: Recession • Period during which real GDP declines for two quarters in a row (6 months) i. Recession begins when the economy reaches a peak • Point where real GDP stops going up. ii. Recessions ends when economy reaches a trough • The turnaround point where the real GDP stops going down.

6. 5 15 0 A recession ends when an economy reaches its peak. • True • False

7. Phases continued…. B. 2nd Phase: Expansion i. Period of recovery from a recession. • Expansion continues until the economy reaches a new peak.

8. III. Business Cycles and the US A. When recessions become severe it is called a depression. • State of the economy where large numbers of people are out of work, shortages, etc. • The Great Depression in the 1930’s was the only depression in the 20th century.

9. IV. The Great Depression A. GDP dropped 50% B. Unemployment rose 800% from 1.6 million to 12.8 million. C. Average wage went from 55 cents/hour to 5 cents/hour D. Banks lost savings. (FDIC did not exist)

10. 20 Which of the following did not happen during the Depression? • Unemployment dropped • GDP dropped • Wages dropped • Banks failed

11. E. Causes of the Great Depression i. Uneven distribution of wealth ii. Availability of credit iii. Global Depression iv. High American Tariffs

12. V. Causes of the Business Cycle A. Capital Expenditures • When economy expands businesses invest in capital goods. Open up more plants and update equipment. B. Inventory Adjustments • Changes in the level of business inventory. Some business cut back when they feel a recession is coming. C. Innovation and Imitation • New inventions or products influence economic growth. • Imitating companies must compete, therefore invest more into business and economy.

13. …continued D. Monetary Factors • Credit and Loan policies allow economist to see how flexible interest rates are. Lower interest rates encourage businesses to invest money. E. External Shocks • Increases in oil, wars, international conflicts.

14. 14.1 EQ Q: What is a business cycle? Why is it important? A: A business cycle refers to the alternating increases and decreases in the level of economic activity. It is important because it allows consumers, businesses and the govt. to better plan their economic actions.

15. 14.2 Unemployment

16. I. Measuring Unemployment A. Full employment is an important goal for the American economy. B. The measure of joblessness is known as unemployment rate and it is measured closely in the economy. i. Unemployed: people available for work who made a specific effort to find a job during the past month. ii. Unemployment rate determined by number of unemployed divided by number of workers. iii. 150 million people employed. A one-tenth of one percent rise in unemployment means 150,000 people without a job.

17. 5 15 0 The Unemployment rate is determined by number of workers divided by number of unemployed. • True • False

18. II. Types of Unemployment A. Frictional Employment i. Workers who are between jobs for one reason or another. Ex: Moving, switching careers, etc. B. Structural Unemployment i. Fundamental change in the operation of the economy reduces demand for labor. Ex: VHS company, Portable CD Players lose consumer interest therefore go out of business or have to let people off.

19. C. Cyclical Unemployment i. Unemployment directly related to swings in the business cycle. Ex: During recession people cannot buy luxurious items therefore companies do not earn money and have to let people go. D. Seasonal Unemployment i. Related to changes in the weather or the demand for a product. Ex: Builders in the winter back east.

20. E. Technological Unemployment i. Workers are replaced by machines and other equipment that do their jobs. Ex: Factories.

21. 20 Which of the following is not a type of unemployment? • Seasonal • Cyclical • Technological • Educational • Frictional

22. III. Unemployment Goals A. Economist push for an unemployment rate below 4.5% B. In 2000, the unemployment rate reached a record 3.9%. C. Currently the unemployment rate is 4.7%.

23. 15 Replacing machines for workers is a part of technological unemployment. • True • False

24. 14.2 EQ Q: What are the different types of unemployment? A: Frictional Structural Cyclical Seasonal Technological

25. 14.3 Inflation

26. I. Inflation A. Inflation: increase in the level of prices B. Measuring Inflation • Change in price level __________________ x 100 Beginning price level

27. II. Measuring Inflation A. Economists select a market basket of goods and use the consumer price index or producer price index. Ex: If the CPI at the beginning of the year is 111 and at the end of the year it reaches 115. What would the inflation rate be? • (115-111) __________ = 3.6% 111

28. III. Degrees of Inflation A. Creeping Inflation • Inflation in the range of 1 to 3 percent B. Galloping Inflation • More intense form of inflation up to 300 percent. C. Hyper Inflation • Inflation in the range of 500 percent.

29. 20 Which of the following is not a degree of inflation? • Galloping Inflation • Hypoinflation • Creeping Inflation

30. IV. Causes of Inflation A. Demand-Pull Theory i. People try to buy more than businesses can produce therefore there is a shortage. a. Shortage = high demand = higher prices b. Prices are “pulled” up through “demand” B. Rising Input Costs i. Labor, products, and etc. costs more money. Ex: Labor union gives workers raise. Therefore company must raise prices to still make profit.

31. C. Unexpected Increase in External products Ex: The Middle East raises the price of oil which effects US gas stations. D. Chain Reaction i. Raise for workers cause businesses to raise prices, which cause other companies to raise prices, which cause other companies to match wages. And so on….

32. E. Federal Reserve and Money Supply i. Extra money will cause and demand-pull effect that drives up prices. ii. Ex: If gas goes up and there is no extra money given out by the Feds then people will have to buy less of something else.

33. 15 15 14 A raise in workers wages leads to a raise in product prices. • True • False

34. V. Consequences of Inflation A. The dollar loses value B. Change in spending habits C. People put money in long terms investments rather than short term items. • Buy a house in 1960 for $50,000. D. Disturbs the distribution of income. • Ex: Minimum Wage

35. 20 H_P_R_N_L_T_O_ • A U R U B Z I • L A S O S O A • F I E Y N I A • I I E F S W U

36. 14.3 EQ Q: What is inflation? A: Inflation is a rise in the general level of prices.

37. 14.4 Poverty and the Distribution of Income

38. I. The Distribution of Income A. The Lorenz Curve shows how the actual distribution of income differs from equal distribution. B. Since 1980 the distribution of income in the United States has become more unequal.

39. II. Reasons for Income Inequality A. Education • Education puts people in a better position to do higher paying / higher skilled jobs B. Wealth • Wealthy families send their kids to wealthy colleges or pass down family businesses. Harder to work from the bottom up.

40. C. Ability i. Everybody has different natural abilities. ii. Ex: Pro Athletes, actors, performers. D. Discrimination i. Although illegal, it still takes place. ii. Women make less then men. Ethnicity. Etc.

41. 20 Which of the following is not a reason for income inequality? • Education • Motivation • Wealth • Ability

42. III. Poverty A. Poverty Guidelines i. Annual dollar amounts used to evaluate the money income that families and individuals receive. ii. In 2003, the poverty was defined as a family of four making less than $18,400. -35 million Americans live in poverty.

43. IV. Antipoverty Programs A. Government provides welfare i. Economic and social programs that provide regular assistance from the government. B. Income Assistance i. Cash payments to blind, disabled, needy families, etc. C. General Assistance i. Food stamps, Medicaid.

44. Programs D. Social Service Programs i. Foster care, family planning, Boys and Girls club. E. Tax Credits i. Meeting certain income requirements F. Workfare i. Provides jobs. Assisting law enforcement, trash clean up, sanitation, etc.

45. 5 15 0 Cash payments to the disabled is a part of General Assistance. • True • False

46. 14.4 EQ Q: What are the reasons for income inequality? A: ability differences, education and training, and discrimination