Class Lecture Notes Unemployment, Inflation, and Business Cycle
Professor Shari Lyman, Ph.D.
Business Cycle
Business cycle is defined as the alternating periods of economic expansion and economic
recession.
The business cycle is made up of expansionary (growth, inflationary, upswings, positive) periods in
which:
1. b The overall price levels are increasing (inflation)
For healthy economic growth, the inflation should be creeping inflation.
2. b The unemployment levels are decreasing.
3. b The national output (GDP) is increasing.
The growth period will reach its highest point (peak), then the business cycle will enter a downturn.
The business cycle is made up of contractionary (slowdowns, downturn, recessionary, negative)
periods in which
1. b The overall price levels are decreasing (deflation)
2. b The unemployment levels are increasing.
3. b The national output (GDP) is decreasing.
The slowdown period will bottom out at its lowest point (trough), then the business cycle will enter
an upturn.
Unemployment
Unemployed is defined as:
actively seeking paid work
not currently engaged in paid work
at least age 16
Employment is working full or part time as a paid worker.
Unemployment rate is the percentage of the labor force that is not working, but actively seeking
work.
If unemployment is increasing, it is demonstrated as a downturn on the business cycle and a shift
inward to the left of the aggregate demand curve. when accompanied by decreasing prices and
decreasing GDP. b This type of unemployment can be resolved using traditional contractionary fiscal
and/or monetary policies.
Labor Force is the sum of the employed and the unemployed workers in the economy.
Discouraged worker is someone who is available for paid labor, but has given up looking for work.
Labor Force Participation Rate is the percentage of the working age population in the labor force.
The Three Main Categories of Unemployment
Frictional Unemployment is short term unemployment arising from the process of matching
workers with jobs. This is a household level (microeconomic) unemployment that is considered
very temporary.
Structural Unemployment is a persistent mismatch between skill sets and characteristics of
workers and the job requirements. This is a household level (microeconomic) unemployment that is
considered more permanent requiring retraining, re-skilling, and re-education of the labor unit.
However, if this type of obsolescence occurs on a large scale in a specific industry or group of
industries, then it may become a regional or national level (macroeconomic) unemployment that
requires government funding for education and training programs.
Natural Rate of Unemployment (Full-Employment Unemployment) is the sum of frictional
unemployment and structural unemployment. This is due to the natural changes in a dynamic
developing and growing economy.
Cyclical unemployment occurs when the macroeconomy enters a recessionary phase on the
business cycle due to a decrease in aggregate demand. This type of unemployment indicates the
economy is suffering loss in output. According to Keynes, this is when expansionary fiscal and/or
monetary policies would benefit an economy by stimulating demand to which supply can respond
positively.
Inflation
Inflation is a general increase in the overall price level.
The Three Main Categories (Types) of Inflation
Creeping inflation is a low-level, steady increase in overall price level that demonstrates a steady,
healthy growing economy. In the US economy, creeping inflation generally is considered any
inflation between 0% and 3%. This type of inflation allows for growth in the resource market and
the product market at a rate that can be accommodated with increases in demand and supply, as
well as slight increases in prices, including wages.
http://useconomy.about.com/od/inflationfaq/tp/Types-of-Inflation.htm
Galloping inflation is a fast-paced inflation at a rate of 10% or greater for the US economy. This
type of inflation is disruptive to both consumers and producers since prices are not easily
maintained or predicted.
http://useconomy.about.com/od/inflationfaq/tp/Types-of-Inflation.htm
Hyperinflation is a rapid increase in price levels at a rate of 50% or more. This is a very
destabilizing type of inflation that may create instability in the economy and the political system.
This type of inflation creates a vacuum in the social-political-economic system as seen during the
US Civil War, during the 1920s in Germany, in many Latin American countries in the 1980s, and
during 2004-2009 in Zimbabwe.
“Hyperinflation is when the prices of most goods and services skyrocket, usually more than 50% a
month. It usually starts when a country's Federal government begins printing money to pay for
fiscal spending. As the money supply increases, prices creep up as in regular inflation.
However, instead of tightening the money supply to lower inflation, the government keeps printing
more money to pay for spending. Once consumers realize what is happening, they expect inflation.
This causes them to buy more now to avoid paying a higher price later. This boosts demand,
causing inflation to spiral out of control. The only winners in hyperinflation are those who borrowed
before the hyperinflation. They find that higher prices makes their debt worth less by comparison,
until it is virtually wiped out.”
http://useconomy.about.com/od/inflationfaq/tp/Types-of-Inflation.htm
Hyperinflation may create a political vacuum in which leadership crumbles and new leaders such as
Adolf Hitler are able become the champion of stability and a good economy regardless of their other
dangerous rhetoric and violence.
Two Causes of Inflation
Demand-Pull Inflation is a general increase in the overall price level due to an increase in
aggregate demand.
This type of inflation is demonstrated by an outward shift to the right of the Aggregate Demand
curve. In small increments, it demonstrates creeping inflation which indicates a healthy, growing
economy. In larger increments, it may demonstrate galloping or hyperinflation which are
destabilizing to the economy.
Also, this type of inflation is demonstrated by the expansionary phase on the business cycle.
This type of inflation, if considered creeping inflation, is an indicator of a healthy, growing economy
due to the increases in price levels, decreases in unemployment, and the increases in GDP.
If this type of inflation becomes a problem, it can be resolved using traditional contractionary fiscal
and/or monetary policies.
Cost-Push Inflation is a general increase in the overall price level due to a decrease in aggregate
supply.
This type of inflation is demonstrated by an inward shift to the left of the Aggregate Supply curve
due to an increase in price and/or decrease in availability of a significant input (resource) into the
production process.
This type of inflation cannot be demonstrated on the business cycle.
This type of inflation is an indicator of an economy experiencing loss and economic challenges that
cannot be resolved with traditional fiscal and/or monetary expansionary or contractionary policies
due to the increases in price levels, increases in unemployment, and the decreases in GDP.
This type of inflation cannot be resolved using traditional fiscal and monetary policy tools. Cost-
Push Inflation can result in stagflation in which the government must step outside the realm of
economic policies and use diplomacy, political policies, military actions, and other resolutions.
http://useconomy.about.com/od/inflationfaq/tp/Types-of-Inflation.htm
