Chapter 10: The Business Cycle

Question 1

What is macroeconomics?

Answer 1

The study of aggregate economic behavior — the economy as a whole.

Question 2

What is the business cycle?

Answer 2

Alternating periods of economic growth and contraction.

Question 3

What are the three basic macroeconomic performance measures?

Answer 3

Output (GDP), unemployment, and inflation.

Question 4

What is GDP?

Answer 4

Gross Domestic Product — the total value of final goods and services produced within a nation’s borders in a given time period.

Question 5

What is nominal GDP?

Answer 5

GDP measured in current prices.

Question 6

What is real GDP?

Answer 6

Inflation-adjusted GDP measured in constant prices.

Question 7

Why is real GDP used instead of nominal GDP?

Answer 7

Because real GDP accounts for inflation and better reflects actual changes in output.

Question 8

How does real GDP behave over time?

Answer 8

It increases in steps and stumbles, not smooth increments (erratic growth).

Question 9

What is a recession?

Answer 9

A decline in real GDP for two or more consecutive quarters.

Question 10

How many recessions has the U.S. had since WWII?

Answer 10

13

Question 11

What ended the Great Depression?

Answer 11

World War II — it greatly increased demand and output.

Question 12

How much did real GDP fall during the Great Depression?

Answer 12

Nearly 30% from 1929 to 1933.

Question 13

What is the labor force?

Answer 13

All persons over age 16 who are working or actively seeking work.

Question 14

What is the unemployment rate?

Answer 14

The percentage of the labor force that is jobless and actively seeking work.

Question 15

What are the four types of unemployment?

Answer 15

Seasonal, frictional, structural, and cyclical.

Question 16

What is full employment?

Answer 16

The lowest unemployment rate compatible with price stability (around 4–6%).

Question 17

Why is zero unemployment not a policy goal?

Answer 17

Some unemployment is natural and unavoidable.

Question 18

What are some social effects of unemployment?

Answer 18

Increased stress, reduced income, health issues, higher divorce rates, crime.

Question 19

How many divorces result from each 1% increase in unemployment?

Answer 19

Approximately 10,000 additional divorces.

Question 20

What is inflation?

Answer 20

A rise in the average level of prices.

Question 21

What is deflation?

Answer 21

A decrease in the average level of prices.

Question 22

What is a relative price?

Answer 22

The price of one good compared to another.

Question 23

What is the CPI?

Answer 23

Consumer Price Index — measures average change in price of consumer goods.

Question 24

How is CPI used to calculate inflation?

Answer 24

By comparing the current market basket cost to the base period (1982–84).

Question 25

What is the inflation rate?

Answer 25

The annual percentage increase in the average price level.

Question 26

What is nominal income?

Answer 26

Income measured in current dollars.

Question 27

What is real income?

Answer 27

Income adjusted for inflation (purchasing power).

Question 28

How does inflation redistribute income?

Answer 28

It helps some people and hurts others depending on what they buy and earn.

Question 29

What are the three redistribution effects of inflation?

Answer 29

Price effects, income effects, wealth effects.

Question 30

How can inflation act like a tax?

Answer 30

It reduces purchasing power, redistributing wealth without legislation.

Question 31

What is price stability?

Answer 31

The absence of significant changes in the average price level.

Question 32

Why is the inflation target 3% and not 0%?

Answer 32

Because 0% may increase unemployment; 3% accommodates quality changes and market dynamics.

Question 33

What agency measures CPI and inflation?

Answer 33

The Bureau of Labor Statistics (BLS).