Chapter 09 – Business Cycles, Unemployment, and Inflation
9-1
CHAPTER 09
Business Cycles, Unemployment, and Inflation
A. Short-Answer, Essays, and Problems
1. What is meant by the term business cycle as described by economists?
2. Describe the four phases of the business cycle.
3. “In the last four months, GDP has been declining and many sectors have shown a contraction in business
activity. Still, employment has remained constant. We are currently in a recession.” Evaluate this
statement.
4. How is the severity of a recession measured? How severe was the recession of 2007–2009 compared with
other recessions since 1950?
5. How does the size of the 2007–2009 recession compare with the Great Depression of the 1930s?
6. What phase of the business cycle is our economy experiencing at the present time? Justify your answer.
7. What are five economic shocks that may cause business cycles?
8. Briefly describe the economic conditions that contributed to the severe recession of 2007–2009.
There was excessive money growth that contributed to the rise in housing prices and overvaluation of that
sector of the economy. The burst of prices in the housing market and resulting defaults in the mortgage
market created substantial financial instability because some financial investments were based on the value
of mortgages. The instability created a freeze in credit markets that reduced consumer and business
confidence and lead to reduced spending by businesses and households. [text: E p. 528; MA p. 172]
9. What appears to be the immediate cause of most changes in the business cycle from the perspective of most
economists?
10. “The increasing importance of durable goods has made our economy more vulnerable to cyclical
fluctuations.” Explain and evaluate.
11. Which types of industries are hit hardest by a recession? Explain.
12. In the table below are statistics showing the labor force and total employment in month 1 and month 2 of
the same year. Make the computations necessary to complete the table. (Number of persons is in
thousands.)
Month 1 Month 2
Labor force 136,297 137,065
Employed 129,558 129,526
Unemployed _____ _____
Unemployment rate (%) _____ _____
Chapter 09 – Business Cycles, Unemployment, and Inflation
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13. In the table below are statistics showing the labor force and total employment during year 1 and year 5.
Make the computations necessary to complete the table. (Number of persons is in thousands.)
Year 1 Year 5
Labor force 95,450 108,250
Employed 90,325 100,830
Unemployed _____ _____
Unemployment rate (%) _____ _____
(a) How is it possible that both employment and unemployment increased?
(b) Would you say that year 5 was a year of full employment?
(c) Why is the task of maintaining full employment over the years more than just a problem of finding
jobs for those who happen to be unemployed at any given time?
14. In the table below are statistics showing the civilian non-institutional population, the civilian labor force
and total employment in year 1 and year 2. Make the computations necessary to complete the table.
(Number of persons is in thousands.)
Year 1 Year 5
Civilian non-institutional population 209,699 211,864
Civilian labor force 140,862 141,815
Employed 135,208 135,973
Unemployed _____ _____
Unemployment rate
(to one decimal place) _____ _____
15. If the population is 267 million, the labor force is 136 million, and the number measured as unemployed is
6.8 million, what is the rate of unemployment?
16. Use the following data to calculate: (a) the size of the labor force and (b) the official unemployment rate.
Total population 1500; population under age 16 and institutionalized, 360; not in labor force, 450;
unemployed, 69; workers with part-time jobs who are looking for full-time jobs, 30.
17. What are two criticisms of the unemployment rate? How do these criticisms relate to the overstating or
understating of the unemployment rate?
18. Explain the differences among the frictional, structural, and cyclical forms of unemployment.
19. Name the type of unemployment occurring in each of the causes below and explain your answer.
(a) Frank recently lost his job as the computer manufacturing company he works for recently downsized
after poor sales and poor performance of the economy during the last year.
(b) Julie just recently graduated from college and is spending the summer traveling before she begins a job
with a consulting firm in the fall.
(c) Tom recently lost his job as the steel manufacturing firm he worked for moved their plant overseas.
The other steel plants in the nation have been also been following this trend.
(d) Susan recently left her marketing job at a local bank because she found that finance interests her more.
She is currently looking for a job as a financial consultant.
20. Define the “full–employment” or “natural” rate of unemployment and give its approximate percentage rate
as economists currently define it.
21. “The economic cost of unemployment is measured by the GDP gap.” Explain this statement.
22. What is Okun’s law? Give an example of how it works.
23. Discuss the unequal burden of unemployment for different demographic groups in the United States.
24. Describe the personal and social costs of unemployment.
Chapter 09 – Business Cycles, Unemployment, and Inflation
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25. What is the consumer price index? How is it different from the GDP price index?
26. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions. Calculate to one decimal place.
Year CPI
1 160
2 165
3 170
4 177
(a) What was the percentage rise in prices between years 1 and 2?
(b) What was the percentage rise in prices between years 2 and 3?
(c) What was the percentage rise in prices between years 3 and 4?
27. Calculate the rate of inflation between Year 1 and Year 2. The price index in Year 1 was 124.0. It was
130.7 in Year 2.
28. The table below shows the price index in the economy at the end of four different years. (a) What is the
rate of inflation in years 2, 3, and 4? (b) Using the “rule of 70,” how many years would it take for the
prices to double at each of these three inflation rates?
Year
Price index Rate of inflation
Years to double
1 100
2 108 _____ _____
3 120 _____ _____
4 132 _____ _____
29. Inflation is frequently described as “too much money chasing too few goods.” Is this an acceptable
definition?
30. What is “demand–pull” inflation?
31. Describe cost-push inflation and its major source.
32. (Consider This) How was the practice of clipping coins during feudalism contributing to inflation? Who
benefited from this inflation?
33. What is core inflation? Why is it used?
34. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions.
Year Nominal income CPI
1 $3166 100
2 3402 114
3 3774 108
4 3989 112
(a) Find real income in year 4.
(b) What was the percentage rise in prices between years 1 and 3?
(c) What was the percentage rise in prices between years 2 and 4?
(d) What was the increase in real income from year 3 to year 4 in percentage?
35. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions.
Year Nominal income CPI
1 $50,000 100
2 60,000 110
Chapter 09 – Business Cycles, Unemployment, and Inflation
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3 70,000 115
4 80,000 120
(a) Find real income in year 2.
(b) What was the percentage rise in prices between years 2 and 3?
(c) What was the percentage rise in prices between years 3 and 4?
(d) What was the increase in real income from year 3 to year 4 in percentage?
36. Assume that nominal income is $35,000 and the price index is 1.20 in year 1. In year 2, nominal income
rises to $38,000 and the price index rises to 1.25. What was the percentage change in real income from
year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the
percentage change in real income and the absolute change in real income using the approximation formula
and using the more precise method with index numbers.
37. Explain the difference between real and nominal income. How can you get an approximation of the
percentage change in real income from one time period to another?
38. “Unexpected inflation is more beneficial to those who save than those who borrow.” Evaluate this
statement. How does your answer change if the inflation is expected?
39. “Inflation is a harsh and arbitrary form of taxation.” Do you agree? If so, who pays this tax?
40. Someone says to you: “Inflation benefits the rich and hurts the poor” and asks for your assessment as an
economist. What would be your response?
41. Explain the difference between nominal and real interest rates.
42. How does unanticipated deflation affect incomes, debts, and savings?
43. Why are there mixed effects from unexpected inflation for most individuals?
44. What are the effects of cost-push inflation on real output?
45. Some economists believe that creeping inflation cannot be accepted because a gradual increase in prices
leads to an ever-rising rate of inflation. Other economists argue that in order to achieve economic growth,
some moderate price increases are necessary. Contrast and evaluate these two points of view.
46. What is hyperinflation and what are its effects?
47. (Last Word) What is the relationship between stock prices and macroeconomic instability?
Chapter 09 – Business Cycles, Unemployment, and Inflation
9-5
B. Answers to Short-Answer, Essays, and Problems
1. What is meant by the term business cycle as described by economists?
2. Describe the four phases of the business cycle.
3. “In the last four months, GDP has been declining and many sectors have shown a contraction in business
activity. Still, employment has remained constant. We are currently in a recession.” Evaluate this
statement.
4. How is the severity of a recession measured? How severe was the recession of 2007–2009 compared with
other recessions since 1950?
5. How does the size of the 2007–2009 recession compare with the Great Depression of the 1930s?
6. What phase of the business cycle is our economy experiencing at the present time? Justify your answer.
7. What are five economic shocks that may cause business cycles?
Chapter 09 – Business Cycles, Unemployment, and Inflation
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8. Briefly describe the economic conditions that contributed to the severe recession of 2007–2009.
9. What appears to be the immediate cause of most changes in the business cycle from the perspective of most
economists?
10. “The increasing importance of durable goods has made our economy more vulnerable to cyclical
fluctuations.” Explain and evaluate.
11. Which types of industries are hit hardest by a recession? Explain.
Chapter 09 – Business Cycles, Unemployment, and Inflation
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12. In the table below are statistics showing the labor force and total employment in month 1 and month 2 of
the same year. Make the computations necessary to complete the table. (Number of persons is in
thousands.)
Month 1 Month 2
Labor force 136,297 137,065
Employed 129,558 129,526
Unemployed _____ _____
Unemployment rate (%) _____ _____
13. In the table below are statistics showing the labor force and total employment during year 1 and year 5.
Make the computations necessary to complete the table. (Number of persons is in thousands.)
Year 1 Year 5
Labor force 95,450 108,250
Employed 90,325 100,830
Unemployed _____ _____
Unemployment rate (%) _____ _____
(a) How is it possible that both employment and unemployment increased?
(b) Would you say that year 5 was a year of full employment?
(c) Why is the task of maintaining full employment over the years more than just a problem of finding
jobs for those who happen to be unemployed at any given time?
14. In the table below are statistics showing the civilian non-institutional population, the civilian labor force
and total employment in year 1 and year 2. Make the computations necessary to complete the table.
(Number of persons is in thousands.)
Year 1 Year 5
Civilian non-institutional population 209,699 211,864
Civilian labor force 140,862 141,815
Employed 135,208 135,973
Unemployed _____ _____
Unemployment rate
(to one decimal place) _____ _____
Chapter 09 – Business Cycles, Unemployment, and Inflation
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15. If the population is 267 million, the labor force is 136 million, and the number measured as unemployed is
6.8 million, what is the rate of unemployment?
16. Use the following data to calculate: (a) the size of the labor force and (b) the official unemployment rate.
Total population 1500; population under age 16 and institutionalized, 360; not in labor force, 450;
unemployed, 69; workers with part-time jobs who are looking for full-time jobs, 30.
17. What are two criticisms of the unemployment rate? How do these criticisms relate to the overstating or
understating of the unemployment rate?
18. Explain the differences among the frictional, structural, and cyclical forms of unemployment.
19. Name the type of unemployment occurring in each of the causes below and explain your answer.
(a) Frank recently lost his job as the computer manufacturing company he works for recently downsized
after poor sales and poor performance of the economy during the last year.
(b) Julie just recently graduated from college and is spending the summer traveling before she begins a job
with a consulting firm in the fall.
(c) Tom recently lost his job as the steel manufacturing firm he worked for moved their plant overseas.
The other steel plants in the nation have been also been following this trend.
(d) Susan recently left her marketing job at a local bank because she found that finance interests her more.
She is currently looking for a job as a financial consultant.
Chapter 09 – Business Cycles, Unemployment, and Inflation
9-9
20. Define the “full–employment” or “natural” rate of unemployment and give its approximate percentage rate
as economists currently define it.
21. “The economic cost of unemployment is measured by the GDP gap.” Explain this statement.
22. What is Okun’s law? Give an example of how it works.
23. Discuss the unequal burden of unemployment for different demographic groups in the United States.
24. Describe the personal and social costs of unemployment.
Chapter 09 – Business Cycles, Unemployment, and Inflation
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25. What is the consumer price index? How is it different from the GDP price index?
26. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions. Calculate to one decimal place.
Year CPI
1 160
2 165
3 170
4 177
(a) What was the percentage rise in prices between years 1 and 2?
(b) What was the percentage rise in prices between years 2 and 3?
(c) What was the percentage rise in prices between years 3 and 4?
27. Calculate the rate of inflation between Year 1 and Year 2. The price index in Year 1 was 124.0. It was
130.7 in Year 2.
28. The table below shows the price index in the economy at the end of four different years. (a) What is the
rate of inflation in years 2, 3, and 4? (b) Using the “rule of 70,” how many years would it take for the
prices to double at each of these three inflation rates?
Year
Price index Rate of inflation
Years to double
1 100
2 108 _____ _____
3 120 _____ _____
4 132 _____ _____
Chapter 09 – Business Cycles, Unemployment, and Inflation
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29. Inflation is frequently described as “too much money chasing too few goods.” Is this an acceptable
definition?
30. What is “demand–pull” inflation?
31. Describe cost-push inflation and its major source.
32. (Consider This) How was the practice of clipping coins during feudalism contributing to inflation? Who
benefited from this inflation?
33. What is core inflation? Why is it used?
34. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions.
Year Nominal income CPI
1 $3166 100
2 3402 114
3 3774 108
4 3989 112
(a) Find real income in year 4.
(b) What was the percentage rise in prices between years 1 and 3?
(c) What was the percentage rise in prices between years 2 and 4?
(d) What was the increase in real income from year 3 to year 4 in percentage?
Chapter 09 – Business Cycles, Unemployment, and Inflation
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35. Answer the next four questions based on the following data using year 1 as the base year. All dollars are in
billions.
Year Nominal income CPI
1 $50,000 100
2 60,000 110
3 70,000 115
4 80,000 120
(a) Find real income in year 2.
(b) What was the percentage rise in prices between years 2 and 3?
(c) What was the percentage rise in prices between years 3 and 4?
(d) What was the increase in real income from year 3 to year 4 in percentage?
36. Assume that nominal income is $35,000 and the price index is 1.20 in year 1. In year 2, nominal income
rises to $38,000 and the price index rises to 1.25. What was the percentage change in real income from
year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the
percentage change in real income and the absolute change in real income using the approximation formula
and using the more precise method with index numbers.
37. Explain the difference between real and nominal income. How can you get an approximation of the
percentage change in real income from one time period to another?
Chapter 09 – Business Cycles, Unemployment, and Inflation
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38. “Unexpected inflation is more beneficial to those who save than those who borrow.” Evaluate this
statement. How does your answer change if the inflation is expected?
39. “Inflation is a harsh and arbitrary form of taxation.” Do you agree? If so, who pays this tax?
40. Someone says to you: “Inflation benefits the rich and hurts the poor” and asks for your assessment as an
economist. What would be your response?
41. Explain the difference between nominal and real interest rates.
42. How does unanticipated deflation affect incomes, debts, and savings?
Chapter 09 – Business Cycles, Unemployment, and Inflation
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43. Why are there mixed effects from unexpected inflation for most individuals?
44. What are the effects of cost-push inflation on real output?
45. Some economists believe that creeping inflation cannot be accepted because a gradual increase in prices
leads to an ever-rising rate of inflation. Other economists argue that in order to achieve economic growth,
some moderate price increases are necessary. Contrast and evaluate these two points of view.
46. What is hyperinflation and what are its effects?
47. (Last Word) What is the relationship between stock prices and macroeconomic instability?