Chapter 45
Business Cycles and Unemployment
Compare and contrast the conservative and progressive views of the business cycle,
particularly the nature and costs of unemployment.
OUTLINE OF CHAPTER
I. Conservative Business Cycle Theories
II. Progressive Business Cycle Theories
V. Recession
VI. Beginnings of Recovery
VII. Human Impact of the Business Cycle
KEY TERMS
crisis
the decline of profits in a capitalist system
expectations
what people think will happen
profit squeeze
the decli
ning growth of demand and the rising growth of costs, which create the nutcracker effect
that lowers profits; the lower profits lead to less investment
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Compare and contrast the conservative and progressive views of the business cycle,
particularly the nature and costs of unemployment.
1. What are sources of disturbances to the economy according to conservative economists?
Why is there unemployment?
2. What are sources of disturbances to the economy according to progressive economists?
Progressive economists believe that the performance of the American economy is
3. What are the differences in the explanations by conservative and progressive –
economists?
Generally, conservatives believe the system works well and disturbances come from
Explain why conservative economists argue that, left alone, the economy will adjust back to
full-employment equilibrium.
4. According to conservative economists, how will the economy recover from a shock?
5. Describe the process of recovery used by progressive economists.
Progressive economists believe that most recessions tend to end as trends reverse
Explain why progressive economists argue that business cycles are driven by the internal
workings of capitalism.
6.
again.
7. Describe in detail each step of the process in #6.
Rising profits and low costs at the start of an expansion lead to further expansion of
8. What are the two sides that squeeze profits near the end of expansion? Explain how the
9. List the components of revenue and explain how revenue behaves over the business
cycle. What leads to crisis? What leads to recovery?
Revenue = spending by consumers + investors + government + foreigners. Crisis arises
10. List the components of costs and explain how costs behave over the business cycle.
What leads to crisis? What leads to recovery?
Costs = Payments to employees + to foreigners + government taxes + interest to lenders
APPENDIX 45.1
Underconsumptionism: A Demand-Side View
LEARNING OBJECTIVE FOR APPENDIX 45.1
SUMMARY OF APPENDIX
This appendix presents a brief overview of the underconsumption theory.
ANSWERS TO APPENDIX 45.1 REVIEW QUESTIONS
Describe the underconsumptionist explanation of recessions and some critiques of the
theory.
1.
Underconsumption is the lack of effective demand for consumer goods. The cause is
2. What is the main criticism of underconsumption?
The most important criticism is the lack of attention to costs. For example, employee
APPENDIX 45.2
Supply-Side Problems: High Wages, Interest, and Raw Material
LEARNING OBJECTIVE FOR APPENDIX 45.2
Describe the overinvestment theory of recessions and some critiques of the theory.
OUTLINE OF APPENDIX
ANSWERS TO APPENDIX 45.2 REVIEW QUESTIONS
Describe the overinvestment theory of recessions and some critiques of the theory.
1. t causes it? How does it impact the macroeconomy?
Overinvestment is the view that recession is caused by too much investment. Rising
2. What are the main criticisms of overinvestment?
APPENDIX 45.3
Virtuous Circles and Vicious Circles
LEARNING OBJECTIVE FOR APPENDIX 45.3
OUTLINE OF APPENDIX
REVIEW QUESTIONS
Describe the notion of virtuous and vicious circles in the economy and why they happen.
1.
A virtuous circle is an upward or expansionary process in which one increase leads to
2.