Macro

. The four phases of a business cycle are trough, recovery, peak, and recession. The length of an average business cycle can be anywhere from 2-15 years. Capital goods and durable goods last, and therefor purchases can be postponed. This may happen when a recession is predicted to be lurking. Durable goods industries therefor suffer large output declines during recessions. However, consumers cannot postpone the buying of nondurables; therefore recessions only slightly reduce non-durable output.

2. Unexpected increase of prices of assets, followed by abrupt asset price decreases can spill over to the general economy by contracting lending and belittle the confidence of buyers. For example, the recession of 2007-2009 was caused by a combination of excessive money and a financial frenzy that led to real estate being overpriced and tremendous mortgage debt. Institutions bundled this debt into new securities, which were then sold. Some of the investors in turn bought insurance to protect themselves from losses. As prices plummeted and mortgage defaults rose, the insurance structure almost collapse. Significant new products or production methods can rapidly spread through the economy, sparking increases in investment, consumption, output, and employment.

5. It is difficult to distinguish between the three types of unemployment as the sum of frictional and structural unemployment is ever changing, making it difficult to determine the unemployment rate. For example, a person who quits a job in order to search for a better job would be classified as frictionally unemployed, but in certain situations depending on the status of the employer, this person could seem to have become cyclically unemployed. Unemployment is an economic problem because of the concept of opportunity cost. The GDP gap is the difference between what the economy could produce at its potential GDP and what it is producing. The consequence of a negative GDP gap is that what is not produced is lost. This leads to weaker economic growth in the future. The noneconomic effects of unemployment include idleness, loss of skills, loss of self respect, bad moral, and sociopolitical unrest.

6. The unemployment compensation program gives the unemployed funds for basic needs. However, many of the unemployed do not qualify for unemployment benefits. The benefits are only for workers who were covered by the insurance. Also unemployment is a waste of resources; when the unemployed go back to work, nothing is forgone except undesired leisure. The unemployed are producing nothing but the compensation helps keep demand in the economy high. 8. Demand-pull inflation occurs when prices rise because of an increase in the average input is not matched by an increase in the average output. Cost-push inflation describes prices rising because of increases in per unit costs of production. Cost-push inflation is most likely to be associated with a negative GDP gap. 'Demand-pull inflation is more likely to occur with a positive GDP gap, because actual GDP will exceed its potential only when aggregate spending is strong and rising.