MACROECONOMICS

TUTORIAL TWO – BUSINESS CYCLE AND UNEMPLOYMENT

Learning Objectives:

By the end of this session, students should be able:

1. Define what is meant by a business cycle and express it graphically.

2. Understand that changes in the business cycle are caused by changes in aggregate demand (total
spending) and aggregate supply.
3. Describe the four phases of the business cycle.
4. Describe the problems associated with the recessionary and recovery phases of the business cycle.
5. Understand that the long-term annual growth rate in real GDP in the U.S. is around 3%.
6. List some leading, coincident, and lagging economic indicators.
7. Define full employment and the full employment unemployment rate.
140 Economics for Today
8. Describe the different types of unemployment and realize that cyclical unemployment is associated
with a recession.
9. Define what is meant by a GDP gap.

SECTION A: MCQ

1. Economists use the phrase "business cycle" when referring to fluctuations in:
a. real GDP. c. the consumer price index.
b. the chain price index. d. the general level of prices.

2. Which of the following will most likely occur during the recessionary phase of a business
cycle?
a. Real GDP rises, and the unemployment rate falls.
b. Real GDP declines, and the rate of inflation rises.
c. The sales of most businesses decline, and the unemployment rate rises.
d. Inflation rises, and employment/population ratio falls.

3. Which of the following will most likely occur during the recovery phase of a business cycle?
a. Real GDP rises, and unemployment falls.
b. Real GDP declines, and inflation rises.
c. Interest rates rise, and the number of business failures rise.
d. Inflation rises, and employment falls.

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4. A long and deep recession in the business cycle is:
a. unemployment.
b. a trough.
c. a recession.
d. a depression
e. unavoidable.

5. The business cycle consists of four phases. At the top we have:

a. recovery, followed by peak, and then recession followed by a recession.
b. recovery, followed by a recession, and then peak followed by recession.
c. peak, then an upturn followed by a recession, and then recession.
d. peak, then a recession followed by recovery, and then recession.
e. peak, then a recession followed by recession, and finally, recovery.

6. If you look for a job for eighteen months after graduation, but fail to generate an offer, even
after lowering your expectations, the economy is probably in the business cycle phase called
a:
a. recession.
b. peak.
c. boom.
d. recovery.
e. trough.

7. If real GDP declines for at least one-half year, the economy is experiencing a:
a. depression.
b. decline.
c. recession.
d. growth recession.
e. deflation.

8. Economic indicators, like unemployment claims and the average workweek, which change
before real GDP changes, are called:
a. leading. c. coincident.
b. lagging. d. structural.

9. Variables that change before real GDP changes are measured by the:
a. personal income index. c. forecasting gauge.
b. real GDP index. d. index of leading indicators.

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10. Which of the following is not a coincident indicator?
a. Personal income. c. Manufacturing and trade sales.
b. Industrial production. d. All of these.

11. A criticism of the unemployment rate is that:

a. underemployment is measured in the calculation.
b. the data includes part-time workers as fully employed.
c. discouraged workers are included in the calculation.
d. all of these are problems.

12. Which of the following statements would come from someone classified as unemployed?
a. I'm not working because I'm going to Jamaica with my buddy.
b. I haven't had a job in a year, and I stopped looking for a job nine months ago.
c. I'm a full-time student at the University of Illinois who doesn't have time to work.
d. I can't stand my current job as a telemarketer. I used to be a nuclear engineer.
e. I'm not working. I had three interviews this week, and I'm trying to find a job.

13. The unemployment rate is the percentage of the:

a. civilian labor force that is unemployed or working part-time.
b. civilian labor force that is unemployed.
c. civilian labor force that is unemployed less the number of government workers.
d. adult population that is unemployed.
e. adult population that is unemployed or looking for a better job.

14. Find the BLS's rate of unemployment from the following data: frictional unemployment =
150, structural unemployment = 200, cyclical unemployment = 225, discouraged workers =
25, underemployed workers = 75, fully employed workers = 850, total population = 2,000.
a. 17.5 percent
b. 23.3 percent
c. 24.6 percent
d. 28.8 percent
e. 38.3 percent

15. Consider an economy made up of 100 people, 50 of whom hold jobs, 10 of whom are looking
for work, and 15 of whom are retired. The unemployment rate is approximately:
a. 10 percent.
b. 12 percent.
c. 17 percent.
d. 20 percent.
e. 25 percent.

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16. The unemployment rate will increase whenever there is a(n):
a. increase in the number of persons classified as unemployed.
b. increase in the number of unemployed persons relative to the size of the labor
force.
c. increase in the size of the U.S. population and there is no change in the number of
persons classified as employed.
d. reduction in the size of the labor force.
e. reduction in the size of the civilian labor force while the number of unemployed
decreases.

17. The number of people officially unemployed is not the same as the number of people who
can't find a job because:
a. the armed forces is included.
b. some people have jobs but continue to look for a better one.
c. some people who can't find a job become discouraged and quit looking.
d. none of these.

18. Brian Vargo, an auto repair mechanic who remains unemployed because he refuses to work
for less than $1,000 an hour, is:
a. counted as part of the labor force.
b. considered frictionally unemployed.
c. an underemployed worker.
d. not counted as part of the labor force.
e. considered as productively active.

19. Unemployment that is of a short duration to allow time to find a new job is:
a. structural unemployment. c. frictional unemployment.
b. cyclical unemployment. d. durational unemployment.

20. A person who voluntarily quits his/her job in New York and expects to get a similar job in
Los Angeles is an example of:
a. structural unemployment. c. durational unemployment.
b. cyclical unemployment. d. frictional unemployment.

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SECTION B: SHORT QUESTIONS

1. What generally causes the business cycle? What are the four phases of a single business
cycle? What are the problems associated with the business cycle?

2. What is full employment? What are the different kinds of unemployment? What constitutes
the natural (normal) rate of unemployment?

3. What does the GDP gap measure?

4. Explain and illustrate the business cycle with a diagram.

5. Write the formula for unemployment rate and labor force participation rate, and explain,

6. Define unemployment, full employment and explain the 4 types of unemployment.

7. The following table shows Singapore’s GDP from 1997 to 2000.

1997 1998 1999 2000
GDP at 1990 Market Prices ($m) 120,140 120,207 127,250 139,840
Source: Singapore Dept. of Statistics
a) Calculate the annual growth rate of the Singapore economy.
b) Comment on the annual growth rate of the economy.

8. In 2000, Singapore had a labour force of 2.2 million people. The number of people
employed was 2.09 million. Calculate Singapore’s unemployment rate in 2000.