Unit 2 Study Guide: Economic Health and Fluctuations

Unemployment

A primary indicator of the health of an economy.

Labor Force

The combination of employed and unemployed individuals who are actively seeking work.

Employed

People currently holding a job, either full-time or part-time.

Unemployed

Individuals without a job who have actively looked for work in the last 4 weeks.

Discouraged Workers

Individuals who have given up looking for work because they believe no jobs are available.

Unemployment Rate (UR)

Calculated as the number of unemployed divided by the labor force, multiplied by 100.

Labor Force Participation Rate (LFPR)

Calculated as the labor force divided by the adult population, multiplied by 100.

Frictional Unemployment

Temporary unemployment due to the time it takes to match workers with jobs.

Structural Unemployment

Unemployment caused by a mismatch between worker skills and the skills demanded by the economy.

Cyclical Unemployment

Unemployment caused by a recession or downturn in the business cycle.

Natural Rate of Unemployment (NRU)

The level of unemployment when the economy produces at its full potential.

Consumer Price Index (CPI)

A measure of the cost of a fixed market basket of goods and services purchased by a typical urban consumer.

Inflation Rate

The percentage change in the Consumer Price Index from one year to the next.

Substitution Bias

A bias in CPI measurement arising when consumers switch to cheaper alternatives as prices change.

New Product Bias

CPI measurement bias caused by the failure to include newly introduced products that improve standards of living.

Quality Bias

Bias that occurs when prices rise due to improvements in product quality, not inflation.

Nominal Variable

The face value of an economic measurement without adjustment for inflation.

Real Variable

An economic measurement adjusted for inflation, reflecting true purchasing power.

Expected Inflation

The rate of inflation that economic agents forecast or predict in their decision-making.

Unanticipated Inflation

Inflation that is higher or lower than what was anticipated by consumers, borrowers, and lenders.

Menu Costs

The costs incurred by businesses when changing their prices.

Shoe-Leather Costs

Costs associated with increased efforts to avoid holding cash during inflation.

Business Cycle

The fluctuations in economic activity, typically measured by changes in real GDP.

Potential GDP

The level of output when the economy is at the Natural Rate of Unemployment.

Output Gap

The difference between actual GDP and potential GDP.

Recessionary Gap

A situation where actual GDP is less than potential GDP, indicating high unemployment.

Inflationary Gap

A situation where actual GDP exceeds potential GDP, indicating an overheated economy.